<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997
REGISTRATION NO. 333-
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
INNOTRAC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
GEORGIA 7389 58-1592285
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
1828 MECA WAY
NORCROSS, GEORGIA 30093
(770) 717-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SCOTT D. DORFMAN
CHIEF EXECUTIVE OFFICER
1828 MECA WAY
NORCROSS, GEORGIA 30093
(770) 717-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
COPIES TO:
DAVID A. STOCKTON, ESQ. GLENN W. STURM, ESQ.
KILPATRICK STOCKTON LLP NELSON MULLINS RILEY & SCARBOROUGH,
1100 PEACHTREE STREET, N.E., SUITE L.L.P.
2800 999 PEACHTREE STREET, N.E., SUITE
ATLANTA, GEORGIA 30309 1400
(404) 815-6500 ATLANTA, GEORGIA 30309
(404) 815-6555 (FAX) (404) 817-6000
---------------(404) 817-6050 (FAX)
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box: [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, check the following box. [_]
CALCULATION OF REGISTRATION FEE
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<TABLE>
<CAPTION>
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, $0.10 par
value per share....... 2,875,000 shares $14.00 $40,250,000 $11,873.75
</TABLE>
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- -------------------------------------------------------------------------------
(1) Includes 375,000 shares subject to the exercise of the Underwriters' over-
allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE
REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 16, 1997
PROSPECTUS
2,500,000 SHARES
[LOGO]
INNOTRAC CORPORATION
COMMON STOCK
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by Innotrac Corporation (the "Company"). Prior to this offering (the
"Offering"), there has been no public market for the Common Stock. It is
currently anticipated that the initial public offering price of the Common
Stock will be between $12.00 and $14.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Company has filed an application for the Common
Stock to be approved for quotation on The Nasdaq Stock Market's National Market
("Nasdaq National Market") under the symbol "INOC."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share.................................... $ $ $
- --------------------------------------------------------------------------------
Total(3)..................................... $ $ $
</TABLE>
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$750,000.00.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 375,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discount will be $ and the total Proceeds to Company will
be $ . See "Underwriting."
-----------
The shares of Common Stock are offered subject to receipt and acceptance by
the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part, and to withdraw, cancel or modify the offer without
notice. It is expected that certificates for the shares of Common Stock will be
available for delivery on or about , 1998.
-----------
J.C.Bradford&Co. Wheat First Butcher Singer
, 1998
<PAGE>
[inside front cover graphics]
GRAPHIC: The Company's name with stylized design.
SUPPORTING
TEXT: In the last decade, quality customer relationships have become an
important determinant of long-term success.
At Innotrac, the future looks bright.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
<PAGE>
GATE
- ----
TITLE: Marketing Support Services
GRAPHIC: Fibre optic cable bundle
SUPPORTING
TEXT: ADVANCED TECHNOLOGY
Investments in advanced technology, including sophisticated computer
integration, telephone systems and software, deliver fast, easy
access to service and information.
GRAPHIC: Account services team meeting
SUPPORTING
TEXT: MARKETING AND MANAGEMENT SUPPORT SERVICES
Account services team operates as an extension of the client's
internal marketing department.
GRAPHIC: Customer service representative talking on telephone
SUPPORTING
TEXT: ORDER PROCESSING AND CUSTOMER SERVICE
Representatives are trained to understand each client's products,
services and technology. From the moment they answer the phone with
the client's greeting, they operate as a seamless extension of the
client company.
GRAPHIC: View of the company's call center
SUPPORTING
TEXT: TELESERVICES
Advanced technology, combined with personal service in multiple
languages, means that making inquiries, placing orders, or getting
technical support is both efficient and professional for our client's
customers.
GRAPHIC: View of company's warehouse
SUPPORTING
TEXT: INVENTORY MANAGEMENT SERVICES
Automated inventory management tracks client materials to assure
accurate stock counts and provide the client with detailed management
information.
GRAPHIC: Example of products distributed by the company
SUPPORTING
TEXT: PRODUCT PARTNERSHIPS
Innotrac works in partnership with clients by purchasing
inventory and products that support its clients' services
and programs.
GRAPHIC: View of company's shipping department
SUPPORTING
TEXT: DISTRIBUTION AND FULFILLMENT
Dedicated account teams assure that each client's orders are entered,
picked, packed and shipped efficiently and accurately.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Prior to the Offering, the business of Innotrac was conducted
through the Company and eight affiliated companies (the "Affiliated Companies")
as an integrated business unit. Simultaneously with, and as a condition to, the
Offering, each of the Affiliated Companies will be either merged or
consolidated with the Company (the "Consolidation"). See "The Consolidation."
All share numbers in this Prospectus reflect a 70.58823-for-one stock split
effected on December 12, 1997. Unless the context otherwise requires, all
references herein to the "Company" or "Innotrac" shall mean Innotrac
Corporation and the Affiliated Companies taken as a whole, and assume that the
Consolidation has been consummated. Unless otherwise indicated, the information
in this Prospectus does not give effect to the Underwriters' over-allotment
option.
THE COMPANY
Innotrac is a full-service provider of customized, technology-based marketing
support services primarily to large corporations. The Company's marketing
support services include product and literature distribution, computerized
inventory and database management and customer-initiated ("inbound")
teleservices. With the goal of providing turnkey marketing support solutions,
Innotrac works with its clients on a consultative basis to create customized
programs through which it can most efficiently match its service offerings with
its clients' needs. Innotrac's flexible marketing support solutions range from
small, specialty projects to larger integrated fulfillment, teleservicing and
database tracking programs. The Company has a broad range of clients including
BellSouth Telecommunications, Inc. ("BellSouth"), Home Depot U.S.A., Inc.
("Home Depot"), National Automotive Parts Association ("NAPA"), Pacific Bell
("Pacific Bell"), Siemens Energy & Automation Inc. ("Siemens E&A"), Turner
Broadcasting System, Inc. and US West Communications Services, Inc. ("US
West").
Since its formation in 1984, the Company has expanded its business and
facilities to offer distribution and management services and inbound
teleservices in response to the needs of clients in a variety of industries and
to capitalize on market opportunities. In 1987, the Company began providing
marketing support services to BellSouth. In 1991, these services were expanded
to include fulfillment services related to Caller ID telecommunications
equipment. This program provides for Innotrac to (i) sell or rent to BellSouth
customers Caller ID hardware, phone sets and other equipment (branded with
BellSouth's logo), (ii) ship ("fulfill") customers' orders, (iii) track
inventory levels and sales and marketing data regarding such items and (iv)
maintain teleservicing operations to handle customer service and technical
support for Caller ID units and other products. In conjunction with this
program, in 1993 Innotrac pioneered a billing option (the "billing options
program") to allow customers to pay for the equipment through their phone
bills, on an interest free installment basis. The addition of the billing
options program was well received in the marketplace, and, as a result, the
fulfillment services for BellSouth have been the primary force behind the
Company's rapid sales growth. Innotrac has continued to capitalize on its
fulfillment expertise in the telecommunications sector, as evidenced by its
additional contractual arrangements with Pacific Bell and US West.
The Company has positioned itself to capitalize on the trend towards
outsourcing of marketing support services. The revenues generated from its
telecommunications marketing support programs have enabled the Company to
develop the infrastructure necessary to offer additional and more advanced
services to its customers. The Company believes it will achieve future growth
by targeting large companies in a variety of industries with numerous and/or
geographically diverse subsidiary or affiliate operations, extensive marketing
needs or complex point-of-distribution requirements.
Companies are increasingly focusing on their primary businesses and turning
to outside service companies to perform marketing support functions. By
outsourcing these functions, companies seek to (i) replace fixed warehouse,
information technology and labor costs with variable costs, (ii) improve their
reaction to business
3
<PAGE>
cycles, (iii) improve customer service and technical support, (iv) manage
capacity to meet fluctuations in demand for products and customer service, (v)
create economies of scale by sharing the costs of advanced telecommunications
and fulfillment systems, and (vi) reduce working capital needs. As the trend
toward outsourcing continues, the Company believes that businesses will
increasingly seek to reduce the number of vendors they utilize and may prefer
single-source providers of integrated, customized marketing support services.
The Company believes that its "one-stop" approach, combined with its use of
advanced technology, provides a competitive advantage in attracting and
retaining clients on a long-term basis.
BUSINESS STRATEGY
The Company's strategy is to take advantage of market trends towards
outsourcing by leveraging its core expertise, reputation for quality and timely
service and strong client relationships. The following are the key elements of
this strategy:
LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand
its customer base in the telecommunications industry by leveraging the
expertise it has developed and the results it has achieved through long-
standing relationships with several clients in the industry. The Company is
also seeking to expand the level of services provided to existing
telecommunications clients.
BROADEN CUSTOMER BASE BY DEVELOPING SALES INFRASTRUCTURE. The Company has
experienced rapid revenue growth since 1993 without a significant sales
infrastructure. The Company intends to use a portion of the net proceeds of the
Offering to develop a national sales force for its services, to form
relationships with independent sales agencies and to develop sales and
marketing materials to highlight the wide array of services offered by the
Company. By developing this infrastructure, the Company intends to broaden its
customer base and diversify its sources of revenues.
CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a
commitment to the use of advanced technology and intends to continue to upgrade
and enhance its computer hardware and software applications to enable it to
continue to provide flexible and powerful services to its clients. The Company
believes that the use of advanced technology provides a competitive advantage
and results in greater capacity and reduced labor costs. The Company also
believes that continued technological advances, particularly those utilizing
the Internet, will provide new opportunities for the Company to tailor its
services to meet each client's needs. The Company intends to address the labor-
intensive nature of fulfillment services by developing more efficient automated
systems that distribute literature via electronic media directly to the
customer. The Company also plans to expand its Internet-related capabilities
for (i) automated inventory management, (ii) access to order and database
information and (iii) virtual warehousing of literature so that such materials
no longer need to be maintained in physical form in the Company's warehouses.
EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored,
value-added solutions that achieve each client's intended marketing results.
The Company devotes considerable resources to assessing and understanding a
client's industry, products, services, processes and culture, then works with
the client to design programs to reduce the costs and investment required to
deliver the client's marketing support programs. The Company believes that this
consultative partnership approach encourages long-term client relationships, as
evidenced by the fact that the Company has serviced its 10 largest clients for
an average of six years and its five oldest clients for an average of 11 years.
The Company believes that this approach also creates substantial opportunities
to expand relationships with existing clients by cross-selling the full range
of its services.
SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take advantage
of the fragmented nature of the marketing support services industry by
selectively acquiring complementary companies that extend its presence into new
geographic markets or industries, expand its client base, add new product or
service applications or provide substantial operating synergies. The Company
believes that there are a variety of such potential acquisition opportunities.
4
<PAGE>
THE OFFERING
Common Stock offered by the
Company..................... 2,500,000 shares
Common Stock to be
outstanding after the 9,000,000 shares(1)
Offering....................
Use of Proceeds.............
To pay certain distributions in connection with
the Consolidation, repay certain indebtedness
of the Company, including indebtedness to a
shareholder, and for general corporate
purposes, including for working capital and
potential acquisitions. See "Use of Proceeds"
and "Certain Transactions."
Proposed Nasdaq National
Market symbol............... INOC
- --------
(1) Excludes 383,000 shares of Common Stock issuable upon exercise of stock
options outstanding under the Company's Stock Option and Incentive Award
Plan (the "Stock Option Plan"). See "Management."
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully a number of factors that could
affect the Company's business, results of operations and financial condition.
See "Risk Factors" beginning on page 8 for a discussion of such factors.
----------------
The Company's principal executive offices are located at 1828 Meca Way,
Norcross, Georgia, where its telephone number is (770) 717-2000.
5
<PAGE>
SUMMARY FINANCIAL DATA
The summary historical and pro forma financial data set forth below should be
read in conjunction with "The Consolidation," "Use of Proceeds," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the financial statements and notes thereto and the
other financial data contained elsewhere in this Prospectus. The pro forma
statement of operations data for the nine months ended September 30, 1997 and
the pro forma balance sheet data at September 30, 1997 give effect to the
Consolidation and the Offering as well as the use of the net proceeds of the
Offering, as if the transactions had occurred at January 1, 1997 (for the
statement of operations) and September 30, 1997 (for the balance sheet). The
pro forma financial information does not purport to represent what the
Company's consolidated results of operations would have been if these
transactions had in fact occurred on these dates, nor does it purport to
indicate the future consolidated financial position or consolidated results of
future operations of the Company. The pro forma adjustments are based on
currently available information and certain assumptions that management
believes to be reasonable.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------------
PRO FORMA
CONSOLIDATED
AS ADJUSTED
1993 1994 1995 1996 1996 1997 1997(1)
------ ------- ------- ------- ---------- ---------- ---------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, net........... $5,586 $17,380 $44,886 $71,297 $ 53,231 $ 67,314 $ 67,314
Cost of revenues........ 3,495 11,274 30,658 55,520 39,232 51,800 51,800
------ ------- ------- ------- ---------- ---------- ----------
Gross profit............ 2,091 6,106 14,228 15,777 13,999 15,514 15,514
------ ------- ------- ------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative
expenses.............. 1,538 2,289 6,510 10,391 8,007 9,072 9,072
Depreciation and
amortization.......... 157 214 293 429 231 454 454
------ ------- ------- ------- ---------- ---------- ----------
Total operating
expenses.............. 1,695 2,503 6,803 10,820 8,238 9,526 9,526
------ ------- ------- ------- ---------- ---------- ----------
Operating income........ 396 3,603 7,425 4,957 5,761 5,988 5,988
------ ------- ------- ------- ---------- ---------- ----------
Other (income) expense:
Interest expense....... 123 622 1,090 1,456 955 1,422 5
Other.................. (6) 67 (73) 94 2 (2) (2)
------ ------- ------- ------- ---------- ---------- ----------
Total other expense.... 117 689 1,017 1,550 957 1,420 3
------ ------- ------- ------- ---------- ---------- ----------
Income before income
taxes.................. 279 2,914 6,408 3,407 4,804 4,568 5,985
Income tax provision.... (30) (356) (793) (211) (472) (75) (2,392)
------ ------- ------- ------- ---------- ---------- ----------
Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,332 $ 4,493 $ 3,593
====== ======= ======= ======= ========== ========== ==========
Weighted average
shares................. 9,103(2)
Net income per share.... $ 0.39(3)
==========
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1997
------------------------------- -------------------------
PRO FORMA
CONSOLIDATED
1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4)
------ ------- ------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,593 $23,842
Property and equipment,
net.................... 1,465 5,059 9,099 10,939 8,249 8,249
Total assets............ 3,457 13,548 30,414 49,037 36,387 47,524
Long term obligations... 708 4,278 4,729 4,779 4,157 453
Shareholders'
equity(5).............. 409 1,624 3,195 4,540 4,921 31,264
</TABLE>
- --------
(1) Pro forma adjustments include (i) the elimination of interest expense
related to the line of credit, the term loan and subordinated debt
borrowings assumed to be repaid with the proceeds of the Offering, (ii) an
income tax provision to reflect the pro forma tax effects as if the Company
were taxed as a C corporation and (iii) the tax effect of the interest
expense adjustment.
(2) Adjusted to reflect the Consolidation, the Offering (assuming the shares
were outstanding for the entire period) and the exercise of all options
outstanding under the Stock Option Plan (using the "treasury stock" method
and assuming the shares were outstanding for the entire period).
(3) Excludes the dividend accretion on redeemable capital stock of a subsidiary
of approximately $64,000, or $(0.01) per share.
(4) Assumes an increase to working capital equal to the aggregate estimated net
proceeds less repayment of borrowings under the line of credit facility,
the term loan, the subordinated debt, and the redeemable capital stock of a
subsidiary. Reflects the recording of deferred tax assets and liabilities
associated with the change in tax status to a C corporation of certain of
the entities that are parties to the Consolidation and distribution of $6.4
million of undistributed earnings of certain of the entities that are
parties to the Consolidation. See "The Consolidation" and "Use of
Proceeds."
(5) Includes capital stock, partners' capital, members' deficit and retained
earnings.
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered hereby.
This Prospectus contains certain forward-looking statements (as such term is
defined in the Securities Act of 1933, as amended (the "Securities Act"))
concerning the Company's operations, performance and financial condition,
including, in particular, the likelihood of the Company's success in developing
and expanding its business. These statements are based upon a number of
assumptions and estimates which are inherently subject to significant
uncertainties, many of which are beyond the control of the Company. Actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those set forth below.
RELIANCE ON A SMALL NUMBER OF MAJOR CLIENTS
As a result of the Company's focus on developing long-term relationships with
large corporations, a significant portion of the Company's revenues are derived
from a relatively small number of clients. The Company's three largest clients,
BellSouth, Pacific Bell and US West, accounted for an aggregate of 90% of the
Company's 1996 revenues and an aggregate of 95% of such revenues for the first
nine months of 1997, of which BellSouth accounted for 82% and 87%,
respectively. Although the Company has written agreements with all of its
telecommunications clients, they generally are terminable upon certain events
after the giving of notice and failure to cure and the lapse of 30 to 90 days.
In addition, the Company's agreement with BellSouth may be terminated for any
reason upon two years' notice. Moreover, the Company's contracts do not assure
the Company a specific level of revenues and they generally do not designate
the Company as the client's exclusive service provider. Further, the Company
does not have written agreements with many clients. There can be no assurance
that the Company will be able to retain any of its largest clients, or that the
Company will be able to replace such clients with others that generate a
comparable amount of revenues or profits. Further, except in the product-based
marketing support and fulfillment services it performs for BellSouth and
Pacific Bell, the Company does not believe that it is the sole or primary
source for most of the services rendered to its clients. The loss of one or
more of its largest clients could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--General."
RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES
In connection with certain of its fulfillment services, the Company purchases
Caller ID and other telecommunications equipment from third party vendors and,
therefore, assumes the risks of inventory obsolescence, damage to leased units,
theft and creditworthiness of purchasers. The ability of the Company to receive
payment for sales or rentals of such equipment is dependent on the transmittal
of correct customer invoices and remittance on a timely basis by BellSouth and
Pacific Bell. If the Company is unable to manage these risks, it could have a
material adverse effect on the Company's business, results of operations and
financial condition. The credit risk assumed by the Company is particularly
significant because of the large number of customers, each of which owes a
relatively small amount. The Company's allowance for bad debt was approximately
$5.6 million at September 30, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--General."
RELIANCE ON TELECOMMUNICATIONS INDUSTRY
Caller ID is a relatively recent offering by telecommunications companies and
there can be no assurance that it will gain or sustain wide acceptance in the
marketplace. In addition, the provision of Caller ID services by
telecommunications companies is regulated at both the federal and state level.
Such regulations may have the effect of delaying the offering or market
acceptance of Caller ID service in a market of one of the Company's clients.
See "Business--Government Regulation."
8
<PAGE>
The Company is also dependent on the level of resources (financial and
otherwise) expended by its clients to promote Caller ID service. There can be
no assurance that the Company's telecommunications clients will sufficiently
promote, or continue to promote, Caller ID service in their areas.
Furthermore, there can be no assurance that the Company's telecommunications
clients will achieve their estimated "market penetration" (the percentage of
consumer telephone lines capable of receiving Caller ID services that actually
receive such services) goals, upon which the Company, in part, plans its
operations. In addition, at some time in the future, peak market penetration
for Caller ID service may be achieved by the Company's clients or Caller ID
service or equipment may be replaced by a different service or hardware. The
occurrence of any of these factors could have a material adverse effect on the
Company's business, results of operations and financial condition.
ABILITY TO CONTINUE AND MANAGE GROWTH
Innotrac has recently experienced significant growth in its operations. The
Company's success will depend upon its ability to initiate, develop and
maintain existing and new client relationships; respond to competitive
developments; develop its sales infrastructure; attract, train, motivate and
retain management and other personnel; and maintain the high quality of its
services. In addition, the Company recently entered into a long-term lease for
a new facility, which will increase lease expenses by approximately $400,000
per year. The Company's continued rapid growth can be expected to place a
significant strain on the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to maintain
or accelerate its current growth, effectively manage its expanding operations
or achieve planned growth on a timely or profitable basis. If the Company is
unable to manage its growth effectively, its business, results of operations
and financial condition could be materially adversely affected. See
"Business."
IMPACT OF TREND TOWARD OUTSOURCING
The Company believes that outsourcing by businesses of an increasing number
of services not directly related to their core competencies has increased
significantly in the past several years. There can be no assurance that this
trend will continue or not be reversed or that corporations will not decide to
bring previously outsourced functions in-house. Particularly during general
economic downturns, continued outsourcing of services could result in layoffs
of employees, and businesses may bring in-house previously outsourced
functions to avoid or delay layoffs of employees. An adverse development with
respect to the trend toward outsourcing could have a material adverse effect
on the business, results of operations and financial condition of the Company.
See "Business--Strategy."
DEPENDENCE ON LABOR FORCE
The Company's success is largely dependent on its ability to recruit, hire,
train and retain qualified employees. The Company's industry is very labor-
intensive and has experienced high personnel turnover. A significant increase
in the Company's employee turnover rate could increase the Company's
recruiting and training costs and decrease operating effectiveness and
productivity. Also, the addition of significant new clients or the
implementation of new large-scale marketing support programs may require the
Company to recruit, hire and train qualified personnel at an accelerated rate.
Some of the Company's operations, particularly its technical support and
customer service, require specially trained personnel. There can be no
assurance that the Company will be able to continue to hire, train and retain
sufficient qualified personnel to adequately staff new marketing support
programs. Because a significant portion of the Company's operating expenses
are related to labor costs, an increase in wages, costs of employee benefits
or employment taxes could have a material adverse effect on the Company's
business, results of operations or financial condition. In addition, the
Company's facilities are located in an area with a relatively low unemployment
rate, potentially making it more difficult and costly to hire and train
qualified personnel. The inability of the Company to recruit, hire, train and
retain qualified employees could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
RISKS OF BUSINESS INTERRUPTION; NEW FACILITY
The Company's operations are dependent upon its ability to protect its
distribution facilities, call center, computer and telecommunications
equipment and software systems against damage from fire, power loss,
9
<PAGE>
telecommunications interruption or failure, natural disaster and other similar
events. In the third quarter of 1998, the Company expects to move its
corporate offices and four distribution facilities into a new facility. In the
event the Company experiences a temporary or permanent interruption of its
business, through casualty, operating malfunction, as a result of the move or
otherwise, the Company's business, results of operations or financial
condition could be materially adversely affected. The Company's property and
business interruption insurance may not adequately compensate the Company for
all losses that it may incur.
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW SOFTWARE
The Company's business is highly dependent on its computer and
telecommunications equipment and software systems. The Company intends to use
a portion of the net proceeds of the Offering to upgrade certain computer
hardware and software, and, as a result, will convert certain existing
programs to the new system. There can be no assurance that the Company can
effectively or efficiently convert its programs to the new system. In
addition, the Company's failure to maintain its technological capabilities or
to respond effectively to technological changes could have a material adverse
effect on the Company's business, results of operations and financial
condition. The Company's future success also will be highly dependent upon its
ability to enhance existing services and develop applications to focus on its
clients' needs and introduce new services and products to respond to changing
technological developments. There can be no assurance that the Company can
select, invest in and develop new and enhanced technology on a timely basis in
the future in order to meet clients' needs and to maintain its own
competitiveness, and the Company's failure to do so could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Technology."
COMPETITION
The markets in which the Company competes are highly competitive. The
Company expects competition to persist and intensify in the future. The
Company's competitors include the in-house operations of the Company's current
and potential clients, small firms offering specific services and large
marketing support services firms. A number of competitors have or may develop
financial and other resources greater than those of the Company. There can be
no assurance that additional competitors with greater name recognition and
resources than the Company will not enter the Company's markets. Because the
in-house operations of the Company's existing or potential clients are
significant competitors of the Company, the Company's performance and growth
could be negatively impacted if its existing clients decide to provide, in-
house, services that currently are outsourced or if potential clients retain
or increase their in-house capabilities. Further, a decision by a large client
to consolidate its outsourced services with a company other than Innotrac
would have a material adverse effect on the Company. In addition, competitive
pressures from current or future competitors could result in significant price
erosion, which could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business--
Competition."
FLUCTUATIONS IN OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results have fluctuated in the past and will
fluctuate in the future based on many factors. These factors include, among
other things, fluctuations in the general economy, increased competition,
changes in operating expenses, expenses related to acquisitions and the
potential adverse effect of acquisitions. Due to these and any unforeseen
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and
investors. In such an event, the price of the Common Stock would likely be
materially adversely affected. In view of the Company's recent significant
growth, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in large part on the abilities and
continuing efforts of its executive officers and senior management. In order
to support its growth the Company will be required to effectively recruit,
develop and retain additional qualified management personnel. There can be no
assurance that the
10
<PAGE>
Company will be able to (i) retain the services of its executive officers and
key management, with whom the Company has no employment agreements or (ii)
recruit, develop and retain additional qualified management personnel. The
business and prospects of the Company could be materially adversely affected
if these persons do not continue in their key roles and the Company is unable
to attract and retain qualified replacements. See "Management."
COMPLIANCE WITH GOVERNMENT REGULATION
Because the Company's current teleservicing business consists primarily of
responding to inbound telephone calls, as opposed to outbound calls, it is not
highly regulated. However, in connection with the limited amount of outbound
telemarketing services that it provides, the Company is required to comply
with the Federal Communications Commission's rules under the Federal Telephone
Consumer Protection Act of 1991 and the Federal Trade Commission's regulations
under the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994, both of which govern telephone solicitation. If the Company expands its
outbound telemarketing services, such rules and regulations would apply to a
larger percentage of the Company's business. Furthermore, there may be
additional federal and state legislation, or changes in regulatory
implementation, that limit the activity of the Company or its clients in the
future or significantly increase the costs of compliance. Additionally, the
Company could be responsible for its failure to comply with regulations
applicable to its clients. The adoption of unfavorable federal or state
legislation or regulations affecting Caller ID service could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "--Risks Associated with Product-Based Marketing Support
Services" and "Business--Government Regulation."
CONTROL BY MANAGEMENT; USE OF PROCEEDS TO BENEFIT MANAGEMENT
Following the Offering, Scott D. Dorfman, the Company's Chairman, President
and Chief Executive Officer, will beneficially own approximately 68% of the
outstanding Common Stock (approximately 66% if the Underwriters' over-
allotment option is exercised in full). See "Principal Shareholders." As a
result, Mr. Dorfman would control the Company's Board of Directors and,
therefore, the business, policies and affairs of the Company. Such voting
concentration may also have the effect of discouraging, delaying or preventing
a change in control of the Company. A portion of the net proceeds of the
Offering will be used to make distributions to Mr. Dorfman, his children and a
shareholder of the Company of accumulated earnings of two of the entities that
are parties to the Consolidation and an amount to pay taxes on the 1997 and
1998 earnings of certain Affiliated Companies, to repay certain indebtedness
to a shareholder of the Company and to repay certain indebtedness which is
guaranteed by Mr. Dorfman. See "Use of Proceeds" and "Certain Transactions."
DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS
One component of the Company's strategy is to pursue strategic acquisitions
of companies that have services, products, technologies, industry
specializations or geographic coverage that extend or complement the Company's
existing business. There can be no assurance that the Company will be able to
successfully identify, acquire on favorable terms or integrate such companies.
If any acquisition is completed, there can be no assurance that such
acquisition will enhance the Company's business, results of operations or
financial condition. The Company may in the future face increased competition
for acquisition candidates, which may inhibit the Company's ability to
consummate suitable acquisitions on terms favorable to the Company. A portion
of the Company's capital resources and proceeds of this Offering could be used
for acquisitions. The Company may require additional debt or equity financing
for future acquisitions, which financing may not be available on terms
favorable to the Company, if at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws may
make a change in control of the Company more difficult to effect, even if a
change in control were in the shareholders' interests. Provisions in the
Company's Articles of Incorporation allow the Board to determine the terms of
preferred stock that may
11
<PAGE>
be issued by the Company without approval of the holders of the Common Stock.
The ability of the Company to issue preferred stock in such manner could
enable the Board to prevent changes in management and control of the Company.
The Articles also provide for three classes of directors as nearly equal in
size as possible. Each class holds office until the third annual meeting
following election except that the initial terms expire in 1998, 1999 and
2000. This provision may have an anti-takeover effect because a third party
would be unable to acquire immediate control of the entire Board. In addition,
the Company's Board of Directors has adopted a Rights Agreement (as defined
herein) pursuant to which holders of Common Stock will be entitled to purchase
a fraction of a share of the Company's Series A Participating Cumulative
Preferred Stock if a third party acquires beneficial ownership of 15% or more
of the Common Stock and will be entitled to purchase the stock of a Principal
Party (as defined in the Rights Agreement) at a discount upon the occurrence
of certain triggering events. These provisions of the Company's Articles of
Incorporation, Bylaws and the Rights Agreement could have the effect of
discouraging tender offers or other transactions that would result in
shareholders receiving a premium over the market price for the Common Stock.
See "Description of Capital Stock."
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop or
continue after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public
offering price of the Common Stock has been determined by negotiation between
the Company, J.C. Bradford & Co. and Wheat, First Securities, Inc. as
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), and may bear no relationship to the market price for the
Common Stock after the Offering. See "Underwriting."
From time to time after the Offering, there may be significant volatility in
the market price of the Common Stock. Quarterly operating results of the
Company, changes in earnings estimates by analysts, changes in general
conditions in the economy or the financial markets, or other developments
affecting the Company or its industry or competitors could cause the market
price of the Common Stock to fluctuate substantially. In addition, recently
the stock market has experienced extreme price and volume fluctuations. This
volatility has had a significant effect on the market prices of securities
issued by many companies for reasons unrelated to their operating performance.
Therefore, the Company cannot predict the market price for the Common Stock
subsequent to the Offering.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience an immediate and
substantial dilution of $9.53 per share in the net tangible book value of
their shares of Common Stock immediately following the Offering. Current
shareholders will receive a material increase in the book value of their
shares. If the Company issues additional Common Stock in the future, including
shares that may be issued in connection with acquisitions, purchasers of
Common Stock in the Offering may experience further dilution in net tangible
book value per share of the Common Stock. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. Upon consummation of the Offering, the Company will have a total of
9,000,000 shares of Common Stock outstanding (9,375,000 if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,500,000
shares offered hereby (2,875,000 if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restrictions under the
Securities Act. All of the remaining shares are "restricted securities" as
that term is defined by Rule 144 promulgated under the Securities Act and will
be eligible for sale in compliance with Rule 144 volume and other
requirements. The number of outstanding shares of Common Stock available for
sale in the public market will be limited by lock-up agreements under which
the Company, its officers, directors and shareholders have agreed not to sell
or otherwise dispose of any of their shares for a period of 180 days after the
date of this Prospectus without the prior written consent of J.C. Bradford &
Co., on behalf of the Underwriters, and applicable restrictions under the
Securities Act. The Company intends to register for issuance or resale the
800,000 shares
12
<PAGE>
of Common Stock reserved for issuance under the Stock Option Plan on a
registration statement on Form S-8. Following the Offering, sales of
substantial amounts of Common Stock in the public market, pursuant to Rule 144
or otherwise, or even the potential of such sales, could adversely affect the
prevailing market price of the Common Stock or impair the Company's ability to
raise additional capital through equity issuances. See "Management--Stock
Option Plan," "Shares Eligible for Future Sale" and "Underwriting."
POLICY TO PAY NO DIVIDENDS
The Company presently intends to retain its earnings to finance its growth
and expansion and for general corporate purposes. Consequently, it does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's financing agreements contain limitations on the payment of cash
dividends and other distributions of assets. See "Dividend Policy."
13
<PAGE>
THE CONSOLIDATION
Prior to the Offering, the business of the Company, a C corporation for tax
purposes, was conducted through the Company and the Affiliated Companies,
including three corporations that had elected S corporation tax status, one
limited partnership, two limited liability companies and three C corporations.
The Consolidation will be effected simultaneously with, and as a condition to,
the Offering. Ninety percent or more of the equity of each of the Affiliated
Companies was owned by Scott D. Dorfman, the Chairman, President and Chief
Executive Officer of the Company, his family and affiliated entities. In
connection with the Consolidation, two of the affiliated entities that are
parties to the Consolidation will make certain distributions to their
principals, Mr. Dorfman, his children and ITC Service Company ("ITC"), a
shareholder of the Company, reflecting a portion of accumulated earnings and
an amount equal to the estimated tax payments to be made by such principals
with respect to such entities' estimated income for 1997 and 1998. See "Use of
Proceeds," "Certain Transactions" and Note 10 of the financial statements.
The Company was incorporated in Georgia on August 19, 1984 under the name
Video Catalog Operations, Inc. On September 5, 1985, the name was changed to
Innotrac Corporation.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share are estimated to be approximately $29.5 million
(approximately $34.1 million if the Underwriters' over-allotment option is
exercised in full) after deduction of the underwriting discount and estimated
Offering expenses payable by the Company.
The Company intends to use approximately $6.4 million of the net proceeds of
the Offering to distribute a portion of the earnings of two of the entities
that are parties to the Consolidation to the equity holders thereof, including
Mr. Dorfman, his children and ITC. In addition, the Company intends to repay
indebtedness with certain of the net proceeds of the Offering as follows: (i)
approximately $14.0 million to repay indebtedness under its line of credit
facility, (ii) approximately $1.0 million to repay a term loan and (iii) $3.5
million to repay indebtedness to ITC. Such indebtedness currently bears
interest per annum at rates equal to (i) at the Company's option, LIBOR plus
225 basis points (8.25%) or the lender's prime rate (8.5%), (ii) 8.95% per
annum and (iii) the prime rate plus 8.0% (16.5%), respectively, and, if not
repaid, will mature in November, July and April 1999, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Approximately $390,000 of such
indebtedness under the line of credit will be incurred to fund the redemption
of the equity interests of Mr. Dorfman's father in one of the entities that is
a party to the Consolidation.
The remainder of the net proceeds is expected to be used for general
corporate purposes, including (i) approximately $1.0 million to develop the
Company's sales infrastructure, which entails hiring new sales personnel,
forming relationships with independent sales organizations and developing
sales and marketing materials, (ii) approximately $1.0 million to upgrade the
Company's computer software, (iii) approximately $500,000 to purchase computer
hardware for the Company's call center, (iv) approximately $1.5 million for
equipment and fixtures for the Company's new distribution facility and
corporate headquarters expected to be completed in the third quarter of 1998,
and (v) for general working capital needs. The Company may from time to time
consider possible acquisitions of related businesses and the use of net
proceeds from the Offering to finance such acquisitions. The Company does not
have any present agreements or commitments for, and is not presently engaged
in active negotiations with respect to, any particular prospects.
Pending application of the net proceeds as described above, the Company will
invest the net proceeds in short-term, interest-bearing investment grade or
government securities.
14
<PAGE>
DIVIDEND POLICY
Innotrac has never paid any cash dividends on its Common Stock. The Company
currently intends to retain its future earnings, if any, to finance the
growth, development, and expansion of the Company's business and, accordingly,
does not currently intend to declare or pay any dividends on the Common Stock
for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of the Company's Board of
Directors and will depend upon the future earnings, results of operations,
financial condition and capital requirements of the Company, among other
factors. In addition, the Company's financing agreements contain limitations
on the payment of cash dividends and other distributions of assets. See "The
Consolidation" for a description of distributions to equity holders, including
shareholders of the Company, made by affiliated companies that are parties to
the Consolidation.
DILUTION
At September 30, 1997, after giving effect to the Consolidation as if it had
occurred at such date, the pro forma combined net tangible book value of the
Company would have been $5.0 million, or $0.76 per share. Net tangible book
value per share represents the amount of the Company's shareholders' equity
less intangible assets, divided by the number of shares of Common Stock
outstanding. Dilution per share to new investors represents the difference
between the price per share of Common Stock in the Offering and the pro forma
net tangible book value per share of Common Stock immediately after completion
of the Offering. After giving effect to the Consolidation and the sale of the
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00 per share and after deducting the underwriting
discount and estimated Offering expenses payable by the Company, the pro forma
combined net tangible book value of the Company would have been $31.3 million,
or $3.47 per share. This represents an immediate increase in pro forma net
tangible book value of $2.71 per share to existing shareholders and an
immediate dilution in net tangible book value of $9.53 per share to new
investors purchasing the shares of Common Stock in the Offering. The following
table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value before the Offering......... $0.76
Increase in net tangible book value per share attributable to
new investors................................................ 2.71
-----
Pro forma net tangible book value after the Offering.......... 3.47
------
Dilution per share to new investors........................... $ 9.53
======
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Consolidation as of September 30, 1997, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and
the average price per share paid by existing shareholders and the new
investors, assuming the sale of 2,500,000 shares of Common Stock at an assumed
initial public offering price of $13.00 per share.
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders(1)....... 6,500,000 72% $ 22,000 0% $ 0.00
New investors.................. 2,500,000 28 32,500,000 100 $13.00
--------- --- ----------- ---
Total........................ 9,000,000 100% $32,522,000 100%
========= === =========== ===
</TABLE>
- --------
(1) Does not include 383,000 shares of Common Stock reserved for issuance
pursuant to stock options granted under the Company's Stock Option Plan.
15
<PAGE>
CAPITALIZATION
The following table sets forth, as of September 30, 1997, (i) the actual
combined capitalization of the Company and (ii) the pro forma consolidated
capitalization of the Company giving effect to the Consolidation and to the
application of the net proceeds from the Offering at an anticipated initial
public offering price of $13.00 per share. The data set forth below should be
read in conjunction with "The Consolidation," "Use of Proceeds," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the financial statements and notes thereto and the
other financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
---------------------
PRO FORMA
CONSOLIDATED
ACTUAL AS ADJUSTED
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Indebtedness:
Line-of-credit facility................................ $10,446 --
Long term debt(1)...................................... 1,292 $ 70
Subordinated debt...................................... 3,500 --
Redeemable capital stock .............................. 894 504(2)
------- -------
Total indebtedness................................... 16,132 574
------- -------
Shareholders' equity:
Partners' capital...................................... 1,577 --
Members' deficit....................................... (999) --
Preferred Stock, $0.10 par value, 10,000,000 shares
authorized; none issued and outstanding............... -- --
Common Stock, $0.10 par value; 50,000,000 shares
authorized, 6,500,000 shares issued and outstanding,
9,000,000 shares issued and outstanding as
adjusted(3)........................................... 5 900
Additional paid-in capital(3).......................... 14 25,375
Retained earnings...................................... 4,324 4,989
------- -------
Total shareholders' equity........................... 4,921 31,264
------- -------
Total capitalization............................... $21,053 $31,838
======= =======
</TABLE>
- --------
(1) Includes current portion of related indebtedness.
(2) Represents redeemable capital stock of a subsidiary to be repurchased in
the fourth quarter of 1998. See "Certain Transactions."
(3) Excludes 383,000 shares of Common Stock reserved for issuance pursuant to
stock options granted under the Stock Option Plan.
16
<PAGE>
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company. The
selected historical statements of operations data for each of the years ended
December 31, 1995 and 1996, the nine months ended September 30, 1997 and the
selected historical balance sheet data for the periods then ended have been
derived from the combined financial statements that have been audited by
Arthur Andersen LLP, independent public accountants. The selected historical
statement of operations data for the nine months ended September 30, 1996 have
been derived from the Company's unaudited combined financial statements and
include, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the data for such
periods. Operating results for interim periods are not necessarily indicative
of results for the full fiscal year. The pro forma statement of operations
data for the nine months ended September 30, 1997 and the pro forma balance
sheet data at September 30, 1997 give effect to the Consolidation and the
Offering as well as the use of the net proceeds from the Offering as if the
transactions had occurred at January 1, 1997 (for the statement of operations)
and September 30, 1997 (for the balance sheet). The pro forma financial
information does not purport to represent what the Company's consolidated
results of operations would have been if these transactions had in fact
occurred on these dates, nor does it purport to indicate the future
consolidated financial position or consolidated results of future operations
of the Company. The pro forma adjustments are based on currently available
information and certain assumptions that management believes to be reasonable.
The selected financial data should be read in conjunction with "The
Consolidation," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial statements and
notes thereto and other financial data included elsewhere in this Prospectus.
17
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------------
PRO FORMA
CONSOLIDATED
AS ADJUSTED
1993 1994 1995 1996 1996 1997 1997(1)
------ ------- ------- ------- ---------- ---------- ---------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues, net........... $5,586 $17,380 $44,886 $71,297 $ 53,231 $ 67,314 $ 67,314
Cost of revenues........ 3,495 11,274 30,658 55,520 39,232 51,800 51,800
------ ------- ------- ------- ---------- ---------- ----------
Gross profit............ 2,091 6,106 14,228 15,777 13,999 15,514 15,514
------ ------- ------- ------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative
expenses.............. 1,538 2,289 6,510 10,391 8,007 9,072 9,072
Depreciation and
amortization.......... 157 214 293 429 231 454 454
------ ------- ------- ------- ---------- ---------- ----------
Total operating
expenses.............. 1,695 2,503 6,803 10,820 8,238 9,526 9,526
------ ------- ------- ------- ---------- ---------- ----------
Operating income........ 396 3,603 7,425 4,957 5,761 5,988 5,988
------ ------- ------- ------- ---------- ---------- ----------
Other (income) expense:
Interest expense....... 123 622 1,090 1,456 955 1,422 5
Other.................. (6) 67 (73) 94 2 (2) (2)
------ ------- ------- ------- ---------- ---------- ----------
Total other expense.... 117 689 1,017 1,550 957 1,420 3
------ ------- ------- ------- ---------- ---------- ----------
Income before income
taxes.................. 279 2,914 6,408 3,407 4,804 4,568 5,985
Income tax provision.... (30) (356) (793) (211) (472) (75) (2,392)
------ ------- ------- ------- ---------- ---------- ----------
Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,332 $ 4,493 $ 3,593
====== ======= ======= ======= ========== ========== ==========
Weighted average
shares................. 9,103(2)
Net income per share.... $ 0.39(3)
==========
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1997
------------------------------- -------------------------
PRO FORMA
CONSOLIDATED
1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4)
------ ------- ------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,593 $23,842
Property and equipment,
net.................... 1,465 5,059 9,099 10,939 8,249 8,249
Total assets............ 3,457 13,548 30,414 49,037 36,387 47,524
Long-term obligations... 708 4,278 4,729 4,779 4,157 453
Shareholders'
equity(5).............. 409 1,624 3,195 4,540 4,921 31,264
</TABLE>
- --------
(1) Pro forma adjustments include (i) the elimination of interest expense on
the line of credit, the term loan and subordinated debt borrowings assumed
to be repaid with the proceeds of the Offering, (ii) an income tax
provision to reflect the pro forma tax effects as if the Company were
taxed as a C corporation and (iii) the tax effect of the interest expense
adjustment.
(2) Adjusted to reflect the Consolidation, the Offering (assuming the shares
were outstanding for the entire period) and the exercise of all options
outstanding under the Stock Option Plan (using the "treasury stock" method
and assuming the shares were outstanding for the entire period).
(3) Excludes the dividend accretion on redeemable capital stock of a
subsidiary of approximately $64,000, or $(0.01) per share.
(4) Assumes an increase to working capital equal to the aggregate estimated
net proceeds less repayment of borrowings under the line-of-credit
facility, the term loan the subordinated debt and the redeemable capital
stock of a subsidiary. Reflects the recording of deferred tax assets and
liabilities associated with the change in tax status to a C corporation of
certain of the entities as a result of the Consolidation, and distribution
of $6.4 million of a portion of undistributed earnings of certain of the
entities that are parties to the Consolidation. See "The Consolidation"
and "Use of Proceeds."
(5) Includes capital stock, partners' capital, members' deficit and retained
earnings.
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
Since its formation in 1984, the Company has expanded its business and
facilities to offer distribution and management services, and inbound
teleservices in response to the needs of clients in a variety of industries
and to capitalize on market opportunities. In 1987, the Company began
providing marketing support services to BellSouth. In 1991, the Company
initiated a fulfillment program to sell or rent to BellSouth customers Caller
ID hardware, phone sets and other equipment, and in 1993, began billing the
charges on customers' telephone bills. As part of this program, Innotrac
acquires the Caller ID and other telecommunications equipment from third party
manufacturers, thereby assuming inventory and credit risk. Upon receipt of an
order, the Company ships the product, tracks inventory levels and sales and
marketing data and maintains teleservicing operations to handle customer
service and technical support.
To leverage its experience and infrastructure investment related to the
BellSouth marketing support program, in June 1996 the Company entered into an
agreement with Pacific Bell to sell Pacific Bell's Caller ID equipment. The
Company also provides marketing support services to US West and seeks other
telecommunication companies for whom it can provide similar marketing support
services.
The Company has experienced significant growth in revenue in recent years
primarily due to the growth in Caller ID market penetration and service
improvements by the Company with respect to product-based marketing support
services. Industry sources indicate that at the end of 1995 BellSouth's Caller
ID penetration was approximately 13%. BellSouth indicates that through the end
of October 1997 its Caller ID penetration had increased to approximately 28%.
In 1993 the Company began billing on the telephone bill and in mid-1995,
changed the method of selling BellSouth equipment from taking referrals in the
Company's call center from BellSouth representatives to having a BellSouth
representative negotiate sales on behalf of the Company and send order
information to the Company by electronic data interchange ("EDI"). This change
in process increased sales and decreased order processing time. Also, in
January 1997 the Company implemented an interactive voice response ("IVR")
system to handle some of the BellSouth customer service calls, which generally
reduced response time and lowered operating costs.
Management believes that growth in revenues from Caller ID marketing support
services will remain constant for the next several years as market penetration
increases and new Caller ID services that require enhanced equipment are
introduced. Sales are expected to level-off as penetration of the market
matures. According to industry sources, market penetration of Caller ID
services in the U.S. as of December 1, 1997 is approximately 18% and is
expected to peak at approximately 75% by 2007. Management intends to offset
the eventual maturity of its Caller ID business by diversifying its client
base and expanding the scope of marketing support services it renders to its
clients. The Company intends to use a portion of the net proceeds from the
Offering to develop a sales infrastructure to aggressively promote its
marketing support services. See "Use of Proceeds" and "Business--Business
Strategy."
The largest component of the Company's expenses is its cost of revenues,
which includes the product costs of telecommunications equipment, depreciation
on Caller ID rental equipment, the costs of labor associated with marketing
support services for a particular client, telecommunications services costs,
materials and freight charges, and directly allocable facilities costs. Most
of these costs are variable in nature. A second component of the Company's
expenses includes selling, general and administrative ("SG&A") expenses. This
expense item is comprised of labor and other costs associated with marketing,
financial, information technology support, human resources and administrative
functions that are not allocable to specific client services, as well as bad
debt expense. SG&A expenses tend to be fixed in nature, with the exception of
bad debt, which is related to revenues.
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RESULTS OF OPERATIONS
The following table sets forth summary operating data, expressed as a
percentage of revenues, for the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1996 and 1997. Operating results for any period
are not necessarily indicative of results for any future period.
The financial information provided below has been rounded in order to
simplify its presentation. However, the percentages below are calculated using
the detailed information contained in the financial statements, the notes
thereto and the other financial data included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ------------------
1995 1996 1996 1997
------ ------ -------- --------
<S> <C> <C> <C> <C>
Revenues, net............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 68.3 77.9 73.7 77.0
Gross profit.............................. 31.7 22.1 26.3 23.0
Selling, general and administrative
expenses................................. 14.5 14.6 15.0 13.5
Operating income.......................... 16.5 7.0 10.8 8.8
Interest expense.......................... 2.4 2.0 1.8 2.1
Income before income taxes................ 14.3% 4.8% 9.0% 6.8%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues. The Company's revenues increased 26.5% to $67.3 million for the
nine months ended September 30, 1997 from $53.2 million for the nine months
ended September 30, 1996, primarily due to increased sales of Caller ID units
to BellSouth and Pacific Bell customers. The growth was partially offset by a
decrease in revenues during the nine months ended September 30, 1997 compared
to the prior nine month period resulting from the conclusion of a fulfillment
program performed by the Company in connection with the 1996 Olympic Games. The
Company's sales to Pacific Bell customers have been less than expected due to
regulatory delays and a low level of promotion of Caller ID services by Pacific
Bell.
Cost of Revenues. The Company's cost of revenues increased 32.1% to $51.8
million for the nine months ended September 30, 1997 compared to $39.2 million
for the nine months ended September 30, 1996. This increase was due to
increased revenue volume and a $1.6 million write-down (2.4% of revenues) on
Caller ID equipment purchased for the start-up of the Pacific Bell program. The
increase in cost of revenues was also associated with the Company's new call
center.
Gross Profit. For the nine months ended September 30, 1997, the Company's
gross profit was $15.5 million or 23.0% of revenues as compared to $14.0
million or 26.3% of revenues for the nine months ended September 30, 1996. The
decrease in gross margin was primarily due to the $1.6 million inventory write-
down and costs associated with the new call center, along with the impact of
introductory promotional prices on certain Caller ID units, which were lower
than regular prices.
Selling, General and Administrative Expenses. SG&A expenses for the nine
months ended September 30, 1997 were $9.1 million or 13.5% of revenues compared
to $8.0 million or 15.0% of revenues for the nine months ended September 30,
1996. The decrease in SG&A expenses as a percentage of revenues was due to
improved economies of scale. This was slightly offset by an increase in the
Company's bad debt expense, most of which was associated with sales of Caller
ID and other telecommunications equipment. Bad debt expense was $5.5 million
for the nine months ended September 30, 1997 as compared to $3.5 million for
the nine months ended September 30, 1996. The increase in bad debt expense was
primarily due to the Company's higher revenue volume and higher Caller ID
market penetration, which the Company believes results in an increase in sales
of Caller ID units to consumers having higher credit risks.
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Interest Expense. Interest expense increased to $1.4 million for the nine
months ended September 30, 1997 from $1.0 million for the nine months ended
September 30, 1996. The increase was primarily due to increased borrowings
under the Company's line of credit to fund working capital, consisting
primarily of accounts receivable and inventory necessary to support increases
in revenues. This increase was slightly offset by lower interest on the
Company's subordinated debt in the 1997 period compared to the 1996 period due
to a repayment of such debt by the Company in September 1996.
Income Taxes. The Company's effective tax rates for the nine months ended
September 30, 1997 and 1996 were 1.6% and 9.8%, respectively. The change from
1996 to 1997 was primarily the result of a higher level of income attributable
to the pass-through entities involved in the Consolidation. As a result of the
Consolidation, the Company expects its effective tax rate in future periods to
increase to statutory levels. See "The Consolidation."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. The Company's revenues increased 58.8% to $71.3 million for the
year ended December 31, 1996 from $44.9 million for the year ended December
31, 1995, primarily due to increased sales of Caller ID units to BellSouth
customers.
Cost of Revenues. The Company's cost of revenues increased 80.8% to $55.5
million for the year ended December 31, 1996 from $30.7 million for the year
ended December 31, 1995, primarily due to increased revenue volume, as well as
costs associated with the Company's new call center, which opened in June
1996.
Gross Profit. The Company's gross profit for the year ended December 31,
1996 increased 11.2% to $15.8 million or 22.1% of revenues from $14.2 million
or 31.7% of revenues for the year ended December 31, 1995. The decrease in
gross margin was primarily due to costs associated with the call center that
opened in June 1996, along with the impact of introductory promotional prices
on certain Caller ID units sold during the last six months of 1996.
Selling, General and Administrative Expenses. SG&A expenses for the year
ended December 31, 1996 were $10.4 million or 14.5% of revenues compared to
$6.5 million or 14.6% of revenues for the year ended December 31, 1995. The
increase in the 1996 period over the 1995 period was primarily due to the
fixed costs associated with the Company's new call center and an increase in
the Company's bad debt expense. The bad debt expense, which was associated
with sales of Caller ID and other telecommunications equipment, was $5.6
million for the year ended December 31, 1996, compared to $3.0 million for the
year ended December 31, 1995. The increase in bad debt expense was primarily
due to the Company's higher revenue volume and Caller ID market penetration,
which the Company believes results in an increase in sales of Caller ID units
to consumers having higher credit risks.
Interest Expense. Interest expense increased to $1.5 million for the year
ended December 31, 1996 from $1.1 million for the year ended December 31,
1995. The increase was primarily due to additional borrowings in the 1996
period under the Company's line of credit to fund working capital, consisting
primarily of accounts receivable and inventory required to support increased
revenue. The increase was partially offset by lower interest on the Company's
subordinated debt in the 1996 period compared to the 1995 period due to a
repayment of such debt made by the Company in September 1996.
Income Taxes. The Company's effective tax rates for the years ended December
31, 1996 and 1995 were 6.2% and 12.3%, respectively. This change was primarily
the result of a higher level of income attributable to the pass-through
entities involved in the Consolidation. See "The Consolidation."
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations and capital expenditures
primarily through cash flow from operations and borrowings from banks and
shareholders. The Company had cash and cash equivalents of approximately
$40,000, $2.0 million and $425,000 at December 31, 1995, December 31, 1996 and
September
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<PAGE>
30, 1997, respectively. The Company maintains a $25.0 million revolving line of
credit with a bank, maturing in November 1999, which was increased from $18.0
million in December 1997. Borrowings under the line of credit bear interest at
the Company's option at the bank's prime rate, as adjusted from time to time,
or LIBOR plus up to 225 basis points. At September 30, 1997, the interest rate
was 8.5%. The Company also has a term loan with the same bank that matures in
July 1999 and bears interest at 8.95% per annum. In addition, the Company has a
subordinated note payable to a shareholder, which matures in April 1999 and
bears interest at a particular bank's prime rate, as adjusted from time to
time, plus 8.0% per annum. At September 30, 1997, the interest rate was 16.5%.
At December 1, 1997, approximately $9.1 million, $1.1 million and $3.5 million
were outstanding under the line of credit, the term loan and the subordinated
note, respectively. The Company anticipates that all outstanding indebtedness
under the line of credit, term loan and subordinated note will be repaid from
the net proceeds of this Offering. The Company will be able to continue to draw
on the line of credit from time to time. See "Use of Proceeds."
At September 30, 1997, the Company had entered into various operating leases
in the ordinary course of business. In December 1997, the Company entered into
an operating lease for a new distribution facility and corporate offices
expected to be ready for occupancy in the third quarter of 1998. As a result of
this lease, rental expense will increase approximately $400,000 per year
through 2008. In addition, the Company entered into an agreement with a related
party to acquire from him by the end of 1998 all of his interest in a
subsidiary of the Company and one entity involved in the Consolidation for an
aggregate of $980,000. See "Certain Transactions."
During the nine months ended September 30, 1997, the Company generated (used)
cash flow from operating activities of $11.6 million compared to ($5.8 million)
in the same period in 1996. Although the Company historically has generated
positive cash flow from operations, the negative cash flow for the nine months
ended September 30, 1996 was due to the increased working capital needed to
support the expansion of the Company's Caller ID programs, along with the
impact of the delay in the Pacific Bell Caller ID program in California, which
resulted in higher inventory levels. During the fiscal years ended December 31,
1996 and 1995, the Company generated cash flow from operating activities of
$88,000 and $6.4 million, respectively. The lower cash flow from operating
activities for the year ended December 31, 1996 was due to lower net income and
increased working capital requirements needed to support the expansion of the
Company's Caller ID programs, along with the impact of the delay in the Pacific
Bell Caller ID program.
Net cash used in investing activities was $5.0 million for the nine months
ended September 30, 1997 compared to $4.4 million for the nine months ended
September 30, 1996. This increase was primarily due to increased purchases of
telecommunications equipment. Net cash used in investing activities was $8.0
million for the year ended December 31, 1996 compared to $7.8 million for the
year ended December 31, 1995. This increase was primarily due to increased
purchases of telecommunications equipment and capital costs associated with the
build-out and opening of the Company's call center.
Net cash provided from (used in) financing activities was ($8.2 million) for
the nine months ended September 30, 1997 compared to $6.7 million for the nine
months ended September 30, 1996. The use of cash for financing activities in
the 1997 period reflects repayments under the line of credit and term loan. Net
cash provided from financing activities was $9.8 million for the year ended
December 31, 1996 and $588,000 for the year ended December 31, 1995. The
increase in cash provided by financing activities for the year ended December
31, 1996 was due to increased borrowings under the line of credit to fund
increased accounts receivable and inventory, partially offset by repayments on
the term loan and subordinated debt and distributions to equity holders of
entities involved in the Consolidation.
The Company estimates that its cash and financing needs through 1998 will be
met by cash flows from operations, its line of credit facility, and the net
proceeds from the Offering. However, any increases in the Company's growth
rate, shortfalls in anticipated revenues, increases in anticipated expenses, or
significant acquisitions could have a material adverse effect on the Company's
liquidity and capital resources and would require the Company to raise
additional capital from public or private equity or debt sources in order to
finance
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<PAGE>
operating losses, anticipated growth and contemplated capital expenditures. If
such sources of financing are insufficient or unavailable, the Company will be
required to modify its growth and operating plans in accordance with the
extent of available funding. The Company may need to raise additional funds in
order to take advantage of unanticipated opportunities, such as acquisitions
of complementary businesses or the development of new products, or otherwise
respond to unanticipated competitive pressures. There can be no assurance that
the Company will be able to raise any such capital on terms acceptable to the
Company or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires companies that do not choose to
account for stock-based compensation as prescribed by the statement to
disclose the pro forma effects on earnings and earnings per share as if SFAS
123 had been adopted. The Company has chosen the disclosure method, but for
all periods presented herein the Company did not have any stock option plans.
Subsequent to September 30, 1997, the Company adopted the Stock Option Plan.
Therefore, in subsequent periods the Company will have additional disclosures
related to SFAS 123.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), which redefines how
entities compute earnings per share. SFAS 128 requires presentation of "basic
earnings per share" and "diluted earnings per share," as defined. Primary
earnings per share will be replaced by basic earnings per share which will be
computed exclusively based on the weighted average number of common shares
outstanding. This statement is effective for periods ending after December 15,
1997 and will require restatement of all prior period earnings per share data
presented. The adoption of SFAS 128 is not expected to have a material impact
on the Company's earnings per share data.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of general purpose financial statements. This
statement is effective for periods beginning after December 15, 1997. The
adoption of SFAS 130 is not expected to have an impact on the Company's
financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement is effective
for financial statements for periods beginning after December 15, 1997. The
adoption of SFAS 131 is not expected to have a material impact on the
Company's financial statements.
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<PAGE>
BUSINESS
GENERAL
Innotrac is a full-service provider of customized, technology-based
marketing support services primarily to large corporations. The Company's
marketing support services include product and literature distribution,
computerized inventory and database management and customer-initiated
("inbound") teleservices. With the goal of providing turnkey marketing support
solutions, Innotrac works with its clients on a consultative basis to create
customized programs through which it can most efficiently match its service
offerings with its clients' needs. Innotrac's flexible marketing support
solutions range from small, specialty projects to larger integrated
fulfillment, teleservicing and database tracking programs. The Company has a
broad range of clients including BellSouth, Home Depot, NAPA, Pacific Bell,
Siemens E&A, Turner Broadcasting System, Inc. and US West.
Since its formation in 1984, the Company has expanded its business and
facilities to offer distribution and management services and inbound
teleservices in response to the needs of clients in a variety of industries
and to capitalize on market opportunities. In 1987, the Company began
providing marketing support services to BellSouth. In 1991, these services
were expanded to include fulfillment services related to Caller ID
telecommunications equipment. This program provides for Innotrac to (i) sell
or rent to BellSouth customers Caller ID hardware, phone sets and other
equipment (branded with BellSouth's logo), (ii) ship ("fulfill") customers'
orders, (iii) track inventory levels and sales and marketing data regarding
such items and (iv) maintain teleservicing operations to handle customer
service and technical support for Caller ID units and other products. In
conjunction with this program, in 1993 Innotrac pioneered a billing option
(the "billing options program") to allow customers to pay for the equipment
through their phone bills, on an interest free installment basis. The addition
of the billing options program was well received in the marketplace, and, as a
result, the fulfillment services for BellSouth have been the primary force
behind the Company's rapid sales growth. Innotrac has continued to capitalize
on its fulfillment expertise in the telecommunications sector, as evidenced by
its additional contractual arrangements with Pacific Bell and US West.
The Company has positioned itself to capitalize on the trend towards
outsourcing of marketing support services. The revenues generated from its
telecommunications marketing support programs have enabled the Company to
develop the infrastructure necessary to offer additional and more advanced
services to its customers. The Company believes it will achieve future growth
by targeting large companies in a variety of industries with numerous and/or
geographically diverse subsidiary or affiliate operations, extensive marketing
needs or complex point-of-distribution requirements.
Companies are increasingly focusing on their primary businesses and turning
to outside service companies to perform marketing support functions. By
outsourcing these functions, companies seek to (i) replace fixed warehouse,
information technology and labor costs with variable costs, (ii) improve their
reaction to business cycles, (iii) improve customer service and technical
support, (iv) manage capacity to meet fluctuations in demand for products and
customer service, (v) create economies of scale by sharing the costs of
advanced telecommunications and fulfillment systems, and (vi) reduce working
capital needs. As the trend toward outsourcing continues, the Company believes
that businesses will increasingly seek to reduce the number of vendors they
utilize and may prefer single-source providers of integrated, customized
marketing support services. The Company believes that its "one-stop" approach,
combined with its use of advanced technology, provides a competitive advantage
in attracting and retaining clients on a long-term basis.
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BUSINESS STRATEGY
The Company's strategy is to take advantage of market trends towards
outsourcing by leveraging its core expertise, reputation for quality and
timely service and strong client relationships. The following are the key
elements of this strategy:
LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand
its customer base in the telecommunications industry by leveraging the
expertise it has developed and the results it has achieved through long-
standing relationships with several clients in the industry. The Company is
also seeking to expand the level of services provided to existing
telecommunications clients.
BROADEN CUSTOMER BASE BY DEVELOPING SALES INFRASTRUCTURE. The Company has
experienced rapid revenue growth since 1993 without a significant sales
infrastructure. The Company intends to use a portion of the net proceeds of
the Offering to develop a national sales force for its services, to form
relationships with independent sales agencies and to develop sales and
marketing materials to highlight the wide array of services offered by the
Company. By developing this infrastructure, the Company intends to broaden its
customer base and diversify its sources of revenues.
CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a
commitment to the use of advanced technology and intends to continue to
upgrade and enhance its computer hardware and software applications to enable
it to continue to provide flexible and powerful services to its clients. The
Company believes that the use of advanced technology provides a competitive
advantage and results in greater capacity and reduced labor costs. The Company
also believes that continued technological advances, particularly those
utilizing the Internet, will provide new opportunities for the Company to
tailor its services to meet each client's needs. The Company intends to
address the labor-intensive nature of fulfillment services by developing more
efficient automated systems that distribute literature via electronic media
directly to the customer. The Company also plans to expand its Internet-
related capabilities for (i) automated inventory management, (ii) access to
order and database information and (iii) virtual warehousing of literature so
that such materials no longer need to be maintained in physical form in the
Company's warehouses.
EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored,
value-added solutions that achieve each client's intended marketing results.
The Company devotes considerable resources to assessing and understanding a
client's industry, products, services, processes and culture, then works with
the client to design programs to reduce the costs and investment required to
deliver the client's marketing support programs. The Company believes that
this consultative partnership approach encourages long-term client
relationships, as evidenced by the fact that the Company has serviced its 10
largest clients for an average of six years and its five oldest clients for an
average of 11 years. The Company believes that this approach also creates
substantial opportunities to expand relationships with existing clients by
cross-selling the full range of its services.
SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take
advantage of the fragmented nature of the marketing support services industry
by selectively acquiring complementary companies that extend its presence into
new geographic markets or industries, expand its client base, add new product
or service applications or provide substantial operating synergies. The
Company believes that there are a variety of such potential acquisition
opportunities.
CLIENTS
The flexibility of its services allows the Company to attract clients in a
broad range of industries. Innotrac targets companies that have developed a
large customer base, numerous and/or geographically diverse subsidiary or
affiliate operations, extensive marketing needs, or complex point-of-
distribution requirements. Companies with these characteristics tend to need
customer support, product or literature distribution, inventory warehousing
and management, or tracking and reporting capabilities. Although a company may
elect to perform these functions in-house, it will require the development of
expensive, labor intensive infrastructures, which may divert a company's focus
from its core competencies. Outsourcing these functions to a company such as
Innotrac may result in a lower cost and higher quality level than such
companies can achieve
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on an in-house basis. The following are some examples of the Company's clients
and the marketing support services the Company performs for them:
SIEMENS ENERGY AND AUTOMATION
Starting with the provision of marketing support services for just one
business unit in 1986, Innotrac currently provides marketing support services
for more than 20 business units of Siemens E&A. One component of these
services is the storage of technical literature, product catalogs and
brochures. Siemens E&A sales offices, dealers and distributors may order, via
telephone, fax or Innotrac's Internet gateway, various types of literature
stored in the Company's distribution facilities. Innotrac processes the order,
packs and ships the product using the least expensive carrier for the time
frame requested. Innotrac provides Siemens E&A with detailed inventory
management and charge back reports to allow Siemens E&A to allocate costs
appropriately to each business unit. Innotrac also distributes literature and
information from Siemens E&A's corporate office to its sales offices, dealers
and distributors. Siemens E&A frequently provides various other projects that
require Innotrac to assemble, collate, print and distribute information
contained in various databases maintained by Innotrac.
HOME DEPOT
Home Depot purchases in-store signage from various vendors and warehouses
the inventory in one of Innotrac's distribution facilities. For new store
openings, promotions or replacement, Home Depot orders signs from Innotrac to
ship to one or several of its stores in the United States and Canada. Innotrac
does not own the inventory, but manages it and provides cost and inventory
reports directly to Home Depot. As requested, Innotrac may assemble special
signs or products for distribution to Home Depot stores. In addition, Innotrac
provides Home Depot with cost accounting for each store's usage of signs so
that Home Depot can allocate those costs directly to the appropriate stores.
The Company invoices Home Depot monthly for order processing, consultative
account services, fulfillment and other expenses (such as freight and
supplies).
BELLSOUTH
Since 1987, the Company has provided many marketing support services for
BellSouth, including the Caller ID display unit distribution program, which
began in 1991. A transaction generally begins when a customer calls BellSouth
and speaks with one of over 4,000 BellSouth service representatives to obtain
Caller ID service. On behalf of Innotrac, the representative may offer to sell
or rent to the customer one of several models of Caller ID and telephone
products that can be paid for through the customer's phone bill, on an
interest free installment basis. If the representative makes the sale, the
order is sent via EDI to Innotrac. Occasionally, if more detailed information
is required, the customer's call is transferred directly to Innotrac. Innotrac
generally ships the order the next day and electronically submits monthly to
BellSouth the appropriate charges to be included on the customer's telephone
bill. Innotrac also provides the BellSouth customer with order status, billing
information and technical product support through its call center by IVR or
representative. Innotrac does not charge BellSouth for its services but
instead derives its fees from the difference in the price of the Caller ID
display unit charged to the customer and the wholesale cost of the product.
The Company has also been selected by BellSouth, starting in the first
quarter of 1998, to sell telephone network services such as voice mail and
upgraded Caller ID service. When one of Innotrac's thousands of daily customer
service calls for BellSouth is received, Innotrac's computer system will be
able to determine if the customer's telephone system can support the enhanced
services. If the customer and its existing system meet certain parameters, the
Innotrac representative will be prompted by the computer to offer the new
features. Innotrac will be paid by BellSouth on a per sale basis under this
program, and the program is expected to require minimal additional cost to
Innotrac.
MARKETING SUPPORT SERVICES
Innotrac designs flexible marketing support solutions that range from small,
specialty projects to large integrated fulfillment, teleservicing and database
tracking project from among the following service options:
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DISTRIBUTION SERVICES
TRADITIONAL PRODUCT AND LITERATURE FULFILLMENT. Innotrac is committed to
making its clients' products and services available to its customers on a
timely and accurate basis. Innotrac personnel process, pack and ship from the
Company's warehouses product orders and requests for promotional, technical and
educational literature, signage and point of sale materials for clients.
Clients may order such inventory by e-mail, through customized Internet
applications, EDI, telephone or facsimile. The Company ships orders so that the
product or literature reaches the client or its customer as it is needed
("just-in-time"). Additional fulfillment services offered by the Company
include (i) customized product assembly, (ii) kit assembly, (iii) binder
collation, (iv) manifest delivery service systems, (v) shrink wrapping, (vi)
weight verification of materials and (vii) preparing, addressing, coordinating,
sorting and mailing materials. The Company streamlines and customizes the
fulfillment procedures for each client based upon the product and literature
request, and the tracking, reporting and inventory controls necessary to
implement the marketing support program.
VIRTUAL DISTRIBUTION. Innotrac can provide literature and publishing
fulfillment services through advanced delivery systems, such as fax-on-demand,
print-on-demand and virtual warehousing, which management believes will be the
industry norm in the near future. Management believes these services will speed
the delivery of important documents to a client or a client's customer at a
much lower cost than traditional literature fulfillment, and that increasing
advances in facsimile and printer technology will enable the quality of
documents provided through these services to equal or surpass current quality.
With fax-on-demand, a client or a client's customer calls a toll-free
number to reach the Company's call center. Using the IVR system, the caller
then searches for a particular publication from a menu of choices, or from a
catalog of publications already in his or her possession, and instructs the
system to deliver such publication. The desired literature or marketing
materials are then quickly faxed to the customer.
Print-on-demand solutions enable customers to cost-effectively produce and
distribute small or large volumes of a document on short notice. As part of
this service, the client supplies the Company with either an electronic file
containing the document or a hard copy of the document, in black and white or
in color, which the Company converts to an electronic file and stores in its
computer system. The client or the client's customer can then use its own
computer system or telephone to place a print order, including production
amount and distribution method and location. The Company then completes the
print and distribution process, thereby avoiding the costs of maintaining a
warehouse for storage of the documents and personnel to pick and pack the
documents for shipment.
Virtual warehousing solutions take the print-on-demand program to a more
efficient level of operation. With these services, the client provides Innotrac
with copies of its technical, educational or marketing literature for transfer
onto Innotrac's computer system. The Company then stores and organizes the
materials on a customized system designed to facilitate the client's retrieval
needs. Instead of placing orders with Innotrac to print and ship literature
requirements (as in print-on-demand), utilizing virtual warehousing, the client
can print the materials directly to its printers or its customer's printers,
thereby reducing warehousing, labor and shipping costs.
Other components of the Company's virtual distribution services include
broadcast fax and broadcast e-mail, which enable an Innotrac client to send
literature to a database of fax numbers or e-mail addresses. These services
allow a client to communicate with customers or sales personnel quickly,
efficiently and cost effectively.
MANAGEMENT SERVICES
INVENTORY MANAGEMENT. An integral part of Innotrac's marketing support
services is the on-line tracking and control of a client's inventory. The
Company provides automated inventory management to assure real-time stock
counts of a client's products, sales, educational and technical literature,
signage and other items. These inventory management systems allow Innotrac and
the client to maintain consistent and timely reorder
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<PAGE>
levels and supply capabilities and also allow the client to assess quickly (i)
current stock balances, (ii) year-to-date receipts, (iii) monthly and yearly
usage, (iv) reorder levels, (v) pricing information and (vi) dollar value of
inventory. The Company offers this information to the client on a real-time
basis via direct dial-up, through its Internet gateway, or through EDI.
Inventory management data is also utilized in the Company's reporting
services. See "--Management Services--Reporting." Innotrac also utilizes bar
coding equipment in its inventory management systems, which improves the
efficiency of stock management and selection.
DATABASE MANAGEMENT. Innotrac can manage a client's databases
independently or in conjunction with other marketing support programs.
Independent database management begins with the client providing Innotrac with
the information to establish the database, which the Company then customizes,
manages, uses to provide reports to the client, and updates based upon
information supplied by the client. In addition, Innotrac's integrated
marketing support programs generate information about customers, demographics,
recurring technical problems and other matters. Innotrac compiles this
information into customized databases that evolve in conjunction with its on-
going marketing support and customer service programs. This data is a source
of valuable information to Innotrac and its clients in evaluating ongoing
programs and planning and designing future programs.
REPORTING. Innotrac provides reporting to support most of its services,
such as inventory analysis, program results and detailed order processing
information. Innotrac has developed flexible technologies and reporting
procedures that effectively convert raw data gathered during the course of a
marketing support program into useful, customized reports upon which clients
and Innotrac can base strategic decisions and more effectively respond to
customer needs and inquiries. For example, information obtained during a
customer telephone call is captured by the Company's database marketing and
management systems and is then incorporated into broader reports. These
reports also are used by Innotrac to ensure high quality performance. On-line
functions allow clients to monitor their programs in real-time to obtain
comprehensive trend analyses and modify program parameters as necessary.
Innotrac provides clients with customized reports in printed form, via the
Internet, electronic mail, computer-to-computer transmission, disk and
magnetic tape. Innotrac also provides cost-center based accounting reports for
clients who utilize Innotrac's services for subsidiary and intra-company
fulfillment transactions.
LEAD MANAGEMENT. The Company offers lead management services as a means
for clients to identify, communicate with and sell their products to new
customers. For example, clients often place advertisements in magazines and
newspapers with toll-free numbers for prospective customers to call to receive
more information. Innotrac can answer these requests for information,
establish a database of prospective customers, send information,
questionnaires or surveys to the prospective customers (which helps to further
screen the prospective customer for a possible sales contact by Innotrac's
client), and, once properly screened, Innotrac can issue a sales lead to the
appropriate sales representative of the client. During this process, the
Company tracks, analyzes and provides full reporting to the client so that
modifications or alterations in the program can be made at any time.
PAYMENT PROCESSING. Innotrac manages client programs in which the Company
distributes invoices on behalf of its clients and collects, tracks and reports
for its clients amounts due to them. In addition, the Company provides
services for clients in connection with credit card, coupon and rebate
processing.
INBOUND TELESERVICES
PRODUCT ORDERS. The Company's representatives in its call center process
orders with respect to items such as Caller ID display units and phone sets,
literature, signage, point-of-purchase materials, promotional items (caps,
shirts, pens, etc.) and video and audio tapes. Inbound teleservices are
generally commenced by a toll-free call from a client's customer that is
received by the Company, identified and routed to an Innotrac service
representative, who generally answers using the client's name. Orders for
Caller ID and other telecommunication products also occur as a result of an
Innotrac service representative offering products in connection with a
customer service or technical support call. To properly handle the call,
Innotrac's automated call distributors and
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digital switches identify each inbound call by the toll-free number dialed and
immediately route the call to an Innotrac representative trained for that
client's program and possessing the language capabilities to deal with the
customer. In some cases teleservices are offered by IVR systems, which allow
customers to route their calls by selecting from a menu of offerings, and text
to speech systems, which allow the IVR system to "read" specific, real-time
data from the client's databases and convert it into speech based on cues from
a caller. Such systems, which the Company expects increasingly to utilize in
the future, generally reduce personnel and physical plant expenses associated
with a call center and expand the operating capabilities of the center.
Whether a customer's call is answered by a representative or one of the
Company's automated systems, the customer's needs are generally resolved with
a single call. The information and results of the call are then communicated
to appropriate personnel for order or additional processing and fulfillment
or, if Innotrac does not manage the client's inventory, the Company transmits
the customer's request directly to the client. Once an order is received,
Innotrac's automated systems allow representatives to track and update the
disposition of the order at any time through receipt by the customer.
TECHNICAL SUPPORT; CUSTOMER SERVICE. Innotrac service representatives
resolve complaints, diagnose and resolve product or service problems, and
answer technical questions for its client's customers. Technical support
inquiries are generally driven by a customer's purchase of a product or by a
customer's need for ongoing assistance. Customers of Innotrac's clients dial a
support number and are either connected with a trained Innotrac representative
or an IVR system. Innotrac's service representatives receiving a call can
enter customer information into the Company's call-tracking system, listen to
a question, and quickly access a proprietary network database via computer to
answer a customer's question. The IVR system attempts to resolve support
issues by guiding the customer through a series of interactive questions. If
automatic resolution by IVR cannot solve the problem, the call can be routed
to one of Innotrac's service representatives who is specially trained in the
applicable product. A senior representative is available to provide additional
assistance for complex or unique customer questions. As additional product
information becomes available over the course of the program, the Company
promptly integrates such information into its database, thereby ensuring that
IVR and representatives' answers are based upon the latest product
information. Frequently asked questions can also be integrated into IVR
systems to bypass representatives.
DEALER LOCATOR. Dealer locator services are offered both by IVR and
customer service representatives. Customers of Innotrac's clients, such as
NAPA, call a toll-free number to locate the closest dealer, store or
distributor office. By using the customer's zip code, Innotrac's software will
search the client database and offer the customer the address, phone number
and directions to the nearest location.
TECHNOLOGY
Innotrac's use of advanced technology enables it to design and efficiently
deliver services for each client's marketing support needs. The Company's
information technology group ("IT Group") has developed the Company's database
marketing support and management systems, which utilize a UNIX-based open
architecture comprised of multiple networked computers and anchored by a
Hewlett-Packard HP9000 K420 multiprocessing system. The Company plans to
utilize a portion of the net proceeds of the Offering to install an Oracle
database system and specialized order processing and inventory management
applications software, which features a 4GL (4th Generation Language)
technology that will allow for quick and efficient changes to programs,
systems and reports. This system will standardize the Company's computer
services and allow for even greater flexibility and capacity. See "Use of
Proceeds."
The open architecture of the Company's computer system permits the Company
to seamlessly interact with many different types of client systems. The IT
Group uses this platform to design and implement application software for each
client's program, allowing clients to review their programs' progress on-line
to obtain real-time comprehensive trend analysis, inventory levels and order
status and to instantly alter certain program parameters. As the needs of a
client evolve, the IT Group works with the client to modify the program on an
ongoing basis. Information can also be exchanged via EDI, Internet access and
direct-dial applications. The Company believes
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<PAGE>
that its technology platform is and will be among the most advanced in the
industry and provides the Company with the resources to continue to offer
leading edge services to current and new clients. The Company believes that
the integrity of client information is adequately protected by its data
security system and its off-site disaster back-up storage facilities.
The Company's call center utilizes a sophisticated Rockwell Spectrum
Automatic Call Distributor ("ACD") switch to handle the Company's call
management functions. This ACD system has the capacity to handle 2,400
teleservice representatives simultaneously, and is currently supporting over
200 representatives simultaneously. Additionally, the ACD system is integrated
with software designed to enable management to automatically schedule
teleservices representatives based on call length and call volume data
compiled by the ACD system.
PERSONNEL AND TRAINING
Innotrac's success in recruiting, hiring and training large numbers of
skilled employees and obtaining large numbers of hourly employees during peak
periods for distribution and teleservice operations is critical to the
Company's ability to provide high quality marketing support services.
Teleservice representatives and fulfillment personnel receive feedback on
their performance on a regular basis and, as appropriate, are recognized for
superior performance or given additional training. To maintain good employee
relations and to minimize employee turnover, the Company offers competitive
pay, hires primarily full-time employees who are eligible to receive a full
range of employee benefits, and provides employees with clear, visible career
paths.
As of December 1, 1997, the Company had 535 employees, of which
approximately 85% were full-time and 15% were part-time. Management believes
that the demographics surrounding its facilities, and its reputation,
stability, compensation and benefit plans should allow the Company to continue
to attract and retain qualified employees. The Company considers its employee
relations to be good.
FACILITIES
Innotrac's headquarters are located in 63,000 square feet of leased space in
Norcross, Georgia. The Company's corporate offices occupy 20,000 square feet
of this facility and the remaining 43,000 square feet is distribution space.
The Company leases an additional 16,000 square feet of space adjacent to its
corporate offices and operates another distribution center in Norcross with
42,000 square feet of space. The Company is combining its corporate offices
and distribution facilities into a 250,000 square foot facility, which is
within two miles of its call center. Construction on this facility has
commenced, and the Company expects to move into this new facility in the third
quarter of 1998. The new site also includes approximately 3.5 acres that will
be available for the Company's expansion requirements. The Company has entered
into a lease for the new facility with a term of 10 years and two five year
renewal options. The lease provides for an option to purchase the facility
prior to occupancy, at the end of the first five years of the term or at the
end of the first 10 years of the term. The Company has not yet determined
whether to exercise such purchase option.
Innotrac provides teleservices through its call center located in Duluth,
Georgia, which opened in June 1996. The call center is currently configured
with 325 workstations and has room to expand to approximately 700
workstations. It also contains approximately 18,000 square feet of
distribution space. It currently operates from 8:00 a.m. until midnight Monday
through Friday and from 9:00 a.m. to 8:00 p.m. on Saturday.
The Company believes that its facilities, after the move to the new
corporate offices and distribution facilities, will be adequate for its needs
for the foreseeable future.
COMPETITION
Innotrac competes on the basis of quality, reliability of service,
efficiency, technical superiority, speed, flexibility and price in tailoring
services to client needs. Management believes its comprehensive and integrated
services differentiate it from many of its competitors who may only be able to
provide one or a few of the
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<PAGE>
services that Innotrac provides. The Company continuously explores new
outsourcing service opportunities, typically in circumstances where clients
are experiencing inefficiencies in non-core areas of their businesses and
management believes it can develop a superior outsourced solution to such
inefficiency on a cost-effective basis. The Company primarily competes with
the in-house operations of its current and potential clients and also competes
with certain companies that provide similar services on an outsourced basis,
many of whom have greater resources than the Company.
GOVERNMENT REGULATION
Telephone sales practices are regulated at both the federal and state level
and primarily relate to outbound teleservices, which Innotrac generally does
not provide. To the extent that Innotrac offers outbound teleservices, such
operations are regulated by the rules of the Federal Communications Commission
(the "FCC") under the Federal Telephone Consumer Protection Act of 1991 (the
"TCPA"), the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act
of 1994 (the "TCFAPA") and various state regulations regarding telephone
solicitations. The Company believes that it is in compliance with the TCPA,
the TCFAPA and the FCC rules thereunder and the various state regulations and
that it would operate in compliance with those rules and regulations if it
were to engage in more substantial outbound teleservice operations in the
future.
The Caller ID services offered by the Company's telecommunications clients
are subject to various federal and state regulations. The legality of Caller
ID has been challenged in cases decided under the Electronic Communications
Privacy Act (the "ECPA") and several state statutes. In March 1994, an FCC
report preempted certain state regulation of interstate calling party number
parameter ("CPN") based services, the technology underlying Caller ID. This
report requires certain common carriers to transmit CPN and its associated
privacy indicator (which allows telephone callers to block the display of
their phone numbers on Caller ID display units) on an interstate call to
connecting carriers without charge (the "Free Passage" rule). In connection
with this report, the Department of Justice issued a memorandum which
concluded that the installation or use of interstate Caller ID service is not
prohibited by any federal wiretap statute and that, in general, the FCC has
authority to preempt state laws that the FCC finds would hinder federal
communications policy on Caller ID services. Court decisions since the FCC
issued its March 1994 report have consistently held that Caller ID does not
violate any state or federal wiretap statute.
In May 1995, the FCC narrowed its March 1994 preemption of state public
utilities blocking regulations by permitting subscribers to choose per-line
blocking or per-call blocking on interstate calls, provided that all carriers
were required to adopt a uniform method of overriding blocking on any
particular call. At the same time, the FCC specifically preempted a California
Public Utilities Commission ("CPUC") per-line blocking default policy, which
required that all emergency service organizations and subscribers with
nonpublished numbers, who failed to communicate their choice between per-call
blocking and per-line blocking, be served with a per-line blocking.
The FCC's revised rules and regulations also require carriers to explain to
their subscribers that their telephone numbers may be transmitted to the
called party and that there is a privacy mechanism (i.e., the "blocking"
feature) available on interstate calls, and explain how the mechanism can be
activated. The CPUC, seeking to protect the caller's privacy, has ruled that a
carrier can offer Caller ID or transmit CPN to interconnecting carriers only
upon CPUC approval of its customer notification and education plan. The CPUC
has approved the education plan of Pacific Bell, whose Caller ID market
includes California.
The Company works closely with its clients and their advisors to ensure that
the Company and the client are in compliance with such regulations. The
Company cannot predict whether the status of the regulation of Caller ID
services will change and what effect, if any, such change would have on the
Company or its industry.
INTELLECTUAL PROPERTY
The Company has used the service mark "Innotrac" since 1985 and has filed
applications for federal registration of this service mark in multiple
classes. The "innotrac.com" domain name has been a registered
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domain name since 1995. Due to the possible use of identical or phonetically
similar service marks by other companies in different businesses, there can be
no assurance that the United States Patent and Trademark Office will grant the
Company's registration of its service mark, or that such service mark will not
be challenged by other users. The Company does not believe that it owns or
utilizes any other service marks that are material to its business. The
Company's operations, however, frequently incorporate proprietary and
confidential information. In accordance with industry practice, the Company
relies upon a combination of contract provisions and trade secret laws to
protect the proprietary technology it uses and to deter misappropriation of
its proprietary rights and trade secrets.
LEGAL PROCEEDINGS
The Company may be involved from time to time in litigation arising in the
normal course of business. The Company is not a party to any current legal
proceeding.
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MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
<TABLE>
<CAPTION>
DIRECTOR TERM
NAME AGE POSITION EXPIRES
---- --- -------- -------------
<S> <C> <C> <C>
Executive Officers and
Directors:
Scott D. 40 President, Chief Executive Officer 2000
Dorfman(1)(3)......... and Chairman of the Board
David L. Ellin(1)...... 39 Senior Vice President, Chief 2000
Operating Officer, Secretary and
Director
Donald L. Colter, 37 Vice President--Operations
Jr. ..................
Larry C. Hanger........ 42 Vice President--Business Development 1998
and Director
John H. Nichols, III... 43 Vice President and Chief Financial
Officer
Bruce V. 40 Director 1998
Benator(1)(2).........
Martin J. Blank(2)(3).. 50 Director 1999
Campbell B. Lanier, 47 Director 1999
III(2)................
William H. Scott, 50 Director 1999
III(3)................
Key Employees:
Nancy C. Bergeron...... 46 Director of Marketing
Robert C. Covington, 41 Director of Information Technology
III...................
Robert Jackson, Jr. ... 46 Director of Fulfillment Operations
Melissa B. Ohlson...... 33 Director of Human Resources
Robert W. Seitz........ 51 Director of Client Services
J. Mark Tobin.......... 39 Director of Call Center Operations
</TABLE>
- --------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Mr. Dorfman is the founder of Innotrac and has served as President, Chief
Executive Officer and Chairman of the Board of the Company since its inception
in 1984. Prior to founding the Company, Mr. Dorfman was employed by Paymaster
Checkwriter Company, Inc. ("Paymaster"), an equipment distributor, where he
developed and managed Paymaster's mail order catalog and developed proprietary
software to track and analyze marketing programs. Prior to his employment with
Paymaster, Mr. Dorfman co-founded and served as President of Features Mail
Order Catalog, where he gained experience in distribution, tracking and
inventory control.
Mr. Ellin joined Innotrac in 1986, was appointed Secretary of the Company in
December 1997 and has served as Senior Vice President and Chief Operating
Officer of the Company since November 1997. He served as the Company's Vice
President from 1988 to November 1997. From 1984 to 1986, Mr. Ellin was
employed by the Atlanta branch of WHERE Magazine, where he managed the sales
and production departments. From 1980 to 1984, Mr. Ellin was employed by
Paymaster, where he was responsible for Paymaster's sales and collections.
Mr. Colter joined Innotrac in 1995 and has served as Vice President-
Operations since November 1997. He served as the Company's Chief Financial
Officer from 1995 to November 1997. Prior to joining Innotrac, Mr. Colter was
from 1993 to 1995 the corporate controller of Gay & Taylor/Thomas Howell
Group, an international insurance adjusting company. From 1991 to 1993, Mr.
Colter was corporate controller of Outdoor West, Inc., an outdoor advertising
company. Mr. Colter is a certified public accountant and has over 15 years of
experience in the financial and accounting industry.
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<PAGE>
Mr. Hanger joined Innotrac in 1994, and has served as Vice President-
Business Development since November 1997. He served as the Company's
Department Manager of Business Development from 1994 to November 1997, and was
responsible for the management of the telecommunication equipment marketing
and service business. From 1979 to 1994, Mr. Hanger served as Project Manager-
Third Party Marketing at BellSouth, where he managed the marketing program for
BellSouth's network services and was involved in implementing the billing
options program for BellSouth with Innotrac.
Mr. Nichols joined Innotrac in November 1997 as Vice President and Chief
Financial Officer. From 1993 until November 1997 he served as Vice President
and Chief Financial Officer for Storehouse, Inc., a furniture retailer. From
1982 until 1993, Mr. Nichols was employed by Contel Corporation and GTE
Corporation in various senior financial management positions in both the
telephone and cellular telephone business units. Mr. Nichols is a certified
public accountant.
Mr. Benator is a partner of Williams Benator and Libby, LLP, certified
public accountants. He has been affiliated with the firm since 1984 and is the
firm's Director of Accounting and Auditing Services. He has been associated
with the Company since its inception, serving as a financial advisor and its
outside accountant. From 1979 to 1984, Mr. Benator was employed by Ernst &
Young, LLP.
Mr. Blank has been a director since December 1997 and is a co-founder of
Automobile Protection Corporation ("APCO"), a publicly held corporation
engaged in the marketing of extended vehicle service contracts and warranty
programs. Mr. Blank has served as Secretary and Director of APCO since its
inception in 1984 and as Chairman of the Board and Chief Operating Officer
since 1988. Mr. Blank's experiences prior to co-founding APCO include the
practice of law and the representation of and financial management for
professional athletes. Mr. Blank is admitted to the bar in the States of
Georgia and California.
Mr. Lanier has been a director since December 1997 and is Chairman of the
Board and Chief Executive Officer of ITC Holding Company, Inc. ("ITC
Holding"), the parent company of ITC. He has served as a director of ITC
Holding since its inception in 1989. In addition, Mr. Lanier is an officer and
director of several ITC Holding subsidiaries. He also is a director of KNOLOGY
Holdings, Inc. ("KNOLOGY"), a broadband telecommunications services company
currently operating in Alabama, Florida and Georgia (formerly known as
CyberNet Holding, Inc.); MindSpring Enterprises, Inc., an Internet service
provider; National Vision Associates, Ltd., a full service optical retailer;
K&G Men's Center, Inc., a discount retailer of men's clothing; Vice Chairman
of the Board of AvData Systems, Inc. ("AvData"), a company providing data
communications networks; Chairman of the Board of Powertel, Inc. (formerly
InterCel, Inc.) ("Powertel"), a wireless telecommunications services company
operating in the southeastern United States, and Chairman of the Board of ITC
DeltaCom, Inc. ("ITC DeltaCom") a full service telecommunications provider to
business customers in the southeastern United States. He has served as a
Managing Director of South Atlantic Private Equity Fund IV, Limited
Partnership since 1997.
Mr. Scott has been a director since December 1997 and has served as
President and Chief Operating Officer of ITC Holding since 1991. He has been a
director of ITC Holding since 1989. From 1989 to 1991, he served as Executive
Vice President of ITC Holding. Mr. Scott is a director of Powertel, AvData,
KNOLOGY, ITC DeltaCom and MindSpring.
Ms. Bergeron joined Innotrac in April 1997 as Director of Marketing. From
1994 to 1996, Ms. Bergeron was Director of Marketing of Chemtronics, Inc., a
chemical manufacturer, and from 1992 until 1994 she served as Director of
Communications of Diversified Products, a home fitness equipment manufacturer.
Mr. Covington joined Innotrac in 1995 as Director of Information Technology.
From February 1995 to October 1995, Mr. Covington was a Technical Services
Manager at Alexander Howden North America, Inc., an insurance broker, where he
managed the company's information technology services. From 1985 to 1994,
Mr. Covington was the Director of MIS Operations at Digital Communications
Associates, Inc., a computer hardware and software manufacturer.
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<PAGE>
Mr. Jackson joined Innotrac in June 1997 as Director of Fulfillment
Operations. Prior to joining Innotrac, Mr. Jackson was from 1996 to 1997 a
Manufacturing Team Leader and Quality Engineer at Prestolite Wire Corporation.
From 1995 to 1996, Mr. Jackson was a Strategic Business Unit Manager at
Heatcraft Refrigeration and from 1993 to 1995 he engaged in independent
consulting with Total Quality Management. From 1976 to 1993, Mr. Jackson
served in various management roles at Digital Equipment Corporation.
Ms. Ohlson joined Innotrac in 1994 as Director of Human Resources. Prior to
joining Innotrac, Ms. Ohlson was from May to October 1994 engaged on a short-
term assignment as a human resource generalist with GEC Marconi Avionics, Inc.
From 1992 to May 1994, Ms. Ohlson was the Personnel Director at Star
Manufacturing, Inc.
Mr. Seitz joined Innotrac in December 1997 as Director of Client Services.
Prior to joining Innotrac, Mr. Seitz was from 1996 until November 1997 a
Principal and Senior Consultant at Weisser, Fitzpatrick & Greene Marketing.
From 1995 until 1996, Mr. Seitz was Manager of Market Development and
Communications at Boehringer Mannheim Corporation. From 1992 until 1995, Mr.
Seitz was a Principal and Senior Consultant at Winston, Greene Assoc. and from
1991 to 1992, he was Corporate Manager of Marketing Communications at Coulter
Corporation. Mr. Seitz also has 15 years of marketing communications
experience at Baxter Healthcare Corporation.
Mr. Tobin joined Innotrac in June 1997 as Director of Call Center
Operations. Prior to joining Innotrac, Mr. Tobin was from 1996 to April 1997
engaged in independent consulting in the telemarketing field. From 1995 to
1996, Mr. Tobin was the Call Center Director at ICT Global Enterprises, Inc.,
a telemarketing company. From 1985 to 1995, Mr. Tobin served as Area Manager-
Financial Management at SBC Communications, a telecommunications company.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual
compensation for services in all capacities to the Company for the year ended
December 31, 1996 with respect to the Company's Chairman, President and Chief
Executive Officer and each of the Company's two other executive officers who
earned more than $100,000 in salary and bonus during such fiscal year (the
"Named Executive Officers"):
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- ---------- ---------
<S> <C> <C>
Scott D. Dorfman....................................... $ 196,977 --
Chairman, President and Chief Executive Officer
David L. Ellin......................................... 136,849 $ 50,000
Senior Vice President, Chief Operating Officer and
Secretary
Larry C. Hanger........................................ 87,825 25,000
Vice President--Business Development
</TABLE>
No options were granted by the Company to its executive officers during the
year ended December 31, 1996 and none were exercised. None of the Company's
executive officers or key personnel has an employment agreement with the
Company.
DIRECTORS COMPENSATION
The Company pays its outside directors an annual fee of $10,000, and
additional fees of $250 and $100, respectively, for each Board meeting and
committee meeting attended. The Company reimburses all directors for their
travel and other expenses incurred in connection with attending Board or
committee meetings. In addition, on December 11, 1997, the Company granted
options to purchase 20,000 shares of Common Stock to Mr. Benator at a price of
$9.10. The Company has granted each outside director options to purchase
10,000 shares of Common Stock at the initial public offering price, effective
as of the date of this Prospectus.
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<PAGE>
STOCK OPTION PLAN
In November 1997, the Company adopted its Stock Option Plan to provide key
employees, officers, directors, contractors and consultants an opportunity to
own Common Stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under the Stock Option
Plan may be structured in a variety of ways, including as "incentive stock
options" as defined in Section 422 of the Internal Revenue Code, as amended
("IRC"), non-qualified stock options, restricted stock awards and stock
appreciation rights ("SARs"). Incentive stock options may be granted only to
full-time employees (including officers) of the Company, including its
subsidiaries. Non-qualified options, restricted stock awards, SARs and other
permitted forms of awards may be granted to any person employed by or
performing services for the Company, including directors, contractors and
consultants. The Stock Option Plan provides for the issuance of options and
awards for up to 800,000 shares of Common Stock.
Incentive stock options are also subject to certain limitations prescribed by
the IRC, including the requirement that such options may not be granted to
employees who own more than 10% of the combined voting power of all classes of
voting stock of the Company, unless the option price is at least 110% of the
fair market value of the Common Stock subject to the option, may be exercised
for no more than five years from the grant date. The Board of Directors of the
Company (or a committee designated by the Board) otherwise generally has
discretion to set the terms and conditions of options and other awards,
including the term, exercise price and vesting conditions, if any, to select
the persons who receive such grants and awards, and to interpret and administer
the Stock Option Plan.
As of the date of this Prospectus, options to purchase an aggregate of
383,000 shares of Common Stock have been granted under the Stock Option Plan,
including options for 155,000 and 25,000 shares of Common Stock issued to
Messrs. Ellin and Hanger, respectively, having an exercise price of $9.10 per
share.
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<PAGE>
PRINCIPAL SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock, as of the date of this Prospectus and giving
effect to the Consolidation and to the Offering, by (i) each person known to
the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group. Unless otherwise indicated, each of the shareholders listed below
has sole voting and investment power with respect to the shares beneficially
owned.
<TABLE>
<CAPTION>
PERCENTAGE BENEFICIALLY OWNED
NUMBER OF SHARES ------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------- --------------------- --------------- --------------
<S> <C> <C> <C>
Scott D. Dorfman(2)...... 6,146,154(3) 94.6% 68.3%
ITC Service Company(4)... 353,846(5) 5.4 3.9
David L. Ellin........... 87,500(6) 1.3 *
Larry C. Hanger.......... -- -- --
Bruce V. Benator......... -- -- --
Martin J. Blank.......... -- -- --
Campbell B. Lanier, III.. 353,846(7) 5.4 3.9
William H. Scott, III.... 353,846(7) 5.4 3.9
All directors and
executive officers as a
group (9 persons)....... 6,555,000 100.0% 72.4%
</TABLE>
- --------
* Denotes less than 1%
(1) For purposes of this table, a person or group of persons is deemed to have
"beneficial ownership" of any shares that such person or group has the
right to acquire within 60 days after the date of this Prospectus or with
respect to which such person has or shares voting or investment power. For
purposes of computing the percentages of outstanding shares held by each
person or group of persons, shares which such person or group has the right
to acquire within 60 days after such date are deemed to be outstanding for
purposes of computing the percentage for such person or group but are not
deemed to be outstanding for the purpose of computing the percentage of any
other person or group. None of the options granted under the Company's
Stock Option Plan is exercisable within 60 days from the date of this
Prospectus.
(2) Mr. Dorfman's address is 1828 Meca Way, Norcross, Georgia 30093.
(3) Includes an aggregate of 160,060 shares owned by Mr. Dorfman's wife
individually and as custodian and trusts for the benefit of his children
and 32,500 shares subject to presently exercisable purchase options granted
to Mr. Ellin.
(4) ITC's and Messrs. Lanier and Scott's address is 1239 O.G. Skinner Drive,
West Point, Georgia 31833.
(5) ITC is entitled to receive shares of Common Stock in the Consolidation
equal to 10% of $46.0 million divided by the initial public offering price.
The other equity holders of the combining entities will own the remainder
of the 6,500,000 shares that will be outstanding after the Consolidation.
This formula is expected to result in 353,846 shares being issued to ITC,
assuming an initial public offering price of $13.00.
(6) Consists of 32,500 shares subject to presently exercisable options to
purchase such shares from Mr. Dorfman and 55,000 shares subject to
presently exercisable options from the Company.
(7) Consists of the shares owned of record by ITC, with respect to which
Messrs. Lanier and Scott, as principal shareholders and officers of such
entity, may be deemed the beneficial owner. Messrs. Lanier and Scott
disclaim beneficial ownership of such shares.
37
<PAGE>
CERTAIN TRANSACTIONS
Scott D. Dorfman, Chairman of the Board, Chief Executive Officer and
majority shareholder of the Company, has guaranteed the Company's obligations
under its credit facility with a bank, which consists of a $25,000,000
revolving line of credit and a $2,000,000 term loan, and the subordinated note
in the principal amount of $3.5 million payable to ITC described below. The
bank guarantee will terminate upon the completion of the Offering, and the
subordinated note will be repaid with a portion of the proceeds from the
Offering.
In connection with the Consolidation, Mr. Dorfman, together with his
children, and ITC, will receive distributions of $6.0 million and $400,000,
respectively, from two pass-through entities that are parties to the
Consolidation, which distributions represent a portion of these entities'
accumulated earnings. In addition, each of the entities will reimburse Mr.
Dorfman and ITC for estimated tax payments with respect to their earnings for
1997 and 1998. Two directors of the Company, Messrs. Lanier and Scott, are
officers, directors and principal shareholders of ITC. See "Use of Proceeds."
As a result of the Consolidation, and as consideration for their respective
interests in the affiliated entities that are parties to the Consolidation,
shares of Common Stock of the Company will be owned as follows: Mr. Dorfman--
6,146,154 shares (including 493 shares beneficially owned by his wife, and
159,567 shares held by trusts or in custodianship for his children) and ITC--
353,846 shares, assuming an initial public offering price of $13.00. ITC is
entitled to receive shares of Common Stock in the Consolidation equal to 10%
of $46.0 million divided by the initial public offering price.
Prior to the closing of the Offering, the Company intends to redeem for
approximately $390,000 from Arnold Dorfman, the father of Scott D. Dorfman,
all of his shares of one of the entities that is a party to the Consolidation.
In December 1998, the Company intends to redeem for approximately $590,000
from Arnold Dorfman all of his shares of a second affiliated entity that is a
party to the Consolidation.
ITC is a creditor of the Company with respect to a certain subordinated note
in the principal amount of $3.5 million. The note bears interest at the prime
rate plus 8.0% per annum and matures in April 1999. Upon the completion of the
Offering, the Company intends to repay such note, plus accrued interest, in
full. See "Use of Proceeds."
From January 1, 1996 through October 1, 1997, the Company paid $145,914 in
fees to Williams Benator & Libby, LLP, certified public accountants, for
accounting and consulting services. Bruce V. Benator, a director of the
Company, is a partner of Williams Benator & Libby, LLP. After consummation of
the Offering, it is expected that Williams Benator & Libby, LLP will continue
to provide accounting and consulting services for the Company.
On December 11, 1997, the Board of Directors adopted a policy that any
transactions between the Company and any of its officers, directors, or
principal shareholders or affiliates must be on terms no less favorable than
those that could be obtained from unaffiliated parties in comparable
situations and must be approved by the Audit Committee of the Board of
Directors.
38
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 9,000,000
shares of Common Stock (9,375,000 shares if the Underwriters' over-allotment
option is exercised in full). Of such shares, the 2,500,000 shares sold in the
Offering (2,875,000 shares if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restrictions or further
registration under the Securities Act, unless acquired by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act ("Rule
144"), in which case these shares will be subject to the resale limitations of
Rule 144.
The outstanding shares of Common Stock not sold in the Offering were issued
and sold by the Company in a private transaction in reliance upon the
exemption from registration contained in Section 4(2) of the Securities Act
and are restricted securities under Rule 144. These shares may not be sold
unless they are registered under the Securities Act or are sold pursuant to an
applicable exemption from registration, including the exemption pursuant to
Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days
after the Offering, a person who has beneficially owned any such shares for at
least one year, including "affiliates" of the Company, would be entitled to
sell in broker's transactions or to market makers within any three-month
period a number of shares that does not exceed the greater of one percent of
the then outstanding shares of Common Stock (estimated to be 90,000 shares
after completion of this Offering, or 93,750 shares if the Underwriters' over-
allotment option is exercised in full) or the average weekly trading volume of
the Common Stock on the Nasdaq National Market during the four calendar weeks
preceding the date on which notice of the sale is filed with the Commission.
Sales under Rule 144 are also subject to certain manner of sale restrictions
and notice requirements and to the availability of current public information
concerning the Company. A person (or persons whose shares are aggregated) who
is not an "affiliate" of the Company at any time during the 90 days preceding
a sale, and who has beneficially owned such shares for at least two years,
would be entitled to sell such shares under Rule 144(k) without regard to the
availability of current public information, volume limitations, manner of sale
provisions, or notice requirements. The above is a summary of Rule 144 and is
not intended to be a complete description thereof.
The Company, its officers and directors, and all shareholders of the Company
have agreed that they will enter into lock-up agreements generally providing
that they will not, directly or indirectly, offer, pledge, sell, contract to
sell, or otherwise dispose of or grant any options or other rights with
respect to, any shares of Common Stock or any securities that are convertible
into or exchangeable or exercisable for Common Stock owned by them for a
period of 180 days after the date of this Prospectus, without the prior
written consent of J.C. Bradford & Co. on behalf of Underwriters. If a
shareholder should request J.C. Bradford & Co. to waive the 180 day lock-up
period, J.C. Bradford & Co., consistent with past practice with regard to
other issuing companies, would take into consideration the number of shares as
to which such request relates, the identity of the requesting shareholder, the
relative demand for additional shares of Common Stock in the market, the
period of time since the completion of the Offering and the average trading
volume and price performance of the Common Stock during such period. See
"Underwriting."
Prior to the Offering, there has been no market for the Common Stock and no
prediction can be made as to the effect, if any, that sales of Common Stock by
existing shareholders in reliance upon Rule 144 or otherwise will have on the
market price prevailing from time to time. Nevertheless, sales of substantial
amounts of Common Stock in the public market, or the perception that such
sales could occur, could adversely affect the prevailing market price. Such
sales may also make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
it deems appropriate.
39
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $0.10 par value per share, and 10,000,000 shares of preferred
stock, $0.10 par value per share (the "Preferred Stock"), having such rights
and privileges as the Board of Directors may from time to time determine.
Giving effect to the Consolidation, 6,500,000 shares of Common Stock and no
shares of Preferred Stock will be issued and outstanding immediately prior to
the Offering.
The following summary of the Company's capital stock does not purport to be
complete and is qualified in its entirety by reference to the Amended and
Restated Articles of Incorporation (the "Articles of Incorporation") and the
Amended and Restated Bylaws (the "Bylaws") of the Company that are included as
exhibits to the Registration Statement of which this Prospectus forms a part,
and the applicable provisions of the Georgia Business Corporation Code.
COMMON STOCK
Holders of Common Stock are entitled to one vote per share on any issue
submitted to a vote of the shareholders and do not have cumulative voting
rights in the election of directors. Accordingly, the holders of a majority of
the outstanding shares of Common Stock voting in an election of directors can
elect all of the directors then standing for election, if they choose to do
so. All shares of Common Stock are entitled to share equally in such dividends
as the Board of Directors of the Company may, in its discretion, declare out
of sources legally available therefor. See "Dividend Policy." Upon
dissolution, liquidation, or winding up of the Company, holders of Common
Stock are entitled to receive on a ratable basis, after payment or provision
for payment of all debts and liabilities of the Company and any preferential
amount due with respect to outstanding shares of Preferred Stock, all assets
of the Company available for distribution, in cash or in kind. Holders of
shares of Common Stock do not have preemptive or other subscription rights,
conversion or redemption rights, or any rights to share in any sinking fund.
All currently outstanding shares of Common Stock are, and the shares offered
hereby (when sold in the manner contemplated by this Prospectus) will be,
fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board of Directors,
from time to time, may authorize the issuance of shares of Preferred Stock in
one or more series, may establish the number of shares to be included in any
such series, and may fix the designations, powers, preferences and rights
(including voting rights) of the shares of each such series and any
qualifications, limitations, or restrictions thereon. No shareholder
authorization is required for the issuance of shares of Preferred Stock unless
imposed by then applicable law. Shares of Preferred Stock may be issued for
any general corporate purposes, including acquisitions. The Board of Directors
may issue one or more series of Preferred Stock with rights more favorable
with regard to dividends and liquidation than the rights of holders of Common
Stock. Any such series of Preferred Stock also could be used for the purpose
of preventing a hostile takeover of the Company that is considered to be
desirable by the holders of the Common Stock, could otherwise adversely affect
the voting power of the holders of Common Stock, and could serve to perpetuate
the Board of Directors' control of the Company under certain circumstances.
Other than the issuance of the series of Preferred Stock previously authorized
by the Board of Directors in connection with the Shareholder Rights Plan,
described below, no transaction is now contemplated that would result in the
issuance of any such shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS
Staggered Board of Directors; Removal; Filling Vacancies. The Articles of
Incorporation provide that the Board of Directors will consist of between five
and eleven directors. The Board currently consists of seven directors, four of
whom are not employees of the Company. The Board of Directors is divided into
three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
shareholders to change the composition of the Board of Directors. The Company
believes, however,
40
<PAGE>
that the longer time required to elect a majority of a classified Board of
Directors will help to ensure the continuity and stability of the Company's
management and policies. The classification provisions could also have the
effect of discouraging a third party from accumulating large blocks of the
Company's stock or attempting to obtain control of the Company, even though
such an attempt might be beneficial to the Company and its shareholders.
Accordingly, shareholders could be deprived of certain opportunities to sell
their shares of Common Stock at a higher market price than might otherwise be
the case. See "Risk Factors--Certain Anti-Takeover Provisions." The
shareholders will be entitled to vote on the election or removal of directors,
with each share entitled to one vote.
The Bylaws provide that, unless the Board of Directors otherwise determines,
any vacancies will be filled by the affirmative vote of a majority of the
remaining directors, even if less than a quorum. A director may be removed
only with cause by the vote of the holders of a majority of the shares
entitled to vote for the election of directors at a meeting of the
shareholders called for the purpose of removing such director. A vacancy
resulting from an increase in the number of directors may be filled by action
of the Board of Directors.
Shareholder Rights Plan. On December 11, 1997, the Company's Board of
Directors declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock of the Company. Each Right
entitles the registered holder to purchase from the Company one one-hundredth
(1/100) of a share of Series A Participating Cumulative Preferred Stock, par
value $0.10 per share (the "Preferred Shares"), of the Company at a price of
$60.00 per one one-hundredth of a Preferred Share (the "Purchase Price"),
subject to adjustments to the exercise price and the number of Preferred
Shares issuable upon exercise from time to time to prevent dilution. The
Rights are not exercisable until the earlier to occur of (i) 10 days following
a public announcement that a person or group of affiliated or associated
persons (an "Acquiring Person") have acquired beneficial ownership of 15% or
more of the outstanding Common Stock or (ii) 10 business days following the
commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding shares of
Common Stock (the earlier of such dates being called the "Distribution Date").
In the event that the Company is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the Right, that number of shares of common stock of the acquiring company
which at the time of such transaction will have a market value of two times
the exercise price of the Right. In the event that any person or group of
affiliated or associated persons becomes an Acquiring Person, proper provision
shall be made so that each holder of a Right, other than Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive upon exercise that number of shares of Common Stock
having a market value of two times the exercise price of the Right.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each Preferred Share will be entitled to a minimum preferential
quarterly dividend payment of $1.00 per share but will be entitled to an
aggregate dividend of 100 times the dividend declared per share of Common
Stock. In the event of liquidation, the holders of the Preferred Shares will
be entitled to a minimum preferential liquidation payment of $100.00 per share
but will be entitled to an aggregate payment of 100 times the payment made per
share of Common Stock. Each Preferred Share will have 100 votes, voting
together with the shares of Common Stock. Finally, in the event of any merger,
consolidation or other transaction in which shares of Common Stock are
exchanged, each Preferred Share will be entitled to receive 100 times the
amount received per share of Common Stock. These rights are protected by
customary antidilution provisions.
Prior to the Distribution Date, the Rights may not be detached or
transferred separately from the Common Stock. The Rights will expire on
, 2007 (the "Final Expiration Date"), unless the Final Expiration Date
is extended or unless the Rights are earlier redeemed or exchanged by the
Company, in each case, as described below. At any time prior to the
acquisition by a person or group of affiliated or associated persons of
beneficial ownership of 15% or more of the outstanding Common Stock, the Board
of Directors of the Company may redeem the Rights in whole, but not in part,
at a price of $0.001 per Right (the "Redemption
41
<PAGE>
Price"). Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be
to receive the Redemption Price. A more detailed description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between
the Company and Reliance Trust Company as Rights Agent (the "Rights Agent").
Ability to Consider Other Constituencies. The Articles of Incorporation
permit the Board of Directors, in determining what is believed to be in the
best interest of the Company, to consider the interests of the employees,
customers, suppliers and creditors of the Company, the communities in which
offices or other establishments of the Company are located and all other
factors the directors consider pertinent, in addition to considering the
effects of any actions on the Company and its shareholders. Pursuant to this
provision, the Board of Directors may consider numerous judgmental or
subjective factors affecting a proposal, including certain non-financial
matters, and on the basis of these considerations may oppose a business
combination or other transaction which, viewed exclusively from a financial
perspective, might be attractive to some, or even a majority, of the Company's
shareholders.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's Bylaws provide for indemnification of directors to the fullest
extent permitted by Georgia law. The Articles of Incorporation, to the extent
permitted by Georgia law, eliminate or limit the personal liability of
directors to the Company and its shareholders for monetary damages for certain
breaches of fiduciary duty and the duty of care. Such indemnification may be
available for liabilities arising in connection with this Offering. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. Pursuant to its Bylaws, the
Company may also indemnify its officers, employees, agents and other persons
to the fullest extent permitted by Georgia law. The Company's Bylaws obligate
the Company, under certain circumstances, to advance expenses to its directors
and officers in defending an action, suit or proceeding for which
indemnification may be sought. The Company has entered into Indemnification
Agreements with its directors and executive officers.
The Company's Bylaws also provide that the Company shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the Company, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of the Company's subsidiaries or, at
the request of the Company, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
where the Company would have the power to indemnify such person against such
liability under Georgia law. The Company intends to purchase and maintain
insurance on behalf of all of its directors and executive officers.
OTHER MATTERS
The Company has filed an application for the Common Stock to be approved for
quotation on The Nasdaq National Market under the symbol "INOC."
The transfer agent and registrar for the Company's Common Stock is Reliance
Trust Company, Atlanta, Georgia.
42
<PAGE>
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford
& Co. and Wheat, First Securities, Inc., as representatives of the several
underwriters (the "Representatives"), have severally agreed to purchase from
the Company the number of shares of Common Stock set forth below opposite
their respective names:
<TABLE>
<CAPTION>
NAME OF UNDERWRITERS NUMBER OF SHARES
-------------------- ----------------
<S> <C>
J.C. Bradford & Co. ...........................................
Wheat, First Securities, Inc. .................................
---------
Total........................................................ 2,500,000
=========
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all shares of Common Stock
offered hereby, if any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering, the public offering price and such concessions may be
changed. The Representatives have informed the Company that the Underwriters
do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Offering of the shares of Common Stock is made for delivery when, as and
if accepted by the Underwriters and subject to prior sale and to withdrawal,
cancellation or modification of the offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days from the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any. To the
extent that the Underwriters exercise such option, each of them will have a
firm commitment to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased by it shown in the table
above bears to the total number of shares in such table, and the Company will
be obligated, pursuant to the option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of the 2,500,000 shares of Common Stock offered
hereby. If purchased, the Underwriters will sell such additional shares on the
same terms as those on which the 2,500,000 shares are being offered.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price has been determined by negotiation between
the Company and the Representatives. In determining such price, consideration
was given to, among other things, the financial and operating history and
trends of the Company, the experience of its management, the position of the
Company in its industry, the Company's prospects and the Company's financial
results. In addition, consideration was given to the status of the securities
markets, market conditions for new offerings of securities and the prices of
similar securities of comparable companies.
The Company, its executive officers and directors and all of its
shareholders have agreed with the Representatives not to offer, sell or
otherwise dispose of any shares of Common Stock, any securities exercisable
for or convertible into Common Stock or any options to acquire Common Stock
owned by them prior to the expiration of 180 days from the date of this
Prospectus, without the prior written consent of J.C. Bradford & Co., except
that the Company may issue shares in connection with the exercise of stock
options granted or to be granted under the Company's stock option plan. See
"Shares Eligible for Future Sale."
43
<PAGE>
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil
liabilities, including liabilities under the Securities Act, or will
contribute to payments that the Underwriters or any such controlling persons
may be required to make in respect thereof.
In connection with the Offering, the Underwriters and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to
an underwriter or a dealer for distributing Common Stock in the Offering, if
the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short position, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of
Common Stock in market making transactions. These activities may stabilize or
maintain the market price of Common Stock above market levels that may
otherwise prevail. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Kilpatrick
Stockton LLP, Atlanta, Georgia. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Nelson Mullins Riley &
Scarborough, L.L.P., Atlanta, Georgia.
EXPERTS
The financial statements of the Company at December 31, 1995 and 1996, and
for the nine months ended September 30, 1997, included in this Prospectus and
elsewhere in the Registration Statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with
respect thereto, and are included herein in reliance upon such reports and
upon the authority of said firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which is a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement, including the
exhibits thereto. Statements contained in this Prospectus concerning the
contents of any contract or any other document are not necessarily complete.
With respect to each such contract or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission. A copy of the Registration Statement,
including the exhibits thereto, may be inspected without charge at the Public
Reference section of the commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following regional offices of
the Commission: New York Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048; and Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration
Statement and the exhibits and schedules thereto can be obtained from the
Public Reference Section of the Commission upon payment of prescribed fees.
The Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.
44
<PAGE>
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement, the Company will
become subject to the informational and periodic reporting requirements of the
Exchange Act, and in accordance therewith, will file periodic reports, proxy
statements, and other information with the Commission. Such periodic reports,
proxy statements, and other information will be available for inspection and
copying at the public reference facilities and other regional offices referred
to above. The Company intends to register the securities offered by the
Registration Statement under the Exchange Act simultaneously with the
effectiveness of the Registration Statement and to furnish its shareholders
with annual reports containing audited financial statements and such other
reports as may be required from time to time by law or the Nasdaq National
Market.
45
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
OF INNOTRAC CORPORATION
<TABLE>
<S> <C>
COMBINED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................. F-2
Combined Balance Sheets as of September 30, 1997 and December 31, 1996.... F-3
Combined Statements of Operations for the Nine Months Ended September 30,
1997 and 1996 (unaudited) and for the Years Ended December 31, 1996 and
1995..................................................................... F-4
Combined Statements of Partners', Members' and Shareholders' Equity for
the Nine Months Ended September 30, 1997 and for the Years Ended December
31, 1996 and 1995........................................................ F-5
Combined Statements of Cash Flows for the Nine Months Ended September 30,
1997 and 1996 (unaudited) and for the Years Ended December 31, 1996 and
1995..................................................................... F-6
Notes to Combined Financial Statements.................................... F-7
Unaudited Pro Forma Financial Data........................................ F-19
Unaudited Consolidated Pro Forma Statement of Operations for the Nine
Months Ended September 30, 1997.......................................... F-20
Unaudited Consolidated Pro Forma Balance Sheet as of September 30, 1997... F-21
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: Innotrac Corporation, IELC, Inc.,
RenTel #1, Inc., SellTel #1, Inc.,
HomeTel Systems, Inc.,
HomeTel Providers, Inc., RenTel #2, LLC,
SellTel #2, LLC and HomeTel Providers Partners, L.P.:
We have audited the accompanying combined balance sheets of INNOTRAC
CORPORATION (a Georgia corporation), IELC, INC. (a Georgia corporation),
RENTEL #1, INC. (a Georgia corporation), SELLTEL #1, INC. (a Georgia
corporation), HOMETEL SYSTEMS, INC. (a Georgia corporation), HOMETEL
PROVIDERS, INC. (a Georgia corporation), RENTEL #2, LLC (a Georgia limited
liability company), SELLTEL #2, LLC (a Georgia limited liability company) and
HOMETEL PROVIDERS PARTNERS, L.P. (a Georgia limited partnership) (collectively
referred to as the "Companies") as of September 30, 1997 and December 31, 1996
and the related combined statements of operations, partners', members' and
shareholders' equity and cash flows for the nine-month period ended September
30, 1997 and years ended December 31, 1996 and 1995. These combined financial
statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Innotrac
Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems,
Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel
Providers Partners, L.P. as of September 30, 1997 and December 31, 1996 and
the results of their operations and their cash flows for the nine-month period
ended September 30, 1997 and the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
December 12, 1997
F-2
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
COMBINED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 425,624 $ 2,004,746
Accounts receivable, net (Note 3)..................... 21,672,839 25,460,016
Inventories........................................... 5,308,965 10,020,635
Deferred tax assets (Note 6).......................... 376,000 15,000
Prepaid expenses and other current assets............. 225,196 344,951
----------- -----------
Total current assets.................................. 28,008,624 37,845,348
----------- -----------
Property and equipment:
Rental equipment...................................... 11,070,723 13,005,802
Computer, machinery and transportation equipment...... 1,429,182 1,368,471
Furniture, fixtures and leasehold improvements........ 720,097 732,182
----------- -----------
13,220,002 15,106,455
Less accumulated depreciation and amortization........ 4,971,353 4,167,937
----------- -----------
8,248,649 10,938,518
----------- -----------
Other assets, net of amortization of $276,868 and
$160,255 as of September 30, 1997 and December 31,
1996, respectively.................................... 130,211 252,656
----------- -----------
Total assets.......................................... $36,387,484 $49,036,522
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
SHAREHOLDERS'
EQUITY AT
SEPTEMBER 30,
1997 1997 1996
----------- ------------- -----------
LIABILITIES AND PARTNERS', MEMBERS',
AND SHAREHOLDERS' EQUITY (NOTE 10)
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt
(Note 4)............................ $ 736,249 $ 787,523
Line of credit (Note 4).............. 10,446,000 17,230,621
Accounts payable..................... 4,370,629 15,420,211
Distributions payable (Note 2)....... 3,509,960 300,229
Accrued expenses..................... 7,148,524 5,083,672
Other................................ 203,943 65,173
----------- -----------
Total current liabilities............ 26,415,305 38,887,429
----------- -----------
Noncurrent liabilities:
Subordinated debt (Note 4)........... 3,500,000 3,500,000
Long-term debt (Note 4).............. 555,555 1,060,720
Deferred tax liabilities (Note 6).... 101,000 206,000
Other................................ 0 12,300
----------- -----------
Total noncurrent liabilities......... 4,156,555 4,779,020
----------- -----------
Total liabilities.................... 30,571,860 43,666,449
----------- -----------
Commitments and contingencies (Note
5)...................................
Redeemable capital stock (Note 7)..... 894,402 830,033
----------- -----------
Partners', members' and shareholders'
equity (Note 7):
Partners' capital.................... 1,577,303 (2,422,697) 1,902,038
Members' deficit..................... (999,271) (999,271) (272,381)
Common stock......................... 4,590 4,590 4,590
Additional paid-in capital........... 14,370 14,370 14,370
Retained earnings.................... 4,324,230 1,924,230 2,891,423
----------- ---------- -----------
Total partners', members' and
shareholders' equity................ 4,921,222 (1,478,778) 4,540,040
----------- ---------- -----------
Total liabilities and partners',
members' and shareholders' equity... $36,387,484 $49,036,522
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
F-3
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues, net.............. $67,313,499 $53,230,767 $71,297,170 $44,886,334
Cost of revenues........... 51,799,309 39,232,114 55,519,503 30,658,112
----------- ----------- ----------- -----------
Gross profit........... 15,514,190 13,998,653 15,777,667 14,228,222
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative
expenses................ 9,072,142 8,007,071 10,390,817 6,510,069
Depreciation and
amortization............ 453,609 230,659 429,170 292,609
----------- ----------- ----------- -----------
Total operating
expenses.............. 9,525,751 8,237,730 10,819,987 6,802,678
----------- ----------- ----------- -----------
Operating income........... 5,988,439 5,760,923 4,957,680 7,425,544
----------- ----------- ----------- -----------
Other (income) expense:
Interest expense......... 1,422,302 954,607 1,456,508 1,089,853
Other.................... (1,715) 1,767 94,367 (72,645)
----------- ----------- ----------- -----------
Total other expense.... 1,420,587 956,374 1,550,875 1,017,208
----------- ----------- ----------- -----------
Income before income
taxes..................... 4,567,852 4,804,549 3,406,805 6,408,336
Income tax provision....... (75,300) (472,226) (211,494) (793,629)
----------- ----------- ----------- -----------
Net income............. $ 4,492,552 $ 4,332,323 $ 3,195,311 $ 5,614,707
=========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-4
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
COMBINED STATEMENTS OF PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED
CAPITAL DEFICIT STOCK CAPITAL EARNINGS TOTAL
----------- --------- ------ ------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31,
1994...................... $ 406,275 $ 0 $4,590 $14,370 $ 1,199,057 $ 1,624,292
Net income................. 2,032,545 0 0 0 3,582,162 5,614,707
Distributions to
shareholders, members and
partners.................. (1,331,028) 0 0 0 (2,607,242) (3,938,270)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (105,608) (105,608)
----------- --------- ------ ------- ----------- -----------
BALANCE, DECEMBER 31,
1995...................... 1,107,792 0 4,590 14,370 2,068,369 3,195,121
Member contributions....... 0 2,000 0 0 0 2,000
Net income (loss)............. 1,323,246 (39,381) 0 0 1,911,446 3,195,311
Distributions to
shareholders, members and
partners.................. (529,000) (235,000) 0 0 (977,000) (1,741,000)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (111,392) (111,392)
----------- --------- ------ ------- ----------- -----------
BALANCE, DECEMBER 31,
1996...................... 1,902,038 (272,381) 4,590 14,370 2,891,423 4,540,040
Net income (loss).......... 2,940,265 (961,889) 0 0 2,514,176 4,492,552
Distributions to
shareholders, members and
partners.................. (3,265,000) 234,999 0 0 (1,017,000) (4,047,001)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (64,369) (64,369)
----------- --------- ------ ------- ----------- -----------
BALANCE, SEPTEMBER 30,
1997...................... $ 1,577,303 $(999,271) $4,590 $14,370 $ 4,324,230 $ 4,921,222
=========== ========= ====== ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-5
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------
1997 1996 1996 1995
----------- ------------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Cash flows from operating
activities:
Net income.............. $ 4,492,552 $ 4,332,323 $ 3,195,311 $ 5,614,707
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization........... 453,609 230,659 429,170 292,609
Depreciation--rental
equipment.............. 2,861,214 2,084,545 3,004,699 1,763,028
Loss on disposal of
rental equipment....... 3,174,742 1,835,397 2,538,129 1,755,956
Subordinated debt
accretion.............. 0 163,781 163,781 179,776
Deferred income taxes... (466,000) (254,000) (107,000) 227,000
Decrease (increase) in
accounts receivable.... 3,787,177 (10,779,733) (6,753,077) (12,594,156)
Decrease (increase) in
inventories............ 4,711,670 (8,141,131) (7,683,173) (1,092,926)
Decrease (increase) in
prepaid expenses and
other assets........... 119,755 (45,315) (327,074) 44,466
(Decrease) increase in
accounts payable....... (9,687,582) 1,727,406 3,610,642 8,814,933
Increase in accrued
expenses............... 2,064,852 3,213,546 2,484,253 1,397,043
Other................... 126,469 (151,867) (468,149) 12,119
----------- ------------ ----------- ------------
Net cash provided by
(used in) operating
activities............ 11,638,458 (5,784,389) 87,512 6,414,555
----------- ------------ ----------- ------------
Cash flows from investing
activities:
Accrued equipment
purchases.............. (1,362,000) 0 (272,000) 0
Purchases of property
and equipment.......... (3,677,250) (4,440,772) (7,699,769) (7,812,510)
----------- ------------ ----------- ------------
Net cash used in
investing activities.. (5,039,250) (4,440,772) (7,971,769) (7,812,510)
----------- ------------ ----------- ------------
Cash flows from financing
activities:
Net (repayments)
borrowings under lines
of credit.............. (6,784,621) 9,868,876 13,168,781 3,164,848
Proceeds from long-term
debt................... 0 2,027,000 2,096,000 0
Repayment of long-term
debt................... (556,439) (156,123) (327,766) (397,401)
Repayment of
subordinated debt...... 0 (1,000,000) (1,000,000) 0
Loan commitment fees.... 0 (200,000) (200,000) 0
Proceeds from members'
contributions.......... 0 2,000 2,000 0
Distributions to
shareholders, members
and partners........... (837,270) (3,822,861) (3,890,244) (2,179,797)
----------- ------------ ----------- ------------
Net cash (used in)
provided by financing
activities............ (8,178,330) 6,718,892 9,848,771 587,650
----------- ------------ ----------- ------------
Net (decrease) increase
in cash and cash
equivalents............. (1,579,122) (3,506,269) 1,964,514 (810,305)
Cash and cash
equivalents, beginning
of period............... 2,004,746 40,232 40,232 850,537
----------- ------------ ----------- ------------
Cash and cash
equivalents, end of
period.................. $ 425,624 $ (3,466,037) $ 2,004,746 $ 40,232
=========== ============ =========== ============
Supplemental cash flow
disclosures:
Cash paid for interest.. $ 1,440,255 $ 740,826 $ 1,207,483 $ 846,010
=========== ============ =========== ============
Cash paid for income
taxes, net of refunds
received............... $ 251,931 $ 356,256 $ 891,552 $ 523,134
=========== ============ =========== ============
Non cash transactions:
Accreted dividends on
Redeemable Capital
Stock.................. $ 64,369 $ 90,982 $ 111,392 $ 105,608
=========== ============ =========== ============
</TABLE>
The accompanying notes are an integral part of these combined statements.
F-6
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTEL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Innotrac Corporation ("Innotrac"), IELC, Inc., RenTel #1, Inc., SellTel #1,
Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel
#2, LLC and HomeTel Providers Partners, L.P. are all entities under common
control and are collectively referred to herein as the "Companies." Each of
these entities provides various forms of marketing support and distribution
services. In conjunction with Innotrac's planned initial public offering, the
Companies will reorganize as one consolidated entity. (See Note 10 for a
description of the Companies' planned reorganization.)
Innotrac provides marketing support services, including fulfillment, order
processing, data processing, and teleservices. IELC, Inc. ("IELC") is owned by
Innotrac's sole shareholder and provides employee-leasing services. RenTel #1,
Inc. ("RenTel") is 90%-owned by Innotrac's sole shareholder and rents caller
identification display devices ("Caller I.D. units") to consumers in Tennessee
and South Carolina. RenTel #2, L.L.C. ("RenTel #2") is primarily owned by
Innotrac's sole shareholder and rents Caller I.D. units to consumers in
California. SellTel, Inc. ("SellTel") is 90%-owned by Innotrac's sole
shareholder and sells Caller I.D. units and other telecommunications equipment
on an installment basis to consumers in Tennessee and South Carolina. SellTel
#2, L.L.C. ("SellTel #2") is primarily owned by Innotrac's sole shareholder and
sells Caller I.D. units and other telecommunications equipment on an
installment basis to consumers in California. HomeTel Systems, Inc. ("HomeTel")
is primarily owned by Innotrac's sole shareholder and sells and rents various
types of telecommunications equipment to consumers in the southeastern and
western United States. HomeTel Providers, Inc. ("Providers Inc.") is wholly
owned by Innotrac's sole shareholder and is the general partner of HomeTel
Providers Partners, L.P. ("Providers, L.P."). Providers, L.P. rents and sells
Caller ID units and other telecommunications equipment on an installment basis
to consumers in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi and
North Carolina.
See Note 7 for a discussion of RenTel and SellTel debt and equity
arrangements.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Innotrac, IELC, RenTel, SellTel, HomeTel, Providers Inc., RenTel #2, SellTel #2
and Providers, L.P. and are prepared on the accrual basis of accounting.
Significant intercompany accounts and transactions have been eliminated in the
combination. Combined financial statements are presented since the Companies
have similar ownership and interrelated activities.
The financial information included herein may not necessarily reflect the
financial position, results of operations, or cash flows of the Companies in
the future or what the financial position, results of operations, or cash flows
of the Companies would have been if they were combined as a separate, stand-
alone company during the periods presented.
Accounting Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the
F-7
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Sources of Supplies
In accordance with their agreements with certain telecommunications
companies, the Companies primarily use two providers for the supply of
telecommunications equipment. However, if these vendors were unable to meet
the Companies' needs, management believes that other sources for this
equipment exist on commensurate terms and that operating results would not be
adversely affected.
Concentration of Revenues
Revenues earned under the Companies' agreement with a major
telecommunications company to sell and rent certain telecommunications
equipment to the customers of this company accounted for approximately 87%,
82% and 82% of total revenues for the nine month period ended September 30,
1997 and the years ended December 31, 1996 and 1995, respectively. If this
agreement were terminated, it could have a material adverse affect on the
future operating results and liquidity of the Companies (Note 5).
Cash and Cash Equivalents
The Companies consider all short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories, consisting primarily of telecommunications equipment, are
stated at the lower of cost or market, with cost determined by the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is determined using
straight-line methods over the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment................................................... 3-4 years
Computers.......................................................... 3 years
Machinery and transportation equipment............................. 5-7 years
Furniture and fixtures............................................. 7 years
</TABLE>
Leasehold improvements are amortized using the straight-line method over the
shorter of the service lives of the improvements or the remaining term of the
lease.
Prior to January 1, 1996, depreciation for rental equipment was computed
using the straight-line method over a four-year period. As a result of a
review of its rental equipment, management decreased the useful lives of its
rental equipment to three years. The effect of this change was not material to
the results of operations.
Rental equipment is written off at its net book value when it is no longer
generating revenues or is not returned by the customer. Provisions are made
for estimated equipment losses that have not yet been reported.
F-8
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Equipment rental losses were approximately $3,175,000, $2,538,000 and
$1,756,000 for the nine month period ended September 30, 1997 and for the
years ended December 31, 1996 and 1995 respectively, and are included in "Cost
of Revenues" on the accompanying statements of operations.
Long-Lived Assets
The Companies periodically review the values assigned to long-lived assets
such as property and equipment to determine if any impairments are other than
temporary. Management believes that the long-lived assets on the accompanying
balance sheets are appropriately valued.
Income Taxes
Innotrac, IELC and SellTel, as C corporations, utilize the liability method
of accounting for income taxes. Under the liability method, deferred taxes are
determined based on the difference between the financial and tax bases of
assets and liabilities using enacted tax rates in effect in the years in which
the differences are expected to reverse.
The shareholders of RenTel, Providers Inc. and HomeTel have elected to have
the Companies treated as S corporations. The Internal Revenue Code of 1986, as
amended (the "Code") and certain applicable state statutes provide that the
income and expenses of an S corporation are not taxable separately to the
corporation but rather accrue directly to the shareholders. Accordingly, no
provisions for federal and certain state income taxes related to these
entities have been made in the accompanying financial statements.
The Code and certain applicable state statutes provide that the income and
expenses of a partnership are not separately taxable to the partnership, but
rather accrue directly to the partners. Accordingly, no provision for federal
and certain state income taxes related to Providers, L.P. have been made in
the accompanying financial statements.
As limited liability companies, RenTel #2 and SellTel #2 are not subject to
federal and state income taxes. The taxable income or loss of these entities
are included in the federal and state income tax returns of their members.
Accordingly, no provisions for income taxes have been reflected in the
accompanying financial statements related to these entities.
It is the policy of management to pay and accrue distributions primarily for
income taxes that are required to be paid by the shareholders, members and
partners due to the flow through of income of RenTel, RenTel #2, SellTel #2,
HomeTel, Providers Inc., and Providers, L.P. During the nine-month period
ended September 30, 1997 and the years ended December 31, 1996 and 1995,
distributions of approximately $4,047,000, $1,741,000 and $3,938,000,
respectively, were recorded, of which approximately $3,510,000 and $300,000
were accrued and unpaid as of September 30, 1997 and December 31, 1996,
respectively. Additionally, in conjunction with the reorganization (Note 10),
management anticipates distributing approximately $6,400,000 of the
undistributed earnings of approximately $9,000,000 to the owners of HomeTel
and Providers, L.P.
Revenue Recognition
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped or rentals are provided. Allowances are made
for estimated billings that are not collectible and for estimates of product
returns (Note 3).
F-9
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The carrying values of the Companies' financial instruments approximate
their fair values.
Advertising Costs
The Companies expense all advertising costs as incurred.
3. ACCOUNTS RECEIVABLE
The Companies' accounts receivable include amounts that are billed in
installments over a five to twelve month period. Accounts receivable were
composed of the following at September 30, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Billed receivables................................. $18,112,282 $16,857,463
Unbilled installment receivables................... 9,156,565 12,844,916
----------- -----------
Total receivables.................................. 27,268,847 29,702,379
Less allowances.................................... (5,596,008) (4,242,363)
----------- -----------
$21,672,839 $25,460,016
=========== ===========
</TABLE>
Management believes that the allowances for doubtful accounts and returns
reduce the gross accounts receivable to net amounts that will be collected.
F-10
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. FINANCING OBLIGATIONS
Financing obligations as of September 30, 1997 and December 31, 1996
consisted of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Borrowings under revolving credit agreement (up to
$18,000,000 individually or in aggregate, except as
to Rentel and SellTel, which combined borrowings
cannot exceed $2,000,000 and Providers, L.P., which
borrowings cannot exceed $12,000,000; the revolving
advances owing by any one borrower cannot exceed an
amount equal to the sum of 80% of the eligible
accounts receivable plus 70% of the eligible
installment receivables), interest payable monthly at
the prime rate (8.5% at September 30, 1997 and
December 31, 1996), matured on October 15, 1997,
secured by all assets of the Companies and a personal
guarantee of the sole shareholder of Innotrac........ $10,446,000 $17,230,621
Subordinated note payable to the limited partner of
Providers, L.P., due April 1999; interest payable
monthly at a variable rate of prime plus 8% (16.5% as
of September 30, 1997) and a fixed rate of 14% as of
December 31, 1996; secured by accounts receivable,
inventories, rental equipment and the personal
guarantee of the sole shareholder of the general
partner of Providers, L.P.; subordinated to the line
of credit............................................ 3,500,000 3,500,000
Note payable, due in monthly installments of principal
of $55,556, plus interest at 8.95%, through July
1999; secured by accounts receivable, inventories,
equipment and the personal guarantee of Innotrac's
sole shareholder..................................... 1,222,222 1,722,222
Other................................................. 69,582 126,021
----------- -----------
15,237,804 22,578,864
Current portion....................................... 11,182,249 18,018,144
----------- -----------
$ 4,055,555 $ 4,560,720
=========== ===========
</TABLE>
Scheduled maturities of financing obligations are as follows:
<TABLE>
<S> <C>
Through December 31, 1997....................................... $10,612,667
1998............................................................ 736,249
1999............................................................ 3,888,888
-----------
Total......................................................... $15,237,804
===========
</TABLE>
The revolving line of credit agreement and the term note contain various
restrictive financial and change of ownership control covenants, with which
the Company is currently in compliance.
Subsequent to September 30, 1997, the Companies extended the maturity of the
revolving line of credit from October 15, 1997 to November 15, 1999. Under the
terms of the new agreement, the total borrowings available under the line will
be increased from $18,000,000 to $25,000,000. The Companies paid a loan
commitment fee of $125,000 associated with this agreement.
F-11
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES
Operating Leases
Innotrac leases office and warehouse space and equipment under various
operating leases. The primary office and warehouse operating leases provide
for escalating payments over the lease term. Innotrac recognizes rent expense
on a straight-line basis over the lease term and accrues the differences each
month between the amount expensed and the amount actually paid.
Aggregate future minimum lease payments under noncancellable operating
leases with original periods in excess of one year as of September 30, 1997
are as follows:
<TABLE>
<S> <C>
Three months ending December 31, 1997............................ $ 262,483
1998............................................................. 690,028
1999............................................................. 294,312
----------
Total minimum lease payments..................................... $1,246,823
==========
</TABLE>
Rent expense under all operating leases totaled approximately $802,000,
$770,000 and $393,000 during the nine-month period ended September 30, 1997
and the years ended December 31, 1996 and 1995, respectively.
The Companies entered into an operating lease agreement to lease new
facilities subsequent to September 30, 1997. Under the new agreement, which
commences in July 1998, rental expense will increase by approximately $400,000
per year through 2008.
Marketing Support Agreements
The Companies have entered into a six-year agreement, which expires in March
2000, with a major telecommunications company to sell and rent certain
telecommunications equipment to the customers of this company. The
telecommunications company has agreed to provide billing, collection and
referral services for the Companies. This agreement can be terminated upon 24
months written notice; however, in the event of termination, the
telecommunications company must continue to provide billing and collections
services for existing customers for four years after the termination of the
agreements.
Legal Proceedings
The Companies are subject to legal proceedings and claims that arise in the
ordinary course of business. There are no material pending legal proceedings
to which the Companies are a party.
6. INCOME TAXES
Details of the income tax provision for the nine-month period ended
September 30, 1997 and the years ended December 31, 1996 and 1995 are as
follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Current....................................... $ 541,300 $ 318,494 $566,629
Deferred...................................... (466,000) (107,000) 227,000
--------- --------- --------
$ 75,300 $ 211,494 $793,629
========= ========= ========
</TABLE>
F-12
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Deferred income taxes reflect the net effect of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Companies' deferred tax assets and liabilities as of
September 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Noncurrent deferred tax (liabilities) assets:
Property, plant, equipment basis differences....... $ 18,000 $ 16,000
Conversion from cash to accrual taxpayer method--
long term......................................... (119,000) (227,000)
Other.............................................. 0 5,000
--------- ---------
(101,000) (206,000)
--------- ---------
Current deferred tax (liabilities) assets:
Reserves for uncollectable accounts................ 504,000 131,000
Conversion from cash to accrual taxpayer method--
current........................................... (143,000) (143,000)
Other.............................................. 15,000 27,000
--------- ---------
376,000 15,000
--------- ---------
Net deferred tax asset (liability)................... $ 275,000 $(191,000)
========= =========
</TABLE>
Innotrac converted from the cash basis to the accrual basis for income tax
purposes effective August 1995, with the accumulated difference to be added
back to taxable income over a four-year period.
A reconciliation of the income tax provision computed at statutory rates to
the income tax provision for the periods presented is as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30 DECEMBER 31
------------ ------------
1997 1996 1995
------------ ----- -----
<S> <C> <C> <C>
Federal statutory rate.......................... 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit.... 1.4 3.6 3.1
Income taxable directly to shareholders,
partners and members (Notes 1 and 2)......... (34.1) (31.8) (24.9)
Other........................................... 0.3 0.4 0.1
----- ----- -----
1.6% 6.2% 12.3%
===== ===== =====
</TABLE>
7. REDEEMABLE CAPITAL STOCK
In September 1993, the Companies obtained $1,000,000 of financing from a
related party in the form of subordinated debt and equity in RenTel and
SellTel. The subordinated debt required monthly payments of interest with the
principal maturing at 60 months (September 1998). The subordinated debt was
repaid in full in September 1996. Additionally, the related party received
callable common stock representing 10 percent of the common stock in RenTel
and SellTel. The terms of the callable common stock provide each of Rentel and
SellTel the option to call the common stock at predetermined amounts on or
before September 30, 1998. If the
F-13
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Companies do not call the common stock interests, the Companies are obligated
to issue the related party an additional 10 percent common stock interest in
each of RenTel and SellTel. The related party does not have the right to
require each of RenTel and SellTel to redeem the common stock. However, due to
the related party nature of the transaction, the Companies are accounting for
the callable common stock as redeemable equity.
The Companies allocated the capital raised between "Subordinated Debt" and
"Redeemable Capital Stock" at the respective fair market values based on
discounted cash flow analyses (approximately $500,000 each to "Subordinated
Debt" and "Redeemable Capital Stock") and then accreted to their redemption
values over 36 months using the effective interest rate method (an approximate
30% return on both the subordinated debt and the callable common stock). The
portion of the accretion attributable to Subordinated Debt is reflected as
interest expense in the accompanying statements of operations. For the equity
portion, the Companies have accreted via recording of dividends to the
estimated redemption amounts at each balance sheet date and reflected such
redemption amounts as "Redeemable Capital Stock" on the accompanying balance
sheets. These dividends represent a 16% effective rate through September 1996
(the first trigger date as defined) and 10% thereafter. In conjunction with
the proposed initial public offering (the "Offering") (see Note 10), the
Companies anticipate calling the RenTel shares prior to or on the effective
date of the Offering for $390,000 and the SellTel shares for $590,000
subsequent to the effective date of the Offering.
8. PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
Common stock and paid-in capital consisted of the following at September 30,
1997 and December 31, 1996:
<TABLE>
<CAPTION>
COMMON PAID-IN
STOCK CAPITAL
------ -------
<S> <C> <C>
Innotrac Corporation, $0.10 par value, 100,000 shares
authorized, 15,300 shares issued and outstanding.......... $1,530 $13,470
IELC, Inc., no par value, 1,000 shares authorized, 10
shares issued
and outstanding........................................... 100 0
RenTel #1, Inc., no par value, 1,000 shares authorized, 100
shares issued
and outstanding........................................... 900 0
SellTel #1, Inc., no par value, 1,000 shares authorized,
100 shares issued
and outstanding........................................... 900 0
HomeTel Systems, Inc., no par value, 10,000 shares
authorized, 100 shares issued and outstanding............. 1,060 0
HomeTel Providers Inc., $0.10 par value, 10,000 shares
authorized, 1,000 shares issued and outstanding........... 100 900
------ -------
$4,590 $14,370
====== =======
</TABLE>
See Note 10 for a description of the Companies' plan of consolidation.
9. EMPLOYEE RETIREMENT PLAN
Employees of Innotrac may participate in an employee retirement defined
contribution plan. The plan covers all employees of the participating entities
who have at least one year of service (six months if hired before
F-14
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
January 1, 1997) and are 18 years of age. Participants may elect to defer 15%
of compensation up to a maximum amount determined annually pursuant to IRS
regulations. Innotrac has elected to provide matching employer contributions
equal to 15% of contributions for less than five years of service, 25% of
contributions for five to nine years of service, and 35% of contributions for
over nine years of service. Total matching contributions made to the plan and
charged to expense by Innotrac for the nine-month period ended September 30,
1997 and the years ended December 31, 1996 and 1995 were $12,600, $9,400 and
$6,000, respectively.
10. SUBSEQUENT EVENTS
Initial Public Offering
In the first quarter of 1998, Innotrac is planning an initial public
offering of common stock. Innotrac plans to issue 2,500,000 shares (2,875,000
if the underwriters overallotment is exercised in full) at an estimated
initial public offering price of between $12.00 and $14.00 per share. There
can be, however, no assurance that the Offering will be completed at a per
share price within the estimated range or at all. There are significant
potential risks associated with this Offering as well as Innotrac's ability to
compete profitability in this industry including, but not limited to, the
following:
RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES
In connection with certain of its fulfillment services, the Company
purchases the Caller ID and other equipment from third party vendors and,
therefore, assumes the risks of inventory obsolescence, damage to leased
units, theft and creditworthiness of purchasers. The ability of the Company
to receive payment for sales or rentals of such equipment is dependent on
the transmittal of correct customer invoices and remittance on a timely
basis by BellSouth and Pacific Bell. The occurrence of any of these events
could have a material adverse effect on the Company's business, results of
operations and financial condition. The credit risk assumed by the Company
is particularly significant because of the large number of customers, each
of which owes a relatively small amount. The Company's allowance for bad
debt was approximately $5.6 million at September 30, 1997.
F-15
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
RELIANCE ON TELECOMMUNICATIONS INDUSTRY
Caller ID is a relatively recent offering by telecommunications companies
and there can be no assurance that it will gain or sustain wide acceptance
in the marketplace. In addition, the provision of Caller ID services by
telecommunications companies is regulated at both the federal and state
level. Such regulations may have the effect of delaying the offering of
Caller ID service in a market of one of the Company's clients.
The Company is also dependent on the level of resources (financial and
otherwise) expended by its clients to promote Caller ID service. There can
be no assurance that the Company's telecommunications clients will
sufficiently promote, or continue to promote, Caller ID service in their
areas. Furthermore, there can be no assurance that the Company's
telecommunications clients will achieve their estimated "market
penetration" (the percentage of consumer telephone lines capable of
receiving Caller ID services that actually receive such services) goals,
upon which the Company, in part, plans its operations. In addition, at some
time in the future, peak market penetration for Caller ID service may be
achieved by the Company's clients or Caller ID service may be replaced by a
different service or hardware. The occurrence of any of these factors could
have a material adverse effect on the Company's business, results of
operations and financial condition.
RISKS OF BUSINESS INTERRUPTION; NEW FACILITY
The Company's operations are dependent upon its ability to protect its
distribution facilities, call center, computer and telecommunications
equipment and software systems against damage from fire, power loss,
telecommunications interruption or failure, natural disaster and other
similar events. In the third quarter of 1998, the Company expects to move
its corporate offices and four distribution facilities into a new facility.
In the event the Company experiences a temporary or permanent interruption
of its business, through casualty, operating malfunction, as a result of
the move or otherwise, the Company's business, results of operations or
financial condition could be materially adversely affected. The Company's
property and business interruption insurance, may not adequately compensate
the Company for all losses that it may incur.
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW
SOFTWARE
The Company's business is highly dependent on its computer and
telecommunications equipment and software systems. The Company intends to
use a portion of the net proceeds of the Offering to upgrade certain
computer hardware and software, and, as a result, will convert certain
existing programs to the new system. There can be no assurance that the
Company can effectively or efficiently convert its programs to the new
system. In addition, the Company's failure to maintain its technological
capabilities or to respond
F-16
<PAGE>
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
effectively to technological changes could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's future success also will be highly dependent upon its ability
to enhance existing services and develop applications to focus on its
clients' needs and introduce new services and products to respond to
changing technological developments. There can be no assurance that the
Company can select, invest in and develop new and enhanced technology on a
timely basis in the future in order to meet clients' needs and to maintain
its own competitiveness, and the Company's failure to do so could have a
material adverse effect on the Company's business, results of operations
and financial condition.
ABILITY TO CONTINUE AND MANAGE GROWTH
Innotrac has recently experienced significant growth in its operations.
The Company's success will depend upon its ability to initiate, develop and
maintain existing and new client relationships; respond to competitive
developments; develop its sales and marketing forces; attract, train,
motivate and retain management and hourly personnel; and maintain the high
quality of the services and products that it provides to its clients. In
addition, the Company has entered into a long-term lease for a new
facility, which will increase lease expenses by approximately $400,000 per
year. The Company's continued rapid growth can be expected to place a
significant strain on the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to
maintain or accelerate its current growth, effectively manage its expanding
operations or achieve planned growth on a timely or profitable basis. If
the Company is unable to manage its growth effectively, its business,
results of operations and financial condition could be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in large part on the abilities and
continuing efforts of its executive officers and senior management. In
order to support its growth the Company will be required to effectively
recruit, develop and retain additional qualified management personnel.
There can be no assurance that the Company will be able to (i) retain the
services of its executive officers and key management, with whom the
Company has no employment agreements or (ii) recruit, develop and retain
additional qualified management personnel. The business and prospects of
the Company could be adversely affected if these persons do not continue in
their key roles and the Company is unable to attract and retain qualified
replacements.
Stock Options
In November 1997, the Company adopted a Stock Option Plan to provide key
employees, officers, directors, contractors, and consultants an opportunity to
own Common Stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under the Stock Option
Plan may be structured in a variety of ways, including as "incentive stock
options" as defined in Section 422 of the Code, non-qualified stock options,
restricted stock awards, and stock appreciation rights ("SARs"). Incentive
stock options may be granted only to full-time employees (including officers)
of the Company and its subsidiaries. Non-qualified options, restricted stock
awards, SARs, and other permitted forms of awards may be granted to any person
employed by or performing services for the Company, including directors,
contractors, and consultants. The Stock Option Plan provides for the issuance
of options to purchase up to an aggregate of 800,000 shares of Common Stock.
F-17
<PAGE>
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Incentive stock options are also subject to certain limitations prescribed
by the Code, including the requirement that such options may not be granted to
employees who own more than 10% of the combined voting power of all classes of
voting stock of the Company, unless the option price is at least 110% of the
fair market value of the Common Stock subject to the option. The Board of
Directors of the Company (or a committee designated by the Board) otherwise
generally has discretion to set the terms and conditions of options and other
awards, including the term, exercise price, and vesting conditions, if any; to
select the persons who receive such grants and awards; and to interpret and
administer the Plan.
As of December 12, 1997, stock options to purchase an aggregate of 343,000
shares at $9.10 per share of Common Stock have been granted under the Stock
Option Plan. 55,000 of these options vest immediately at the effective date of
the Offering; the remaining options vest 50%, 25% and 25% at two, three and
four years, respectively, after the grant date and expire 10 years from the
grant date. Additionally, the Company plans on granting options to purchase
40,000 shares to four non-employee members of the Board of Directors at a
price equal to the initial public offering price which will vest immediately
upon grant.
Consolidation
In conjunction with the proposed Offering, Innotrac plans to consolidate the
eight affiliated entities (the "Consolidation") that had previously conducted
the business of the Company as an integrated business unit. The Consolidation
will be effected simultaneously with, and as a condition to, the Offering.
Innotrac has authorized 50,000,000 shares of Common Stock, $0.10 par value,
and 10,000,000 shares of Preferred Stock, $0.10 par value. On December 12,
1997, Innotrac effected a 70.58823 -for- 1 stock split resulting in 1,080,000
shares outstanding. In exchange for their previous ownership interests,
5,420,000 shares of $0.10 par value common stock will be issued to the owners
pari-passu except for the minority stockholder of RenTel and SellTel, whose
ownership interests will be repurchased as scheduled effective with the
Offering and in the fourth quarter of 1998, respectively. In connection with
the Consolidation as detailed in the pro forma shareholders' equity, two of
the entities will make certain distributions of undistributed accumulated
earnings (approximately $6,400,000) to their principals. No shares of
Preferred Stock will be issued.
F-18
<PAGE>
UNAUDITED PRO FORMA FINANCIAL DATA
As discussed in Note 1 to the combined financial statements, the historical
combined financial statements include the financial statements of Innotrac
Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems,
Inc., HomeTel Providers, Inc., RenTel #2, L.L.C., SellTel #2, L.L.C. and
HomeTel Providers Partners, L.P. Effective simultaneous with the Offering, the
Companies will be reorganized and consolidated. For accounting purposes,
HomeTel Providers Partners, LP will be deemed to be the acquiring entity. See
"The Consolidation."
The pro forma adjustments to the statements of operations for the nine month
period ended September 30, 1997 reflect (i) the Consolidation and (ii) the
Offering and the use of net proceeds thereof, as if each of such transactions
had occurred on January 1, 1997. The pro forma adjustments to the balance sheet
reflect (i) the Consolidation and (ii) the Offering and the use of net proceeds
thereof, as if each of such transactions had occurred on September 30, 1997.
The pro forma financial information does not purport to represent what
Innotrac's consolidated results of operations would have been if these
transactions had in fact occurred on these dates, nor does it purport to
indicate the future consolidated financial position or consolidated results of
future operations of Innotrac. The pro forma adjustments are based on currently
available information and certain assumptions that management believes to be
reasonable.
F-19
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL PRO FORMA CONSOLIDATED
COMBINED ADJUSTMENTS AS ADJUSTED
---------- ----------- ------------
<S> <C> <C> <C>
Revenues net............................ $67,314 $ -- $67,314
Cost of revenues........................ 51,800 -- 51,800
------- ------- -------
Gross profit............................ 15,514 -- 15,514
------- ------- -------
Operating expenses:
Selling, general and administrative
expenses.............................. 9,072 -- 9,072
Depreciation and amortization.......... 454 -- 454
------- ------- -------
Total operating expenses............ 9,526 -- 9,526
------- ------- -------
Operating income........................ 5,988 -- 5,988
------- ------- -------
Other (income) expense:
Interest expense...................... 1,422 (1,417)(a) 5
Other................................. (2) -- (2)
------- ------- -------
Total other expense................. 1,420 (1,417) 3
------- ------- -------
Income before income taxes.............. 4,568 1,417 5,985
Income tax provision.................... (75) (2,317)(b) (2,392)
------- ------- -------
Net income.............................. $ 4,493 $ (900) $ 3,593
======= ======= =======
Weighted average number of shares....... 2,500 (c)
6,603 (d) 9,103
Net income per share.................... $ 0.39 (e)
=======
</TABLE>
- --------
(a) Reflects the elimination of interest expense on the line of credit, bank
note, and subordinated debt borrowings assumed to be repaid with the net
proceeds of the Offering.
(b) Reflects the tax effect of HomeTel Systems, HomeTel Providers Inc.,
HomeTel Providers Partners, L.P., RenTel #1, Inc., RenTel #2 LLC and
SellTel #2 LLC losing their non-C corporation status in conjunction with
the Consolidation as well as the tax effects of (a) above.
(c) Reflects 2,500,000 shares being offered hereby.
(d) Reflects 1,080,000 shares of Innotrac (after the stock split) and
5,420,000 shares of the Company issued in conjunction with the
Consolidation plus 102,900 shares granted under the Company's Stock Option
Plans within the 12 months prior to the effective date of the initial
public offering using the "treasury stock" method as if all shares had
been outstanding for all periods.
(e) Excludes the dividend accretion on redeemable capital stock of a
subsidiary of approximately $64,000 or $(0.01) per share.
F-20
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Cash and cash equivalents................ $ 426 $ 4,184 (b) $ 4,610
Restricted cash.......................... -- 3,332 (b) 3,332
Accounts receivable, net................. 21,673 -- 21,673
Inventory................................ 5,309 -- 5,309
Prepaids and other....................... 600 3,621 (a) 4,221
------- -------- -------
Total current assets................. 28,008 11,137 39,145
------- -------- -------
Property and equipment, net.............. 8,249 -- 8,249
------- -------- -------
Other assets, net........................ 130 -- 130
------- -------- -------
Total assets......................... $36,387 $ 11,137 $47,524
======= ======== =======
Accounts payable......................... $ 4,371 $ -- $ 4,371
Accrued expenses......................... 10,658 -- 10,658
Current portion of debt.................. 736 (666)(b) 70
Line of credit........................... 10,446 (10,446)(b) 0
Other.................................... 204 -- 204
------- -------- -------
Total current liabilities............ 26,415 (11,112) 15,303
------- -------- -------
Subordinated debt........................ 3,500 (3,500)(b) 0
Long term debt........................... 556 (556)(b) 0
Deferred income taxes.................... 101 352 (a) 453
------- -------- -------
Total non-current liabilities........ 4,157 (3,704) 453
------- -------- -------
Total liabilities.................... 30,572 (14,816) 15,756
------- -------- -------
Redeemable Capital Stock................. 894 (390)(b) 504
------- -------- -------
Shareholders' equity:
Partners' capital...................... 1,577 (1,577)(b) 0
Members' deficit....................... (999) 999 (b) 0
Common stock........................... 5 645 (b) 900
250 (b)
Additional paid-in capital............. 14 (2,536)(b) 25,375
29,225 (b)
(6,400)(b)
Retained earnings...................... 4,324 3,268 (a) 4,989
(2,603)(b)
------- -------- -------
Total shareholders' equity........... 4,921 26,343 31,264
------- -------- -------
Total liabilities and shareholders'
equity.............................. $36,387 $ 11,137 $47,525
======= ======== =======
</TABLE>
- --------
(a) Reflects the recording of deferred tax assets and liabilities associated
with the change in tax status to C corporation of HomeTel Systems, HomeTel
Providers Inc., HomeTel Providers Partners, L.P., RenTel #1, Inc., RenTel
#2 LLC and SellTel #2 LLC in conjunction with the Consolidation. See "The
Consolidation" for discussion.
(b) Reflects the Consolidation of the Company as described in "The
Consolidation" including the reclassification of the portion of retained
earnings attributable to the S corporation and to additional paid in
capital and the issuance of 5,420,000 shares of $0.10 par value Innotrac
Common Stock as well as the 1,080,000 shares of Innotrac after the stock
split. Also reflects the issuance of 2,500,000 shares of common stock at an
assumed offering price of $13.00 offered hereby and an increase in cash
equal to the net proceeds less repayment of the borrowings under the line-
of-credit facility ("LOC"), bank note, and the subordinated debt as well as
the redemption of the redeemable capital stock of a subsidiary. Restricted
cash represents the difference between borrowings under the LOC and the
term note at September 30, 1997 and the anticipated amounts outstanding at
closing. Remaining portion represents redeemable capital stock of a
subsidiary (SellTel) to be redeemed in the fourth quarter of 1998. Reflects
distribution of $6.4 million of the undistributed earnings of HomeTel
Systems and HomeTel Providers Partners L.P.
F-21
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, ANY OF THE COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
The Consolidation........................................................ 14
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 15
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 24
Management............................................................... 33
Principal Shareholders................................................... 37
Certain Transactions..................................................... 38
Shares Eligible for Future Sale.......................................... 39
Description of Capital Stock............................................. 40
Underwriting............................................................. 43
Legal Matters............................................................ 44
Experts.................................................................. 44
Additional Information................................................... 44
Index to Financial Statements............................................ F-1
</TABLE>
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 SHARES
[LOGO]
INNOTRAC
CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
J.C.Bradford&Co.
Wheat First Butcher Singer
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than the underwriting discount) payable by the Registrant in
connection with the issuance and distribution of the shares of Common Stock in
the Offering.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee........... $11,873.75
NASD Filing Fees.............................................. 4,525.00
Nasdaq National Market Filing Fees............................ 40,000.00
Blue Sky Fees and Expenses.................................... *
Printing and Engraving Expenses............................... *
Legal Fees and Expenses....................................... *
Accounting Fees and Expenses.................................. *
Transfer Agent Fees and Expenses.............................. *
Miscellaneous................................................. *
----------
Total..................................................... $ *
==========
</TABLE>
- --------
* To be provided by amendment.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Articles of Incorporation provide that
a director shall not be personally liable to the Registrant or its
shareholders for monetary damages for breach of the duty of care or any other
duty owed to the Registrant as a director to the fullest extent permitted by
Georgia law. Under such law, corporations cannot limit the liability of a
director (a) for any appropriation, in violation of his duties, of any
business opportunity of the Registrant; (b) for acts or omissions which
involve intentional misconduct or a knowing violation of law; (c) for unlawful
corporate distributions or (d) for any transactions from which the director
receives an improper benefit.
Under Article VII of the Registrant's Amended and Restated Bylaws, the
Registrant is required to indemnify its directors and officers to the fullest
extent permitted by Georgia law. The Georgia Business Corporation Code
provides that a corporation may indemnify its directors, officers and agents
against judgments, fines, penalties, amounts paid in settlement and expenses,
including attorneys' fees, resulting from various types of legal actions or
proceedings if the actions of the party being indemnified meet the standards
of conduct specified therein. Determinations concerning whether the applicable
standard of conduct has been met can be made by (a) a majority of the
disinterested directors; (b) a majority of a committee of disinterested
directors; (c) independent legal counsel or (d) an affirmative vote of a
majority of shares held by the disinterested stockholders. No indemnification
may be made to or on behalf of a corporate director, officer, employee or
agent (i) in connection with a proceeding by or in right of the Registrant in
which such person was adjudged liable to the Registrant or (ii) in connection
with any other proceeding in which said person was adjudged liable on the
basis that personal benefit was improperly received by him.
The Registrant has entered into Indemnification Agreements with certain of
its directors and officers (the "Indemnified Parties"). Under the terms of the
Indemnification Agreements, the Registrant is required to indemnify the
Indemnified Parties against certain liabilities arising out of their service
for the Registrant. The Indemnification Agreements require the Registrant (i)
to indemnify each Indemnified Party to the fullest extent permitted by law;
and (ii) to advance certain expenses incurred by an Indemnified Party. The
Indemnification Agreements provide limitations on the Indemnified Party's
rights to indemnification in certain circumstances.
The Registrant's directors and officers are insured against losses arising
from any claim against them as such for wrongful acts or omissions, subject to
certain limitations.
II-1
<PAGE>
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following persons or entities will be issued the following number of
shares of Common Stock of the Registrant in the Consolidation as of the
effective date of the Registration Statement in consideration of each person's
or entity's equity interests in one of the eight companies involved in the
Consolidation. Such shares will be issued in a private placement made pursuant
to Section 4(2) of the Securities Act of 1933. The Registrant has not issued
any other shares since December 1994.
<TABLE>
<CAPTION>
NAME NO. SHARES
---- ----------
<S> <C>
Scott D. Dorfman 4,989,428
ITC Service Company 353,846
Susan Mary Trotochaud 493
Trust and custodianship for Bradley H. Dorfman 25,411
Trust and custodianship for Brent M. Dorfman 25,411
Trust and custodianship for Jesse E. Dorfman 25,411
</TABLE>
II-2
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement between the Representatives of the
Underwriters and the Registrant**
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Amended and Restated By-laws of the Registrant*
4.1 Form of Common Stock Certificate of the Registrant**
4.2 Rights Agreement between Registrant and Reliance Trust Company as
Rights Agent, dated as of **
5 Opinion of Kilpatrick Stockton LLP**
10.1 Acquisition Agreement by and among the Registrant, SellTel #1, Inc.,
RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers
Inc., Rentel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers
Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary
Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman And
Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997*
10.2 Stock Option and Incentive Award Plan*
10.3 Amended and Restated Loan and Security Agreement by and among the
Registrant, HomeTel Systems Inc., IELC, Inc., RenTel #1, Inc., RenTel
#2, L.L.C., SellTel #1, Inc., SellTel #2, L.L.C., HomeTel Providers
Partners, L.P. and SouthTrust Bank, N.A., dated December 5, 1997*
10.4 Equipment Negotiation and Referral Agreement between BellSouth
Telecommunications, Inc. and the Registrant, effective May 1, 1995*+
10.5 Form of Indemnification Agreements entered into as of December 11,
1997, by and between the Company and each of Messrs. Scott D. Dorfman,
David L. Ellin, Donald L. Colter, Jr., John H. Nichols II, Bruce V.
Benator, Martin J. Blank, Campbell B. Lanier, III and William H.
Scott, III*
10.6 Loan and Security Agreement by and between HomeTel Providers Partners,
L.P. and ITC Holding Company, Inc. dated as of April 11, 1994*
10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the
Registrant*
10.8 Lease, dated , by and between Weeks Development Partnership and
the Registrant**
23.1 Consent of Kilpatrick Stockton LLP, included in Exhibit 5
23.2 Consent of Arthur Andersen LLP*
24 Power of attorney (on signature page)
27 Financial Data Schedule*
</TABLE>
- --------
* Filed herewith
** To be filed by amendment
+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In
accordance with Rule 406(b)(2), these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
II-3
<PAGE>
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act, and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act,
the information omitted from the form of Prospectus filed as part of this
Registration Statement in reliance upon Rule 430A and contained in a form
of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Atlanta, State of
Georgia, on the 16th day of December 1997.
INNOTRAC CORPORATION
/s/ Scott D. Dorfman
By:__________________________________
SCOTT D. DORFMAN
CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Scott D. Dorfman and David L. Ellin and either of them, his true and lawful
attorneys-in-fact with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign a Registration Statement pursuant to Rule 462(b) under the Securities Act
of 1933 and to cause the same to be filed, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby granting to said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing whatsoever
requisite or desirable to be done in and about the premises, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all acts and things that said attorneys-in-fact and
agents, or their substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 16th
day of December 1997, in the capacities indicated.
SIGNATURES POSITION
/s/ Scott D. Dorfman Chairman, President and
- ------------------------------------- Chief Executive Officer
Scott D. Dorfman (Principal Executive
Officer)
/s/ David L. Ellin Senior Vice President,
- ------------------------------------- Secretary, Chief Operating
David L. Ellin Officer and Director
/s/ Larry C. Hanger Vice President--Business
- ------------------------------------- Development and Director
Larry C. Hanger
/s/ John H. Nichols, III Vice President and Chief
- ------------------------------------- Financial Officer
John H. Nichols, III (Principal Financial and
Accounting Officer)
<PAGE>
SIGNATURES POSITION
/s/ Bruce V. Benator Director
- -------------------------------------
Bruce V. Benator
/s/ Martin J. Blank Director
- -------------------------------------
Martin J. Blank
/s/ Campbell B. Lanier, III Director
- -------------------------------------
Campbell B. Lanier, III
/s/ William H. Scott, III Director
- -------------------------------------
William H. Scott, III
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited, in accordance with generally accepted auditing standards,
the combined financial statements of INNOTRAC CORPORATION (a Georgia
corporation), IELC, INC. (a Georgia corporation), RENTEL #1, INC. (a Georgia
corporation), SELLTEL #1, INC. (a Georgia corporation), HOMETEL SYSTEMS, INC.
(a Georgia corporation), HOMETEL PROVIDERS, INC. (a Georgia corporation),
RENTEL #2, LLC (a Georgia limited liability company), SELLTEL #2, LLC (a
Georgia limited liability company) and HOMETEL PROVIDERS PARTNERS, L.P. (a
Georgia limited partnership) included in this Registration Statement and have
issued our report thereon dated December 12, 1997. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 16(b) is the responsibility of the
Company's management and is presented for purposes of complying with the
Securities and Exchange Commission's rules and is not part of the basic
financial statements. This schedule has been subjected to the auditing
procedures applied in the audits of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
December 12, 1997
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ------------------
AT CHARGED CHARGES TO
BEGINNING TO OTHER BALANCE AT END
DESCRIPTION OF PERIOD INCOME ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- ------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Provision for
uncollectible accounts
1997................... $4,242 $14,227 $0.00 $(12,873)(1) $5,596
1996................... $2,552 $9,377 $0.00 $(7,687) $4,242
1995................... $575 $3,043 $0.00 $(1,066)(1) $2,552
</TABLE>
- --------
(1) Represents write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.
<PAGE>
(A) EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
<C> <S>
1.1 Form of Underwriting Agreement between the Representatives of the
Underwriters and the Registrant**
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Amended and Restated By-laws of the Registrant*
4.1 Form of Common Stock Certificate of the Registrant**
4.2 Rights Agreement between Registrant and Reliance Trust Company as
Rights Agent, dated as of **
5 Opinion of Kilpatrick Stockton LLP**
10.1 Acquisition Agreement by and among the Registrant, SellTel #1, Inc.,
RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers
Inc., Rentel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers
Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary
Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman And
Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997*
10.2 Stock Option and Incentive Award Plan*
10.3 Amended and Restated Loan and Security Agreement by and among the
Registrant, HomeTel Systems Inc., IELC, Inc., RenTel #1, Inc., RenTel
#2, L.L.C., SellTel #1, Inc., SellTel #2, L.L.C., HomeTel Providers
Partners, L.P. and SouthTrust Bank, N.A., dated December 5, 1997*
10.4 Equipment Negotiation and Referral Agreement between BellSouth
Telecommunications, Inc. and the Registrant, effective May 1, 1995*+
10.5 Form of Indemnification Agreements entered into as of December 11,
1997, by and between the Company and each of Messrs. Scott D. Dorfman,
David L. Ellin, Donald L. Colter, Jr., John H. Nichols II, Bruce V.
Benator, Martin J. Blank, Campbell B. Lanier, III and William H.
Scott, III*
10.6 Loan and Security Agreement by and between HomeTel Providers Partners,
L.P. and ITC Holding Company, Inc. dated as of April 11, 1994*
10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the
Registrant*
10.8 Lease, dated , by and between Weeks Development Partnership and
the Registrant**
23.1 Consent of Kilpatrick Stockton LLP, included in Exhibit 5
23.2 Consent of Arthur Andersen LLP*
24 Power of attorney (on signature page)
27 Financial Data Schedule
</TABLE>
- --------
* Filed herewith
** To be filed by amendment
+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In
accordance with Rule 406(b)(2), these confidential portions have been
omitted from this exhibits and filed separately with the Commission.
<PAGE>
EXHIBIT 3.1
AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF INNOTRAC CORPORATION
Article I.
The name of the Corporation is:
Innotrac Corporation.
Article II.
The Corporation shall have authority to issue not more than 50,000,000
shares of common stock, par value $ 0.10 per share (the "Common Stock") and
10,000,000 shares of preferred stock, par value $0.10 per share (the "Preferred
Stock").
Article III.
Holders of the Common Stock are entitled to the entire voting power,
all distributions declared and all assets of the Corporation upon dissolution,
subject to the rights and preferences, if any, of the holders of the Preferred
Stock to such voting power, dividends and assets upon dissolution pursuant to
applicable law and the resolution or resolutions of the Board of Directors
providing for the issue of one or more series of Preferred Stock.
Article IV.
The Board of Directors is hereby expressly authorized to issue, at any
time and from time to time, shares of Preferred Stock in one or more series. The
number of shares within any such series shall be designated by the Board of
Directors in one or more resolutions, and the shares of each series so
designated shall have such preferences with respect to the Common Stock and
other series of Preferred Stock, and such other rights, restrictions or
limitations with respect to voting, dividends, conversion, exchange, redemption
and any other matters, as may be set forth in one or more resolutions adopted by
the Board of Directors. The Board of Directors has established below one series
of Preferred Stock and to the extent required by law, must file Articles of
Amendment setting forth any designation, preferences,
<PAGE>
rights, restrictions or limitations of other series of Preferred Stock with the
Georgia Secretary of State prior to the issuance of any shares of such series.
The authority of the Board of Directors with respect to the
establishment of each series of Preferred Stock shall include, without limiting
the generality of the foregoing, determination of the following matters which
may vary between series:
(a) The distinctive designation of that series and the number of shares
constituting that series, which number may be increased (except where otherwise
provided by the Board of Directors in creating such series) or decreased (but
not below the number of shares of such series then outstanding) from time to
time;
(b) The dividend rate on the shares of that series, whether dividends
shall be cumulative, and, if so, from which date or dates, and the relative
rights of priority, if any, of payments of dividends on shares of that series;
(c) Whether that series shall have voting rights, in addition to the
voting rights provided by law, and, if so, the terms of such voting rights;
(d) Whether that series shall have conversion privileges, and, if so,
the terms and conditions of such conversion, including provisions for adjustment
of the conversion rate in such events as the Board of Directors shall determine;
(e) Whether the shares of that series shall be redeemable, and, if so,
the terms and conditions of such redemption, including the date or dates upon or
after which they shall be redeemable, and the amount per share payable in case
of redemption, which amount may vary under different conditions;
(f) Whether that series shall have a sinking fund for the redemption or
purchase of shares of that series, and, if so, the terms and amount of such
sinking fund;
(g) The rights of the shares of that series in the event of voluntary or
involuntary liquidation, dissolution or winding-up of the Corporation, and the
relative rights of priority, if any, of payment of shares of that series; and
(h) Any other relative preferences, rights, restrictions or limitations
of that series, including but not limited to any obligations of the Corporation
to repurchase shares of that series upon specified events.
Article V.
2
<PAGE>
In discharging the duties of their respective positions and in
determining what is believed to be in the best interests of the Corporation, the
Board of Directors, committees of the Board of Directors and individual
directors, in addition to considering the effects of any action on the
Corporation or its shareholders, may consider the interests of the employees,
customers, suppliers, and creditors of the Corporation and its subsidiaries, the
communities in which offices or other establishments of the Corporation and its
subsidiaries are located, and all other factors the directors consider
pertinent.
Article VI.
No director of the Corporation shall be personally liable to the
Corporation or its shareholders for monetary damages for breach of his duty of
care or other duty as a director, provided that this provision shall eliminate
or limit the liability of a director only to the extent permitted from time to
time by the Georgia Business Corporation Code (the "Code") or any successor law
or laws. If at any time the Code shall have been amended to authorize the
further elimination or limitation of the liability of a director, then the
liability of each director of the Corporation shall be eliminated or limited to
the fullest extent permitted by the Code, as so amended, without further action
by the shareholders, unless the provisions of the Code, as amended, require
further action by the shareholders. Any repeal or modification of the foregoing
provisions of this Article VII shall not adversely affect the elimination or
limitation of liability or alleged liability pursuant hereto of any director of
the Corporation for or with respect to any alleged act or omission of the
director occurring prior to such repeal or modification.
Article VII.
The number of directors which shall constitute the whole board shall
be not less than five nor more than eleven, the number thereof to be determined
from time to time by resolution of the board of directors or the shareholders;
provided, however, that no decrease in the number of directors shall have the
effect of shortening the term of an incumbent director. Upon the closing of the
Corporation's initial public offering of shares of its Common Stock, the
directors shall be classified with respect to the time during which they shall
severally hold office by dividing them into three classes, as nearly equal in
number as possible, and with respect to the initial seven person board, Class 1
shall consist of two directors with a term of one year; Class 2 shall consist of
three directors with a term of two years; and Class 3 shall consist of two
directors. At each annual meeting of the shareholders held thereafter, the
successors to the class of directors whose terms shall expire that year shall be
elected to hold office for a term of three years, so that the term of office of
one class of directors shall expire in each year. Any increase in the number of
directors following the establishment of the staggered board of directors shall
be apportioned among the classes so as to make all classes as nearly equal in
number as possible.
3
<PAGE>
Article VIII.
The street address and county of the Corporation's registered agent
shall be 1828 Meca Way, Norcross, Gwinnett County, Georgia 30093. The
registered agent of the Corporation at that office shall be Melissa Ohlson.
Article IX.
The mailing address of the Corporation's initial principal office is
1828 Meca Way, Norcross, Georgia 30093.
IN WITNESS WHEREOF, the Corporation has caused these Amended and
Restated Articles of Incorporation to be executed by its duly authorized officer
on the 24th day of November, 1997.
INNOTRAC CORPORATION
By: /s/ Scott D. Dorfman
------------------------
Scott D. Dorfman, Chairman,
President and Chief Executive
Officer
4
<PAGE>
EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
INNNOTRAC CORPORATION
ARTICLE I
OFFICES
-------
Section 1. Registered Office. The registered office shall be in the
-----------------
State of Georgia, County of Gwinnett.
Section 2. Other Offices. The corporation may also have offices at
-------------
such other places both inside and outside the State of Georgia as the board of
directors may from time to time determine and the business of the corporation
may require or make desirable.
ARTICLE II
SHAREHOLDERS MEETINGS
---------------------
Section 1. Annual Meetings. The annual meeting of the shareholders
---------------
of the corporation shall be held at the principal office of the corporation or
at such other place inside or outside the United States as may be determined by
the board of directors, on such date and at such time as may be determined by
the board of directors, for the purpose of electing directors and transacting
such other business as may properly be brought before the meeting.
Section 2. Special Meetings. Special meetings of the shareholders
----------------
shall be held at the principal office of the corporation or at such other place
inside or outside the United States as may be designated in the notice of said
meetings, upon call of the chairman of the board of directors or the president
and shall be called by the president or the secretary when so directed by the
board of directors or at the request in writing of shareholders owning at least
25% of the issued and outstanding capital stock of the corporation entitled to
vote thereat. Any such request shall state the purposes for which the meeting
is to be called.
Section 3. Notice of Meetings. Written notice of every meeting of
------------------
shareholders, stating the place, date and hour of the meetings, shall be given
in a manner
<PAGE>
permitted by applicable law to each shareholder of record entitled to vote at
such meeting not less than 10 nor more than 60 days before the date of the
meeting. Attendance of a shareholder at a meeting of shareholders shall
constitute a waiver of notice of such meeting and of all objections to the place
or time of meeting, or the manner in which it has been called or convened,
except when a shareholder attends a meeting solely for the purpose of stating,
at the beginning of the meeting, any such objection to the transaction of any
business. Notice need not be given to any shareholder who signs a waiver of
notice, in person or by proxy, either before or after the meeting.
Section 4. Quorum. At all meetings of shareholders, any Voting
------
Group (as defined below) entitled to vote on a matter may take action on the
matter only if a quorum of that Voting Group exists at the meeting, and if a
quorum exists, the Voting Group may take action on the matter notwithstanding
the absence of a quorum of any other Voting Group that may be entitled to vote
separately on the matter. Unless the articles of incorporation, these by-laws or
the Code provides otherwise, the presence (in person or by proxy) of shares
representing a majority of votes entitled to be cast on a matter by a Voting
Group shall constitute a quorum of the Voting Group with regard to that matter.
Once a share is present at any meeting other than solely to object to holding
the meeting or transacting business at the meeting, the share shall be deemed
present for quorum purposes for the remainder of the meeting and for any
adjournments of that meeting, unless a new record date for the adjourned meeting
is or must be set pursuant to Article V, Section 4 of these by-laws. If a quorum
is not present at any meeting of the shareholders, the holders of a majority of
the shares present (in person or represented by proxy) and entitled to vote
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented, any
business may be transacted which might have been transacted at the original
meeting.
Section 5. Voting. Unless otherwise provided by law, the articles of
------
incorporation, or board resolutions setting forth the preferences and other
rights, restrictions or limitations of any class or series of preferred stock,
each outstanding share, regardless of class or series, shall be entitled to one
vote on each matter voted on at a shareholders meeting, and each class or series
of the corporation's shares entitled to vote generally on a matter shall for
that purpose be considered a single voting group (a "Voting Group"). Unless the
articles of incorporation, these by-laws, a resolution of the board of directors
or applicable law require a different vote, action on a matter presented for
consideration at a meeting where a quorum is present, shall be approved as
follows: (a) directors shall be elected by a plurality of the votes cast by the
shares entitled to vote in the election at a meeting at which a quorum is
present; and (b) all other matters shall be approved if the votes cast within
the applicable Voting Group favoring the action exceed the votes cast opposing
the action, unless the articles of incorporation, a provision of these by-laws
that has been adopted pursuant to Section 14-2-1021 of the Code (or any
successor provision), or applicable law requires a greater number of affirmative
votes. If either the articles of incorporation or the Code requires separate
voting by
2
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two or more Voting Groups on a matter, action on that matter is taken only when
voted upon by each such Voting Group separately.
A shareholder may vote his shares in person or by proxy. A shareholder
may appoint a proxy to vote or otherwise act for him by signing an appointment
form. An appointment of a proxy is valid for eleven months unless a shorter or
longer period is expressly provided in the appointment form.
Section 6. Consent of Shareholders. Any action required or
-----------------------
permitted to be taken at any meeting of the shareholders may be taken without a
meeting if all of the shareholders consent thereto in writing, setting forth the
action so taken. Such consent shall have the same force and effect as a
unanimous vote of shareholders.
Section 7. List of Shareholders; Inspection of Records. (a) The
-------------------------------------------
corporation shall keep at its registered office or principal place of business,
or at the office of its transfer agent or registrar, a record of its
shareholders, giving their names and addresses and the number, class and series,
if any, of the shares held by each.
(b) Shareholders are entitled to inspect the corporate
records as and to the extent provided by the Code; provided, however, that only
shareholders owning more than two percent (2%) of the outstanding shares of any
class of the corporation's stock shall be entitled to inspect (1) the minutes
from any board, board committee or shareholders meeting (including any records
of action taken thereby without a meeting); (2) the accounting records of the
corporation; or (3) any record of the shareholders.
ARTICLE III
DIRECTORS
---------
Section 1. Powers. Except as otherwise provided by any legal
------
agreement among shareholders, the property, affairs and business of the
corporation shall be managed and directed by its board of directors, which may
exercise all powers of the corporation and do all lawful acts and things which
are not by law, by any legal agreement among shareholders, by the articles of
incorporation or by these by-laws directed or required to be exercised or done
by the shareholders.
Section 2. Number, Election, and Term. The board of directors shall
--------------------------
consist of the number and shall be elected in the manner and serve the term as
set forth in the Amended and Restated Articles of Incorporation. Except as
provided in this Article with respect to filling vacancies on the board, the
directors shall be elected by the shareholders as provided in Article II, and
each director elected shall hold office until his successor is elected
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and qualified or until his earlier resignation, removal from office, or death.
Directors shall be natural persons who have attained the age of 21 years, but
need not be residents of the State of Georgia or shareholders of the
corporation. The board, from time to time, may designate persons to act as
advisory directors.
Section 3. Nominations. (a) If any shareholder intends to nominate
-----------
or cause to be nominated any candidate for election to the board of directors
(other than any candidate to be sponsored by and proposed at the instance of the
management), such shareholder shall notify the president by first class
registered mail sent not less than 14 nor more than 50 days before the scheduled
meeting of the shareholders at which directors will be elected. However, if
less than 21 days notice of the meeting is given to shareholders, such
nomination shall be delivered or mailed to the president not later than the
close of the seventh day following the date on which the notice of the
shareholders' meeting was mailed. Such notification shall contain the following
information with respect to each nominee, to the extent known to the shareholder
giving such notification:
(1) Name, address and principal present occupation;
(2) To the knowledge of the shareholder who proposed to make such
nomination, the total number of shares that may be voted for such
proposed nominee;
(3) The names and address of the shareholders who propose to make such
nomination, and the number of shares of the corporation owned by
each of such shareholders; and
(4) The following additional information with respect to each nominee:
age, past employment, education, beneficial ownership of shares in
the corporation, past and present financial standing, criminal
history (including any convictions, indictments or settlements
thereof), involvement in any past or pending litigation or
administrative proceedings (including threatened involvement),
relationship to and agreements (whether or not in writing) with
the shareholder(s) (and their relatives, subsidiaries and
affiliates) intending to make such nomination, past and present
relationships or dealings with the corporation or any of its
subsidiaries, affiliates, directors, officers or agents, plans or
ideas for managing the affairs of the corporation (including,
without limitation, any termination of employees, any sales of
corporate assets, any proposed merger, business combination or
recapitalization involving the corporation, and any proposed
dissolution or liquidation of the corporation), and all additional
information relating to such person that would be required to be
disclosed, or otherwise required, pursuant to Sections 13 or 14 of
the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the
4
<PAGE>
"Exchange Act"), in connection with any acquisition of shares by
such nominee or in connection with the solicitation of proxies by
such nominee for his election as a director, regardless of the
applicability of such provisions of the Exchange Act.
(b) Any nominations not in accordance with the provisions of this
Section may be disregarded by the chairman of the meeting, and upon instruction
by the chairman, votes cast for each such nominee shall be disregarded. In the
event, however, that a person should be nominated by more than one shareholder,
and if one such nomination complies with the provisions of this Section, such
nomination shall be honored, and all shares voted for such nominee shall be
counted.
Section 4. Vacancies. (a) Subject to subsections 4(b), vacancies,
---------
including vacancies resulting from any increase in the number of directors and
vacancies resulting from removal from office by the shareholders, may be filled
only by the board of directors or by a majority of the directors then in office
(if the directors remaining in office constitute less than a quorum), and a
director so chosen shall hold office until the expiration of the term and until
his successor is duly elected and qualified, unless sooner displaced; provided,
however, that if there are no directors in office, then vacancies shall be
filled through election by the shareholders.
(b) If any vacant office described in subsection 4(a) was held by a
director elected by a particular Voting Group, only the remaining directors
elected by that Voting Group shall be entitled to fill the vacancy; provided,
however, that if the vacant office was held by a director elected by a
particular Voting Group and there is no remaining director elected by that
---
Voting Group, the other remaining directors or director (elected by another
Voting Group or Groups) may fill the vacancy.
Section 5. Meetings and Notice. The board of directors of the
-------------------
corporation may hold meetings, both regular and special, either inside or
outside the State of Georgia. Regular meetings of the board of directors may be
held without notice at such time and place as shall from time to time be
determined by resolution of the board. Special meetings of the board may be
called by the chairman of the board or president or by any two directors upon
one days notice given in a manner permitted by law. Such notice shall state a
reasonable time, date and place of meeting, but the purpose need not be stated
therein. A director may waive any notice required by the Code, the articles of
incorporation, or these by-laws before or after the date and time of the matter
to which the notice related, by a written waiver signed by the director and
delivered to the corporation for inclusion in the minutes or filing with the
corporate records. Attendance of a director at a meeting shall constitute a
waiver of notice of such meeting and waiver of all objections to the place and
time of the meeting, or the manner in which it has been called or convened
except when the director states, at the beginning of the meeting, any such
objection or objections to the transaction of business.
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<PAGE>
Section 6. Quorum. At all meetings of the board of directors, a
------
majority of directors shall constitute a quorum for the transaction of business,
and the act of a majority of the directors present at any meeting at which there
is a quorum shall be the act of the board, except as may be otherwise
specifically provided by law, by the articles of incorporation, or by these by-
laws. If a quorum shall not be present at any meeting of the board, the
directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 7. Conference Telephone Meeting. Unless the articles of
----------------------------
incorporation or these by-laws otherwise provide, members of the board of
directors, or any committee designated by the board, may participate in a
meeting of the board or committee by means of conference telephone or similar
communications equipment whereby all persons participating in the meeting can
hear each other. Participation in the meeting shall constitute presence in
person.
Section 8. Consent of Directors. Unless otherwise restricted by the
--------------------
articles of incorporation or these by-laws, any action required or permitted to
be taken at any meeting of the board of directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, setting forth the action so taken, and
the writing or writings are filed with the minutes of the proceedings of the
board or committee. Such consent shall have the same force and effect as a
unanimous vote of the board.
Section 9. Committees. The board of directors may, by resolution
----------
passed by a majority of the whole board, designate from among its members one or
more committees, each committee to consist of two or more directors. The board
may designate one or more directors as alternate members of any committee, who
may replace any absent member at any meeting of such committee. Any such
committee, to the extent provided in the resolution, shall have and may exercise
all of the authority of the board of directors in the management of the business
and affairs of the corporation except as limited by law. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the board of directors. A majority of each committee
may determine its action and may fix the time and places of its meetings, unless
otherwise provided by the board of directors. Each committee shall keep regular
minutes of its meetings and report the same to the board of directors when
required.
Section 10. Removal of Directors. At any shareholders' meeting with
--------------------
respect to which notice of such purpose has been given, any director may be
removed from office, only for cause, by the vote of shareholders representing a
majority of the issued and outstanding capital stock entitled to vote for the
election of directors, provided that a director elected by a Voting Group may
only be removed for cause by the vote of shareholders representing a majority of
the issued and outstanding capital stock of the Voting Group that elected the
particular director, and his successor may be elected at the same or any
subsequent meeting of shareholders; provided that to the extent any vacancy
created by such
6
<PAGE>
removal is not filled by such an election within 60 days after such removal, the
remaining directors shall, by majority vote, fill any such vacancy.
Section 11. Compensation of Directors. Directors shall be entitled
-------------------------
to such reasonable compensation for their services as directors or members of
any committee of the board as shall be fixed from time to time by resolution
adopted by the board, and shall also be entitled to reimbursement for any
reasonable expenses incurred in attending any meeting of the board or any such
committee.
ARTICLE IV
OFFICERS
--------
Section 1. Number. The officers of the corporation shall be chosen
------
by the board of directors and shall be a president and a treasurer. The board
of directors may also choose a chairman of the board, one or more vice-
presidents, a secretary, assistant secretaries and assistant treasurers. The
board of directors may appoint such other officers and agents as it shall deem
necessary who shall hold their offices for such terms and shall exercise such
powers and perform such duties as shall be determined from time to time by the
board.
Section 2. Compensation. The salaries of all officers and agents of
------------
the corporation shall be fixed by the board of directors or a committee or
officer appointed by the board.
Section 3. Term of Office. Unless otherwise provided by resolution
--------------
of the board of directors, the principal officers shall be chosen annually by
the board at the first meeting of the board following the annual meeting of
shareholders of the corporation, or as soon thereafter as is conveniently
possible. Subordinate officers may be elected from time to time. Each officer
shall serve until his successor shall have been chosen and qualified, or until
his death, resignation or removal.
Section 4. Removal. Any officer may be removed from office at any
-------
time, with or without cause, by the board of directors whenever in its judgment
the best interest of the corporation will be served thereby, or if appointed at
the authorization of the board of directors, by a senior officer at any time,
with or without cause, whenever in the officer's judgment the best interest of
the corporation will be served thereby.
Section 5. Vacancies. Any vacancy in an office resulting from any
---------
cause may be filled by the board of directors.
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<PAGE>
Section 6. Powers and Duties. Except as hereinafter provided, the
-----------------
officers of the corporation shall each have such powers and duties as
generally pertain to their respective offices, as well as such powers and
duties as from time to time may be conferred by the board of directors.
(a) Chairman of the Board. The chairman of the board (if
---------------------
there be one) shall preside at and serve as chairman of meetings of the
stockholders and of the board of directors. The chairman of the board shall
perform other duties and have other authority as may from time to time be
delegated by the board of directors.
(b) Chief Executive Officer. The chief executive officer
-----------------------
shall be charged with the general and active management of the corporation,
shall see that all orders and resolutions of the board of directors are
carried into effect, shall have the authority to select and appoint
employees and agents of the corporation, and shall, in the absence or
disability of the chairman of the board, perform the duties and exercise
the powers of the chairman of the board. The chief executive officer shall
also be responsible for the development, establishment, and implementation
of the policy and strategic initiatives for the corporation. The chief
executive officer shall perform any other duties and have any other
authority as may be delegated from time to time by the board of directors,
and shall be subject to the limitations fixed from time to time by the
board of directors.
(c) President. If there shall be no separate chief executive
---------
officer of the corporation, then the president shall be the chief executive
officer of the corporation, with the duties and authority provided in
Section 6 (b). The president shall otherwise be the chief operating
officer of the corporation and shall, consistent with the authority
otherwise conferred upon the chief executive officer in Section 6 (b), have
responsibility for the conduct and general supervision of the business
operations of the corporation, including without limitation responsibility
for the direction, supervision, and coordination of the activities of all
operating subsidiaries and other business units of the corporation. The
president shall perform such other duties and have such other authority as
may from time to time be delegated by the board of directors. In the
absence or disability of the chief executive officer, the president shall
perform the duties and exercise the powers of the chief executive officer.
(d) Vice President. The vice president (if there be one)
--------------
shall, in the absence or disability of the president, perform the duties
and exercise the powers of the president, whether the duties and powers are
specified in these by-laws or otherwise. If the corporation has more than
one vice president, the one designated by the board of directors shall act
in the event of the absence or disability of the president. Vice presidents
shall perform any other duties and have any other authority as from time to
time may be delegated by the board of directors, the chief executive
officer, or the president.
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<PAGE>
(e) Secretary. The secretary shall attend all meetings of
---------
the board of directors and all meetings of the shareholders and record all
the proceedings of the meetings of the corporation and of the board of
directors in a book to be kept for that purpose and shall perform like
duties for the standing committees when required. He shall give, or cause
to be given, notice of all meetings of the shareholders and special
meetings of the board of directors, and shall perform such other duties as
may be prescribed by the board of directors or president, under whose
supervision he shall be. He shall have custody of the corporate seal of the
corporation and he, or an assistant secretary, shall have authority to
affix the same to any instrument requiring it and when so affixed, it may
be attested by his signature or by the signature of such assistant
secretary. The board of directors may give general authority to any other
officer to affix the seal of the corporation and to attest the affixing by
his signature.
(f) Assistant Secretary. The assistant secretary or if
-------------------
there be more than one, the assistant secretaries in the order determined
by the board of directors (or if there be no such determination, then in
the order of their election), shall, in the absence of the secretary or in
the event of his inability or refusal to act, perform the duties and
exercise the powers of the secretary and shall perform such other duties
and have such other powers as the board of directors may from time to time
prescribe.
(g) Treasurer. The treasurer shall have the custody of the
---------
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit
of the corporation in such depositories as may be designated by the board
of directors. He shall disburse the funds of the corporation as may be
ordered by the board of directors, taking proper vouchers for such
disbursements, and shall render to the president and the board of
directors, at its regular meetings, or when the board of directors so
requires, an account of all his transactions as treasurer and of the
financial condition of the corporation. If required by the board of
directors, he shall give the corporation a bond (which shall be renewed
every six years) in such sum and with such surety or sureties as shall be
satisfactory to the board of directors for the faithful performance of the
duties of his office and for the restoration to the corporation, in case of
his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his
possession or under this control belonging to the corporation.
(h) Assistant Treasurer. The assistant treasurer, or if
-------------------
there shall be more than one, the assistant treasurers in the order
determined by the board of directors (or if there be no such determination,
then in the order of their election) shall, in the absence of the treasurer
or in the event of his inability or refusal to act, perform the duties and
exercise the powers of the treasurer and shall perform such
9
<PAGE>
other duties and have such other powers as the board of directors may from
time to time prescribe.
Section 7. Signatures. The signature of any officer, employee or
----------
agent upon any document of the corporation may be made by facsimile or machine
signature under such limitations and circumstances as the board of directors or
any appropriate committee of the board of directors may provide from time to
time.
Section 8. Voting Securities of Corporation. Unless otherwise
--------------------------------
ordered by the board of directors, the chairman shall have full power and
authority on behalf of the corporation to attend and to act and vote at any
meetings of security holders of corporations in which the corporation may hold
securities, and at such meetings shall possess and may exercise any and all
rights and powers incident to the ownership of such securities which the
corporation might have possessed and exercised if it had been present. The
board of directors by resolution from time to time may confer like powers upon
any other person or persons.
ARTICLE V
CERTIFICATE
-----------
Section 1. Form of Certificate. Every holder of fully-paid stock in
-------------------
the corporation shall be entitled to have a certificate in such form as the
board of directors may from time to time prescribe.
Section 2. Lost Certificates. The board of directors may direct
-----------------
that a new certificate be issued in place of any certificate theretofore issued
by the corporation and alleged to have been lost, stolen or destroyed, upon the
making of an affidavit of that fact by the person claiming the certificate of
stock to be lost, stolen or destroyed. When authorizing such issue of a new
certificate, the board of directors may, in its discretion and as a condition
precedent to the issuance thereof, require the owner of such lost, stolen or
destroyed certificate, or his legal representative, to advertise the same in
such manner as it shall require and/or to give the corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
corporation with respect to the certificate alleged to have been lost, stolen or
destroyed.
Section 3. Transfers. (a) Transfers of shares of the capital stock
---------
of the corporation shall be made only on the books of the corporation by the
registered holder thereof, or by his duly authorized attorney, or with a
transfer clerk or transfer agent appointed as provided in Section 5 of this
Article, and on surrender of the certificate or certificates for such shares
properly endorsed and the payment of all taxes thereon.
(b) The corporation shall be entitled to recognize the exclusive right
of a person registered on its books as the owner of shares to receive dividends,
and to vote as such
10
<PAGE>
owner, and for all other purposes, and shall not be bound to recognize any
equitable or other claim to or interest in such share or shares on the part of
any other person, whether or not it shall have express or other notice thereof,
except as otherwise provided by law.
(c) Shares of capital stock may be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on the
back of the certificates or by separate written power of attorney to sell,
assign and transfer the same, signed by the record holder thereof, or by his
duly authorized attorney-in-fact, but no transfer shall affect the right of the
corporation to pay any dividend upon the stock to the holder of record as the
holder in fact thereof for all purposes, and no transfer shall be valid, except
between the parties thereto, until such transfer shall have been made upon the
books of the corporation as herein provided.
(d) The board may, from time to time, make such additional rules and
regulations as it may deem expedient, not inconsistent with these by-laws or the
articles of incorporation, concerning the issue, transfer and registration of
certificates for shares of the capital stock of the corporation.
Section 4. Record Date. In order that the corporation may determine
-----------
the shareholders entitled to notice of or to vote at any meeting of shareholders
or any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of any
other lawful action, the board of directors may fix, in advance, a record date,
which shall not be more than 70 days and, in case of a meeting of shareholders,
not less than 10 days prior to the date on which the particular action requiring
such determination of stockholders is to be taken. If no record date is fixed
for the determination of shareholders entitled to notice of and to vote at any
meeting of shareholders, the record date shall be at the close of business on
the day next preceding the day on which the notice is given, or, if notice is
waived, at the close of business on the day next preceding the day on which the
meeting is held. If no record date is fixed for other purposes, the record date
shall be at the close of business on the day next preceding the day on which the
board of directors adopts the resolution relating thereto. A determination of
shareholders of record entitled to notice of or to vote at a meeting of
shareholders shall apply to any adjournment of the meeting unless the board of
directors shall fix a new record date for the adjourned meeting.
Section 5. Transfer Agent and Registrar. The board of directors
----------------------------
may appoint one or more transfer agents or one or more transfer clerks and one
or more registrars, and may require all certificates of stock to bear the
signature or signatures of any of them.
ARTICLE VI
GENERAL PROVISIONS
------------------
11
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Section 1. Distributions. Distributions upon the capital stock of
-------------
the corporation, subject to the provisions of the articles of incorporation, if
any, may be declared by the board of directors at any regular or special
meetings, pursuant to law. Distributions may be paid in cash, in property, or in
shares of the corporation's capital stock, subject to the provisions of the
articles of incorporation. Before payment of any distribution, there may be set
aside out of any funds of the corporation available for distributions such sum
or sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
distributions, or for repairing or maintaining any property of the corporation,
or for such other purpose as the directors shall think conducive to the interest
of the corporation, and the directors may modify or abolish any such reserve in
the manner in which it was created.
Section 2. Fiscal Year. The fiscal year of the corporation shall be
-----------
fixed by resolution of the board of directors.
Section 3. Seal. The corporate seal shall have inscribed thereon
----
the name of the corporation, the year of its organization and the words
"Corporate Seal" and "Georgia". The seal may be used by causing it or a
facsimile thereof to be impressed or affixed or reproduced or otherwise. In the
event it is inconvenient to use such a seal at any time, the signature of the
corporation followed by the word "Seal" enclosed in parentheses shall be deemed
the seal of the corporation.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
-----------------------------------------
Section 1. Indemnification of Directors and Officers.
-----------------------------------------
corporation shall indemnify and hold harmless any person (an "Indemnified
Person") who is or was a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action or suit by or in
the right of the corporation) by reason of the fact that he is or was a director
or officer of the corporation, against expenses (including, but not limited to,
attorneys' fees and disbursements, court costs and expert witness fees), and
against any judgments, fines, and amounts paid in settlement actually and
reasonably incurred by him in connection with such action, suit or proceeding,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation, and with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful; provided, in any case, that no indemnification shall be made in
respect of expenses, judgments, fines and amounts paid in settlement
attributable to circumstances as to which, under applicable provisions of the
Code as in effect from time to time, such indemnification may not be authorized
by action of the board of directors, the shareholders or otherwise.
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<PAGE>
Section 2. Indemnification of Directors and Officers for Derivative
--------------------------------------------------------
Actions. The corporation shall indemnify and hold harmless any Indemnified
- -------
Person who is or was a party, or is threatened to be made a party, to any
threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative, by or in the right of the
corporation, by reason of the fact that he is or was a director or officer of
the corporation, against expenses (including, but not limited to, attorneys'
fees and disbursements, court costs and expert witness fees) actually and
reasonably incurred by him in connection with such action, suit or proceeding,
if he acted in good faith and in a manner he reasonably believed to be in or not
opposed to the best interests of the corporation. No indemnification shall be
made pursuant to this Section for any claim, issue or matter as to which an
Indemnified Person shall have been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation, or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which such action or suit was brought or
other court of competent jurisdiction shall determine upon application that such
person is fairly and reasonably entitled to indemnity for such expenses which
the court shall deem proper.
Section 3. Indemnification of Employees and Agents. The board of
---------------------------------------
directors shall have the power to cause the corporation to provide to any person
who is or was an employee or agent of the corporation all or any part of the
right to indemnification and other rights of the type provided under Sections 1,
2, 6 and 12 of this Article (subject to the conditions, limitations, obligations
and other provisions specified herein), upon a resolution to that effect
identifying such employee or agent (by position or name) and specifying the
particular rights provided, which may be different for each employee or agent
identified. Each employee or agent of the corporation so identified shall be an
"Indemnified Person" for purposes of the provisions of this Article.
Section 4. Subsidiaries and Other Organizations. The board of
------------------------------------
directors shall have the power to cause the corporation to provide to any person
who is or was a director, officer, employee or agent of the corporation or who
also is or was a director, officer, trustee, partner, employee or agent of a
Subsidiary (as defined below), or is or was serving at the corporation's request
in such a position with any other organization, all or any part of the right to
indemnification and other rights of the type provided under Sections 1, 2, 6 and
12 of this Article (subject to the conditions, limitations, obligations and
other provisions specified herein), with respect to service by such person in
such position with a Subsidiary or other organization, upon a resolution
identifying such person, the Subsidiary or other organization involved (by name
or other classification), and the particular rights provided, which may be
different for each person so identified. Each person so identified shall be an
"Indemnified Person" for purposes of the provisions of this Article. As used in
this Article, "Subsidiary" shall mean (i) another corporation, joint venture,
trust, partnership or unincorporated business association more than 20% of the
voting capital stock or other voting equity interest of which was, at or after
the time of the circumstances giving rise to such action, suit or proceeding,
owned, directly or indirectly, by the corporation; or (ii) a nonprofit
corporation that receives its principal financial support from the corporation
or its Subsidiaries.
13
<PAGE>
Section 5. Determination. Notwithstanding any judgment, order,
-------------
settlement, conviction or plea in any action, suit or proceeding of the kind
referred to in Sections 1 and 2 of this Article, an Indemnified Person shall be
entitled to indemnification as provided in such Sections 1 and 2 if a
determination that such Indemnified Person is entitled to such indemnification
shall be made (i) by the board of directors by a majority vote of a quorum
consisting of directors who are not at the time parties to the proceeding; or
(ii) if a quorum cannot be obtained under (i) above, by majority vote of a
committee duly designated by the board of directors (in which designation
interested directors may participate), consisting solely of two or more
directors who are not at the time parties to the proceeding; or (iii) in a
written opinion by special legal counsel selected as required by Section 14-2-
855(b)(3) of the Code or any successor provision. To the extent that an
Indemnified Person has been successful on the merits or otherwise in defense of
any action, suit or proceeding of the kind referred to in Sections 1 and 2 of
this Article, or in defense of any claim, issue or matter therein, he shall be
indemnified against expenses (including attorneys' fees) actually and reasonably
incurred by him in connection therewith.
Section 6. Advances. Expenses (including, but not limited to,
--------
attorneys' fees and disbursements, court costs, and expert witness fees)
incurred by an Indemnified Person in defending any action, suit or proceeding of
the kind described in Sections 1 and 2 hereof (or in Section 4 hereof if
applicable to such Indemnified Person) shall be paid by the corporation in
advance of the final disposition of such action, suit or proceeding as set forth
herein. The corporation shall promptly pay the amount of such expenses to the
Indemnified Person, but in no event later than ten days following the
Indemnified Person's delivery to the corporation of a written request for an
advance pursuant to this Section, together with a reasonable accounting of such
expenses; provided, however, that the Indemnified Person shall furnish the
corporation a written affirmation of his good faith belief that he has met the
standard of conduct set forth in the Code and a written undertaking and
agreement, executed personally or on his behalf, to repay to the corporation any
advances made pursuant to this Section if it shall be ultimately determined that
the Indemnified Person is not entitled to be indemnified by the corporation for
such amounts. The corporation shall make the advances contemplated by this
Section regardless of the Indemnified Person's financial ability to make
repayment. Any advances and undertakings to repay pursuant to this Section
shall be unsecured and interest-free.
Section 7. Non-Exclusivity. Subject to any applicable limitation
---------------
imposed by the Code or the Articles of Incorporation, the indemnification and
advancement of expenses provided by or granted pursuant to this Article shall
not be exclusive of any other rights to which a person seeking indemnification
or advancement of expenses may be entitled under any by-law, resolution or
agreement specifically or in general terms approved or ratified by the
affirmative vote of holders of a majority of the shares entitled to be cast
thereon.
Section 8. Insurance. The corporation shall have the power to
---------
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or who, while a
director, officer, employee, or agent of the corporation, is or was serving as a
director, officer, trustee, general partner, employee or agent of a Subsidiary
or, at the request of the corporation, of any other organization, against any
liability asserted against
14
<PAGE>
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article.
Section 9. Notice. If any expenses or other amounts are paid by
------
way of indemnification, otherwise than by court order or action by the
shareholders or by an insurance carrier pursuant to insurance maintained by the
corporation, the corporation shall, not later than the next annual meeting of
shareholders, unless such meeting is held within three months from the date of
such payment, and in any event within 15 months from the date of such payment,
send by first class mail to its shareholders of record at the time entitled to
vote for the election of directors a statement specifying the persons paid, the
amount paid and the nature and status at the time of such payment of the
litigation or threatened litigation.
Section 10. Security. The corporation may designate certain of its
--------
assets as collateral, provide self-insurance or otherwise secure its obligations
under this Article, or under any indemnification agreement or plan of
indemnification adopted and entered into in accordance with the provisions of
this Article, as the board of directors deems appropriate.
Section 11. Amendment. Any amendment to this Article that limits or
---------
otherwise adversely affects the right of indemnification, advancement of
expenses, or other rights of any Indemnified Person hereunder shall, as to such
Indemnified Person, apply only to claims, actions, suits or proceedings based on
actions, events or omissions (collectively, "Post Amendment Events") occurring
after such amendment and after delivery of notice of such amendment to the
Indemnified Person so affected. Any Indemnified Person shall, as to any claim,
action, suit or proceeding based on actions, events or omissions occurring prior
to the date of receipt of such notice, be entitled to the right of
indemnification, advancement of expenses and other rights under this Article to
the same extent as if such provisions had continued as part of the by-laws of
the corporation without such amendment. This Section cannot be altered, amended
or repealed in a manner effective as to any Indemnified Person (except as to
Post Amendment Events) without the prior written consent of such Indemnified
Person.
Section 12. Agreements. In addition to the rights provided in this
----------
Article, the corporation shall have the power, upon authorization by the board
of directors, to enter into an agreement or agreements providing to any person
who is or was a director, officer, employee or agent of the corporation
indemnification rights substantially similar to, or greater than, those provided
in this Article.
Section 13. Continuing Benefits. The indemnification and
-------------------
advancement of expenses provided by or granted pursuant to this Article shall,
unless otherwise provided when authorized or ratified, continue as to a person
who has ceased to be a director, officer, employee or agent and shall inure to
the benefit of the heirs, executors and administrators of such a person.
Section 14. Successors. For purposes of this Article, the terms
----------
"the corporation" or "this corporation" shall include any corporation, joint
venture, trust, partnership or unincorporated business association that is the
successor to all or substantially all of the
15
<PAGE>
business or assets of this corporation, as a result of merger, consolidation,
sale, liquidation or otherwise, and any such successor shall be liable to the
persons indemnified under this Article on the same terms and conditions and to
the same extent as this corporation.
Section 15. Severability. Each of the sections of this Article,
------------
and each of the clauses set forth herein, shall be deemed separate and
independent, and should any part of any such section or clause be declared
invalid or unenforceable by any court of competent jurisdiction, such invalidity
or unenforceability shall in no way render invalid or unenforceable any other
part thereof or any other separate section or clause of this Article that is not
declared invalid or unenforceable.
Section 16. Additional Indemnification. In addition to the specific
--------------------------
indemnification rights set forth herein, the corporation shall indemnify each of
its directors and officers to the full extent permitted by action of the board
of directors without shareholder approval under the Code or other laws of the
State of Georgia as in effect from time to time.
ARTICLE VIII
AMENDMENTS
----------
The board of directors shall have power to alter, amend or repeal the
by-laws or adopt new by-laws by majority vote of all of the directors, but any
by-laws adopted by the board of directors may be altered, amended or repealed
and new by-laws adopted, by the shareholders by majority vote of all of the
shares having voting power.
16
<PAGE>
ACQUISITION AGREEMENT
BY AND AMONG
INNOTRAC CORPORATION
SELLTEL #1, INC.
RENTEL #1, INC.
IELC, INC.
HOMETEL SYSTEMS, INC.
HOMETEL PROVIDERS INC.
RENTEL #2, L.L.C.
SELLTEL #2, L.L.C.
HOMETEL PROVIDERS PARTNERS, L.P.
ITC SERVICE COMPANY
SCOTT D. DORFMAN
SUSAN MARY TROTOCHAUD, as Custodian for Bradley H. Dorfman,
Brent M. Dorfman and Jesse E. Dorfman
AND
SUSAN MARY TROTOCHAUD
DECEMBER 15, 1997
1
<PAGE>
ACQUISITION AGREEMENT
THIS AGREEMENT is made and entered into as of the 15th day of
December, 1997, by and among INNOTRAC CORPORATION, a Georgia corporation
("INNOTRAC"); SELLTEL #1, INC., a Georgia corporation ("SELLTEL #1"); RENTEL #1,
-------- ----------
INC., a Georgia corporation ("RENTEL #1"); IELC, INC., a Georgia corporation
---------
("IELC"); HOMETEL SYSTEMS, INC., a Georgia corporation ("HOMETEL"); HOMETEL
---- -------
PROVIDERS INC., a Georgia corporation ("PROVIDERS"); RENTEL #2, L.L.C., a
---------
Georgia limited liability company ("RENTEL #2"); SELLTEL #2, L.L.C., a Georgia
---------
limited liability company ("SELLTEL #2"); HOMETEL PROVIDERS PARTNERS, L.P., a
----------
Georgia limited partnership ("HOMETEL PARTNERS"); ITC SERVICE COMPANY, a
----------------
Delaware corporation ("ITC"); SCOTT D. DORFMAN, an individual resident of the
---
State of Georgia ("S. DORFMAN"); SUSAN MARY TROTOCHAUD, AS CUSTODIAN FOR EACH OF
----------
BRADLEY H. DORFMAN, BRENT M. DORFMAN AND JESSE E. DORFMAN, all individual
residents of the State of Georgia (in such capacity, "CUSTODIAN"); and SUSAN
---------
MARY TROTOCHAUD, an individual resident of the State of Georgia ("TROTOCHAUD").
----------
IELC, HomeTel and Providers are sometimes collectively referred to herein as the
"MERGING CORPORATIONS", and individually as a "MERGING CORPORATION". RenTel #1,
-------------------- -------------------
RenTel #2, SellTel #1, SellTel #2 and HomeTel Partners are sometimes
collectively referred to herein as the "CONTRIBUTED COMPANIES", and individually
---------------------
as a "CONTRIBUTED COMPANY". The Merging Corporations, the Contributed Companies
-------------------
and Innotrac are sometimes collectively referred to herein as the "ENTITIES",
--------
and individually as an "ENTITY". S. Dorfman, ITC, Custodian and Trotochaud are
------
sometimes collectively referred to herein as the "EQUITY HOLDERS", and
--------------
individually as an "EQUITY HOLDER".
-------------
WITNESSETH:
WHEREAS, each of the Entities is engaged in the business of providing
customized, technology-based marketing support services (the "BUSINESS"); and
--------
WHEREAS, the parties hereto believe it to be in their individual and
collective best interests for the Business as currently conducted by each Entity
other than Innotrac to be combined; and
WHEREAS, to partially accomplish this objective, the Merging
Corporations are to be merged with and into Innotrac, in a transaction
qualifying as a plan of reorganization within the provisions of Section
368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "CODE"); and
----
WHEREAS, to partially accomplish this objective, those of the Equity
Holders who hold equity and ownership interests in the Contributed Companies
desire to contribute to Innotrac all of their respective equity and ownership
interests in the Contributed Companies in exchange for shares of the common
stock of Innotrac in a transaction qualifying within the provisions of Section
351 of the Code; and
<PAGE>
WHEREAS, promptly following consummation of (i) the merger of the
Merging Corporations with and into Innotrac and (ii) the contribution to
Innotrac by the relevant Equity Holders of all of their respective equity and
ownership interests in the Contributed Companies, Innotrac intends to offer a
number of its shares of common stock to the public;
NOW, THEREFORE, for and in consideration of the premises and the
mutual covenants and agreements herein contained, and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
parties hereto agree as follows:
ARTICLE 1
THE MERGER
----------
1.1 THE MERGER. At the Effective Time (such term and other capitalized
----------
terms used herein being defined in this Agreement in either ARTICLE 12 or
elsewhere in relevant portions of this Agreement) upon the terms and subject to
the conditions contained herein, and in accordance with the Georgia Business
Corporation Code as then in effect (the "ACT"), each of the Merging Corporations
---
shall be merged (the "MERGER") with and into Innotrac, the separate existence of
------
each Merging Corporation shall cease, and Innotrac shall continue as the
surviving corporation (as the surviving corporation in the Merger, the
"SURVIVING CORPORATION").
- ----------------------
1.2 EFFECT OF THE MERGER. At the Effective Time, Innotrac shall continue
--------------------
its corporate existence under the Laws of the State of Georgia and shall succeed
to all rights, privileges, immunities, franchises and powers, and be subject to
all duties, liabilities, debts and obligations, of each of the Merging
Corporations in accordance with the provisions of the Act.
1.3 ARTICLES OF INCORPORATION. The Articles of Incorporation of Innotrac
-------------------------
as in effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation until thereafter amended in
accordance with applicable Law and such Articles of Incorporation.
1.4 BY-LAWS. The By-Laws of Innotrac as in effect immediately prior to
-------
the Effective Time shall continue to be the By-Laws of the Surviving Corporation
until thereafter amended in accordance with applicable Law, the Articles of
Incorporation of the Surviving Corporation, and such By-Laws.
1.5 BOARD OF DIRECTORS. The directors of the Surviving Corporation
------------------
immediately prior to the Effective Time shall continue to be the directors of
the Surviving Corporation, each of such persons to serve until his or her
successor is duly elected and qualified.
1.6 OFFICERS. The officers of the Surviving Corporation immediately prior
--------
to the Effective Time shall continue to be the officers of the Surviving
Corporation, each of such officers to serve until his or her successor is duly
qualified.
2
<PAGE>
ARTICLE 2
THE CONTRIBUTION OF EQUITY INTERESTS
------------------------------------
2.1 CONTRIBUTION. At the Closing, each Equity Holder shall contribute,
------------
assign, transfer and convey to Innotrac all of their respective equity and
ownership interests in the Contributed Companies (collectively, the "EQUITY
------
INTERESTS"), free and clear of any and all Liens, in exchange for that number of
- ---------
shares of Innotrac Common Stock determined in accordance with ARTICLE 3.
2.2 WAIVER. Each Equity Holder, Contributed Company and Innotrac, as
------
appropriate, hereby waives and/or acknowledges compliance with any and all
requirements and limitations regarding the contribution, conveyance, transfer
and assignment of the Equity Interests, that might apply to such transfer
pursuant to that certain (i) Limited Partnership Agreement, dated April 11,
1994, between HomeTel Providers and ITC Holding Company, (ii) SellTel #2, L.L.C.
Operating Agreement, dated June 12, 1996, between S. Dorfman and Trotochaud,
and, (iii) RenTel #2, L.L.C. Operating Agreement, dated June 12, 1996, between
S. Dorfman and Custodian.
ARTICLE 3
FINANCIAL MATTERS AND CLOSING
-----------------------------
3.1 MERGER CONSIDERATION. At the Effective Time, by virtue of the Merger,
--------------------
and without any action on the part of the shareholders of the Merging
Corporations, all of the shares of capital stock of each Merging Corporation
issued and outstanding immediately prior to the Effective Time (as defined in
PARAGRAPH 3.5(B) below), including without limitation, all of the Stock (as
defined in PARAGRAPH 4.2(A) below) of such Merging Corporation, and any and all
rights and options granted by such Merging Corporation to acquire any of the
capital stock of such Merging Corporation, shall be canceled, retired and
converted into and become the right to receive the consideration (the "MERGER
------
CONSIDERATION") described in EXHIBIT A-1.
- -------------
3.2 CONTRIBUTION CONSIDERATION. On the Closing Date and against delivery
--------------------------
of the certificates, if any, representing the Shares (as defined in PARAGRAPH
4.2(B) below) and the instruments, if any, representing the Partnership
Interests (as defined in PARAGRAPH 4.2(C) below), Innotrac shall deliver and pay
to each relevant Equity Holder the consideration (the "CONTRIBUTION
------------
CONSIDERATION"; and together with the Merger Consideration, the "CONSIDERATION")
- ------------- -------------
described in EXHIBIT A-2.
3.3 FRACTIONAL SHARES. Notwithstanding any other provision herein, no
-----------------
fractional shares of Innotrac Common Stock will be issued, and any Equity Holder
who otherwise would be entitled hereunder to receive a fractional share of
Innotrac Common Stock but for this PARAGRAPH 3.3 will be entitled to receive, in
lieu thereof, a cash payment for and in the amount
3
<PAGE>
(rounded up to the nearest whole cent) equal to that Equity Holder's fractional
interest in a share of Innotrac Common Stock multiplied by the IPO Price.
3.4 CLOSING. The consummation (the "CLOSING") of the transactions
------- -------
contemplated in this Agreement (collectively, the "TRANSACTIONS") shall take
------------
place at the offices of Kilpatrick Stockton LLP, 1100 Peachtree Street, Suite
2800, Atlanta, Georgia, at 10:00 a.m., Atlanta Time, on the Business Day on
which all the conditions set forth in ARTICLES 8 AND 9 hereof have been
satisfied or waived (the "CLOSING DATE").
------------
3.5 TRANSACTIONS AT CLOSING. (a) Each Equity Holder shall deliver to
-----------------------
Innotrac certificates representing the Stock, Shares or the Partnership
Interests, if any, or such other documents or instruments of title, ownership
and conveyance as Innotrac may require, duly endorsed for transfer, with all
required transfer stamps affixed, in each case free and clear of any and all
Liens.
(b) Innotrac shall file a Certificate of Merger in substantially the form
attached hereto as EXHIBIT B, with such changes therein as Innotrac shall
reasonably determine and which are otherwise consistent with the terms and
conditions of this Agreement, with the Office of the Secretary of the State of
Georgia which shall become effective at the time so filed (the "EFFECTIVE
---------
TIME").
- ----
(c) Innotrac shall issue, deliver and pay the relevant Contribution
Consideration to each Equity Holder and the relevant Merger Consideration to
each person or entity entitled to receive same.
(d) All deliveries, payments and other transactions and documents
relating to the Closing shall be interdependent and none shall be effective
unless and until all are effective (except to the extent that the party entitled
to the benefit thereof has waived in writing satisfaction or performance thereof
as a condition precedent to Closing).
(e) From time to time and at any time, at any party's reasonable
request, whether on or after the Closing Date, and without further
consideration, each party shall execute and deliver such further documents and
instruments of conveyance, assignment, and transfer and shall take such further
reasonable actions as may be reasonably necessary or desirable to carry out the
intent of this Agreement.
3.6 SHARES OF INNOTRAC COMMON STOCK. Each certificate evidencing shares
-------------------------------
of Innotrac Common Stock to be received as Consideration hereunder (and each
replacement certificate therefor) shall bear a legend in substantially the form
set forth below:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY
NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF
4
<PAGE>
UNLESS THEY HAVE BEEN REGISTERED OR AN EXEMPTION FROM REGISTRATION IS
AVAILABLE.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES OF THE ENTITIES
----------------------------------------------
To induce each other party to enter into and perform this Agreement,
to consummate the Merger, to effect the contribution of the Equity Interests,
and to deliver and pay the Consideration as provided herein, each Entity in
respect of itself only, represents and warrants to, and covenants and agrees
with, each other party hereto, as follows:
4.1 ORGANIZATION AND AUTHORITY. Entity is a corporation, limited
--------------------------
liability company, or limited partnership, as appropriate, duly organized,
validly existing and in good standing under the laws of the State of Georgia.
Entity has all requisite power and authority and is entitled to own or lease its
assets and to carry on its business as and in all places where such business is
now conducted and such properties are owned or leased. Entity is duly
authorized, licensed, qualified or domesticated as a foreign legal entity in the
jurisdictions where the character of the property owned by it or the nature of
the business transacted by it makes such authorization, license, qualification
or domestication necessary.
4.2 CAPITAL; OWNERSHIP; SUBSIDIARIES.
--------------------------------
(a) If Entity is a corporation, Entity has an authorized capital stock
(the "STOCK") as set forth on Schedule 4.2. As of the date hereof, all
----- ------------
outstanding shares of the Stock are owned beneficially and of record by those
Persons identified on Schedule 4.2 hereto in the amounts set forth opposite
------------
their respective names. All of the outstanding shares of the Stock are duly
authorized, validly issued, fully paid and nonassessable and were authorized,
offered, issued and sold in accordance with all applicable securities and other
Laws and all rights of each Entity's shareholders and other Persons. No Person
has any preemptive rights with respect to shares of Stock of Entity. Except as
set forth on Schedule 4.2, there are no outstanding securities convertible into
------------
Stock or rights to subscribe for or to purchase, or any options for the purchase
of, or any agreements or arrangements providing for the issuance (contingent or
otherwise) of, or any Actions relating to, the Stock. There are no voting
trusts, proxies or other agreements or understandings with respect to the voting
of any of the Stock. Except as set forth on Schedule 4.2 or as otherwise
------------
provided in PARAGRAPH 6.6, Entity is not subject to any obligation to repurchase
or otherwise acquire or retire any of its Stock, and Entity has no Liability for
dividends declared or accrued, but unpaid, with respect to its Stock. Entity
has not purchased or redeemed any of its Stock, and, except as set forth in
Schedule 4.2, has not paid any dividend or made any other payment to any of the
- ------------
Equity Holders or related or affiliated persons within the past year.
(b) If Entity is a limited liability company, Entity is authorized to
issue that number of shares (the "SHARES") as set forth on Schedule 4.2. As of
------ ------------
the date hereof, all
5
<PAGE>
outstanding Shares are owned beneficially and of record by those Persons
identified on Schedule 4.2 hereto as set forth opposite their respective names.
------------
All of the outstanding Shares are duly authorized, validly issued, fully paid
and non-assessable and were authorized, offered, issued and sold in accordance
with all applicable securities and other Laws and all rights of each Entity's
members or shareholders and other Persons. No Person has any preemptive rights
with respect to the Shares. Except as set forth on Schedule 4.2, there are no
------------
outstanding securities convertible into Shares or rights to subscribe for, or to
purchase, or any options for the purchase of, or any agreements or arrangements
providing for the issuance (contingent or otherwise) of, or any Actions relating
to, the Shares. There are no voting trusts, proxies or other agreements or
other understandings with respect to the voting of any of the Shares. Except as
set forth on Schedule 4.2 or as otherwise provided in PARAGRAPH 6.6, Entity is
------------
not subject to any obligation to repurchase or otherwise acquire or retire any
of the Shares, and has no Liability for distributions declared or accrued, but
unpaid, with respect to its Shares. Except as set forth in Schedule 4.2, Entity
------------
has made no distribution nor any other payments to any of the Equity Holders or
other Related Parties within the past year.
(c) If Entity is a limited partnership, the partnership interests of
Entity (the "PARTNERSHIP INTERESTS") are as set forth on Schedule 4.2. As of
--------------------- ------------
the date hereof, all Partnership Interests are owned beneficially and of record
by those Persons identified on Schedule 4.2 hereto as set forth opposite their
------------
respective names. All of the Partnership Interests were authorized, offered,
issued and sold in accordance with all applicable securities and other Laws and
all rights of each Entity's partners and other Persons. No Person has any
preemptive right with respect to the Partnership Interests. Except as set forth
on Schedule 4.2, there are no outstanding securities convertible into
------------
Partnership Interests or rights to subscribe for, or to purchase, or any options
for the purchase of, or any agreements or arrangements providing for the
issuance (contingent or otherwise) of, or any Actions relating to, the
Partnership Interests. There are no voting trusts, proxies or other agreements
or other understandings with respect to the voting of any of the Partnership
Interests. Except as set forth on Schedule 4.2 or as otherwise provided in
------------
PARAGRAPH 6.6, Entity is not subject to any obligation to repurchase or
otherwise acquire or retire any of the Partnership Interests, and has no
Liability for distributions declared or accrued, but unpaid, with respect to its
Partnership Interests. Except as set forth in Schedule 4.2, Entity has made no
------------
distribution nor any other payments to any of the Equity Holders or other
Related Parties within the past year.
(d) None of the Entities has any interest, direct or indirect, nor has
any commitment to purchase or otherwise acquire any equity, ownership or
participatory interest, or any rights or claims to same, direct or indirect, in
any other Person.
4.3 AUTHORITY; INCONSISTENT OBLIGATIONS. (a) Entity has the full
-----------------------------------
right, power and authority to execute and deliver and to perform and comply with
this Agreement in accordance with its terms. All proceedings and actions
required to be taken by Entity to authorize the execution, delivery and
performance of this Agreement have been properly taken. This Agreement has been
duly and validly executed and delivered on behalf of Entity by its duly
authorized officers, agents or representatives. This Agreement constitutes the
valid and legally binding obligation, subject to general equity principles, of
Entity, enforceable in accordance with
6
<PAGE>
its terms, except as the same may be limited by bankruptcy, insolvency,
reorganization or similar Laws affecting the rights of creditors generally.
(b) Neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated herein will result in a violation
or breach of, or constitute a default under, (i) the articles of incorporation,
by-laws, articles of organization, operating agreement, certificate of limited
partnership, or limited partnership agreement, as applicable, of Entity, (ii)
any term or provision of any indenture, note, mortgage, bond, security
agreement, loan agreement, guaranty, pledge or other agreement, instrument or
document, (iii) any material Law, (iv) any other commitment or restriction, to
which Entity is a party or by which Entity or any of its assets, property or
business is subject or bound; nor will such actions result in (v) the creation
of any Lien on any of the assets of Entity, (vi) the acceleration or creation of
any obligation of Entity, or (vii) the forfeiture of any material right or
privilege of Entity.
4.4 CONSENTS. The execution and delivery of this Agreement by Entity
--------
and the consummation by it of the transactions contemplated by this Agreement
(a) do not require the consent, approval or action of, or any filing with or
notice to, any Person or Government, and (b) and do not impose any other term,
condition or restriction on Innotrac or Entity pursuant to any business
combination, takeover or other similar Law.
4.5 NO VIOLATION; COMPLIANCE WITH LAWS. Other than as described in
----------------------------------
the Private Placement Memorandum, Entity is not in default under or in violation
of its articles of incorporation, by-laws, articles of organization, operating
agreement, certificate of limited partnership, or limited partnership agreement,
as applicable, and has complied with all applicable Laws, where the failure to
comply would have a Material Adverse Effect on Entity or Innotrac (after giving
effect to the transactions contemplated by and provided for in this Agreement).
Entity has not received any notification of any asserted present or past failure
by any Entity to comply with any Laws.
4.6 FINANCIAL STATEMENTS; DISCLOSURE. (a) Prior to the date hereof,
--------------------------------
Entity has delivered to Innotrac copies of the financial statements and related
documents as identified in Schedule 4.6 (collectively, the "FINANCIAL
------------ ---------
STATEMENTS"). The Financial Statements are true and correct in all material
respects, have been prepared in accordance with GAAP, present fairly the
financial condition of Entity as at the respective dates thereof and the results
of Entity's operations and cash flows for the periods then ended and are
consistent in all material respects with the books and records of Entity.
(b) As of the date hereof, all Information that has been made
available by or on behalf of Entity prior to the date of this Agreement in
connection with the transactions contemplated hereby is, taken together, true
and correct in all material respects and does not contain, to the knowledge of
Entity, any untrue statement of a material fact or omit to state a material fact
necessary in order to make the statements contained therein not misleading in
light of the circumstances under which those statements were made. Information
that is made available by or on behalf of Entity after the date hereof from time
to time prior to the Closing will be, when made available, true and correct in
all material respects and will not contain any
7
<PAGE>
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements contained therein not materially misleading in
light of the circumstances under which those statements were made.
4.7 LIABILITIES. Except as set forth in Schedule 4.7, Entity does
------------ ------------
not have any debt, liability or obligation of any kind, whether accrued,
absolute, known or unknown, contingent or otherwise, except (i) those reflected
on the latest balance sheet of Entity included within the Financial Statements,
(ii) current liabilities incurred in the regular and ordinary course of business
consistent with Entity's past practices in connection with the purchase of goods
and services since the date of such last balance sheet and properly reflected in
Entity's books and records, (iii) liabilities under or pursuant to the
SouthTrust Credit Facility, (iv) executory commitments of Entity under or
pursuant to any contract to which Entity is a party, and (v) as specifically
disclosed in the Private Placement Memorandum, other than for those that would
not have a Material Adverse Effect on Entity or Innotrac (after giving effect to
the transactions contemplated by and provided for in this Agreement).
4.8 LITIGATION. No Action is pending or, to the knowledge of Entity,
----------
threatened to which Entity is or may become a party, which if adversely
determined to Entity would have a Material Adverse Effect on Entity or Innotrac
(after giving effect to the transactions contemplated by and provided for in
this Agreement).
4.9 PRIVATE PLACEMENT MEMORANDUM AND REGISTRATION STATEMENT. The
-------------------------------------------------------
descriptions in the Private Placement Memorandum and the Registration Statement
of agreements and documents to which Entity is a party or by which Entity or its
assets, properties or business are bound, including any such agreements or
documents incorporated by reference or attached as exhibits to the Private
Placement Memorandum or the Registration Statement, are accurate in all material
respects and fairly present the subject matter thereof.
ARTICLE 5
REPRESENTATIONS AND WARRANTIES OF THE EQUITY HOLDERS
----------------------------------------------------
To induce each other party to enter into and perform this Agreement,
to consummate the Merger, to effect the contribution of the Equity Interests,
and to deliver and pay the Consideration as provided herein, each Equity Holder,
in respect of itself only, represents and warrants to, and covenants and agrees
with, each other party hereto, as follows:
5.1 INVESTMENT INTENTIONS. Equity Holder (i) will be acquiring the
---------------------
shares of Innotrac Common Stock to be issued pursuant to ARTICLE 3 to Equity
Holder solely for Equity Holder's account, for investment purposes only and with
no current intention or plan to distribute, sell, or otherwise dispose of any of
those shares in connection with any distribution; (ii) is not a party to any
agreement or other arrangement for the disposition of any shares of Innotrac
Common Stock other than this Agreement; (iii) is an "accredited investor" as
defined in Securities Act Rule 501(a); (iv) (A) is able to bear the economic
risks of an investment in the Innotrac Common
8
<PAGE>
Stock acquired pursuant to this Agreement, (B) can afford to sustain a total
loss of that investment, (C) has such knowledge and experience in financial and
business matters that the Equity Holder is capable of evaluating the merits and
risks of the proposed investment in the Innotrac Common Stock, (D) has had an
adequate opportunity to ask questions and receive answers from the officers of
Innotrac concerning any and all matters relating to the transactions
contemplated hereby, including the background and experience of the current and
proposed officers and directors of Innotrac, the plans for the operations of the
business of Innotrac, and the business, operations, and financial condition of
the Entities, and (E) has asked all questions of the nature described in the
preceding clause (D), and all those questions have been answered to Equity
Holder's satisfaction; and (v) has received and carefully reviewed the Private
Placement Memorandum.
5.2 OWNERSHIP. Equity Holder is the record and beneficial owner of
---------
the Stock, Shares or Partnership Interest, as appropriate, set forth opposite
Equity Holder's name in Schedule 4.2, free and clear of all Liens.
------------
5.3 POWER OF THE EQUITY HOLDER; APPROVAL OF TRANSACTION. Equity
---------------------------------------------------
Holder has the full power, legal capacity, and authority to execute and deliver
this Agreement and to perform Equity Holder's obligations in this Agreement.
This Agreement constitutes the legal, valid, and binding obligation of Equity
Holder, enforceable against Equity Holder in accordance with its terms, except
as that enforceability may be (i) limited by any applicable bankruptcy,
insolvency, reorganization, moratorium, or similar laws affecting the
enforcement of creditors' rights generally and (ii) subject to general
principles of equity (regardless of whether that enforceability is considered in
a proceeding in equity or at law). In the case of ITC, ITC has obtained all
necessary corporate approvals for the authorization, execution, delivery, and
performance by the ITC of this Agreement, including without limitation, any
required shareholder approval. In the case of Custodian, all actions on the part
of Custodian and all other Persons (including any court) necessary for the
authorization, execution, delivery, and performance by Custodian of this
Agreement have been duly taken and the transactions contemplated herein have
been duly authorized.
5.4 NO CONFLICTS OR LITIGATION. The execution, delivery, and
--------------------------
performance in accordance with their respective terms by Equity Holder of this
Agreement do not and will not (a) violate or conflict with any Law applicable to
Equity Holder, (b) breach or constitute a default under any agreement or
instrument to which Equity Holder is a party or by which Equity Holder or any of
the Stock, Shares or Partnership Interests, as appropriate, owned by Equity
Holder is bound, (c) result in the creation or imposition of, or afford any
Person the right to obtain, any Lien upon any of the Stock, Shares or
Partnership Interests owned by Equity Holder, or (d) if Equity Holder is ITC,
violate ITC's articles of incorporation or by-laws. No Action is pending or, to
the knowledge of Equity Holder, threatened to which Equity Holder is or may
become a party that (i) questions or involves the validity or enforceability of
any of Equity Holder's obligations under this Agreement or (ii) seeks (or
reasonably may be expected to seek) (A) to prevent or delay the consummation by
Equity Holder of the transactions contemplated by this Agreement to be
consummated by Equity Holder or (B) damages or other relief in connection with
any consummation by Equity Holder of the transactions contemplated by this
Agreement.
9
<PAGE>
5.5 NO BROKERS. Equity Holder has not, directly or indirectly, in
----------
connection with this Agreement or the transactions contemplated hereby (a)
employed any broker, finder, or agent or (b) agreed to pay or incurred any
obligation to pay any broker's or finder's fee, any sales commission, or any
similar form of compensation.
5.6 PREEMPTIVE AND OTHER RIGHTS; WAIVER. Except for the rights of
-----------------------------------
the Equity Holder to receive shares of Innotrac Common Stock in accordance with
ARTICLE 3 as a result of the Transactions or to acquire Innotrac Common Stock
pursuant to any written option granted by Innotrac to Equity Holder separate and
apart from this Agreement, Equity Holder either (a) does not own or otherwise
have any statutory or contractual preemptive or other right of any kind
(including any right of first offer or refusal) to acquire any Stock, Shares,
Partnership Interests or Innotrac Common Stock or (b) hereby irrevocably waives
each right of that type the Equity Holder does own or otherwise has.
ARTICLE 6
ADDITIONAL AGREEMENTS
---------------------
6.1 COOPERATION. The parties shall cooperate fully with each other
-----------
and with their respective Representatives in connection with any steps required
to be taken as part of their respective obligations under this Agreement, and
all parties shall use their best commercial efforts to consummate the
transactions contemplated herein and to fulfill their obligations hereunder,
including, without limitation, causing to be fulfilled at the earliest practical
date the conditions precedent to the obligations of the parties to consummate
the transactions contemplated hereby. Without the prior written consent of the
other parties, no party hereto may take any intentional action that would cause
the conditions precedent to the obligations of the parties hereto to effect the
transactions contemplated hereby not to be fulfilled, including, without
limitation, taking or causing to be taken any action which would cause the
representations and warranties made by such party herein not to be true, correct
and complete as of the Closing.
6.2 OTHER POST-CLOSING COOPERATION. Each Equity Holder, severally
------------------------------
and not jointly, covenants and agrees that they shall cooperate fully and in
good faith, and shall use their best efforts to cause any and all accountants,
legal counsel, actuaries and other professional advisors employed or engaged by
an Entity at any time prior to the Effective Time to cooperate fully and in good
faith, with Innotrac in connection with the preparation and filing of any and
all documents, agreements, instruments, certificates, consents, registration
statements and other reports or papers required or permitted to be filed,
registered or submitted in accordance with any Law, including, without
limitation, the federal securities Laws.
6.3 PUBLICITY. All press releases and other public announcements
---------
respecting the subject matter hereof shall be made only with the prior consent
of Innotrac, such consent not to be unreasonably withheld.
10
<PAGE>
6.4 CERTAIN GOVERNMENTAL FILINGS. The parties will make, or cause to
----------------------------
be made, all filings and submissions required to be made to any Government in
connection with the transactions contemplated by this Agreement. Each of the
parties will furnish to the other parties such necessary information and
reasonable assistance as such other party may reasonably request in connection
with their preparation of necessary filings or submissions to any governmental
or other regulatory agency.
6.5 TAX MATTERS. The following provisions shall govern the allocation
-----------
of responsibility as among Innotrac, the Contributed Companies and Equity
Holders, for certain tax matters following the Closing Date:
(a) Innotrac shall prepare or cause to be prepared and file or cause to be
filed all federal, state or local income, sales, use, ad valorem or other Tax
returns for the Entities for all periods ending on or prior to the Closing Date
which are filed after the Closing Date. Innotrac shall issue to the Equity
Holders or other appropriate persons or entities (collectively with the Equity
Holders, the "TAXPAYERS") appropriate forms K-1 or other information returns
---------
with respect to the Taxpayers' respective distributive shares of income, gain,
loss, deduction and other income tax items of the Entities, if any.
(b) Innotrac, the Entities and the Taxpayers shall cooperate fully, as and
to the extent reasonably requested by any other party, in connection with the
filing of tax returns pursuant to this PARAGRAPH 6.5 and any audit, litigation
or other proceeding with respect to Taxes. Such cooperation shall include the
retention and (upon another party's request) the provision of records and
information which are reasonably relevant to any such audit, litigation or other
proceeding and making employees available on a mutually convenient basis to
provide additional information and explanation of any material provided
hereunder. Innotrac agrees to retain all books and records with respect to Tax
matters pertinent to the Entities relating to any taxable period beginning
before the Closing Date until the expiration of the statute of limitations (and,
to the extent notified by the Equity Holders, any extensions thereof) of the
respective taxable periods, and to abide by all record retention agreements
entered into with any taxing authority.
(c) Innotrac and the Taxpayers further agree, upon request, to use their
best efforts to obtain any certificate or other document from any governmental
authority or any other Person as may be necessary to mitigate, reduce or
eliminate any Tax that could be imposed (including, but not limited to, with
respect to the transactions contemplated hereby).
6.6 DIVIDENDS AND DISTRIBUTIONS. The parties agree that various of the
---------------------------
Entities will be making distributions to their equity holders, in such amounts
as shall be approved by the Board of Directors or other governing body of such
Entity and consistent with their respective organizational and other governing
documents and applicable law. Such distributions shall be generally be in
respect of (i) previously taxed but undistributed income, (ii) distributions
to cover taxes for the relevant equity holder for taxable year 1997, (iii)
distributions to cover taxes for the relevant equity holder for taxable
year 1998 or any part thereof, and (iv) distributions in respect of other
prior taxable years. It is further understood and agreed that these
distributions will be declared but not paid, and are expressly made subject
to, completion and
11
<PAGE>
closing of the IPO. The aggregate distributions to be declared by HomeTel
Partners, other than in respect of 1997 and 1998 income taxes, shall be
$4,000,000, $3,600,000 of which shall be distributed to Providers, and $400,000
of which shall be distributed to ITC.
ARTICLE 7
CONDUCT OF BUSINESS OF THE ENTITIES PENDING CLOSING
---------------------------------------------------
Each Entity covenants and agrees, in respect of itself only, that, except
as may otherwise be provided herein, without the prior written consent of
Innotrac, between the date hereof and the Closing Date:
7.1 BUSINESS IN THE ORDINARY COURSE. The operations of Entity shall
-------------------------------
be conducted only in the ordinary and usual course and consistent with prior
practices, without the creation of any additional indebtedness for borrowed
money, provided that Entity may continue to draw on the SouthTrust Credit
Facility. Without limiting the generality of the foregoing:
(a) Entity shall not enter into any contracts, agreements or other
arrangements to provide, sell, rent, lease, license, distribute or supply goods
or services to any customer or any third party except in the ordinary course of
its operations at prices and on terms consistent with the prior operating
practices of Entity.
(b) Entity shall maintain, preserve and protect all of its assets in good
condition, except for ordinary wear and tear and damage by fire or other
casualty.
(c) The books, records and accounts of Entity shall be maintained in the
usual, regular and ordinary course of business on a basis consistent with prior
practices and in accordance with GAAP.
(d) Entity shall use its best efforts to preserve its operations, to keep
available the services of its present employees, to preserve the goodwill of its
suppliers, customers and others having business relations with it.
7.2 NO MATERIAL CHANGES. No action shall be taken by Entity or any
-------------------
Equity Holder which shall materially alter the capitalization, or financial
structure of the Business of Entity. Without limiting the generality of the
foregoing:
(a) No change shall be made in the articles of incorporation, by-laws,
operating agreement, or limited partnership agreement, as applicable, of Entity.
(b) No change shall be made in the authorized or issued capital stock, or
membership interests or partnership interests, as applicable, of Entity.
12
<PAGE>
(c) Neither Entity nor any Equity Holder shall issue or grant any right or
option to purchase or otherwise acquire any Equity Interest or other security of
any Entity, other than options granted by Innotrac pursuant to its Stock Option
and Incentive Award Plan.
(d) Except as provided in PARAGRAPH 6.6, no dividend or other distribution
or payment shall be declared or made with respect to any of the Stock, Shares or
Partnership Interests, as appropriate, of Entity, and Entity shall not, directly
or indirectly, redeem, purchase or otherwise acquire any of same.
(e) Entity shall not dissolve, liquidate or voluntarily declare bankruptcy
or seek the appointment of a receiver, trustee or custodian.
ARTICLE 8
CONDITIONS TO OBLIGATIONS OF INNOTRAC
-------------------------------------
The obligations of Innotrac to consummate the Transactions and to pay the
Consideration as set forth in ARTICLE 3, are subject to the fulfillment and
satisfaction of each and every of the following conditions on or prior to the
Closing, any or all of which may be waived in writing in whole or in part by
Innotrac:
8.1 PROCEEDINGS AND DOCUMENTS SATISFACTORY. All proceedings taken in
--------------------------------------
connection with the consummation of the Transactions and all documents and
papers required in connection therewith shall be reasonably satisfactory to
Innotrac and its counsel, and Innotrac and its counsel shall have timely
received copies of such documents and papers, all in form and substance
satisfactory to Innotrac and its counsel, as reasonably requested by Innotrac or
its counsel in connection therewith.
8.2 REPRESENTATIONS AND WARRANTIES. The representations and
------------------------------
warranties contained in this Agreement and in any certificate, instrument,
schedule, agreement or other writing delivered by or on behalf of any other
Entity or any Equity Holder in connection with the transactions contemplated by
this Agreement shall be true and correct as of the date when made and shall be
deemed to be made again at and as of the Closing Date and shall be true and
correct at and as of such time.
8.3 COMPLIANCE WITH AGREEMENTS AND CONDITIONS. Each other Entity and
-----------------------------------------
each Equity Holder shall have performed and complied with all covenants,
agreements and conditions required by this Agreement to be performed or complied
with by each such party prior to or on the Closing Date.
8.4 CERTIFICATES. Each other Entity and each Equity Holder shall have
------------
delivered to Innotrac a certificate executed by a duly authorized
representative, dated the Closing Date, certifying in such detail as Innotrac
may reasonably request as to the fulfillment and satisfaction of the conditions
specified in PARAGRAPHS 8.2 AND 8.3.
13
<PAGE>
8.5 UNDERWRITING AGREEMENT. A counterpart execution original of the
----------------------
Underwriting Agreement shall have been executed and delivered by the
representatives of the several underwriters named therein to Innotrac.
8.6 CONSENTS. Innotrac shall have received from any and all Persons
--------
and Governments such consents, authorizations and approvals as are necessary for
the consummation of the transactions contemplated by this Agreement and the
conduct of the Business after the Effective Time, and the Registration Statement
shall have been declared effective by the SEC.
8.7 NO INCONSISTENT REQUIREMENTS. No Action shall have been commenced
----------------------------
by any Government or Person seeking to enjoin, prohibit or delay the
Transactions or the IPO.
8.8 MISCELLANEOUS. Innotrac and its counsel shall have received such
-------------
other opinions, certifications and documents from any Entity, Equity Holder,
Government or other Person as Innotrac and its counsel may reasonably request.
ARTICLE 9
CONDITIONS TO OBLIGATIONS OF THE ENTITIES AND THE EQUITY HOLDERS
----------------------------------------------------------------
The obligations of the Entities (other than Innotrac) and the Equity
Holders under this Agreement are subject to the fulfillment and satisfaction of
each and every of the following conditions on or prior to the Closing, any or
all of which may be waived in writing in whole or in part by the Entities and
the Equity Holders, acting as a group:
9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties
------------------------------
contained in this Agreement shall be true and correct as of the date when made
and shall be deemed to be made again at and as of the Closing Date and shall be
true and correct at and as of such time.
9.2 COMPLIANCE WITH AGREEMENTS AND CONDITIONS. Innotrac shall have
-----------------------------------------
performed and complied with all agreements and conditions required by this
Agreement to be performed or complied with by Innotrac prior to or on the
Closing Date.
9.3 CERTIFICATE OF INNOTRAC. Innotrac shall have delivered to the
-----------------------
Entities and the Equity Holders a certificate, dated the Closing Date,
certifying in such detail as the Entities and the Equity Holders may reasonably
request the fulfillment and satisfaction of the conditions specified in
PARAGRAPHS 9.1 AND 9.2.
9.4 RESOLUTIONS. Innotrac shall have delivered to the Entities and Equity
-----------
Holders duly adopted resolutions of its Board of Directors, certified by the
Secretary or an Assistant Secretary of Innotrac, dated as of the Closing Date,
authorizing and approving the execution of this Agreement by Innotrac and all
other action necessary to enable Innotrac to comply with the terms of this
Agreement.
14
<PAGE>
9.5 UNDERWRITING AGREEMENT. A counterpart execution original of the
----------------------
Underwriting Agreement shall have been executed and delivered by the
representatives of the several underwriters named therein to Innotrac.
9.6 NO INCONSISTENT REQUIREMENTS. No Action shall have been commenced by
----------------------------
any Government or Person, seeking to enjoin, prohibit or delay the Transactions
or the IPO.
ARTICLE 10
TERMINATION
-----------
10.1 TERMINATION FOR CERTAIN CAUSES. This Agreement may be terminated at
------------------------------
any time prior to or on the Closing Date by the Entities (other than Innotrac)
and the Equity Holders, on the one hand and acting as a group, or by Innotrac,
on the other hand, upon written notice to the other parties as follows:
(a) By Innotrac, if the terms, covenants or conditions of this
Agreement to be complied with or performed by any or all of the other Entities
and the Equity Holders at or before the Closing Date shall not have been
complied with or performed and such noncompliance or nonperformance shall not
have been waived by Innotrac.
(b) By the other Entities and the Equity Holders, acting as a group,
if the terms, covenants or conditions of this Agreement to be complied with or
performed by Innotrac at or before the Closing Date shall not have been complied
with or performed and such noncompliance or nonperformance shall not have been
waived by all Entities and all Equity Holders.
(c) By any party, if any Action shall have been instituted or
threatened against any party to this Agreement to restrain, prohibit or delay,
or to obtain substantial damages in respect of, this Agreement or the
consummation of the Transactions or the IPO, which, in the reasonable and good
faith opinion of any party, makes consummation of the transactions herein
contemplated inadvisable.
(d) By any party, if the Underwriting Agreement has not been executed
and delivered by the several underwriters named therein on or before December
31, 1998.
(e) By mutual written agreement of the parties.
10.2 PROCEDURE ON AND EFFECT OF TERMINATION. Pursuant to PARAGRAPH 10.1
--------------------------------------
hereof, written notice of termination shall be given to all other parties by the
party electing to terminate, and this Agreement shall terminate upon the giving
of such notice, without further action by any of the parties hereto, with the
consequence and effect set forth in this PARAGRAPH 10.2. If for any reason on
the Closing Date there has been nonfulfillment of an undertaking by or condition
precedent for Innotrac, on the one hand, or the Entities and the Equity Holders,
on the other hand, not waived in writing by or on behalf of the party in whose
favor such undertaking or condition
15
<PAGE>
or undertaking runs, the party in whose favor such undertaking or condition
runs, in addition to any other right or remedy available to it, may refuse to
consummate the transactions contemplated by this Agreement without liability or
obligation on its part whatsoever.
ARTICLE 11
MISCELLANEOUS
-------------
11.1 NOTICES. All notices, demands or other communications required or
-------
permitted to be given or made hereunder shall be in writing and .(a) delivered
personally, or (b) sent by pre-paid, first class, certified or registered air
mail, return receipt requested, or (c) by an express courier service, or (d) by
facsimile transmission to the intended recipient thereof, at its address or
facsimile number set out below. Any such notice, demand or communication shall
be deemed to have been duly given immediately (if given or made by confirmed
facsimile), or three days after mailing or the second day after delivery to an
express courier service, and in proving same it shall be sufficient to show that
the envelope containing the same was duly addressed, stamped and posted (or that
the envelope was delivered to the express courier service), or that receipt of a
facsimile was confirmed by the recipient. The addresses and facsimile numbers
of the parties for purposes of this Agreement are:
(i) If to Innotrac c/o Innotrac Corporation
or any Entity: 1828 Meca Way
Norcross, Georgia 30093
Facsimile No.: (770) 717-2111
Attention: Scott D. Dorfman
With a copy to: Kilpatrick Stockton LLP
1100 Peachtree Street
Atlanta, Georgia 30309
Facsimile No.: 404-815-6555
Attention: David A. Stockton
(ii) If to ITC: ITC Service Company
1239 O. G. Skinner Drive
West Point, GA 31833
Facsimile No.: (706) 643-5067
Attention: Bryan W. Adams
(iii) If to Scott D. Dorfman c/o Innotrac Corporation
1828 Meca Way
Norcross, Georgia 30093
Facsimile No.: (770) 717-2111
16
<PAGE>
(iv) If to Susan Mary Trotochaud, individually or
as custodian for Bradley H. Dorfman,
Brent M. Dorfman and
Jesse E. Dorfman c/o Innotrac Corporation
1828 Meca Way
Norcross, Georgia 30093
Facsimile No.: (770) 717-2111
Attention: Scott D. Dorfman
Any party may change the address to which notices, requests, demands or other
communications to such parties shall be delivered or mailed by giving notice
thereof to the other parties hereto in the manner provided herein.
11.2 COUNTERPARTS. This Agreement may be executed in any number of
------------
counterparts, each of which shall be deemed an original, and all of which shall
constitute one and the same instrument.
11.3 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions
----------------
and agreements between the parties with respect to the subject matter hereof,
and this Agreement contains the sole and entire agreement among the parties with
respect to the matters covered hereby. This Agreement shall not be altered or
amended except by an instrument in writing signed by or on behalf of the party
entitled to the benefit of the provision against whom enforcement is sought.
11.4 GOVERNING LAW. The validity and effect of this Agreement shall be
-------------
governed by and construed and enforced in accordance with the laws of the State
of Georgia, without regard to conflicts of laws principles.
11.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and
----------------------
shall inure to the benefit of the parties hereto and their respective heirs,
executors, legal representatives, successors and assigns.
11.6 PARTIAL INVALIDITY AND SEVERABILITY. All rights and restrictions
-----------------------------------
contained herein may be exercised and shall be applicable and binding only to
the extent that they do not violate any applicable Laws and are intended to be
limited to the extent necessary to render this Agreement legal, valid and
enforceable. If any term of this Agreement, or part thereof, not essential to
the commercial purpose of this Agreement shall be held to be illegal, invalid or
unenforceable by a court of competent jurisdiction, it is the intention of the
parties that the remaining terms hereof, or part thereof, shall constitute their
agreement with respect to the subject matter hereof, and all such remaining
terms, or parts thereof, shall remain in full force and effect. To the extent
legally permissible, any illegal, invalid or unenforceable provision of this
Agreement shall be replaced by a valid provision which will implement the
commercial purpose of the illegal, invalid or unenforceable provision.
17
<PAGE>
11.7 WAIVER. Any term or condition of this Agreement may be waived at any
------
time by the party which is entitled to the benefit thereof, but only if such
waiver is evidenced by a writing signed by such party. No failure on the part
of any party hereto to exercise, and no delay in exercising, any right, power or
remedy created hereunder shall operate as a waiver thereof, nor shall any single
or partial exercise of any right, power or remedy by any such party preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy. No waiver by any party hereto of any breach of or default in any term
or condition of this Agreement shall constitute a waiver of or assent to any
succeeding breach of or default in the same or any other term or condition
hereof.
11.8 HEADINGS. The headings of particular provisions of this Agreement
--------
are inserted for convenience only and shall not be construed as a part of this
Agreement or serve as a limitation or expansion on the scope of any term or
provision of this Agreement.
11.9 NUMBER AND GENDER. Where the context requires, the use of the
-----------------
singular form herein shall include the plural, the use of the plural shall
include the singular, and the use of any gender shall include any and all
genders.
ARTICLE 12
CERTAIN DEFINITIONS
-------------------
For purposes of this Agreement, the following capitalized terms shall have
the meanings specified with respect thereto below (all terms used in this
Agreement which are not defined in this ARTICLE 12, but are defined elsewhere in
this Agreement, shall have for purposes of this Agreement the meanings set forth
elsewhere in this Agreement):
"ACTION" shall mean any action, suit, complaint, claim, counter-claim,
------
petition, set-off, inquiry, investigation, administrative proceeding,
arbitration, or private dispute resolution proceeding, whether at law, in
equity, by contract or agreement, or otherwise, and whether conducted by or
before any Government, any Forum, or other Person.
"BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a day
------------
on which commercial banks in Atlanta, Georgia, are required or authorized to be
closed.
"FINAL PROSPECTUS" means the prospectus included in the Registration
----------------
Statement at the time it becomes effective, except that if the prospectus first
furnished to the underwriters after the Registration Statement becomes effective
for use in connection with the IPO differs from the prospectus included in the
Registration Statement at the time it becomes effective (whether or not that
prospectus so furnished is required to be filed with the SEC pursuant to
Securities Act Rule 424(b)), the prospectus so furnished is the "Final
Prospectus."
"GAAP" shall mean generally accepted accounting principles, consistently
----
applied.
18
<PAGE>
"GOVERNMENT" shall mean any federal, state, local, municipal, or foreign
----------
government or any department, commission, board, bureau, agency,
instrumentality, unit, or taxing authority thereof.
"HEREOF," "HEREIN," "HEREUNDER" and words of similar import when used in
------ ------ ---------
this Agreement shall refer to this Agreement as a whole and not to any
particular provision of this Agreement, and "ARTICLE", "PARAGRAPH", "SCHEDULE",
"EXHIBIT" and like references are to this Agreement unless otherwise specified.
"INFORMATION" shall mean written information, including without limitation,
-----------
(a) data, certificates, reports, files, records, agreements, correspondence,
plans, policies, practices, manuals, and statements, and (b) summaries of
unwritten agreements, arrangements, contracts, plans, policies, programs, or
practices or of unwritten amendments or modifications of, supplements to, or
waivers under any of the foregoing.
"INNOTRAC COMMON STOCK" shall mean the $0.10 par value per share Common
---------------------
Stock of Innotrac.
"IPO" means the initial public offering by Innotrac of shares of Innotrac
---
Common Stock pursuant to the Registration Statement filed and declared effective
under the Securities Act.
"IPO PRICE" means the price per share of Innotrac Common Stock that is set
---------
forth as the "Price to Public" on the cover page of the Final Prospectus.
"LAW" shall mean all federal, state, local, municipal or foreign
---
constitutions, statutes, rules, regulations, ordinances, acts, codes,
legislation, treaties, conventions and similar laws and legal requirements, as
in effect from time to time.
"LIABILITY" shall mean shall mean any liability or obligation whether known
---------
or unknown, asserted or unasserted, absolute or contingent, accrued or
unaccrued, liquidated or unliquidated and whether due or to become due.
"LIEN" shall mean any mortgage, pledge, hypothecation, security interest,
----
encumbrance, lien or charge of any kind, or any rights of others, however
evidenced or created (including any agreement to give any of the foregoing, any
conditional sale or other title retention agreement, any lease in the nature
thereof, and the filing of or agreement to give any financing statement under
the Uniform Commercial Code of any jurisdiction).
"MATERIAL ADVERSE EFFECT" shall mean, with respect to the consequences of
-----------------------
any fact or circumstance (including the occurrence or non-occurrence of any
event) to Entity (or after the Closing Date, the Surviving Corporation), that
such fact or circumstance has caused, is causing, or may reasonably be expected
to cause, directly, indirectly, or consequentially, singularly or in the
aggregate with other facts and circumstances, any loss, damage, cost or expense
in excess of $100,000.
19
<PAGE>
"PERSON" shall mean and include an individual, a partnership, a joint
------
venture, a corporation, a limited liability company, a trust, an unincorporated
association or organization, and a Government.
"PRIVATE PLACEMENT MEMORANDUM" shall mean that certain Private Placement
----------------------------
Memorandum, dated December 11, 1997, relating to the shares of Innotrac Common
Stock to be issued pursuant to this Agreement, as the same may be supplemented
or amended.
"REGISTRATION STATEMENT" shall mean that certain registration statement
----------------------
filed by Innotrac with the SEC subsequent to the date that this Agreement is
entered into, to register shares of Innotrac Common Stock under the Securities
Act for public offering and sale in the IPO, including (a) each preliminary
prospectus included therein prior to the date on which that registration
statement is declared effective under the Securities Act (including any
prospectus filed with the SEC pursuant to Securities Act Rule 424(b)), (b) the
Final Prospectus, and (c) any amendments thereof and all supplements and
exhibits thereto.
"REPRESENTATIVE" of a party shall mean such party's directors, officers,
--------------
partners, employees, agents, accountants, lenders, lawyers, investment bankers,
and other financial or professional advisors or consultants.
"SECURITIES ACT" shall mean the Securities Act of 1933, as amended.
--------------
"SEC" shall mean the Securities and Exchange Commission.
---
"SOUTHTRUST CREDIT FACILITY" shall mean the credit facilities extended by
--------------------------
SouthTrust Bank, N.A. to the Entities pursuant to that certain Amended and
Restated Loan and Security Agreement, dated December 5, 1997, between the
Entities and SouthTrust Bank, N.A.
"TAXES" shall mean any past, present or future taxes, levies, imposts,
-----
duties, fees, assessments, deductions, withholdings or other charges of whatever
nature, including without limitation income, gross receipts, excise, property,
sales, transfer, license, payroll, withholding, social security, and franchise
taxes, now or hereafter imposed or levied by any Government, and all interest,
penalties, additions to tax, and other similar liabilities with respect thereto.
"UNDERWRITING AGREEMENT" shall mean the written agreement filed or to be
----------------------
filed as Exhibit 1 to the Registration Statement.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
20
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
INNOTRAC CORPORATION
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
SELLTEL #1, INC.
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
RENTEL #1, INC.
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
IELC, INC.
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
HOMETEL SYSTEMS, INC.
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
21
<PAGE>
[SIGNATURES CONTINUED FROM PRECEDING PAGE]
HOMETEL PROVIDERS INC.
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
RENTEL #2, L.L.C.
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
SELLTEL #2, L.L.C.
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
HOMETEL PROVIDERS PARTNERS, L.P.
By: HomeTel Providers Inc., its general partner
By: /s/ Scott D. Dorfman
----------------------------------
SCOTT D. DORFMAN
President
ITC SERVICE COMPANY
By: /s/ Bryan Adams
----------------------------------
Name:
Title:
[SIGNATURES CONTINUED ON FOLLOWING PAGE]
22
<PAGE>
[SIGNATURES CONTINUED FROM PRECEDING PAGE]
/s/ John H. Nichols, III /s/ Scott D. Dorfman (SEAL)
- ------------------------------- -------------------------------------
Witness SCOTT D. DORFMAN
/s/ John H. Nichols, III /s/ Susan Mary Trotochaud (SEAL)
- ------------------------------- -------------------------------------
Witness SUSAN MARY TROTOCHAUD, as custodian for each
of Bradley H. Dorfman, Brent M. Dorfman and
Jesse E. Dorfman
/s/ John H. Nichols, III /s/ Susan Mary Trotochaud (SEAL)
- ------------------------------- -------------------------------------
Witness SUSAN MARY TROTOCHAUD
23
<PAGE>
EXHIBIT A-1
MERGER CONSIDERATION
In respect of HomeTel:
The right to receive, in the aggregate, a number of shares of Innotrac Common
Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares (as defined in
-----
Exhibit A-2) multiplied by (iii) 63.8204%
-------------
In respect of IELC:
The right to receive, in the aggregate, a number of shares of Innotrac Common
Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares (as defined in
-----
Exhibit A-2) multiplied by (iii) 0.5244%%
-------------
In respect of Providers.:
The right to receive, in the aggregate, a number of shares of Innotrac Common
Stock equal to (i) $46,000,000 divided by (ii) the IPO Price multiplied by
---------- -------------
(iii) 90%
<PAGE>
EXHIBIT A-2
CONTRIBUTION CONSIDERATION
<TABLE>
<CAPTION>
Name of Equity Holder Number of Shares of Innotrac Common Stock
- --------------------- -----------------------------------------
<S> <C>
In respect of HomeTel Partners:
ITC The right to receive, in the aggregate, a number
of shares of Innotrac Common Stock equal to (i)
$46,000,000 divided by (ii) the IPO Price
----------
multiplied by (iii) 10%.
-------------
(The number of shares of Innotrac Common Stock to
be received by ITC as Contribution Consideration
and to be received by Providers as Merger
Consideration as reflected on Exhibits A-2 and
A-1, respectively, are referred to herein
collectively as the "PARTNERSHIP SHARES").
------------------
In respect of RenTel #1:
S. Dorfman The right to receive, in the aggregate, a number
of shares of Innotrac Common Stock equal to (i)
5,420,000 minus (ii) the Partnership Shares (as
-----
defined in Exhibit A-2) multiplied by (iii) 9.9625%
-------------
In respect of RenTel #2:
1. S. Dorfman 1. The right to receive, in the aggregate, a
number of shares of Innotrac Common Stock equal to
(i) 5,420,000 minus (ii) the Partnership Shares
-----
(as defined in Exhibit A-2) multiplied by (iii)
-------------
2.6217% multiplied by (iv) 99%
-------------
2. Trotochaud 2. The right to receive, in the aggregate, a
number of shares of Innotrac Common Stock equal to
(i) 5,420,000 minus (ii) the Partnership Shares
-----
(as defined in Exhibit A-2) multiplied by (iii)
-------------
2.6217% multiplied by (iv) 1%
-------------
</TABLE>
<PAGE>
<TABLE>
<S> <C>
In respect of SellTel #1:
S. Dorfman The right to receive, in the aggregate, a number
of shares of Innotrac Common Stock equal to (i)
5,420,000 minus (ii) the Partnership Shares (as
-----
defined in Exhibit A-2) multiplied by (iii)
-------------
15.2059%
In respect of SellTel #2:
1. S. Dorfman 1. The right to receive, in the aggregate, a
number of shares of Innotrac Common Stock equal to
(i) 5,420,000 minus (ii) the Partnership Shares
-----
(as defined in Exhibit A-2) multiplied by (iii)
-------------
7.8651% multiplied by (iv) 85%
-------------
2. Trotochaud (as custodian for BHD) 2. The right to receive, in the aggregate, a
number of shares of Innotrac Common Stock equal to
(i) 5,420,000 minus (ii) the Partnership Shares
-----
(as defined in Exhibit A-2) multiplied by (iii)
-------------
7.8651% multiplied by (iv) 5%
-------------
3. Trotochaud (as custodian for BMD) 3. The right to receive, in the aggregate, a
number of shares of Innotrac Common Stock equal to
(i) 5,420,000 minus (ii) the Partnership Shares
-----
(as defined in Exhibit A-2) multiplied by (iii)
-------------
7.8651% multiplied by (iv) 5%
-------------
4. Trotochaud (as custodian for JED) 4. The right to receive, in the aggregate, a
number of shares of Innotrac Common Stock equal to
(i) 5,420,000 minus (ii) the Partnership Shares
-----
(as defined in Exhibit A-2) multiplied by (iii)
-------------
7.8651% multiplied by (iv) 5%
-------------
</TABLE>
<PAGE>
SCHEDULE 4.2
<TABLE>
<CAPTION>
(a) ENTITY AUTHORIZED OUTSTANDING SHARE OWNERSHIP
SHARES SHARES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INNOTRAC 50,000,000 1,080,000 Scott Dorfman 996,666 Shares
Larry I. Dorfman, Trustee, The Bradley
Harris Dorfman Accumulation
Trust U/A 12/10/97 27,778 Shares
Larry I. Dorfman, Trustee, The Brent
Michael Dorfman Accumulation
Trust U/A 12/10/97 27,778 Shares
Larry I. Dorfman, Trustee, The Jesse
Elyse Dorfman Accumulation
Trust U/A 12/10/97 27,778 Shares
</TABLE>
Any and all options, repurchase obligations and any other obligations with
regard to Innotrac Common Stock are disclosed in that certain Form S-1
Registration Statement, a draft dated December 11, 1997, which has been
delivered to the equity holders of each of the Entities.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
IELC 1,000 1,000 Scott Dorfman 1,000 Shares; Certificate #1
- ------------------------------------------------------------------------------------------------------------------------
HOMETEL 10,000 100 Scott Dorfman 95.5 Shares; Certificate #5
Susan Mary Trotochaud, as custodian for
Bradley H. Dorfman
1.5 Shares; Certificate #2
Susan Mary Trotochaud, as custodian for
Brent M. Dorfman
1.5 Shares; Certificate #3
Susan Mary Trotochaud, as custodian for
Jesse E. Dorfman
1.5 Shares; Certificate #4
- ------------------------------------------------------------------------------------------------------------------------
PROVIDERS 10,000 1,000 Scott Dorfman 1,000 Shares; Certificate #1
- ------------------------------------------------------------------------------------------------------------------------
RENTEL #1 1,000 1,000 SCOTT DORFMAN 90 SHARES; CERTIFICATE #1
ARNOLD DORFMAN 10 SHARES; CERTIFICATE #2
</TABLE>
Pursuant to that certain Stock Redemption Agreement, dated December 15, 1997, by
and among RenTel #1, Scott Dorfman and Arnold Dorfman, RenTel #1 agrees to
redeem on the Closing Date all of Arnold Dorfman's shares of RenTel #1.
<PAGE>
<TABLE>
<CAPTION>
(a) ENTITY AUTHORIZED OUTSTANDING SHARE OWNERSHIP
SHARES SHARES
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
IELC 1,000 1,000 Scott Dorfman 1,000 Shares; Certificate #1
SELLTEL #1 1,000 1,000 Scott Dorfman 90 Shares; Certificate #1
Arnold Dorfman 10 Shares; Certificate #2
- --------------------------------------------------------------------------------------------------------------------------
(b) ENTITY AUTHORIZED OUTSTANDING SHARE OWNERSHIP
SHARES SHARES
- --------------------------------------------------------------------------------------------------------------------------
RENTEL #2 100,000 1,000 Scott Dorfman 990 Shares
Susan Mary Trotochaud 10 Shares
- --------------------------------------------------------------------------------------------------------------------------
SELLTEL #2 100,000 1,000 Susan Mary Trotochaud, as custodian for
Bradley H. Dorfman 50 Shares
Susan Mary Trotochaud, as custodian for
Brent M. Dorfman 50 Shares
Susan Mary Trotochaud, as custodian for
Jesse E. Dorfman 50 Shares
Scott Dorfman 850 Shares
</TABLE>
(c) ENTITY INTEREST OWNERSHIP
HOMETEL PROVIDERS PARTNERS, L.P. HomeTel Providers Inc. 90%
ITC Service Company 10%
In Article 12 of that certain Limited Partnership Agreement, dated April 11,
1997, by and between HomeTel Providers Inc. and ITC Holding Company, Inc., an
option to redeem all of the Limited Partner's interest was granted to the
partnership, and a call option to purchase the General Partner's interest was
granted to the Limited Partner and a call option to purchase the Limited
Partner's interest was granted to both the Partnership and the General Partner.
________________________________________________________________________________
S. Dorfman has granted to David Ellin an option to acquire 1/2% of the total
equity of all Entities in which an equity interest is owned by S. Dorfman. This
option will be converted at the Closing Date to the right to obtain 32,500
Shares of Innotrac Common Stock.
Each of the Entities has made various distributions over the last twelve months
as disclosed in their respective financial statements.
<PAGE>
SCHEDULE 4.6
FINANCIAL STATEMENTS
Those financial statements of the respective Entities attached to and
referenced in the Private Placement Memorandum.
<PAGE>
SCHEDULE 4.7
LIABILITIES
None.
<PAGE>
EXHIBIT 10.2
INNOTRAC CORPORATION
STOCK OPTION AND INCENTIVE
AWARD PLAN
NOVEMBER 24, 1997
<PAGE>
INNOTRAC CORPORATION
STOCK OPTION AND INCENTIVE AWARD PLAN
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION......................... 1
1.1 ESTABLISHMENT OF THE PLAN.......................................... 1
1.2 PURPOSES OF THE PLAN............................................... 1
1.3 DURATION OF THE PLAN............................................... 1
ARTICLE 2. DEFINITIONS.................................................. 1
ARTICLE 3. ADMINISTRATION............................................... 5
3.1 THE COMMITTEE...................................................... 5
3.2 AUTHORITY OF THE COMMITTEE......................................... 5
3.3 COMMITTEE DECISIONS BINDING........................................ 5
ARTICLE 4. SHARES SUBJECT TO THE PLAN................................... 5
4.1 NUMBER OF SHARES................................................... 5
4.2 LAPSED GRANTS OR AWARDS............................................ 6
4.3 ADJUSTMENTS IN NUMBER OF PLAN SHARES............................... 6
ARTICLE 5. ELIGIBILITY AND PARTICIPATION................................ 6
ARTICLE 6. STOCK OPTIONS................................................ 7
6.1 GRANT OF OPTIONS................................................... 7
6.2 OPTION AGREEMENT................................................... 7
6.3 OPTION PRICE....................................................... 7
6.4 DURATION OF OPTIONS................................................ 7
6.5 EXERCISE OF OPTIONS................................................ 8
6.6 PAYMENT............................................................ 8
</TABLE>
-i-
<PAGE>
<TABLE>
<S> <C>
6.7 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT... 8
6.8 TERMINATION OF EMPLOYMENT FOR OTHER REASONS........................ 9
6.9 NONTRANSFERABILITY OF OPTIONS...................................... 9
ARTICLE 7. STOCK APPRECIATION RIGHTS.................................... 9
7.1 GRANT OF SAR....................................................... 9
7.2 AWARD AGREEMENT.................................................... 10
7.3 EXERCISE OF SARS................................................... 10
ARTICLE 8 STOCK AWARDS - RESTRICTED AND UNRESTRICTED.................... 11
8.1 AWARD.............................................................. 11
8.2 RESTRICTED PERIOD; LAPSE OF RESTRICTIONS........................... 11
8.3 RIGHTS OF RESTRICTED STOCK HOLDER; LIMITATIONS THEREON............. 12
8.4 DELIVERY OF UNRESTRICTED SHARES.................................... 12
8.5 NONASSIGNABILITY OF RESTRICTED STOCK............................... 13
ARTICLE 9. PERFORMANCE SHARES........................................... 13
9.1 GRANT OF PERFORMANCE SHARES........................................ 13
9.2 VALUE OF PERFORMANCE SHARES........................................ 13
9.3 EARNING OF PERFORMANCE SHARES...................................... 14
9.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE SHARES................... 14
9.5 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT
OR BY THE COMPANY WITHOUT CAUSE.................................... 14
9.6 TERMINATION OF EMPLOYMENT FOR OTHER REASONS........................ 14
9.7 NONTRANSFERABILITY................................................. 15
ARTICLE 10. BENEFICIARY DESIGNATION..................................... 15
ARTICLE 11. DEFERRALS................................................... 15
ARTICLE 12. RIGHTS OF PARTICIPANTS...................................... 15
12.1 EMPLOYMENT........................................................ 15
</TABLE>
-ii-
<PAGE>
<TABLE>
<S> <C>
12.2 PARTICIPATION..................................................... 15
ARTICLE 13. CHANGE IN CONTROL........................................... 16
13.1 OCCURRENCE........................................................ 16
13.2 DEFINITION........................................................ 17
13.3 POOLING OF INTERESTS ACCOUNTING................................... 17
ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION..................... 18
14.1 AMENDMENT, MODIFICATION AND TERMINATION........................... 18
14.2 GRANTS OR AWARDS PREVIOUSLY GRANTED............................... 18
14.3 COMPLIANCE WITH CODE SECTION 162(m)............................... 18
ARTICLE 15. WITHHOLDING................................................. 18
15.1 TAX WITHHOLDING................................................... 18
15.2 SHARE WITHHOLDING................................................. 18
ARTICLE 16. SUCCESSORS.................................................. 19
ARTICLE 17. LEGAL CONSTRUCTION.......................................... 19
17.1 GENDER AND NUMBER................................................. 19
17.2 SEVERABILITY...................................................... 19
17.3 REQUIREMENTS OF LAW............................................... 19
17.4 REGULATORY APPROVALS AND LISTING.................................. 19
17.5 SECURITIES LAW COMPLIANCE......................................... 20
17.6 GOVERNING LAW..................................................... 20
17.7 DISPUTES AND EXPENSES............................................. 20
</TABLE>
-iii-
<PAGE>
INNOTRAC CORPORATION
STOCK OPTION AND INCENTIVE AWARD PLAN
ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION
1.1 Establishment of the Plan. Innotrac Corporation, a Georgia corporation
(hereinafter referred to as the "Company"), hereby establishes a stock option
and incentive award plan known as the "Innotrac Corporation Stock Option and
Incentive Award Plan" (the "Plan"), as set forth in this document. The Plan
permits the grant of Non-qualified Stock Options and Incentive Stock Options,
and the award of Stock Appreciation Rights, Stock Awards (restricted or
unrestricted), and Performance Shares.
The Plan shall become effective on November 24, 1997 (the "Effective Date")
and shall remain in effect as provided in Section 1.3. The Plan and all action
taken pursuant thereto gives effect to the 70.58823 for one stock split of the
Company that was approved simultaneously with the the approval of the Plan.
1.2 Purposes of the Plan. The purposes of the Plan are to promote greater
stock ownership in the Company by those Participants who are principally
responsible for its future growth and continued success; to more closely link
the personal interests of Participants to those of the Company's shareholders;
and to provide flexibility to the Company in its ability to motivate, attract
and retain the services of Participants upon whose judgment, initiative and
special effort the continued success of the Company depends.
1.3 Duration of the Plan. The Plan shall commence on the Effective Date,
and shall remain in effect, subject to the right of the Board of Directors to
amend or terminate the Plan at any time pursuant to Article 14, until the day
prior to the tenth (10th) anniversary of the Effective Date.
ARTICLE 2. DEFINITIONS
Whenever used in the Plan the following terms shall have the meanings set
forth below and, when the meaning is intended, the initial letter of the word is
capitalized:
(a) "Award" means, individually or collectively, any award under this Plan
of Stock Appreciation Rights, Stock Awards, or Performance Shares.
(b) "Award Agreement" or "Option Agreement" means an agreement entered
into by each Participant and the Company, setting forth as applicable,
the terms and provisions applicable to Grants or Awards made to
Participants under this Plan.
(c) "Beneficial Owner" or "Beneficial Ownership" shall have the meaning
ascribed to such term in Rule 13d-3 of the General Rules and
Regulations under the Exchange Act.
-1-
<PAGE>
(d) "Board" or "Board of Directors" means the Board of Directors of the
Company.
(e) "Cause" means: (i) with respect to the Company or any Subsidiary which
employs the Participant or for which the Participant primarily
performs services, the commission by the Participant of an act of
fraud, embezzlement, theft or proven dishonesty, or any other illegal
act or practice (whether or not resulting in criminal prosecution or
conviction), or any act or practice which the Committee shall, in good
faith, deem to have resulted in the Participant's becoming unbondable
under the Company's or the Subsidiary's fidelity bond; (ii) the
willful engaging by the Participant in misconduct which is deemed by
the Committee, in good faith, to be materially injurious to the
Company or any Subsidiary, monetarily or otherwise; or (iii) the
willful and continued failure or habitual neglect by the Participant
to perform his duties with the Company or the Subsidiary substantially
in accordance with the operating and personnel policies and procedures
of the Company or the Subsidiary generally applicable to all their
employees. For purposes of this Plan, no act or failure to act by the
Participant shall be deemed to be "willful" unless done or omitted to
be done by the Participant not in good faith and without reasonable
belief that the Participant's action or omission was in the best
interest of the Company and/or the Subsidiary. Notwithstanding the
foregoing, if the Participant has entered into an employment agreement
that is binding as of the date of employment termination, and if such
employment agreement defines "Cause," then the definition of "Cause"
in such agreement shall apply to the Participant in this Plan. "Cause"
under either (i), (ii) or (iii) shall be determined by the Committee.
(f) "Change in Control" has the meaning set forth in Article 13 of this
Plan.
(g) "Code" means the Internal Revenue Code of 1986, as amended from time
to time.
(h) "Committee" means: (i) the committee appointed by the Board to
administer the Plan with respect to Grants or Awards, as specified in
Article 3; or (ii) in the absence of such appointment, the Board
itself.
(i) "Company" means Innotrac Corporation, a Georgia corporation, or any
successor thereto, as provided in Article 16.
(j) "Director" means any individual who is a member of the Board of
Directors of the Company.
(k) "Disability" shall have the meaning ascribed to such term in the
Company's long-term disability plan covering the Participant, or in
the absence of such plan, a meaning consistent with Section 22(e) (3)
of the Code.
(l) "Employee" means any full-time, salaried employee of the Company, or
of any of the Company's Subsidiaries.
-2-
<PAGE>
(m) "Effective Date" shall have the meaning ascribed to such term in
Section 1.1.
(n) "Exchange Act" means the Securities Exchange Act of 1934, as amended
from time to time, or any successor act thereto.
(o) "Fair Market Value" shall be determined as follows:
(i) If, on the relevant date, the Shares are traded on a national or
regional securities exchange or on The NASDAQ National Market
System and closing sale prices for the Shares are customarily
quoted, on the basis of the quoted closing sale price or, if
there is no such sale on the relevant date, then on the last
previous day on which a sale was reported;
(ii) If, on the relevant date, the Shares are not listed on any
securities exchange or traded on the NASDAQ National Market
System but the Shares otherwise are publicly traded and reported
by NASDAQ (but closing sale prices for the Shares are not
customary quoted), on the basis of the mean between the closing
bid and asked quotations in such other over-the-counter market
as reported by NASDAQ; but if there are no bid and asked
quotations in the over-the-counter market as reported by NASDAQ
on that date, then the mean between the closing bid and asked
quotations in the over-the-counter market as reported by NASDAQ
on the last previous day such bid and asked prices were quoted;
and
(iii) If, on the relevant date, the Shares are not publicly traded as
described in (i) or (ii), on the basis of the good faith
determination of the Committee.
(p) "Grant" means, individually or collectively, any grant under this Plan
of Non-qualified Stock Options or Incentive Stock Options.
(q) "Incentive Stock Option" or "ISO" means an option to purchase Shares
granted under Article 6 which is designated as an Incentive Stock
Option and is intended to meet the requirements of Section 422 of the
Code.
(r) "Insider" shall mean an Employee who is, on the relevant date, an
officer or a Director; or a beneficial owner of ten percent (10%) or
more of any class of the Company's equity securities that is
registered pursuant to Section 12 of the Exchange Act, all as defined
under Section 16 of the Exchange Act.
(s) "Named Executive Officer" means a Participant who, as of the date of
vesting and/or payout of an Award or Grant is one of the group of
"covered employees," as defined in the regulations promulgated under
Code Section 162(m), or any successor statute.
-3-
<PAGE>
(t) "Non-qualified Stock Option" or "NQSO" means an option to purchase
Shares granted under Article 6, and which is not intended to meet the
requirements of Code Section 422.
(u) "Option" means an Incentive Stock Option or a Non-qualified Stock
Option.
(v) "Option Price" means the price at which a Share may be purchased by a
Participant Pursuant to an Option, as determined by the Committee.
(w) "Participant" means any Director or Employee, independent contractor,
adviser, or consultant to the Company who has an outstanding Grant or
Award made under the Plan.
(x) "Performance Share" means an Award granted to a Participant, as
described in Article 9 hereof.
(y) "Retirement," "Normal Retirement Age," and "Normal Retirement Date"
shall have the meanings ascribed to such terms in the Innotrac
Corporation Employee Retirement Plan, or any successor plan thereto.
(z) "Restricted Stock" means restricted Shares awarded in accordance with
the terms of Article 8 and the other provisions of the Plan.
(aa) "SAR Award Value" means, as applied to a SAR granted independent of an
Option, such amount which may be greater than 100% but not less than
100% of the Fair Market Value of a Share on the date the SAR is
granted, as shall be fixed by the Committee.
(ab) "Shares" means the shares of Common Stock of the Company.
(ac) "Stock Award" means Shares (whether restricted or unrestricted)
awarded under the provisions of Article 8 of the Plan.
(ad) "Stock Appreciation Rights" or "SAR" means an Award of the right to
receive an amount based upon an increase in the Fair Market Value of
the Shares.
(ae) "Subsidiary" means any corporation, partnership, limited liability
company, joint venture or other entity in which the Company has a
majority voting interest, either direct or indirect. With respect to a
Participant, the term shall refer to the Subsidiary for which the
Participant primarily performs services.
-4-
<PAGE>
ARTICLE 3. ADMINISTRATION
3.1 The Committee. The Plan shall be administered by the Compensation
Committee of the Board, or by any substitute Committee appointed by the Board
that is granted authority to administer the Plan. Qualified members of the
Committee shall be appointed from time to time by, and shall serve at the
discretion of, the Board of Directors. In the absence of any such appointment or
if no Compensation Committee is then empowered, the Plan shall be administered
by the Board.
3.2 Authority of the Committee. Subject to the provisions of the Plan the
Committee shall have full and exclusive power to select Participants who shall
participate in the Plan (who may change from year to year); determine the size
and types of Awards or Grants; determine the terms and conditions of Awards or
Grants in a manner consistent with the Plan (including vesting provisions and
the duration of the Awards or Grants); construe and interpret the Plan and any
agreement or instrument entered into under the Plan; establish, amend or waive
rules and regulations for the Plan's administration; and (subject to the
provisions of Article 14) amend the terms and conditions of any outstanding
Award or Grant to the extent such terms and conditions are within the discretion
of the Committee as provided in the Plan. Further, the Committee shall make all
other determinations which may be necessary or advisable in the Committee's
opinion for the administration of the Plan.
3.3 Committee Decisions Binding. All determinations and decisions made by
the Committee pursuant to Paragraph 3.2 above shall be final, conclusive and
binding on the Company and the Participants, their estates and beneficiaries.
ARTICLE 4. SHARES SUBJECT TO THE PLAN
4.1 Number of Shares. Subject to adjustment as provided in Section 4.3,
the gross number of Shares available for Awards or Grants under the plan shall
be Eight Hundred Thousand (800,000) Shares. These Shares may, in the discretion
of the Company, be either authorized but unissued Shares or Shares purchased by
the Company on the open market.
The following rules shall apply for purposes of the determination of the
number of Shares available for Grant or Award under the Plan:
(a) The number of Shares underlying any outstanding Stock Option,
SAR, or Stock Award shall be counted against the gross number of
Plan shares authorized to be issued under the Plan regardless of
its vested status.
(b) The Committee shall determine the appropriate number of Shares to
deduct against the gross number of authorized shares in
connection with the award of Performance Shares.
4.2 Lapsed Grants or Awards . If any Award or Grant made under this Plan
is canceled, terminates, expires or lapses for any reason, any Shares subject to
such Award or Grant shall again
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be available for issue under the Plan. However, in the event that prior to the
Award's or Grant's cancellation, termination, expiration or lapse, the holder of
the Award or Grant at any time received one or more "benefits of ownership"
pursuant to such Award (as defined by the Securities and Exchange Commission,
pursuant to any rule or interpretation promulgated under Section 16 of the
Exchange Act), the Shares subject to such Award or Grant shall not be made
available for issue under the Plan.
4.3 Adjustments in Number of Plan Shares. In the event of any change in
corporate capitalization (such as a stock split or a corporate transaction, such
as any merger, consolidation, separation, including a spin-off, or other
distribution of stock or property of the Company, any reorganization [whether or
not such reorganization comes within the definition of such term in Code Section
368] or any partial or complete liquidation of the Company) and to prevent
dilution or enlargement of rights under this Plan, an adjustment, as the
Committee shall in its sole discretion determine to be appropriate and
equitable, shall be made in the number and class of Shares which may be
delivered under the Plan and in the number and class of and/or price of Shares
subject to outstanding Awards or Grants made under the Plan; provided however,
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that the number of Plan Shares subject to any Award or Grant shall always be a
whole number and the Committee shall make such adjustments as are necessary to
insure Awards or Grants of whole Shares. In no event will any such adjustment be
made as a result of the consolidation of the Company with IELC, Inc., HomeTel
Systems, Inc., SellTel #1, Inc., RenTel #1, Inc., HomeTel Providers, Inc.,
SellTel #2, LLC, RenTel #2, LLC, and HomeTel Providers Partners, L.P. that is
contemplated to take place in connection with the Company's initial public
offering of its securities.
ARTICLE 5. ELIGIBILITY AND PARTICIPATION
Any Director or key Employee of the Company, or of any Subsidiary, or any
independent contractor, adviser, or consultant to the Company or any Subsidiary,
whose judgment, initiative and efforts contribute or may be expected to
contribute materially to the successful performance of the Company and its
Subsidiaries shall be eligible to receive an Award or Grant under the Plan. In
determining the Participants to whom such an Award or Grant will be made, the
Committee shall take into account the duties and responsibilities of the
respective Participants, their present and potential contributions to the
success of the Company and its Subsidiaries, and such other factors as the
Committee shall deem relevant in connection with accomplishing the purpose of
the Plan. No person who is a member of the Committee shall be eligible to
receive an Award or Grant under the Plan while so serving.
ARTICLE 6. STOCK OPTIONS
6.1 Grant of Options. Subject to the terms and provisions of the Plan,
Options may be granted to Participants from time to time, as determined by the
Committee. The Committee shall have sole discretion in determining the number of
Shares underlying each Option granted to a Participant; provided, however, that
in the case of any ISO granted under the Plan, the aggregate Fair Market Value
(determined at the time such Option is granted) of the Shares to which ISOs are
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exercisable for the first time by the Participant during any calendar year
(under the Plan and all other incentive stock option plans of the Company and
any Subsidiary) shall not exceed One Hundred Thousand United States Dollars
($100,000).
The Committee may grant a Participant ISOs, NQSOs or a combination thereof,
and may vary such Grants among Participants. In no event however, shall any
Participant who owns (within the meaning of Section 424(d) of the Code), at the
time he would otherwise be granted an Option to purchase Shares, stock of the
Company possessing more than ten percent (10%) of the total combined voting
power of all classes of stock of the Company be eligible to receive an Incentive
Stock Option to purchase Shares hereunder.
The maximum number of Shares subject to Options which can be granted under
the Plan during a 12-month period to any Participant including a Named Executive
Officer is Two Hundred Thousand (200,000) Shares; provided, however, that the
maximum number of Option Shares available for grant to a Participant during any
12-month period should be correspondingly reduced by the number of Shares
underlying any SAR Awards made under Article 7 hereof to the Participant during
the same period.
6.2 Option Agreement. Each Option granted under the Plan shall be
evidenced by an Option Agreement that shall specify the Option Price, the
duration of the Option, the number of Shares to which the Option pertains and
such other provision as the Committee shall determine. The Option Agreement
shall further specify whether the Option is intended to be an ISO within the
meaning of Code Section 422, or an NQSO, which is not intended to fall under the
provisions of Code Section 422. The failure to so specify shall not impair the
treatment of an Option as an ISO if it otherwise so qualifies.
6.3 Option Price. The Option Price for each ISO granted under this Article
6 shall be not less than the Fair Market Value of a Share on the date the ISO is
granted. The Option Price of each Share underlying a NQSO shall be established
by the Committee, but in no event shall such price be less than eighty-five
percent (85%) of the Fair Market Value (or such higher percentage of Fair Market
Value as may be established by Internal Revenue Service rules or regulations as
the limit for granting discounted stock options without causing immediate tax
consequences to the Participant) of a Share on the date the Option is granted.
6.4 Duration of Options. Each Option shall expire at such time as the
Committee shall determine at the time of grant; provided, however, that no
Options shall be exercisable later than the tenth (10th) anniversary of its
grant. Notwithstanding anything to the contrary herein or in any Option
Agreement, if at the time of vesting of the Option, the Shares of the Company
are not registered under the Exchange Act, or the Shares are not publicly traded
on a national or regional securities exchange, on The NASDAQ Stock Market, or in
the over-the-counter market, then such Option expires ninety days (90) after the
date of vesting, unless the Shares are registered or become publicly traded
within that ninety (90) day period.
6.5 Exercise of Options. Options granted under the Plan shall be subject
to such vesting schedules and exercise periods, and other restrictions and
conditions, as the Committee shall in
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each instance approve, which need not be the same for each Grant or for each
Participant. Except as the Committee may otherwise provide, Options granted
under this Plan shall not generally be exercisable prior to six (6) months
following the date of grant.
6.6 Payment. Options shall be exercised by the delivery of a written
notice of exercise to the Company, setting forth the number of Shares with
respect to which the Option is to be exercised, accompanied by full payment for
the Shares. The Option Price upon exercise of any Option shall be payable to the
Company in full either: (a) in cash, or (b) by tendering previously acquired
Shares having an aggregate Fair Market Value at the time of exercise equal to
the total Option Price (provided that the Shares which are tendered must have
been held by the Participant for the period required by law, if any, prior to
their tender to satisfy the Option Price), or (c) by a combination of (a) and
(b). The Committee also may allow cashless exercises, subject to applicable
securities law restrictions, or by any other means which the Committee
determines to be consistent with the Plan's purpose and applicable law.
As soon as practicable after receipt of a written notification of exercise
and full payment, the Company shall deliver to the Participant, in the
Participant's name, Share certificates in an appropriate amount based upon the
number of Shares purchased under the Option(s).
6.7 Termination of Employment Due to Death, Disability or Retirement .
Unless otherwise provided by the Committee in the Option Agreement, the
following rules shall apply in the event of the Participant's termination of
employment due to death, Disability or Retirement:
(a) Termination by Death. In the event the Participant dies while
actively employed, all outstanding unvested Options granted to
that Participant shall immediately vest, and thereafter all
vested Options shall remain exercisable at any time prior to
their expiration date, or for two (2) years after the date of
death, whichever period is shorter, by (i) such person(s) as
shall have been named as the Participant's beneficiary, (ii) such
person(s) that have acquired the Participant's rights under such
Options by will or by the laws of descent and distribution, or
(iii) the Participant's estate or representative of the
Participant's estate.
(b) Termination by Disability. In the event the employment of the
Participant is terminated by reason of Disability, all
outstanding unvested Options granted to the Participant shall
immediately vest as of the date the Committee determines the
definition of Disability to have been satisfied, and thereafter
all vested Options shall remain exercisable at any time prior to
their expiration date, or for one (1) year after the date that
the Committee determines the definition of Disability to have
been satisfied, whichever period is shorter.
(c) Termination by Retirement. In the event the employment of the
Participant is terminated by reason of Retirement the Participant
shall be entitled to prorata vesting of all outstanding unvested
Options. The prorata vesting
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shall be determined by the Committee, in its sole discretion, and
shall be based upon the length of time that the Participant held
the unvested Options relative to the vesting period for each
Grant of outstanding unvested Options. Upon Retirement vested
Options shall remain exercisable at any time prior to their
expiration date, or for one (1) year after the effective date of
Retirement, whichever period is shorter.
6.8 Termination of Employment for Other Reasons. In the event a
Participant's employment is terminated by the Company or Subsidiary for Cause,
the Participant's right to exercise any then vested outstanding Options shall
expire immediately upon termination of employment. If the Participant's
employment is terminated by the Company or Subsidiary without Cause, or the
Participant voluntarily terminates his employment, any Options vested as of his
date of termination shall remain exercisable at any time prior to their
expiration date or for three (3) months after his date of termination of
employment, whichever period is shorter.
6.9 Nontransferability of Options. Unless the Committee provides otherwise
in the Option Agreement, no Option granted under the Plan may be sold,
transferred, pledged, assigned, or otherwise alienated or hypothecated, other
than by will or by the laws of descent and distribution, and any attempt to sell
transfer, pledge, assign or otherwise alienate or hypothecate an Option shall be
null and void and of no force or effect, and all Options granted to a
Participant under the Plan shall be exercisable during his or her lifetime only
by such Participant.
ARTICLE 7. STOCK APPRECIATION RIGHTS
7.1 Grant of SAR. Stock Appreciation Rights or SARs may be awarded in
conjunction with, or in addition to, any Options granted under the Plan, or may
be awarded under the Plan independent of any Option. Nothing shall preclude the
award on the same day an Option is granted (with or without related SARs) of
SARs independent of an Option. SARs granted in conjunction with, or in addition
to, an Option may be granted either at the time of the Grant of the Option or
any time thereafter during the term of the Option. SARs awarded in conjunction
with an Option shall entitle the holder of the related Option, upon exercise, in
whole or in part, of the SARs, to surrender the Option, or any portion thereof,
to the extent unexercised, and to receive a number of Shares determined pursuant
to subsection 7.3 below. Such Option shall, to the extent so surrendered, cease
to be exercisable.
The maximum number of Shares underlying SARs which can be awarded under the
Plan during any 12-month period to any Participant including a Named Executive
Officer is Two Hundred Thousand (200,000) Shares; provided, however, that the
maximum number of Shares available for award to a Participant during any 12-
month period shall be correspondingly reduced by the number of Shares subject to
Options granted to the Participant during the same period.
7.2 Award Agreement. SARs shall be subject to such terms and conditions
not inconsistent with the Plan as shall from time to time be approved by the
Committee and to the following:
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(a) SARs granted in conjunction with an Option shall be exercisable
at such time or times and to the extent, but only to the extent,
that the Option to which they relate shall be exercisable.
(b) SARs not granted in conjunction with an Option shall be
exercisable at such time or times as may be determined by the
Committee at the time of grant, but shall be subject to the same
restrictions and other rules as to duration, transferability, and
exercisability that are set out for Options in Article 6 above.
7.3 Exercise of SARs. (a) Upon exercise of SARs, the holder thereof shall
be entitled to receive a number of Shares which have an aggregate Fair Market
Value on the date of exercise equal to the amount by which the Fair Market Value
per share of one Share on the date of such exercise shall exceed (i) in the case
of SARs granted in conjunction with an Option or in addition to an Option, the
Option price per Share of the related Option, or (ii) in the case of SARs
unrelated to an Option, its SAR Grant Value, in each case multiplied by the
number of Shares in respect of which the SARs shall have been exercised.
(b) All or any part of the obligation arising out of an exercise of SARs,
whether or not such rights are granted in conjunction with an Option, may in the
sole discretion of the Committee (and consistent with the requirements of Rule
16b-3 of the Exchange Act) be settled by the payment of cash equal to the
aggregate Fair Market Value of the Shares that would otherwise have been
delivered under subsection (a) above.
(c) To the extent that SARs granted in conjunction with an Option shall be
exercisable and whether the obligation upon such exercise shall be discharged by
the delivery of Shares or the payment of cash the Option in connection with
which such SAR shall have been granted shall be deemed to have been exercised
for the purpose of the maximum share limitation set forth in the Plan.
(d) To the extent that SARs granted in addition to, or independent of, an
Option shall be exercised and whether the obligation upon such exercise shall be
discharged by the delivery of Shares or the payment of cash, the number of
Shares in respect of which the SARs shall have been exercised shall be charged
against the maximum share limitation set forth in the Plan.
ARTICLE 8. STOCK AWARDS - RESTRICTED AND UNRESTRICTED
8.1 Award. The Committee may from time to time in its discretion make
Stock Awards to Participants and may determine the number of Shares to be
awarded. The Committee shall determine the terms and conditions of, and the
amount of payment, if any, to be made by the Participant for such Stock Award.
An Award of Restricted Stock may require the Participant to pay
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for such Shares of Restricted Stock, but the Committee may establish a price
below Fair Market Value at which the Participant can purchase the Shares of
Restricted Stock. Each Award of Restricted Stock will be evidenced by an Award
Agreement containing terms and conditions not inconsistent with the Plan as the
Committee shall determine to be appropriate in its sole discretion.
The maximum number of Shares that may be awarded under a Stock Award
(whether restricted or unrestricted) to a Named Executive Officer during any 12-
month period is Two Hundred Thousand (200,000) Shares.
8.2 Restricted Period; Lapse of Restrictions. At the time an Award of
Restricted Stock is made, the Committee shall establish a period or periods of
time (the "Restricted Period") applicable to such Award which, unless the
Committee otherwise provides, shall not be less than six (6) months. Subject to
the other provisions of this Section 8, at the end of the Restricted Period all
restrictions shall lapse and the Restricted Stock shall vest in the Participant.
At the time an Award is made, the Committee may, in its discretion, prescribe
conditions for the incremental lapse of restrictions during the Restricted
Period and for the lapse or termination of restrictions upon the occurrence of
other conditions in addition to or other than the expiration of the Restricted
Period with respect to all or any portion of the Restricted Stock. Such
conditions may, but need not, include without limitation:
(a) The death, Disability or Retirement of the Employee to whom
Restricted Stock is awarded, or
(b) The occurrence of a Change in Control.
The Committee may also, in its discretion, shorten or terminate the Restricted
Period, or waive any conditions for the lapse or termination of restrictions
with respect to all or any portion of the Restricted Stock at any time after the
date the Award is made.
8.3 Rights of Restricted Stock Holder; Limitations Thereon. Upon an Award
of Restricted Stock, a stock certificate (or certificates) representing the
number of Shares of Restricted Stock granted to the Participant shall be
registered in the Participant's name and shall be held in custody by the Company
or a bank selected by the Committee for the Participant's account. Following
such registration, the Participant shall have the rights and privileges of a
shareholder as to such Restricted Stock, including the right to receive
dividends and to vote such Restricted Stock, provided that, the right to receive
cash dividends shall be the right to receive such dividends either in cash
currently or by payment in Restricted Stock, as the Committee shall determine,
and provided further that the following restrictions shall apply:
(a) The Participant shall not be entitled to delivery of a
certificate until the expiration or termination of the Restricted
Period for the Shares represented by such certificate and the
satisfaction of any and all other conditions prescribed by the
Committee;
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(b) None of the Shares of Restricted Stock may be sold, transferred,
assigned, pledged, or otherwise encumbered or disposed of during
the Restricted Period and until the satisfaction of any and all
other conditions prescribed by the Committee; and
(c) All of the Shares of Restricted Stock that have not vested shall
be forfeited and all rights of the Participant to such Shares of
Restricted Stock shall terminate without further obligation on
the part of the Company, unless the Participant has remained a
full-time employee of the Company, or any of its Subsidiaries,
until the expiration or termination of the Restricted Period and
the satisfaction of any and all other conditions prescribed by
the Committee applicable to such Shares of Restricted Stock. Upon
the forfeiture of any Shares of Restricted Stock, such forfeited
Shares shall be transferred to the Company without, further
action by the Participant.
With respect to any Shares received as a result of adjustments under
Section 4.3 hereof and any Shares received with respect to cash dividends
declared on Restricted Stock, the Participant shall have the same rights and
privileges, and be subject to the same restrictions, as are set forth in this
Section 8.
8.4 Delivery of Unrestricted Shares. Upon the expiration or termination of
the Restricted Period for any Shares of Restricted Stock and the satisfaction of
any and all other conditions prescribed by the Committee, the restrictions
applicable to such Shares of Restricted Stock shall lapse and a stock
certificate for the number of Shares of Restricted Stock with respect to which
the restrictions have lapsed shall be delivered, free of all such restrictions
except any that may be imposed by law, to the holder of the Restricted Stock.
The Company shall not be required to deliver any fractional Share but will pay,
in lieu thereof, the Fair Market Value (determined as of the date the
restrictions lapse) of such fractional share to the holder thereof. Prior to or
concurrently with the delivery of a certificate for Restricted Stock, the holder
shall be required to pay an amount necessary to satisfy any applicable federal,
state and local tax requirements as set out in Article 15 below.
8.5 Nonassignability of Restricted Stock. Unless the Committee provides
otherwise in the Award Agreement, no Award of, nor any right or interest of a
Participant in or to any Restricted Stock, or in any instrument evidencing any
Award of Restricted Stock under the Plan, may be assigned, encumbered or
transferred except, in the event of the death of a Participant, by will or the
laws of descent and distribution.
ARTICLE 9. PERFORMANCE SHARES
9.1 Grant of Performance Shares. Subject to the terms of the Plan,
Performance Shares may be granted to Participants from time to time for no
payment. The Committee shall have complete discretion in determining the number
of Performance Shares granted to each Participant; provided, however, that
unless and until the Company's shareholders vote to change the maximum
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number of Performance Shares that may be earned by any one Named Executive
Officer (subject to the terms of Article 14 hereof), none of the Named Executive
Officers may earn more than Two Hundred Thousand (200,000) Performance Shares
with respect to any performance period.
9.2 Value of Performance Shares. Each Performance Share shall have a value
equal to the Fair Market Value of a Share on the date the Performance Share is
earned. The Committee shall set performance goals in its discretion which,
depending on the extent to which they are met, will determine the number of
Performance Shares that will be earned by the Participants. The time period
during which the performance goals must be met shall be called a "performance
period." Performance periods shall, in all cases, equal or exceed two (2) years
in length. The performance goals shall be established at the beginning of the
performance period (or within such time period as is permitted by Code Section
162(m) and the regulations thereunder).
The Committee will select one or more of the following performance measures
for purposes of Awards under the Plan to Named Executive Officers: total
shareholder return, average return on assets, average return on equity, average
growth in assets, increase in operating earnings per share, increase in book
value per share of Common Stock, and ratio of operating revenue to operating
overhead. The Committee, in its sole discretion, may assign the relative weights
to be given to each performance measure selected by it. For Participants other
than Named Executive Officers, the Committee may, in its sole discretion, select
such performance measures (from among those described above or other) as it may
deem appropriate, and may assign the relative weights to be given to each
performance measure selected by it. The Committee may, in its sole discretion,
reserve the right to exclude the effect of extraordinary and non-recurring items
from calculations involving any performance measure.
In the event that applicable tax and/or securities laws (including, but not
limited to, Code Section 162(m) and Section 16 of the Exchange Act) change to
permit the Committee to alter the governing performance measures without
obtaining shareholder approval of such changes, the Committee shall have sole
discretion to make such changes without obtaining shareholder approval.
9.3 Earning of Performance Shares. After the applicable performance period
has ended, the Committee shall certify the extent to which the established
performance goals have been achieved. The Committee may increase or decrease the
amount of any Performance Share Award otherwise payable to a Participant under
this Article 9 if, in the Committee's view, the Company's financial performance
during the relevant performance period justifies such adjustment, whether or not
any one or more of the established performance goals has been achieved;
provided, however, that the Committee shall have no discretion to increase the
amount of any Performance Share Award otherwise payable to a Named Executive
Officer under this Article 9.
9.4 Form and Timing of Payment of Performance Shares . Except as otherwise
provided in Article 13 hereof payment of earned Performance Shares shall be made
in a single lump sum as soon as practical after the end of the performance
period to which the Award relates. The Committee, in its sole discretion, may
pay earned Performance Shares in the form of cash or in
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Shares (or in a combination thereof) which have, as of the last day of the
performance period, an aggregate value equal to the Fair Market Value of the
earned Performance Shares.
9.5 Termination of Employment Due to Death, Disability or Retirement or by
the Company Without Cause. Unless the Award Agreement provides otherwise, in the
event the employment of a Participant is terminated by reason of death,
Disability or Retirement or by the Company without Cause during a performance
period, the Participant shall be entitled to a prorated payout with respect to
the unearned Performance Shares. The prorated payout shall be determined by the
Committee, in its sole discretion, and shall be based upon the length of time
that the Participant held the unearned Performance Shares during the performance
period relative to the performance period, and shall be the greater of the
target award prorated for the applicable time period, or the payout earned on
the basis of actual performance, measured by the achievement of the established
performance goals prorated to the time of his termination due to death,
Disability or Retirement or by the Company without Cause.
Payment of earned Performance Shares to Participants whose termination is
due to Retirement or by the Company without Cause shall be made at the same time
payments are made to Participants who did not terminate employment during the
applicable performance period. Payment of earned Performance Shares to
Participants whose termination is due to death or Disability shall be made as
soon as practical after the Participant's termination.
9.6 Termination of Employment for Other Reasons. Except as provided in
Article 13 and in the Award Agreement, in the event that a Participant's
employment terminates during a performance period for any reason other than
those reasons set forth in Section 9.5 hereof, all unearned Performance Shares
shall be forfeited by the Participant to the Company.
9.7 Nontransferability. Performance Shares may not be sold, transferred,
pledged, assigned or otherwise alienated or hypothecated, other than by will or
by the laws of descent and distribution. Further, a Participant's Performance
Share rights under the Plan shall be exercisable during the Participant's
lifetime only by the Participant or the Participant's legal representative.
ARTICLE 10. BENEFICIARY DESIGNATION
Each Participant under the Plan may, from time to time, name any
beneficiary or beneficiaries (who may be named contingently or successively) to
whom any benefit under the Plan is to be paid in case of his or her death before
he or she receives any or all of such benefit. Each such designation shall
revoke all prior designations by the same Participant, shall be in a form
prescribed by the Company and shall be effective only when filed by the
Participant in writing, with the Company during the Participant's lifetime. In
the absence of any such designation, benefits remaining unpaid at the
Participant's death shall be paid to the Participant's estate.
ARTICLE 11. DEFERRALS
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The Committee may permit a Participant to defer to another plan or program
such Participant's receipt of Shares or cash that would otherwise be due to such
Participant by virtue of the exercise of an Option or SAR, the vesting of
Restricted Stock or the earning of Performance Shares. If any such deferral
election is required or permitted, the Committee shall, in its sole discretion,
establish rules and procedures for such payment deferrals.
ARTICLE 12. RIGHTS OF PARTICIPANTS
12.1 Employment. Nothing in the Plan shall interfere with or limit in any
way the right of the Company or a Subsidiary to terminate any Participant's
employment at any time, nor confer upon any Participant any right to continue in
the employ of the Company or a Subsidiary. For purpose of the Plan, transfer of
employment of a Participant between the Company and any one of its Subsidiaries
(or between Subsidiaries) shall not be deemed a termination of employment.
12.2 Participation. No Employee shall have the right to be selected to
receive an Award or Grant under this Plan, or, having been so selected, to be
selected to receive a future Award or Grant.
ARTICLE 13. CHANGE IN CONTROL
13.1 Occurrence. If after the initial registration of the Company's
Shares with the Securities and Exchange Commission pursuant to the Exchange Act,
a Change in Control should occur, and except as provided in the Award Agreement
or Section 13.3, or as prohibited by the terms of Article 17 hereof, then:
(a) All outstanding, unvested Options and SARs granted or awarded to
Participants hereunder (or, in the case of the termination of a
Participant by the Company or Subsidiary other than for Cause, to
the terminated Participant) shall become fully vested and
immediately exercisable;
(b) To the extent provided by the Committee in the Award Agreement,
the earning of unearned Performance Shares will be based upon the
target award levels or the actual performance compared with goals
prorated to the date of the Change in Control or to the date of
the Participant's termination by the Company or Subsidiary other
than for Cause, whichever provides the greater amount. Unearned
Performance Shares outstanding at the time of a Change in Control
or at the time of a Participant's termination by the Company or
Subsidiary other than for Cause will be fully vested (subject to
the employment requirements in the next sentence) and will be
payable in Shares or cash, or a combination thereof as determined
by the Committee. The Participant will be entitled to payment of
vested Performance Shares for a performance period only if (i) he
remains employed by the Company or Subsidiary (or their
respective successors) until the date that would have
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been the last day of the performance period, at which time the
payment of the Performance Shares shall be made, or (ii) prior to
the end of the performance period, his employment is terminated
by the Company or Subsidiary without Cause, he terminates
employment for a reason other than Cause or he retires (whether
early, normal or late) under the Innotrac Corporation Employee
Retirement Plan or any successor plan thereto, dies or becomes
Disabled. In any of these cases, payment of vested Performance
Shares shall be made as soon as possible after the Participant
ceases active employment.
(c) Unless otherwise provided in the Award Agreement, all
restrictions on an Award of Restricted Stock shall lapse and such
Restricted Stock shall be delivered to the Participant in
accordance with Section 8.4; and
(d) Subject to Article 14 hereof the Committee shall have the
authority to make any modifications to the Awards or Grants as
determined by the Committee to be appropriate before the
effective date of the Change in Control or the date of the
Participant's termination by the Company or Subsidiary other than
for Cause.
13.2 Definition. For purposes of the Plan, a "Change in Control" shall be
deemed to have occurred if:
(a) the Company consolidates or merges with or into another company,
or is otherwise reorganized, if the Company is not the surviving
company in such transaction, or, if after such transaction, any
other company, association or other person, entity or group or
the shareholders thereof that did not own fifty percent (50%) or
more of the then outstanding Shares prior to such transaction,
then own, directly and/or indirectly, more than fifty percent
(50%) of the then outstanding Shares of the Company or more than
fifty percent (50%) of the assets of the Company; or
(b) more than 35% of the Shares of the Company are, in a single
transaction or in a series of related transactions, sold or
otherwise transferred to or are acquired by (except as collateral
security for a loan) any other company, association or other
person, entity or group, whether or not any such shareholder or
any shareholders included in such group were shareholders of the
Company prior to the Change in Control, provided however that a
-------- -------
"Change in Control" shall not be deemed to have occurred as a
result of any transaction wherein any person, entity or group
that owns more than sixty-five percent (65%) of the then
outstanding Shares prior to such transaction continues to own
sixty-five percent (65%) or more after such transaction; or
-16-
<PAGE>
(c) all or substantially all of the assets of the Company are sold or
otherwise transferred to or otherwise acquired by any other
company, association or other person, entity or group; or
(d) the occurrence of any other event or circumstance which is not
covered by (a) through (c) above which the Committee determines
affects control of the Company and constitutes a Change in
Control for purpose of the Plan.
13.3 Pooling of Interests Accounting. No Award or Grant made under this
Plan shall have a scheduled vesting date which is earlier than the date that is
two (2) years following the Effective Date. During the two (2) year period
commencing on the Effective Date, the acceleration of vesting provided for in
Section 13.1 shall not apply in a transaction involving a Change in Control if
both of the following circumstances exist:
(a) The provisions contained in Section 13.1 create conditions which
would preclude the use of pooling of interests accounting, and
(b) The completion of the transaction is subject to the use of
pooling of interests accounting.
ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION
14.1 Amendment, Modification and Termination. The Board may, at any time
and from time to time, alter, amend, suspend or terminate the Plan in whole or
in part; provided, that, unless approved by the holders of a majority of the
total number of Shares of the Company represented and entitled to vote at a
meeting at which a quorum is present, no amendment shall be made to the Plan if
such amendment would (a) materially modify the eligibility requirements provided
in Article 5; (b) increase the total number of Shares (except as provided in
Section 4.3) which may be granted or awarded under the Plan, as provided in
Section 4. 1; (c) extend the term of the Plan; or (d) amend the Plan in any
other manner which the Board, in its discretion, determines should become
effective only if approved by the shareholders even though such shareholder
approval is not expressly required by the Plan or by law.
14.2 Grants or Awards Previously Granted. No termination, amendment or
modification of the Plan shall adversely affect in any material way any Award or
Grant previously made under the Plan, without the written consent of the
Participant holding such Award or Grant. The Committee shall, with the written
consent of the Participant holding such Award or Grant, have the authority to
cancel Awards or Grants outstanding and grant replacement Awards or Grants
therefor.
14.3 Compliance With Code Section 162(m). It is the intent of the Board
that all Awards or Grants made under this Plan shall comply with the
requirements of Code Section 162(m). In the event changes are made to Code
Section 162(m) to permit greater flexibility with respect to any Award or Grant
under the Plan, the Committee may, subject to this Article 14, make any
adjustments it deems appropriate in such Award or Grant.
-17-
<PAGE>
ARTICLE 15. WITHHOLDING
15.1 Tax Withholding. The Company shall have the power and the right to
deduct or withhold, or require a Participant to remit to the Company, an amount
sufficient to satisfy Federal, state and local taxes (including the
Participant's FICA obligation) required by law to be withheld with respect to
any taxable event arising in connection with an Award or Grant under this Plan.
15.2 Share Withholding. With respect to withholding required upon the
exercise of Options, or upon any other taxable event arising as a result of
Awards or Grants made hereunder which are to be paid in the form of Shares,
Participants may request subject to the approval of the Committee, to satisfy
the withholding requirement, in whole or in part, by having the Company withhold
Shares having a Fair Market Value on the date the tax is to be determined equal
to the minimum statutory total tax which could be imposed on the Award or Grant.
All such requests shall be irrevocable, made in writing, and signed by the
Participant, and requests by Insiders shall additionally comply with all legal
requirements applicable to Share transactions by such Participants.
ARTICLE 16. SUCCESSORS
All obligations of the Company under the Plan, with respect to Awards or
Grants made hereunder, shall be binding on any successor to the Company, whether
the existence of such successor is the result of a direct or indirect purchase,
merger, consolidation or otherwise, of all or substantially all of the business
and/or assets of the Company.
ARTICLE 17. LEGAL CONSTRUCTION
17.1 Gender and Number. Except where otherwise indicated by the context,
any masculine term used herein also shall include the feminine; the plural shall
include the singular and the singular shall include the plural.
17.2 Severability. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.
17.3 Requirements of Law. The making of Awards or Grants and the issuance
of Shares under the Plan shall be subject to all applicable laws, rules and
regulations, and to such approvals by any governmental agencies or national
securities exchanges as may be required.
17.4 Regulatory Approvals and Listing. The Company shall not be
required to issue any certificate or certificates for Shares under the Plan
prior to (i) obtaining any approval from any governmental agency which the
Company shall, in its discretion, determine to be necessary or
-18-
<PAGE>
advisable, (ii) the admission of such shares to listing on any national
securities exchange on which the Company's Shares may be listed, and (iii) the
completion of any registration or other qualification of such Shares under any
state or federal law or ruling or regulations of any governmental body which the
Company shall, in its sole discretion, determine to be necessary or advisable.
Notwithstanding any other provision set forth in the Plan, if required by
the then-current Section 16 of the Exchange Act, any "derivative security" or
"equity security" offered pursuant to the Plan to any Insider may not be sold or
transferred for at least six (6) months after the date of grant of such Award.
The terms "equity security" and "derivative security" shall have the meanings
ascribed to them in the then-current Rule 16(a) under the Exchange Act.
The Committee may impose such restrictions on any Shares acquired pursuant
to the Plan as it may deem advisable, including, without limitation,
restrictions under applicable Federal securities laws, under the requirements of
any stock exchange or market upon which such Shares are then listed and/or
traded and under any blue sky or state securities laws applicable to such
Shares.
17.5 Securities Law Compliance. With respect to Insiders, transactions
under this Plan are intended to comply with all applicable conditions of Rule
16b-3 or its successors under the Exchange Act. To the extent any provisions of
the Plan or action by the Committee fails to so comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the Committee.
17.6 Governing Law. To the extent not preempted by Federal law, the Plan,
and all agreements hereunder, shall be construed in accordance with and governed
by the laws of the State of Georgia, without reference to its conflict of laws
rules.
17.7 Disputes and Expenses. After a Change in Control, if a Participant
affected by such Change in Control incurs legal fees or other expenses in
seeking to obtain or enforce any rights to benefits under this Plan and is
successful, in whole or in part, in obtaining or enforcing any such rights
through settlement, litigation, arbitration or otherwise, the Company shall
promptly pay the affected Participant's reasonable legal fees and expenses
incurred in enforcing his rights under the Plan.
-19-
<PAGE>
AS APPROVED BY THE SOLE MEMBER OF THE BOARD OF DIRECTORS AND THE SOLE
SHAREHOLDER OF INNOTRAC CORPORATION ON NOVEMBER 24, 1997.
INNOTRAC CORPORATION
By: /s/ Scott Dorfman
---------------------------
SCOTT DORFMAN
PRESIDENT
ATTEST:
By: /s/ David Ellin
-------------------------------
DAVID ELLIN
VICE PRESIDENT
-20-
<PAGE>
EXHIBIT 10.3
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
AMONG
INNOTRAC CORPORATION,
HOMETEL SYSTEMS, INC.,
IELC, INC.,
RENTEL #1, INC.,
RENTEL #2, L.L.C.,
SELLTEL #1, INC.,
SELLTEL #2, L.L.C.
AND HOMETEL PROVIDERS PARTNERS, L.P.
AS BORROWERS,
AND
SOUTHTRUST BANK, N.A.
AS LENDER
DATED AS OF DECEMBER 5, 1997
<PAGE>
TABLE OF CONTENTS
-----------------
PAGE
----
<TABLE>
<S> <C> <C>
1. DEFINITIONS, TERMS AND REFERENCES................................2
1.1 Certain Definitions...................................2
1.2 Use of Defined Terms.................................11
1.3 Accounting Terms.....................................11
1.4 UCC Terms............................................11
1.5 Terminology..........................................11
1.6 Exhibits.............................................12
2. THE FINANCING...................................................12
2.1 Revolving Line of Credit.............................12
2.2 Term Loan............................................13
2.3 Interest and Fees....................................13
2.4 Method of Making Payments............................14
2.5 Prepayments; Early Termination.......................14
2.6 Use of Proceeds......................................15
2.7 Increased Costs or Reduced Return....................15
2.8 Indemnification of Lender............................15
3. COLLECTIONS.....................................................16
3.1 Collateral Reserve Account; Lockbox Accounts.........16
4. SECURITY INTEREST -- COLLATERAL.................................16
5. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
ACCOUNTS RECEIVABLE COLLATERAL..................................17
5.1 Bona Fide Accounts...................................17
5.2 Good Title; No Existing Encumbrances.................17
5.3 Right to Assign; No Further Encumbrances.............17
5.4 Power of Attorney....................................17
6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
INVENTORY COLLATERAL............................................17
6.1 Sale of Inventory Collateral.........................18
6.2 Insurance............................................18
6.3 Good Title; No Existing Encumbrances.................18
6.4 Right to Grant Security Interest; No Further
Encumbrances.........................................18
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
6.5 Location of Inventory Collateral. 18
7. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
EQUIPMENT COLLATERAL............................................19
7.1 Sale of Equipment Collateral.........................19
7.2 Insurance............................................19
7.3 Good Title; No Existing Encumbrances.................19
7.4 Right to Grant Security Interest; No Further
Encumbrances.........................................19
7.5 Location.............................................19
8. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
BALANCES COLLATERAL.............................................20
8.1 Ownership............................................20
8.2 Liens................................................20
9. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
INTANGIBLES COLLATERAL..........................................20
9.1 Ownership............................................20
9.2 Lien.................................................20
9.3 Preservation.........................................20
10. GENERAL REPRESENTATIONS AND WARRANTIES.........................20
10.1 Existence and Qualification..........................21
10.2 Authority; Validity and Binding Effect...............21
10.3 No Material Litigation...............................21
10.4 Taxes................................................21
10.5 Capital Stock........................................22
10.6 Organization.........................................22
10.7 Insolvency...........................................22
10.8 Title................................................22
10.9 Margin Stock.........................................22
10.10 No Violations........................................23
10.11 ERISA................................................23
10.12 Financial Statements.................................23
10.13 Delivery of Certain Collateral.......................24
10.14 Purchase of Collateral...............................24
10.15 Pollution and Environmental Control..................24
10.16 Possession of Franchises, Licenses, Etc..............24
10.17 Disclosure...........................................24
10.18 Subsidiaries.........................................24
10.19 Ownership............................................25
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C> <C>
11. GENERAL AFFIRMATIVE COVENANTS..................................25
11.1 Records Respecting Collateral......................25
11.2 Further Assurances.................................25
11.3 Right to Inspect...................................25
11.4 Reports............................................26
11.5 Settlement Sheets..................................26
11.6 Periodic Financial Statements of Borrowers.........26
11.7 Annual Financial Statements of Borrowers...........27
11.8 Payment of Taxes...................................27
11.9 Maintenance of Insurance...........................27
11.10 Maintenance of Property............................27
11.11 Certificate of No Event of Default; Compliance
Certificate; Notice of Default.....................28
11.12 Change of Principal Place of Business, Etc.........28
11.13 Waivers............................................28
11.14 Preservation of Corporate Existence................28
11.15 Compliance with Laws...............................28
11.16 ERISA..............................................29
11.17 Litigation.........................................29
11.18 Environmental Compliance...........................29
12. FINANCIAL COVENANTS............................................31
12.1 Debt/Tangible Net Worth Ratio......................31
12.2 Tangible Net Worth.................................31
12.3 Current Ratio......................................31
12.4 Fixed Charge Coverage Ratio........................31
12.5 Capital Expenditures and Leases....................32
12.6 Minimum Net Income.................................32
13. NEGATIVE COVENANTS.............................................32
13.1 No Liens.............................................32
13.2 Debt.................................................32
13.3 Contingent Liabilities...............................32
13.4 Distributions........................................33
13.5 Stock Redemptions, Etc...............................33
13.6 Restricted Investment................................33
13.7 Merger, Transfer, Etc................................33
13.8 ERISA................................................33
13.9 Transactions with Affiliates.........................33
13.10 Fiscal Year..........................................34
13.11 Certain Debts........................................34
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C> <C>
14. EVENTS OF DEFAULT..............................................34
14.1 Notes................................................34
14.2 Obligations..........................................34
14.3 Misrepresentations...................................34
14.4 Covenants............................................35
14.5 Damage, Loss, Theft or Destruction of Collateral.....35
14.6 Certain Debts........................................35
14.7 Other Debts..........................................35
14.8 Voluntary Bankruptcy.................................35
14.9 Involuntary Bankruptcy...............................36
14.10 Judgments............................................36
14.11 ERISA................................................36
14.12 Change of Control....................................36
14.13 Material Adverse Change..............................36
14.14 Certain Debts........................................37
14.15 Change of Management.................................37
15. REMEDIES.......................................................37
15.1 Acceleration of the Obligations......................37
15.2 Remedies of a Secured Party..........................38
15.3 Set Off..............................................38
15.4 Other Remedies.......................................38
16. MISCELLANEOUS..................................................38
16.1 Waiver...............................................38
16.2 Governing Law........................................39
16.3 Survival.............................................39
16.4 No Assignment by Borrowers...........................39
16.5 Counterparts.........................................39
16.6 Reimbursement........................................39
16.7 Successors and Assigns...............................40
16.8 Severability.........................................40
16.9 Notices..............................................40
16.10 Entire Agreement; Amendments.........................41
16.11 Time of the Essence..................................41
16.12 Interpretation.......................................42
16.13 Lender Not Joint Venturer............................42
16.14 Jurisdiction.........................................42
16.15 Acceptance...........................................42
16.16 Payment on Non-Business Days.........................42
16.17 UCC Terminations.....................................42
16.18 Cure of Default by Lender............................43
</TABLE>
iv
<PAGE>
<TABLE>
<S> <C> <C>
16.19 Recitals.............................................43
16.20 Attorney-in-Fact.....................................43
16.21 Sole Benefit.........................................43
16.22 Termination of this Agreement........................43
16.23 Partition............................................44
16.24 Acknowledgment by Borrowers..........................44
17. CONDITIONS PRECEDENT...........................................44
17.1 Conditions to Initial Revolving Advance..............44
</TABLE>
EXHIBIT DOCUMENT
------- --------
A.......Collateral Locations
B.......Guaranty
C.......Other Permitted Encumbrances
D.......Revolving Note
E.......Term Note
F.......Trade Names and Trade Styles
G.......Ownership
H.......Form of Secretary's Certificate
I.......Partnership Certificate
v
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (hereinafter, as it may
be modified, amended or supplemented from time to time, and together with all
Exhibits attached hereto, called this "AGREEMENT"), made, entered into and
---------
effective as of the 5th day of December, 1997, by and among INNOTRAC
CORPORATION, a Georgia corporation ("INNOTRAC"); IELC, INC., a Georgia
--------
corporation ("IELC"); HOMETEL SYSTEMS, INC., a Georgia corporation ("HOMETEL");
---- -------
RENTEL #1, INC., a Georgia corporation ("RENTEL"); RENTEL #2, L.L.C., a Georgia
------
limited liability company ("RENTEL #2"); SELLTEL #1, INC., a Georgia corporation
---------
("SELLTEL"); SELLTEL #2, L.L.C., a Georgia limited liability company ("SELLTEL
------- -------
#2"); and HOMETEL PROVIDERS PARTNERS, L.P., a Georgia limited partnership
- --
("HPP", HPP, SellTel, SellTel #2, RenTel, RenTel #2, HomeTel, IELC and Innotrac
---
called collectively herein the "BORROWERS" and, individually, a "BORROWER"), as
--------- --------
borrowers; and SOUTHTRUST BANK, N.A., a national banking association ("LENDER"),
------
as lender;
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrowers and Lender are parties to that certain Loan and Security
Agreement, dated as of January 19, 1995, as heretofore amended (the "PRIOR
-----
VERSION LOAN AGREEMENT"), pursuant to which Lender has previously established
- ----------------------
for the benefit of the Borrowers a revolving line of credit in the maximum
aggregate principal amount of Eighteen Million Dollars ($18,000,000) and has
extended to Borrowers a term loan in the initial principal amount of Two Million
Dollars ($2,000,000); and
WHEREAS, Borrowers have requested Lender to increase the maximum aggregate
principal amount of such revolving line of credit to Twenty-Five Million Dollars
($25,000,000), and subject to the terms and conditions set forth herein, Lender
is willing to do so; and
WHEREAS, Borrowers and Lender wish to enter into this Agreement in order to
memorialize their mutual understandings in respect to such revolving line of
credit increase and the other financial accommodations made by Lender to the
Borrowers;
WHEREAS, Lender is willing to extend such financial accommodations to
Borrowers in accordance with the terms hereof upon the execution of this
Agreement by Borrowers, compliance by Borrowers with all of the terms and
provisions of this Agreement, and fulfillment by Borrowers of all conditions
precedent to Lender's obligations herein contained; and
NOW, THEREFORE, in consideration of the sum of TEN DOLLARS ($10.00), the
foregoing premises, to induce Lender to extend the financial accommodations
provided for herein, and for other good and valuable consideration, the
sufficiency and receipt of all of which are acknowledged, Borrowers and Lender
agree as follows:
1
<PAGE>
1. DEFINITIONS, TERMS AND REFERENCES.
----------------------------------
1.1 Certain Definitions.
-------------------
In addition to such other terms as elsewhere defined herein, as used in this
Agreement and in any Exhibits, the following capitalized terms shall have the
following meanings, unless the context requires otherwise:
"Accounts Receivable Collateral" shall mean all rights of each Borrower to
------------------------------
payment for goods sold or leased, or to be sold or to be leased, or for services
rendered or to be rendered, howsoever evidenced or incurred, including, without
limitation, all accounts, all contract rights, all instruments, all leases,
rental contracts and other chattel paper and all general intangibles arising
therefrom or relating thereto, all sales orders, all returned or repossessed
goods and all books, records, computer tapes, programs and ledger books arising
therefrom or relating thereto, all whether now owned or hereafter acquired or
arising.
"Account Debtor" shall mean any Person who is or may become obligated on
--------------
any of the Accounts Receivable Collateral of such Borrower.
"A. Dorfman Buyout" shall mean any transaction or series of transactions
-----------------
pursuant to which the capital stock of RenTel #1, Inc. and SellTel #1, Inc.
owned by Arnold Dorfman are purchased, redeemed or otherwise acquired by any
Borrower or Scott Dorfman for an aggregate consideration not exceeding
$1,000,000.
"Affiliate" shall mean, with respect to any Person, any other Person
---------
Controlling, Controlled by or under common Control with, such Person.
"Agreement" shall have the meaning given to such term in the foregoing
---------
recitals to this Agreement.
"Balances Collateral" shall mean all property of each Borrower left with
-------------------
Lender or in its possession now or hereafter, all deposit accounts of each
Borrower now or hereafter opened with Lender, including, particularly, but
without limitation, any Collateral Reserve Account required to be established
with Lender pursuant to Section 3.1 hereof, all certificates of deposit issued
by Lender to each Borrower, and all drafts, checks and other items deposited in
or with Lender by each Borrower for collection now or hereafter.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as amended
---------------
from time to time.
"Base Rate" shall mean that interest rate so denominated and set by Lender
---------
from time to time as an interest rate basis for borrowings from Lender. The
Base Rate is one of
2
<PAGE>
several interest rate bases which may be used by Lender. Lender lends at
interest rates above and below the Base Rate. Any change in any rate of interest
charged hereunder as a result of any change in the Base Rate shall become
effective as of the opening of business on each date on which such change in the
Base Rate occurs.
"Borrower" and "Borrowers" shall have the meanings given to such terms in
-------- ---------
the foregoing recitals to this Agreement; provided, that with effect from and
--------
after consummation of the Consolidation Transaction, "Borrower" shall mean
Innotrac and its permitted successors and assigns.
"Business Day" shall mean any day on which each Lender is open for the
------------
conduct of banking business at its respective main office.
"Capital Expenditures" shall have the meaning given to such term in
--------------------
accordance with GAAP, and shall specifically include, in any event, any current
expenditure made by any Borrower for the acquisition, construction, repair,
maintenance or replacement of fixed or capital assets which, under GAAP, would
be expected to be capitalized on the books of such Borrower; provided, however,
-------- -------
that the purchase or other acquisition of caller identification equipment or
other telecommunications equipment used for sale, rental or lease purposes shall
not be considered a Capital Expenditure for any purpose whatsoever under this
Agreement or any of the other Loan Documents.
"Closing Date" shall mean that date on which the initial disbursement of
------------
funds being made available to Borrowers under the Revolving Line of Credit.
"Collateral" shall mean the property of Borrowers described in Article 4,
----------
or any part thereof, as the context shall require, in which Lender has, or is to
have, a security interest pursuant hereto, as security for payment of the
obligations.
"Collateral Locations" shall mean (i) the Executive Office, (ii) those
--------------------
locations specified in Exhibit "A" attached hereto and (iii) such other
-----------
locations of Collateral as to which Lender shall be notified hereafter by
Borrowers pursuant to Section 11.12.
"Collateral Reserve Account" shall mean, individually and collectively, any
--------------------------
non-interest bearing, demand deposit account (or series of such accounts, as the
case may be) which is or may be required to open and maintain with Lender
pursuant to the requirements of Section 3.1.
"Consolidation Transaction" shall mean any transaction or related series of
-------------------------
transactions pursuant to which (i) any or all of the Borrowers other than
Innotrac is merged (whether initially or subsequent thereto) with and into
Innotrac, (ii) any or all of the Borrowers other than Innotrac become
subsidiaries, either wholly or partially owned, of Innotrac, or (iii) any other
business combination wherein the business of such Borrowers is combined with
that of Innotrac; provided, that Innotrac or any other required Person has then
executed any and all
3
<PAGE>
agreements, documents and instruments which Lender may reasonably require
hereunder in order to preserve its secured position hereunder or under the other
Loan Documents with respect to the Borrower or Borrowers merging with and into
Innotrac.
"Control," "Controlled," or "Controlling" shall mean, with respect to any
------- ---------- -----------
Person, the power to direct the management and policies of such Person, directly
or indirectly, whether through the ownership of voting securities or otherwise;
provided, however, that, in any event, any Person who owns directly or
- -------- -------
indirectly twenty percent (20%) or more of the securities having ordinary voting
power for the election of directors or other governing body of a corporation
shall be deemed to "control" such corporation for purposes of this Agreement.
"Debt" means all liabilities, obligations and indebtedness of each Borrower
----
and its consolidated Subsidiaries to any Person, of any kind or nature, now or
hereafter owing, arising, due or payable, howsoever evidenced, created,
incurred, acquired or owing, whether primary, secondary, direct, contingent,
fixed or otherwise, and including, without in any way limiting the generality of
the foregoing: (i) each Borrower's or any such Subsidiary's liabilities and
obligations to trade creditors; (ii) all Debt for borrowed funds; (iii) all
obligations and liabilities of any Person secured by any Lien on each Borrower's
or any such Subsidiary's Property, even though such Borrower or such Subsidiary
shall not have assumed or become liable for the payment thereof; (iv) all
accrued pension fund and other employee benefit plan obligations and
liabilities; (v) all Guaranteed Obligations; and (vi) deferred taxes.
"Default Condition" shall mean the occurrence of any event which, after
-----------------
satisfaction of any requirement for the giving of notice or the lapse of time,
or both, would become an Event of Default.
"Default Rate" shall mean that interest rate per annum equal to two percent
------------
(2%) plus the stated interest rate effective under each Note from time to time.
"EBITDA" shall mean the net earnings of each Borrower and its consolidated
------
Subsidiaries for any fiscal period before interest, income taxes, depreciation
and amortization expense for such period, determined under GAAP.
"Eligible Accounts" shall mean that portion of the Accounts Receivable
-----------------
Collateral of each Borrower consisting of the net billed dollar amount of
accounts owing to such Borrower by its Account Debtors subject to no
counterclaim, defense, setoff or deduction, excluding, however, in any event,
------------------
but without limitation, unless otherwise waived in writing by Lender, any
account: which is owing by any Account Debtor having any past due accounts with
any Borrower, except for commercial accounts of Innotrac and IELC, and, in the
case of commercial accounts of Innotrac and IELC only, any account of an Account
Debtor which is either more than ninety (90) days past invoice date or as to
which twenty-five percent (25%) or more of the accounts of any Account Debtor
are more than ninety (90) days past invoice date; (ii) as to which Lender does
not have a first priority security interest; or (iii) which has been excluded by
Lender
4
<PAGE>
for purposes hereof, which it reserves the right to do, in its sole discretion,
exercised in a commercially reasonable manner.
"Eligible Installment Sales Orders" shall mean that portion of each
---------------------------------
Borrower's Accounts Receivable Collateral consisting of the net unbilled dollar
amount of installment sales made by such Borrower for its products or services
to its Account Debtors subject to no counterclaim, defense, setoff or deduction,
excluding, however, in any event, but without limitation, unless otherwise
- ------------------
waived in writing by Lender, any such purchase order: (i) which is owing by any
Account Debtor having any past due accounts with any Borrower, except for
commercial accounts of Innotrac and IELC, and, in the case of commercial
accounts of Innotrac and IELC only, any account of an Account Debtor which is
either more than ninety (90) days past invoice date or as to which twenty-five
percent (25%) or more of the accounts of any Account Debtor are more than ninety
(90) days past invoice date; (ii) as to which Lender does not have a first
priority security interest; or (iii) which has been excluded by Lender for
purposes hereof, which it reserves the right to do, in its sole discretion,
exercised in a commercially reasonable manner.
"Eligible Inventory" shall mean the Inventory Collateral of the respective
------------------
Borrower, provided that such Inventory Collateral (i) is located at one of the
locations set forth on Exhibit A; (ii) is subject to a valid and perfected first
priority security interest in favor of Lender; and (iii) is not obsolete, slow
moving, a custom item, defective, irregular, discontinued good or "seconds."
"Employee Benefit Plan" shall mean any employee welfare benefit plan or any
---------------------
employee pension benefit plan, as those terms are defined in Section 3(l) and
3(2) of ERISA, for the benefit of employees of any Borrower or any Subsidiary or
any other entity which is a member of a "controlled group" or under "common
control" with Parent, as such terms are defined in Section 4001(a)(14) of ERISA.
"Equipment Collateral" shall mean all equipment of each Borrower, or in
--------------------
which it has rights, whether now owned or hereafter acquired, wherever located,
including, without limitation, all machinery, fixtures, furniture, furnishings,
leasehold improvements, rolling stock, motor vehicles, plant equipment,
computers and other office equipment and office furniture, together with any and
all attachments and accessions, substitutes and replacements, and tools, spare
parts, and repair parts used or useful in connection therewith.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
-----
may be amended from time to time.
"Event of Default" shall mean any of the events or conditions described in
----------------
Article 14, provided that any requirement for the giving of notice or the lapse
of time, or both, has been satisfied.
5
<PAGE>
"Executive Office" shall mean the chief executive office of each Borrower
----------------
which is located at 1828 Meca Way, Norcross, Gwinnett County, Georgia 30093.
"Fiscal Year" shall mean the fiscal year of each Borrower concluding as of
-----------
December 31 in each calendar year.
"Fixed Charge Coverage Ratio" shall mean, for any fiscal period, on a
---------------------------
combined basis, the ratio which the sum of Net Income of Borrowers and their
respective consolidated Subsidiaries for such period plus total depreciation and
----
amortization expense, lease expense and interest expense of such Borrowers and
their consolidated Subsidiaries for such period bears to the sum of total lease
expense, interest expense, capitalized interest and the current maturities of
the long-term debt of all such Borrowers and their consolidated Subsidiaries for
such period, all as determined under GAAP.
"GAAP" shall mean generally accepted accounting principles, consistently
----
applied.
"General Partner" shall mean HomeTel Providers, Inc., a Georgia
---------------
corporation.
"Guaranteed Obligations" shall mean, with respect to any Person, all
----------------------
obligations of such Person which in any manner directly or indirectly guarantee
or assure, or in effect guarantee or assure, the payment or performance of any
indebtedness, dividend or other obligation of any other Person or assure or in
effect assure the holder of any such obligations against loss in respect
thereof, including, without limitation, any such obligations incurred through an
agreement, contingent or otherwise: (a) to purchase such obligations or any
property constituting security therefor; (b) to advance or supply funds for the
purchase or payment of such obligations or to maintain a working capital or
other balance sheet condition; or (c) to lease Property or to purchase any debt
or equity securities or other Property or services.
"Guarantor" shall mean, initially, Scott Dorfman, individually, a resident
---------
of the State of Georgia. The term "Guarantor" shall extend to and include,
however, any other Person which, now or hereafter, guarantees or becomes surety
for, any of the Obligations of any Borrower.
"Guaranty" shall mean the Amended and Restated Guaranty, dated as of the
--------
date hereof, from Scott Dorfman to Lender in the form of Exhibit "B" attached
-----------
hereto evidencing his guaranty of the Obligations, as the same has been or may
be amended, modified, supplemented or reaffirmed from time to time.
"HomeTel" shall have the meaning given to such term in the foregoing
-------
recitals to this Agreement.
6
<PAGE>
"HPP" shall have the meaning given to such term in the foregoing recitals
---
to this Agreement.
"Innotrac" shall have the meaning given to such term in the foregoing
--------
recitals to this Agreement.
"Intangibles Collateral" shall mean all general intangibles of each
----------------------
Borrower, whether now existing or hereafter acquired or arising, including,
without limitation, all copyrights, royalties, trademarks, trade names, tax
refunds, rights to tax refunds, service marks, patent and proprietary rights,
permits, licenses, sublicenses, leases, subleases, usufructs, trade secrets,
diagrams and all customer lists.
"Interest Expense" for any fiscal period of each Borrower, shall mean
----------------
interest expense of such Borrower during such period on that portion of the Debt
of such Borrower consisting of Debt for borrowed funds, including, without
limitation, the Obligations.
"Interest Period" shall mean, in the case of the determination of any
---------------
LIBOR-based rate, a one-, two-or three-month period as determined by the
applicable Borrower.
"Inventory Collateral" shall mean all inventory of each Borrower, or in
--------------------
which it has rights, whether now owned or hereafter acquired, wherever located
including goods in transit, including, without limitation, all goods of such
Borrower held for sale or lease or furnished or to be furnished under contracts
of service, all goods held for display or demonstration, goods on lease or
consignment, returned or repossessed goods, all raw materials, work-in-process,
finished goods and supplies used or consumed in such Borrower's business,
together with all documents, documents of title, dock warrants, dock receipts,
warehouse receipts, bills of lading or orders for the delivery of all, or any
portion, of the foregoing.
"ITC" shall mean ITC Service Company, a Georgia corporation.
---
"ITC Lien" shall mean the Lien granted to ITC by HPP in HPP's Collateral,
--------
or portions thereof, pursuant to the ITC Loan Security as security for the ITC
Loan.
"ITC Loan" shall mean the term loan in the original principal amount of
--------
Three Million Five Hundred Thousand Dollars ($3,500,000) made by ITC to HPP
pursuant to the ITC Loan Agreement.
"ITC Loan Agreement" shall mean the Loan Agreement, dated as of April 11,
------------------
1994, between ITC and Borrower, pursuant to which ITC made the ITC Loan to HCC,
and HCC granted the ITC Lien to ITC in all or portions of the Collateral as
security for the payment of the ITC Loan.
7
<PAGE>
"Lender" shall have the meaning given to such term in the initial recitals
------
to this Agreement.
"Leverage Ratio" shall mean, for any fiscal period, as to the Borrowers on
--------------
a combined basis, the ratio of the sum of total Debts minus Subordinated Debt to
the sum of combined Tangible Net Worth plus Subordinated Debt plus (through the
earlier of June 30, 1998 or the consummation of an initial public offering as
contemplated by Section 10.19 of this Agreement) any and all deferred tax assets
of Borrower, all as determined under GAAP.
"LIBOR" shall mean, for any Interest Period, the rate per annum at which
-----
deposits in United States dollars for such Interest Period, and for the amount
of the requested LIBOR Advance, are offered in the London interbank market at
approximately 11:00 a.m. (London time) two Business Days before the first day of
such Interest Period, as published or reprinted through the Reuter's Screen or
such other recognized quote service as is acceptable to the Lender; provided,
that, at the Lender's sole option, such rate may be adjusted by dividing such
rate by a percentage equal to one (1) minus the then average stated maximum rate
(stated as a decimal) of all reserve requirements applicable to any member of
the Federal Reserve System in respect of Eurocurrency liabilities as defined in
Regulation D of the Board of Governors of the Federal Reserve System (or any
successor categories for such liabilities under such Regulation D).
"LIBOR Advance" shall mean any borrowing hereunder which bears interest
-------------
based on LIBOR.
"Lien" shall mean any deed to secure debt, deed of trust, mortgage or
----
similar instrument, and any lien, security interest, preferential arrangement
which has the practical effect of constituting a security interest, security
title, pledge, charge, encumbrance or servitude of any kind, whether by
consensual agreement or by operation of statute or other law, and whether
voluntary or involuntary, including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof.
"Loan Documents" shall mean this Agreement, any Notes, any financing
--------------
statements covering the Collateral, and any and all other documents,
instruments, certificates and agreements executed and/or delivered by a Borrower
in connection herewith, or any one, more, or all of the foregoing, as the
context shall require.
"Margin" shall mean, as to each Borrower, an amount equal to the sum of (i)
------
eighty-five percent (85%) of the face dollar amount, as at the date of
determination, of Eligible Accounts of such Borrower, plus (ii) seventy percent
----
(70%) of the face dollar amount, as at the date of determination, of Eligible
Installment Sales Orders of such Borrower, plus (iii) the lesser of forty
----
percent (40%) of the net book value of Eligible Inventory of such Borrower or
$2,500,000.
8
<PAGE>
"Margin Requirement" shall have the meaning ascribed to such term in
------------------
Section 2.1(a).
"Margin Stock" shall have the meaning ascribed to such term in Section
------------
221.2(h) (or any successor provision) of Regulation U of the Board of Governors
of the Federal Reserve System.
"MPPAA" shall mean the Multiemployer Pension Plan Amendments Act of 1980,
-----
amending Title IV of ERISA.
"Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3)
------------------
of ERISA.
"Net Income" shall mean, for any fiscal period of any Person, the net
----------
income (or loss), after provisions for taxes (either actual, accrued or deemed,
in the case of a pass-through entity determined as if the highest marginal
individual income tax rate were applicable), of such Person on a consolidated
basis for such period (taken as a single accounting period) determined in
conformity with GAAP, minus (to the extent otherwise included therein and
-----
without duplication) (i) any gains or losses, together with any related
provisions for taxes, realized by such Person upon any sale of its assets other
than in the ordinary course of business, (ii) any other non-recurring gains or
losses, and (iii) any income or loss of any other Person acquired prior to the
date such other Person becomes a Subsidiary of the Person whose "Net Income" is
being measured or is merged into or consolidated with the Person whose "Net
Income" is being measured or all or substantially all of such other Person's
assets are acquired by the Person whose "Net Income" is being measured.
"Notes" shall mean, collectively, the Revolving Note, the Term Note and any
-----
other promissory notes or other instruments at an time or from time to time
evidencing any Obligations.
"Obligations" shall mean any and all Debts, liabilities and obligations of
-----------
each and every Borrower to Lender, including without limiting the generality of
the foregoing, any indebtedness, liability or obligation of any Borrower to
Lender arising hereunder or as a result hereof, whether evidenced by the Notes,
the other Loan Documents or otherwise, any and all extensions or renewals
thereof in whole or in part; any indebtedness,, liability or obligation of any
Borrower to Lender under any later or future advances or loans made by Lender to
such Borrower, and any and all extensions or renewals thereof in whole or in
part; any and all present and future indebtedness of any Borrower to other
creditors which is purchased by Lender from such other creditors; and any and
all future or additional indebtednesses, liabilities or obligations of any
Borrower to Lender whatsoever and in any event, whether existing as of the date
hereof or hereafter arising, whether arising under a loan, lease, credit card
arrangements, line of credit, letter of credit or other type of financing, and
whether direct, indirect, absolute or contingent, as maker, endorser, guarantor,
surety or otherwise, and whether evidenced by, arising out of, or
9
<PAGE>
relating to, a promissory note, bill of exchange, check, draft, bond, letter of
credit, guaranty agreement, bankers, acceptance, foreign exchange contract,
commitment fee, service charge or otherwise.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
----
"Permitted Encumbrances"shall mean (i) Liens for taxes not yet due and
----------------------
payable or being contested as permitted by Section 11.8; (ii) carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other, like Liens
arising in the ordinary course of business, payment for which is not yet due or
which are being contested in good faith and by appropriate proceedings; (iii)
pledges or deposits in connection with worker's compensation, unemployment
insurance and other social security legislation; (iv) deposits to secure the
performance of utilities, leases, statutory obligations and surety and appeal
bonds and other obligations of a like nature incurred in the ordinary course of
business; (v) bankers, Liens arising by statute or under customary terms
regarding depository relationships on deposits held by financial institutions;
(vi) restrictions imposed by licenses and leases; (vii) any Liens in favor of
Lender, whether in respect of the Collateral or otherwise; (viii) the ITC Lien;
(ix) rights of rental and lease customers; (xi) purchase money Liens on purchase
money Debt permitted hereunder; and (xii) those other Liens (if any) described
on Exhibit "C" attached hereto.
-----------
"Person" shall mean any individual, sole proprietorship, partnership, joint
------
venture, trust, unincorporated organization, association, corporation, limited
liability company, institution, entity, party or government (whether
territorial, national, federal, state, county, city, municipal or otherwise,
including, without limitation, any instrumentality, division, agency, body or
department thereof).
"Plan" shall mean any employee benefit plan or other plan for any employees
----
of Borrower and any employees of any Subsidiary or any other entity which is a
member of a controlled group or under common control with Borrower, as such
terms are defined in Section 4001(a)(14) of ERISA, and which is subject to the
provisions of Title IV of ERISA.
"Property" shall mean any interest in any property or asset of any kind,
--------
whether real, personal or mixed, or tangible or intangible.
"RenTel" shall have the meaning given to such term in the foregoing
------
recitals to this Agreement.
"RenTel #2" shall mean RenTel #2, L.L.C., a Georgia limited liability
---------
company.
"Reportable Event" shall mean any of the events described in Section
----------------
4043(b) of ERISA.
10
<PAGE>
"Restricted Investment" means any acquisition of Property by a Borrower in
---------------------
exchange for cash or other Property, whether in the form of an acquisition of
stock, debt security, or other indebtedness or obligation, or the purchase or
acquisition of any other Property, or by loan, advance, capital contribution, or
subscription, except acquisitions of the following: (a) fixed assets to be used
------
in the business of a Borrower so long as the costs thereof constitute Capital
Expenditures permitted hereunder; (b) goods held for sale or rental or to be
used in the provision of services by a Borrower in the ordinary course of
business; (c) current assets arising from the sale or rental of goods or the
rendition of services in the ordinary course of business of a Borrower; (d)
direct obligations of the United States of America, or any agency thereof, or
obligations guaranteed by the United States of America, provided, however, that
-----------------
such obligations mature within one (1) year from the date of acquisition
thereof; (e) certificates of deposit maturing within one (1) year from the date
of acquisition, or overnight bank deposits, in each case issued by, created by,
or with a bank or trust company organized under the laws of the United States or
any state thereof having capital and surplus aggregating at least One Hundred
Million Dollars ($100,000,000); and (f) commercial paper given the highest
rating by a national credit rating agency and maturing not more than two hundred
seventy (270) days from the date of creation thereof.
"Revolving Advance" shall mean an advance made to any Borrower by Lender
-----------------
under the Revolving Line of Credit, which shall be evidenced by the Revolving
Note.
"Revolving Line of Credit" shall refer to the committed revolving line of
------------------------
credit opened by the Lender in favor of Borrowers, pursuant to the provisions of
Section 2.1.
"Revolving Note" shall mean the Amended and Restated Revolving Promissory
--------------
Note, dated of even date herewith, made by Borrowers to the order of Lender, in
the principal amount of the Revolving Line of Credit, evidencing the Revolving
Line of Credit, together with any renewals or extensions thereof, in whole or in
part, and any amendments, supplements, replacements or substitutions thereof.
The Revolving Note shall be substantially in the form of Exhibit "D" attached
-----------
hereto.
"SellTel" shall have the meaning given to such term in the initial recitals
-------
to this Agreement.
"SellTel #2" shall mean SellTel #2, L.L.C., a Georgia limited liability
----------
company.
"Subsidiary" shall mean any corporation, partnership, business association
----------
or other entity (including any Subsidiary of any of the foregoing) of which a
Borrower owns at any time during the term of this Agreement, directly or
indirectly, fifty percent (50%) or more of the capital stock or equity interest
having ordinary power for the election of directors or others performing similar
functions. Any representation, warranty or covenant contained in this Agreement
which includes the term "Subsidiaries" shall mean and refer to any Subsidiary
which
11
<PAGE>
was such as of the date of determination for purposes of such representation,
warranty or covenant.
"Subordinated Debt" shall mean any Debt which has been subordinated, in
-----------------
right of payment and claim, to the rights and claims of Lender in respect of the
obligations in a form and substance satisfactory to Lender. For purposes
hereof, the ITC Loan shall be considered as Subordinated Debt upon the execution
and delivery of the Subordination Agreements described more particularly in
Section 17.1(g) below and subject to continuing compliance with the terms
thereof by ITC.
"Tangible Net Worth" shall mean the combined net worth of all Borrowers,
------------------
determined as of the end of any fiscal period of Borrowers under GAAP, minus,
any and all assets, on a combined basis, of Borrowers constituting (i) goodwill,
patents, copyrights, trademarks, trade names and other intangible assets, (ii)
write-ups of assets, (iii) unamortized debt discount and expense, (iv) long-term
deferred charges, (v) any Debt owing by any Affiliate to such Borrower
(excluding, for this purpose, any Debt owing by any Borrower to any other
Borrower).
"Termination Date" shall mean (i) as to the Revolving Line of Credit,
----------------
November 15, 1999, and (ii) as to the Term Loan, July 19, 1999; provided,
--------
however, that, at Lender's election, by the giving of written notice to
- -------
Borrowers to such effect prior to such termination date or, if such termination
date is extended pursuant hereto, any subsequent anniversary of such termination
date, Lender may extend the "Termination Date" as to either or both of the
Revolving Line of Credit or the Term Loan from year-to-year, in which case the
"Termination Date" shall be the termination date then in effect that is
applicable to the respective loan facility.
"Term Loan" shall mean the loan made by Lender to Borrowers pursuant to
---------
Section 2.2 of this Agreement.
"Term Note" shall mean the Term Note, dated as of July 19, 1996, made by
---------
Borrowers to the order of Lender, evidencing the Term Loan, (a copy of which is
attached hereto as Exhibit "E") together with any renewals or extensions
-----------
thereof, in whole or in part, and any amendments or supplements thereto.
"UCC" shall mean the Uniform Commercial Code--Secured Transactions of
---
Georgia (O.C.G.A. Title 11, Article 9), as amended.
1.2 Use of Defined Terms.
---------------------
All terms defined in this Agreement and the Exhibits shall have the same
defined meanings when used in any other Loan Documents, unless the context shall
require otherwise.
1.3 Accounting Terms.
----------------
12
<PAGE>
All accounting terms not specifically defined herein shall have the meanings
generally attributed to such terms under GAAP.
1.4 UCC Terms.
---------
The terms "accounts", "chattel paper", "instruments", "general
intangibles", "inventory", "equipment", "fixtures", "documents", "products" and
"proceeds", as and when used in the Loan Documents, shall have the same meanings
given to such terms under the UCC.
1.5 Terminology.
-----------
All personal pronouns used in this Agreement, whether used in the masculine,
feminine or neuter gender, shall include all other genders; the singular shall
include the plural, and the plural shall include the singular. Titles of
Articles and Sections in this Agreement are for convenience only, and neither
limit nor amplify the provisions of this Agreement, and all references in this
Agreement to Articles, Sections, Subsections, paragraphs, clauses, subclauses or
Exhibits shall refer to the corresponding Article, Section, Subsection,
paragraph, clause, subclause of, or Exhibit attached to, this Agreement, unless
specific reference is made to the articles, sections or other subdivisions
divisions of, or Exhibit to, another document or instrument. Each reference to
any document, agreement, instrument or other paper shall be a reference to each
such document, agreement, instrument or paper as it shall be amended, modified,
supplemented, extended, renewed or replaced from time to time.
1.6 Exhibits.
--------
All Exhibits attached hereto are by reference made a part hereof.
2. THE FINANCING.
-------------
Upon execution of this Agreement and compliance with its terms, including,
without limitation, the conditions precedent set forth in Section 17.1 hereof,
Lender agrees to make available to Borrowers the Revolving Line of Credit and
the Term Loan on the following terms and conditions:
2.1 Revolving Line of Credit.
------------------------
(a) Lender agrees to open a committed revolving line of credit (the "REVOLVING
---------
LINE OF CREDIT" or "REVOLVING CREDIT") in favor of Borrowers in the maximum
- -------------- ----------------
aggregate principal amount of Twenty-Five Million Dollars ($25,000,000) so that
during the period commencing on the date hereof and ending on the Termination
Date or the earlier termination of the Revolving Line of Credit pursuant to
Section 2.5 or Article 15 below, each Borrower may borrow and repay and re-
borrow Revolving Advances up to a maximum aggregate principal amount equal, in
the
13
<PAGE>
aggregate, as to all Borrowers, to Twenty-Five Million Dollars ($25,000,000),
and, as to HPP only, the sum of Twelve Million Dollars ($12,000,000); subject,
-------
however, to the further requirement that at no time shall the aggregate
- -------
principal amount of Revolving Advances owing by any one Borrower under the
Revolving Line of Credit exceed the Margin applicable to such Borrower (such
requirement being referred to herein as the "MARGIN
------
REQUIREMENT"). If at any time hereafter the Margin Requirement is not satisfied
- -----------
by any one Borrower, then such Borrower agrees to repay immediately the then
principal balance of the Revolving Advances owing by it by that amount necessary
to satisfy the Margin Requirement applicable to it. The Debt arising from the
disbursement of any and all Revolving Advances shall be evidenced by the
Revolving Note, which shall be executed and delivered by each Borrower
simultaneously herewith. Each request for a Revolving Advance shall be made by
Innotrac, as agent for the Borrowers, to Lender in such manner as Lender may
request from time to time hereafter (including, without limitation, by telephone
or facsimile transmission), or, as Lender and Innotrac, acting in its agency
capacity, may mutually agree hereafter, by pre-approved automatic disbursement.
Borrowers shall report to Lender in a writing in form satisfactory to Lender, by
the twentieth (20th) day of each calendar month, for the calendar month then
ended, as to the allocation of Revolving Advances among the Borrowers made
during such calendar month then ended; provided, however, that Lender shall have
-------- -------
the right at any time hereafter, by notice to Borrowers, to require more
frequent reporting or, if Lender so elects, to require that Innotrac identify
the Borrower to whom each Revolving Advance is to be made at the request for
such Revolving Advance (in which event Borrowers' right to receive pre-approved
automatic disbursements, if in effect, shall be terminated). With respect to
the total Revolving Advances from time to time outstanding, each Borrower shall
be liable only for the payment of all outstanding Revolving Advances disbursed
to, and owing by, it from time to time; but no Borrower shall be liable for the
payment of any Revolving Advances disbursed to, and owing by, any other
Borrower, notwithstanding that each Borrower is a co-maker of the Revolving Note
and a co-borrower pursuant to this Agreement, unless and except to the extent
that, subsequently hereto, either (i) such Borrower executes a guaranty in
respect thereof or (ii) such Borrower becomes a successor in interest to another
Borrower, whether pursuant to a Consolidation Transaction or otherwise. Without
limitation of the preceding provisions, the principal amount of the Revolving
Note shall be due and payable from collections and other proceeds of Collateral
in ac cordance with the provisions of Article 3 below and shall be due and
payable in full on the Termination Date or on the date of any earlier
termination of the Revolving Line of Credit pursuant to Section 2.5 or Article
15 below.
2.2 Term Loan.
---------
Borrowers acknowledge and agree that: (i) the Lender, in reliance upon the
representations and warranties made in, this Agreement, has extended to the
Borrowers a term loan in an amount equal to Two Million Dollars ($2,000,000)
(the "TERM LOAN"); (ii) the Term Loan is evidenced by the Term Note; (iii) the
---------
Term Loan shall mature on the applicable Termination Date; (iv) the Term Loan
shall bear interest at the rates specified in Section 2.3(a); (v) the Term Loan
is payable in accordance with the terms of the Term Note and this Agreement;
14
<PAGE>
and (vi) the proceeds of the Term Loan have been used solely to finance
equipment and improvements to Borrowers' leased facilities located at
Meadowbrook Parkway and Meca Way, Norcross, Georgia and Sacramento, California
and certain related expenditures.
2.3 Interest and Fees.
-----------------
Subject to Section 15.1 of this Agreement, interest and fees shall be charged
on Revolving Advances and the Term Loan (in each case computed based on a 360-
day year and the actual number of days elapsed) in accordance with the following
provisions:
(a) Interest. (i) All Revolving Advances shall bear interest at a
--------
fluctuating rate per annum equal to the Base Rate, as in effect from time to
time, calculated on the basis of a 360-day year and actual days elapsed;
provided, however, that, so long as no Event of Default then exists, Borrower
- -------- -------
may, by a written notice delivered to Lender not later than 10:00 a.m. (Atlanta,
Georgia time) on the second (2nd) Business Day prior to the first (1st) day of
each calendar month (commencing in December 1997) direct that interest accrue on
the principal of any particular Revolving Advance outstanding from time to time
during the Interest Period designated by the Borrower in such notice at a rate
per annum equal to LIBOR plus the number of basis points in excess thereof set
----
forth below corresponding to the applicable Leverage Ratio requirement (the
"LIBOR MARGIN") and for such Interest Period as is selected by Borrower with
- -------------
respect to each such Revolving Advances:
If Leverage Ratio Is: Then the LIBOR Margin Is:
-------------------- ------------------------
Greater than 2.25 to 1.0 but not greater than 2.5 to 1.0 225 basis points
Greater than 2.0 to 1.0 but not greater than 2.25 to 1.0 200 basis points
Greater than 1.5 to 1.0 but not greater than 2.0 to 1.0 175 basis points
Up to 1.5 to 1.0 150 basis points
Each such designation by Borrower of the interest rate based on LIBOR and of an
Interest Period shall be irrevocable and shall remain in effect throughout such
Interest Period. In the event Borrower selects an Interest Period in excess of
one (1) month in length, such Interest Period and the interest rate based on
LIBOR related thereto shall remain in effect hereunder for each full calendar
month thereafter which is covered by such Interest Period. Upon determining the
interest rate based on LIBOR for an Interest Period requested by Borrower,
Lender shall promptly notify Borrower by telephone (confirmed in writing) of
such determination, and such determination shall, absent manifest error, be
final, conclusive and binding for all purposes. Borrower's selection of the
interest rate based on LIBOR for a particular Interest Period shall not affect
Borrower's ability to borrow hereunder during such Interest Period, subject to
the terms of this Agreement. Upon the expiration of an applicable Interest
Period, the applicable Revolving Advance bearing a LIBOR-based rate shall
thereafter bear interest at the Base Rate unless the Borrower provides other
instructions to the Lender in accordance herewith, and (ii) the Term
15
<PAGE>
Loan from time to time outstanding shall be payable at a fixed rate per annum
equal to eight and 95/100ths percent (8.95%).
(b) Payment of Interest and Fees. All interest payable on the
----------------------------
Revolving Advances, the Term Loan and the commitment fee shall be payable
monthly in arrears on the first day of each month hereafter (for the preceding
calendar month or portion thereof, as the case may be).
2.4 Method of Making Payments.
-------------------------
All payments owing under or pursuant to this Agreement, whether of principal,
interest, fees or otherwise, shall be made without defense, set-off or
counterclaim to Lender not later than 2:00 p.m. Atlanta, Georgia time on the
date when due and shall be made in lawful money of the United States of America
in immediately available funds at the head office of Lender in Atlanta, Georgia.
If and to the extent that any such payment is not made by a Borrower when due or
if such Borrower and Lender then have mutually agreed to a pre-approved
automatic advance to make such payment, each Borrower hereby authorizes and
directs Lender to charge any demand deposit account maintained by such Borrower
with Lender for the amount of such payment or, in lieu thereof or in addition
thereto, as necessary, to debit any such payment as a Revolving Advance (whether
or not an over-advance is created thereby). Whenever any payment to be made
hereunder or pursuant hereto shall be stated to be due on a day which is not a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the applicable rate during such extension.
2.5 Prepayments; Early Termination.
------------------------------
(a) Revolving Advances may be repaid and, subject to borrowing
availability, re-borrowed at any time and from time to time by any Borrower up
to, but not including, the Termination Date; provided, however, that if any
-------- -------
Revolving Advance is prepaid at a time when it bears interest at a LIBOR-based
rate before the expiration of the applicable Interest Period, Borrower shall pay
to Lender any and all reasonable costs which Lender must pay as a result of such
prepayment which the Lender would not otherwise have paid if the Revolving
Advance, as the case may be, were paid at the end of the applicable Interest
Period.
(b) In addition to the foregoing, any Borrower, individually, may at
any time prior to the Termination Date, and whether or not a Default Condition
or Event of Default then exists, terminate this Agreement as to itself without
affecting the rights of any other Borrower hereunder, provided however, that:
-------- -------
(1) any such termination by any one Borrower must be preceded by at least ten
(10) days written notice to the Lender; (2) such Borrower shall be required to
pay in full both (A) all outstanding Revolving Advances owing by it, together
with all accrued and un paid interest thereon and all accrued and unpaid fees
and expense which are then due and payable by such Borrower hereunder and un der
any other Loan Document (including,
16
<PAGE>
without limitation, for this purpose, such Borrower's pro rata share of any fees
and expenses then owing by Borrowers jointly to Lender hereunder, based on its
average borrowings under the Revolving Line of Credit over the preceding six
months, period, or any shorter period if such termination occurs less than six
months after the Closing Date) and (B) all Debt of such Borrower to any other
Borrower arising from the receipt of intercompany loans or advances from any
other Borrower, together with all accrued and unpaid interest thereon and (3)
notwithstanding such termination, no Collateral of such Borrower shall be
released and all Collateral of such Borrower shall continue to secure all
Obligations of such Borrower then and thereafter outstanding unless and until
all such Obligations of such Borrower are fully paid and satisfied.
2.6 Use of Proceeds.
---------------
All proceeds of Revolving Advances shall be used for working capital purposes
in the ordinary course of each Borrower's business.
2.7 Increased Costs or Reduced Return.
---------------------------------
If, due to either (a) the introduction of or any change in or in the
interpretation of any U.S. law or regulation, or (b) the compliance with any
guideline or request from any governmental authority, there shall be any
increase in the cost to Lender of maintaining its commitments hereunder or
agreeing to make or making, funding or maintaining Revolving Advances or Term
Loan to any one, or more, or all Borrowers, or any reduction in the rate of
return on Lender's capital as a consequence of its obligations hereunder to a
level below that which Lender would have achieved but for such events described
in clauses (a) and (b) above, each affected Borrower shall, from time to time,
upon demand by Lender, pay to Lender additional amounts sufficient to compensate
Lender for such increased costs or reduced return within ten (10) Business Days
of receipt of the receipt of the certificate referred to below. A certificate
identifying with reasonable specificity the basis for and the amount of such
increased costs or reduced return shall be submitted to Borrowers by Lender and
shall be conclusive and binding for all purposes, absent manifest error. In
determining such amount, Lender shall use reasonable averaging and attribution
methods.
2.8 Indemnification of Lender.
-------------------------
At all times prior to and after the consummation of the transactions
contemplated by this Agreement, Borrowers, jointly and severally, agree to hold
Lender, its directors, officers, employees, agents, Affiliates, successors and
assigns harmless from and to indemnify Lender and its directors, officers,
employees, agents, Affiliates, successors and assigns against, any and all
losses, damages, costs and expenses (including, without limitation, attorney's
fees, costs and expenses) incurred by any of the foregoing, whether direct,
indirect or consequential, as a result of or arising from or relating to any
"Proceedings" (as defined below) by any Person, whether threatened or initiated,
asserting a claim for any legal or equitable remedy against any Person
17
<PAGE>
under any statute, case or regulation, including, without limitation, any
federal or state securities laws or under any common law or equitable case or
otherwise, arising from or in connection with this Agreement, and any other of
the transactions contemplated by this Agreement except to the extent such
losses, damages, costs or expenses are due to the wilful misconduct or gross
negligence of Lender. As used herein, "Proceedings" shall mean actions, suits or
-----------
proceedings before any court, governmental or regulatory authority. Each
Borrower, jointly and severally, further agrees to indemnify any Person to whom
Lender transfers or sells all or any portion of its interest in the Obligations
or participations therein on terms substantially similar to the terms set forth
above. Lender shall not be responsible or liable to any Person for consequential
damages which may be alleged as a result of this Agreement or any of the
transactions contemplated hereby. The obligations of Borrowers under this
Section 2.8 shall survive the termination of this Agreement and payment of the
Obligations but shall terminate upon expiration of the applicable statute or
period of limitations.
3. COLLECTIONS.
-----------
3.1 Collateral Reserve Account; Lockbox Accounts.
--------------------------------------------
On the Closing Date, each Borrower shall establish, and thereafter shall
maintain, with Lender, a separate Collateral Reserve Account, or series thereof,
as Lender may permit or require, into which such Borrower shall be obliged to
transfer and deliver all cash, checks, drafts, items and other instruments for
the payment of money which such Borrower has received or may at any time
hereafter receive in full or partial payment for its Inventory Collateral or
otherwise as proceeds of its Accounts Receivable Collateral and any other
Collateral; and pending such transfer and delivery, such Borrower shall be
deemed to hold any such funds in trust for the benefit of Lender. All collected
balances in each Borrower's Collateral Reserve Account shall be applied by
Lender on a daily basis in payment of such Borrower's Revolving Advances. No
Borrower shall be entitled to draw on its Collateral Reserve Account without the
prior written consent of Lender; provided, however, that, at any time during
-------- -------
which collected balances exist in the Collateral Reserve Account, if there are
no Revolving Advances then owing by such Borrower and no other Obligations are
then due and payable by such Borrower, and provided that no Default Condition or
Event of Default is in existence, a Borrower may withdraw such collected
balances, or any portion thereof, therefrom for use in its business operations.
Lender may, additionally, at any time after the occurrence and during the
continuance of an Event of Default, in its sole discretion, direct Account
Debtors to make payments on the Accounts Receivable Collateral, or portions
thereof, of one, or more, or all Borrowers directly to Lender, and the Account
Debtors are hereby authorized and directed to do so by Borrowers upon Lender's
direction, and the funds so received shall also be deposited in each Borrower's
Collateral Reserve Account, and applied as aforesaid.
18
<PAGE>
4. SECURITY INTEREST -- COLLATERAL.
-------------------------------
As security for the payment of the Revolving Advances and Term Loan owing by
it and all other obligations whatsoever of each Borrower to Lender and the
performance by each Borrower of all covenants and requirements hereunder and
under the other Loan Documents, each Borrower hereby grants to Lender a
continuing, general lien upon and security interest and title in and to the
following described Property, wherever located, whether now existing or
hereafter acquired or arising (herein, the "COLLATERAL"), namely: (a) the
----------
Accounts Receivable Collateral; (b) the Inventory Collateral; (c) the Equipment
Collateral; (d) the Intangibles Collateral; (e) the Balances Collateral; and (f)
all products and/or proceeds of any and all of the foregoing, including, without
limitation, insurance or condemnation proceeds, all Property received wholly or
partly in trade or exchange for any of the foregoing, and all rents, revenues,
issues, profits and proceeds arising from the sale, lease, license, encumbrance,
collection or any other temporary or permanent disposition of any of the
foregoing or any interest therein.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS
------------------------------------------------------- --------
RECEIVABLE COLLATERAL.
---------------------
With respect to the Accounts Receivable Collateral, each Borrower hereby
represents, warrants and covenants to Lender as set forth in Section 5.1 through
5.4, inclusive.
5.1 Bona Fide Accounts.
------------------
Each item of the Accounts Receivable Collateral arises or will arise under a
contract between such Borrower and the Account Debtor, or from the bona fide
sale, rental or delivery of goods to or performance of services for, the Account
Debtor.
5.2 Good Title; No Existing Encumbrances.
------------------------------------
Each Borrower has good title to its Accounts Receivable Collateral free and
clear of all Liens thereon other than any Permitted Encumbrances, and no
financing statement covering the Accounts Receivable Collateral is on file in
any public office other than any evidencing Permitted Encumbrances.
5.3 Right to Assign; No Further Encumbrances.
----------------------------------------
Each Borrower has full right, power and authority to make this assignment of
the Accounts Receivable Collateral and hereafter will not pledge, hypothecate,
grant a security interest in, sell, assign, transfer, or otherwise dispose of
the Accounts Receivable Collateral, or any interest therein.
19
<PAGE>
5.4 Power of Attorney.
-----------------
Each Borrower irrevocably designates and appoints Lender its true and lawful
attorney either in the name of Lender or in the name of such Borrower to ask
for, demand, sue for, collect, compromise, compound, receive, receipt for and
give acquittances for any and all sums owing or which may become due upon any
items of the Accounts Receivable Collateral and, in connection therewith, to
take any and all actions as Lender may deem necessary or desirable in order to
realize upon the Accounts Receivable Collateral, including, without limitation,
power to endorse in the name of such Borrower, any checks, drafts, notes or
other instruments received in payment of or on account of the Accounts
Receivable Collateral, but Lender shall not be under any duty to exercise any
such authority or power or in any way be responsible for the collection of the
Accounts Receivable Collateral. Lender hereby agrees that it will not exercise
the foregoing power of attorney except after the occurrence of, and during the
continuation of, an Event of Default.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INVENTORY
-----------------------------------------------------------------
COLLATERAL.
-----------
With respect to the Inventory Collateral, each Borrower hereby represents,
warrants and covenants to Lender as set forth in Sections 6.1 through 6.5,
inclusive.
6.1 Sale of Inventory Collateral.
----------------------------
Each Borrower will not sell, lease, rent, exchange, or otherwise dispose of
any of the Inventory Collateral without the prior written consent of Lender,
except in the ordinary course of business for cash or on open account or on
terms of payment ordinarily extended to its customers. Upon the sale, lease,
exchange, rental or other disposition of any Inventory Collateral, the security
interest and lien created and provided for herein, without break in continuity
and without further formality or act, shall continue in and attach to any
proceeds thereof, including, without limitation, accounts, contract rights,
shipping documents, documents of title, bills of lading, warehouse receipts,
dock warrants, dock receipts and cash or non-cash proceeds, and in the event of
any unauthorized sale, shall continue in the Inventory Collateral itself.
6.2 Insurance.
---------
Each Borrower agrees that it will obtain and maintain insurance on the
Inventory Collateral, in such amounts and against such risks as Lender may
reasonably request, with insurers having a Best's rating of at least "A-"
(unless otherwise approved by Lender), with loss payable to Lender and
reflecting Lender as an additional insured as its interest may appear. Such
insurance shall not be cancelable by Borrowers, unless with the prior written
consent of Lender, or by Borrowers, insurer, unless with at least thirty (30)
days advance written notice to Lender.
20
<PAGE>
6.3 Good Title; No Existing Encumbrances.
------------------------------------
Except with respect to any Permitted Encumbrances, each Borrower owns the
Inventory Collateral free and clear of any Lien, and no financing statements or
other evidences of the grant of a security interest respecting the Inventory
Collateral exist on the public records as of the date hereof other than any
evidencing any Permitted Encumbrances.
6.4 Right to Grant Security Interest; No Further Encumbrances.
---------------------------------------------------------
Each Borrower has the right to grant a security interest in the Inventory
Collateral. Each Borrower will pay all taxes and other charges against the
Inventory Collateral, and such Borrower will not use the Inventory Collateral
illegally or allow the Inventory Collateral to be encumbered except for the
security interest in favor of Lender granted herein and except for any Permitted
Encumbrances.
6.5 Location of Inventory Collateral.
--------------------------------
Each Borrower hereby represents and warrants to Lender that, as of the date
hereof, the Inventory Collateral (except for certain portions thereof in transit
or located upon the premises of a rental or lease customer) of such Borrower is
situated only at one or more of the Collateral Locations and such Borrower
covenants with Lender not to locate the Inventory Collateral at any location
other than a Collateral Location or the premises of a rental or lease customer
without at least thirty (30) days prior written notice to Lender. In addition,
to the extent any Borrower should warehouse any of the Inventory Collateral at
any time hereafter, such Borrower acknowledges and agrees that such warehousing
may be conducted only by Innotrac or warehousemen who have been pre-approved by
Lender and who, in any event, shall issue non-negotiable warehouse receipts in
Lender's name to evidence any such warehousing of goods constituting Inventory
Collateral. In any event, no Borrower will consign any Inventory Collateral to
any Person other than Innotrac except upon first obtaining Lender's prior
written consent thereto.
7. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO EQUIPMENT
------------------------------------------------------- ---------
COLLATERAL.
----------
With respect to the Equipment Collateral, each Borrower hereby represents,
warrants and covenants to Lender as set forth in Section 7.1 through 7.5,
inclusive.
7.1 Sale of Equipment Collateral.
----------------------------
No Borrower will sell, lease, rent, exchange, or otherwise dispose of any of
the Equipment Collateral other than in the ordinary course of such Borrower's
business without the prior written consent of Lender.
21
<PAGE>
7.2 Insurance.
---------
Each Borrower agrees that it will obtain and maintain insurance on its
Equipment Collateral with such companies and in such amounts and against such
risks as Lender may reasonably request, with loss payable to Lender and
reflecting Lender as an additional insured as its interests may appear. Such
insurance shall not be cancelable by Borrower, unless with the prior written
consent of Lender, or by Borrower's insurer, unless with at least thirty (30)
days advance written notice to Lender.
7.3 Good Title; No Existing Encumbrances.
------------------------------------
Each Borrower owns its Equipment Collateral free and clear of any prior Lien
thereon other than with respect to any Permitted Encumbrances and no financing
statements or other evidences of the grant of a security interest respecting the
Equipment Collateral exist on the public records as of the date hereof other
than any evidencing any Permitted Encumbrances.
7.4 Right to Grant Security Interest; No Further Encumbrances.
---------------------------------------------------------
Each Borrower has the right to grant a security interest in its Equipment
Collateral. Each Borrower will pay all taxes and other charges against its
Equipment Collateral. No Borrower will use any Equipment Collateral illegally
or allow any Equipment Collateral to be encumbered except for the security
interest in favor of Lender granted herein and except for any Permitted
Encumbrances.
7.5 Location.
--------
As of the date hereof, the Equipment Collateral is located only at one or more
of the Collateral Locations or the premises of a rental or lease customer and,
hereafter, each Borrower covenants with Lender not to locate Equipment
Collateral at any location other than a Collateral Location without at least
thirty (30) days advance written notice to Lender.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO BALANCES
----------------------------------------------------------------
COLLATERAL.
----------
With respect to the Balances Collateral, each Borrower hereby represents,
warrants and covenants to Lender as set forth in Section 8.1 through 8.2,
inclusive.
8.1 Ownership.
---------
Each Borrower owns its Balances Collateral free and clear of any Liens, except
in favor of Lender and except for Permitted Encumbrances.
22
<PAGE>
8.2 Liens.
-----
Hereafter, no Borrower will incur, create or suffer to exist any Lien upon its
Balances Collateral or sell, convey, hypothecate, pledge or assign its right,
title or interest therein, without the prior written consent of Lender thereto
other than for the Lien created hereunder and the Permitted Encumbrances.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INTANGIBLES
-------------------------------------------------------------------
COLLATERAL.
----------
With respect to the Intangibles Collateral, each Borrower hereby represents,
warrants and covenants to Lender as set forth in Sections 9.1 through 9.3,
inclusive.
9.1 Ownership.
---------
Each Borrower owns its Intangibles Collateral free and clear of any Liens
thereon other than with respect to any Permitted Encumbrances and no financing
statements or other evidences of the grant of a security interest respecting the
Intangibles Collateral exist on the public records as of the date hereof other
than any evidencing any Permitted Encumbrances.
9.2 Liens.
-----
Hereafter, no Borrower will incur, create or suffer to exist any Lien upon the
Intangibles Collateral, except for the security interest granted herein and
except for any Permitted Encumbrances, or sell, convey, hypothecate, pledge or
assign its right, title or interest therein.
9.3 Preservation.
------------
Hereafter, each Borrower will take all necessary and appropriate measures to
obtain, maintain, protect and preserve the Intangibles Collateral including,
without limitation, registration thereof with the appropriate state or federal
governmental agency or department.
10. GENERAL REPRESENTATIONS AND WARRANTIES.
--------------------------------------
In order to induce Lender to enter into this Agreement, each Borrower hereby
represents and warrants to Lender (which representations and warranties,
together with the representations and warranties of each Borrower contained in
Articles 5, 6, 7, 8 and 9 shall be deemed to be renewed as of the date of the
making of each Revolving Advance and after giving effect to all transactions and
actions permitted by this Agreement, including without limitation, the
Consolidation Transaction) as set forth in Sections 10.1 through 10.19,
inclusive.
10.1 Existence and Qualification.
---------------------------
23
<PAGE>
Each Borrower (except HPP) is a corporation duly organized and validly
existing under, and has filed its certified statement of annual registration and
paid all fees due for the current year under, the laws of the State of Georgia.
HPP is a limited partnership duly organized and validly existing under, and has
filed all required notices, registrations and certifications and has paid all
fees due for the current year under, the laws of the State of Georgia. Each
Borrower has its principal place of business, chief executive office and office
where it keeps all of its books and records at the Executive Office and is duly
qualified as a foreign corporation in good standing in any other state wherein
the conduct of its business or the ownership of its Property requires such
qualification and the failure to so qualify would result in a material
forfeiture. Except as may be set forth on Exhibit "F" attached hereto, no
-----------
Borrower does business under any name or trade style other than the name first
inscribed hereinabove in the recitals hereto.
10.2 Authority; Validity and Binding Effect.
--------------------------------------
Each Borrower has the power to make, deliver and perform under the Loan
Documents, and to borrow hereunder, and has taken all necessary and appropriate
corporate or partnership action to au thorize the execution, delivery and
performance of the Loan Documents. This Agreement constitutes, and the
remainder of the Loan Documents, when executed and delivered for value received,
will constitute, the valid obligations of each Borrower, legally binding upon it
and enforceable against it in accordance with their respective terms, except as
may be limited by bankruptcy, insolvency or other, similar laws affecting the
enforcement of creditor's rights generally. The undersigned officers or
representatives of each Borrower are duly authorized and empowered to execute,
attest and deliver this Agreement and the remainder of the Loan Documents for
and on behalf of each Borrower, and to bind each Borrower accordingly thereby.
10.3 No Material Litigation.
-----------------------
There are no proceedings pending or, so far as each Borrower or its officers
know, threatened, before any court or administrative agency which in such
Borrower's present opinion could reasonably be expected to materially and
adversely affect the financial condition or operations of such Borrower.
10.4 Taxes.
-----
Each Borrower has filed or caused to be filed all tax returns required to be
filed by it and have paid all taxes shown to be due and payable by it on said
returns or on any assessments made against them.
24
<PAGE>
10.5 Capital Stock.
-------------
All capital stock, limited partnership interests, debentures, bonds, notes or
other securities of each Borrower presently issued and outstanding are validly
and properly issued in accordance with all applicable laws, including, but not
limited to, the "blue sky" laws of all applicable states and the federal
securities laws.
10.6 Organization.
------------
The articles of incorporation of and bylaws of each Borrower (except HPP) are
in full force and effect under the laws of the State of Georgia and all
amendments (if any) thereto have been duly and properly made under and in
accordance with all applicable laws. The limited partnership certificate and
limited partnership agreement of HPP is in full force and effect under the laws
of the State of Georgia and all amendments thereto have been duly and properly
made under and in accordance with all applicable laws.
10.7 Insolvency.
----------
After giving effect to the funding of the initial Revolving Advances to be
made on the Closing Date, and the other transactions contemplated by this
Agreement and the uses by Borrowers of the proceeds of the such loans and
advances as provided hereunder, (a) the fair value and present fair saleable
value of each Borrower's assets are in excess of the total amount of such
Borrower's liabilities, including known contingent liabilities; (b) each
Borrower will not have incurred debts, nor will it intend to incur debts, beyond
its ability to pay such debts as they mature; and (c) each Borrower does not
have unreasonably small capital to carry on such Borrower's business as
theretofore operated and all businesses in which such Borrower is about to
engage. As used in this Section 10.7, "debt" means any liability on a claim,
and "claim" means (i) the right to payment, whether or not such right is reduced
to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured,
disputed, undisputed, legal, equitable, secured or unsecured, or (ii) the right
to an equitable remedy for breach of performance if such breach gives rise to a
right to payment, whether or not such right to an equitable remedy is reduced to
judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured
or unsecured.
10.8 Title.
-----
Each Borrower owns all of its Properties subject to no Lien of any kind except
as otherwise disclosed in writing to Lender and, as to the Collateral, except
------
for the Permitted Encumbrances.
10.9 Margin Stock.
------------
25
<PAGE>
No Borrower is engaged principally, or as one of its important activities, in
the business of purchasing or carrying any Margin Stock and no part of the
proceeds of any borrowing made pursuant hereto 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, or be used for any purpose which violates, or which
is inconsistent with, the provisions of Regulation X of the Board of Governors
of the Federal Reserve System. In connection herewith, if requested by Lender,
each Borrower will furnish to each Lender a statement in conformity with the
requirements of Federal Reserve Form F.R. U-1 referred to in Regulation U of
said Board to the foregoing effect.
10.10 No Violations.
-------------
The execution, delivery and performance by each Borrower of this Agreement and
the Loan Documents have been duly authorized by all necessary corporate or
partnership action and do not and will not require any consent or approval of
the shareholders or any partner of any Borrower which will not have been
obtained prior to the Closing Date, violate any provision of any material law,
rule, regulation (including, without limitation,, Regulation X of the Board of
Governors of the Federal Reserve System), order, writ, judgment, injunction,
decree, determination or award presently in effect having applicability to such
Borrower or of the articles of incorporation or bylaws or partnership agreement
of such Borrower, or result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease or
instrument to which such Borrower is a party or by which it or its properties
may be bound or affected; and no Borrower is in default under any such material
law, rule, regulation, order, writ, judgment, injunction, decree, determination
or award or any such indenture, agreement, lease or instrument.
10.11 ERISA.
-----
Each Borrower is in substantial compliance with the requirements of ERISA with
respect to each Employee Benefit Plan. No fact, including, but not limited to,
any Reportable Event exists in connection with any Plan which, more likely than
not, would constitute grounds for the termination of any such Plan by the PBGC
or for the appointment by the appropriate United States district court of a
trustee to administer any such Plan. No Borrower maintains or contributes to
any Plan which has an "accumulated funding deficiency" (as defined in Section
412 of the Internal Revenue Code). No Borrower maintains or contributes to any
Plan which has incurred any material liability to the PBGC (other than for
premium payments due in the ordinary course of business, which premiums will be
paid when due and payable). No Borrower maintains or contributes to any Plan
which has insufficient assets to qualify for a standard termination pursuant to
Section 4041 of ERISA. No Borrower is required pursuant to the terms of any
applicable collective bargaining agreement to pay or accrue any contributions
with respect to any Plan which is a Multiemployer Plan and there has been no
complete or partial withdrawal by any Borrower from any such Multiemployer Plan
within the contemplation of MPPAA. Except as concurrently herewith disclosed to
Lender in writing, (A) no Borrower maintains or contributes to any Employee
Benefit Plan which provides medical benefits, life insurance ben-
26
<PAGE>
efits or other welfare benefits as defined in Section 3(l) of ERISA (excluding
severance pay and benefits required under Section 601 of ERISA) for former
employees of such Borrower, and (B) no Borrower maintains or contributes to any
non-qualified, unfunded deferred compensation plan. Neither any Borrower nor any
fiduciary with respect to any Employee Benefit Plan has engaged in a "Prohibited
transaction" within the meaning of Section 4975 of the Internal Revenue Code or
Section 406 of ERISA with respect to any Employee Benefit Plan.
10.12 Financial Statements.
--------------------
The unaudited financial statements of each Borrower for its most recently
completed fiscal year, together with the unaudited financial statements of each
Borrower for that portion ended September 30, 1994 of its current fiscal year,
copies of which have heretofore been furnished to Lender, are complete and
accurately and fairly represent the financial condition of each Borrower, the
results of its operations and the transactions in its equity accounts as of the
date and for the periods referred to therein, and have been prepared in
accordance with GAAP throughout the period involved. There is no material Debt
of any Borrower as of the date of such financial statements which is not
reflected therein or in the notes thereto. There has been no material adverse
change in the financial conditions or operations of any Borrower since the
respective dates of the balance sheets contained in such financial statements.
10.13 Delivery of Certain Collateral.
------------------------------
[INTENTIONALLY DELETED]
10.14 Purchase of Collateral.
----------------------
No Borrower has purchased any of the Collateral in a bulk transfer or in a
transaction which was outside the ordinary course of the business of Borrower's
seller.
10.15 Pollution and Environmental Control.
-----------------------------------
Each Borrower has obtained all permits, licenses and other authorizations
which are required under, and is in material compliance with all Environmental
Laws the noncompliance with which would or might have a material adverse effect
on its business, financial condition or Property.
10.16 Possession of Franchises, Licenses, Etc.
---------------------------------------
Each Borrower possesses all franchises, certificates, licenses, permits and
other authorizations from governmental political subdivisions or regulatory
authorities, and all patents, trademarks, service marks, trade names,
copyrights, licenses and other rights, free from burdensome restrictions, that
are necessary for the ownership, maintenance and operation of any of their
respective material Property and assets, and no Borrower is in violation of any
thereof
27
<PAGE>
which would or might have a material ad verse effect on its business, financial
condition or Property.
10.17 Disclosure.
----------
To each Borrower's knowledge, neither this Agreement nor any other document,
certificate or statement furnished to Lender by or on behalf of any Borrower in
connection herewith contain any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
and therein not misleading. To each Borrower's knowledge, there is no fact
peculiar to such Borrower which materially adversely affects or in the future
may (so far as such Borrower can now reasonably foresee) materially adversely
affect the business, Property or assets, or financial condition of such Borrower
which has not been set forth in this Agreement or in the other documents,
certificates and statements furnished to Lender by or on behalf of such Borrower
prior to the date hereof in connection with the transactions contemplated
hereby, when taken as a whole.
10.18 Subsidiaries.
------------
No Borrower has any Subsidiaries except pursuant to or as may result from a
consummated Consolidation Transaction.
10.19 Ownership.
---------
The shareholders of each Borrower (except HPP) and the General Partner are as
shown on Exhibit "G" attached hereto. The General Partner is the sole general
-----------
partner of HPP, and ITC is the sole limited partner of HPP. Lender agrees that
nothing in this Agreement shall prohibit the consummation by Borrowers of a
Consolidation Transaction or an initial public offering transaction by Innotrac
of its capital stock as a result of which such capital stock becomes publicly
traded on the New York Stock Exchange, the American Stock Exchange or the NASDAQ
National Market Reporting System, and further that upon the occurrence of any
such initial public offering, this Section 10.19 shall have no further force or
effect.
11. GENERAL AFFIRMATIVE COVENANTS.
-----------------------------
Each Borrower covenants to Lender that from and after the date hereof, and
until such time as Lender shall have terminated this Agreement in writing, each
Borrower will comply with and cause each Subsidiary to comply with the covenants
set forth in Sections 11.1 through 11.18, inclusive.
11.1 Records Respecting Collateral.
-----------------------------
28
<PAGE>
All records of each Borrower with respect to the Collateral will be kept at
the Executive Office (as it may be changed pursuant to Section 11.12) and will
not be removed from such address without the prior written consent of Lender.
11.2 Further Assurances.
------------------
Each Borrower shall duly execute and/or deliver (or cause to be duly executed
and/or delivered) to Lender any instrument, invoice, document, document of
title, dock warrant, dock receipt, warehouse receipt, bill of lading, order,
financing statement, assignment, waiver, consent or other writing which may be
reasonably necessary to Lender to carry out the terms of this Agreement and any
of the other Loan Documents and to perfect its security interest in and
facilitate the collection of the Collateral, the proceeds thereof, and any other
property at any time constituting security to Lender. Each Borrower shall
perform or cause to be performed such acts as Lender may reasonably request to
establish and maintain for Lender a valid and perfected Lien on the Collateral,
free and clear of any Liens other than in favor of Lender and other than the
Permitted Encumbrances.
11.3 Right to Inspect.
----------------
Lender (or any person or persons designated by it) shall, in its sole
discretion, have the right to call at any place of business of a Borrower or any
of its Subsidiaries at any reasonable time during normal business hours upon
advance notice reasonable under the circumstances), and, without hindrance or
delay, inspect the Collateral and inspect, audit, check and make extracts from
such Borrower's or such Subsidiary's books, records, journals, orders, receipts
and any correspondence and other data relating to the Collateral, to such
Borrower's or such Subsidiaries, business or to any other transactions between
the parties hereto. Without limiting the foregoing, Lender shall be entitled to
perform peri odic field audits of each Borrower's operations. Lender shall hold
in confidence each Borrower's and its Subsidiaries, confidential or proprietary
information obtained pursuant to this Agreement and shall not disclose the same
to any third party, except: (i) as required by law or by judicial or
-------
administrative process or to appropriate regulatory authorities and (ii) to
Lender's attorneys and accountants, who have previously or contemporaneously
therewith been advised of the confidential and proprietary nature of such
information, and who have agreed to maintain the confidential nature thereof.
11.4 Reports.
-------
Each Borrower shall, as soon as practicable, but in any event on or before the
respective dates specified below furnish or cause to be furnished to Lender: (i)
within twenty (20) days after the end of each calendar month, a status report,
certified by a duly authorized officer on behalf of each Borrower, showing the
aggregate dollar value of the items comprising the Accounts Receivable
Collateral of each Borrower and the age of each individual item thereof from
invoice date as of the last day of the preceding calendar month (segregating
such items in such manner and to such degree as Lender may reasonably request),
and (ii) within twenty (20) days after the end of
29
<PAGE>
each calendar month, the aggregate dollar value of the items comprising the
accounts payable of each Borrower, and the age of each individual item thereof
as of the last day of the preceding calendar month (segregating such items in
such manner and to such degree as Lender may reasonably request). Additionally,
Lender may, at any time, request that each Borrower verify the individual
account balances of the individual Account Debtors by such means as each
Borrower and Lender then mutually agree, provided that, after any Event of
Default has continued and while it is continuing Lender shall have the further
right to verify such balances directly. In any event, upon request from Lender,
made at any time hereafter, each Borrower shall furnish Lender with a then
current Account Debtor address list.
11.5 Settlement Sheets.
-----------------
By the twentieth (20th) day of each calendar month for the calendar month just
ended, or more frequently if requested by Lender, each Borrower shall prepare
and deliver to Lender a settlement report with respect to satisfaction of the
Margin Requirement as of the date of report submission (to include a calculation
of Eligible Accounts) to be in such form as Lender may deliver for such purpose
to each Borrower from time to time hereafter, the statements in which, in each
instance, shall be certified as to truth and accuracy by a duly authorized
officer on behalf of each Borrower.
11.6 Periodic Financial Statements of Borrowers.
------------------------------------------
Each Borrower shall, as soon as practicable, and in any event within: (i)
thirty (30) days after the end of each calendar month, furnish to Lender,
unaudited financial statements of each Borrower and its consolidated
Subsidiaries, on a consolidating basis, including balance sheets and income
statements, for the calendar month then ended, and for the fiscal year to date;
and (ii) thirty (30) days after the end of each fiscal quarter, furnish to
Lender, unaudited financial statements of each Borrower and its consolidated
Subsidiaries, on a consolidating and consolidated basis, including balance
sheets and income statements, for the fiscal quarter then ended, and for the
fiscal year to date; in each case, certified as to truth and accuracy by each
Borrower's chief executive officer or chief financial officer.
11.7 Annual Financial Statements of Borrowers.
----------------------------------------
Each Borrower shall, as soon as practicable, and in any event within one
hundred twenty (120) days after the end of each Fiscal Year, furnish to Lender
the annual audit report of Borrowers and their consolidated Subsidiaries, on a
combined basis, including a balance sheet, and statement of cash flow, as
appropriate (but, for the current fiscal year being a balance sheet only),
certified without material qualification, by Williams, Benator & Libby or such
other independent certified public accountants selected by each Borrower but
acceptable to Lender, and prepared in accordance with GAAP. Each Borrower shall
cause said accountants to furnish Lender, together with the aforesaid audit
report, a statement that, in the normal course of making their examination of
such financial statements, they obtained no knowledge of any Event of
30
<PAGE>
Default or Default Condition relating to this Agreement or the Notes, or, in
lieu thereof, a statement specifying the nature and period of existence of any
such Event of Default or Default Condition disclosed by their examination.
11.8 Payment of Taxes.
----------------
Each Borrower shall pay and discharge all taxes, assessments and governmental
charges upon them, their income and their Property the non-payment of which
could reasonably be expected to have a material adverse effect on a Borrower's
financial condition or business operations prior to the date on which penalties
attach thereto, unless and to the extent only that (x) such taxes, assessments
and governmental charges are being contested in good faith and by appropriate
proceedings by Borrower or its applicable Subsidiary and (y) such Borrower
maintains reasonable reserves on its books therefor in accordance with GAAP.
11.9 Maintenance of Insurance.
------------------------
In addition to and cumulative with any other requirements imposed herein or in
any Loan Document on each Borrower with respect to insurance, each Borrower
shall maintain insurance with responsible insurance companies on such of its
Property, in such amounts and against such risks as is customarily maintained by
similar businesses operating in the same vicinity, but in any event to include
public liability, worker's compensation, loss, damage, flood, windstorm, fire,
theft, extended coverage and product liability insurance in amounts reasonably
satisfactory to Lender, which such insurance shall not be cancellable by any
Borrower, unless with the prior written consent of Lender, or by any Borrower's
insurer, unless with at least thirty (30) days advance written notice to Lender
thereof. Each Borrower shall file with Lender on or before the Closing Date and
annually upon Lender's request thereafter copies of insurance policies,
certified by an officer of Borrower's insurance company, to Lender's
satisfaction, of such insurance then in effect stating the names of the
insurance companies, the amounts and rates of insurance, the date of expiration
thereof, the properties and risks covered thereby and the insured with respect
thereto, and, within thirty (30) days after notice in writing from Lender,
obtain such additional insurance as Lender may reasonably request.
11.10 Maintenance of Property.
-----------------------
Each Borrower shall maintain its Properties in good working condition,
ordinary wear and tear excepted.
11.11 Certificate of No Event of Default; Compliance Certificate;
-----------------------------------------------------------
Notice of Default.
-----------------
Each Borrower shall, on a quarterly basis not later than forty-five (45) days
after the close of each of its first three (3) fiscal quarters and not later
than one hundred twenty (120) days after the close of its Fiscal Year, certify
to Lender, in a statement executed by each Borrower's or the
31
<PAGE>
General Partner's chief executive officer or chief financial officer, as
appropriate, that no Event of Default and no Default Condition exists or has
occurred and is existing, or, if an Event of Default or Default Condition
exists, specifying the nature and period of existence thereof and setting forth
the action which each Borrower proposes to take with respect thereto. Such
certificate shall be accompanied by the certificate of such officer on behalf of
each Borrower showing, in reasonable detail, compliance with Sections 12.1
through 12.5, inclusive, by each Borrower for the immediately preceding fiscal
quarter. In addition, promptly upon its becoming aware of the occurrence of any
Default Condition or Event of Default, each Borrower will notify Lender thereof
in writing, specifying the nature and period of existence thereof and the action
which each Borrower proposes to take with respect thereto.
11.12 Change of Principal Place of Business, Etc.
------------------------------------------
Each Borrower hereby understands and agrees that if, at any time hereafter,
it elects either (i) to move its Executive Office, (ii) to change its name,
identity or its structure to other than a corporate structure, or (iii) to add
any Collateral Location, such Borrower will notify Lender in writing at least
thirty (30) days prior thereto and take such action in regard thereto as Lender
may reasonably request to continue the perfection of the Lender's security
interest in the Collateral in respect of such change.
11.13 Waivers.
-------
With respect to each of the Collateral Locations, each Borrower will obtain
such waivers of lien, estoppel certificates or subordination agreements as
Lender may reasonably require to insure the priority of its security interest in
that portion of the Collateral situated at such locations.
11.14 Preservation of Corporate Existence.
-----------------------------------
Each Borrower shall preserve and maintain its corporate or partnership
existence, rights, franchises and privileges in the respective jurisdictions of
incorporation or organization, and qualify and remain qualified as a foreign
corporation or partnership (if applicable) in each Collateral Location state and
each jurisdiction in which such qualification is necessary or desirable in view
of their respective businesses and operations or the ownership of their Property
to avoid a material forfeiture.
11.15 Compliance with Laws.
--------------------
Each Borrower shall comply in all material respects with the requirements
of all applicable laws, rules, regulations and orders of any governmental
authority, noncompliance with which would ma terially adversely affect any of
their respective businesses or credit. Without limiting the foregoing, each
Borrower shall obtain and maintain all permits, licenses and other
authorizations which are required under, and otherwise comply with, all
Environmental Laws (as
32
<PAGE>
defined in Section 11.18(a)(i)), and all laws pertaining to consumer credit,
privacy and telephonic transmissions.
11.16 ERISA.
-----
Each Borrower shall: (i) make prompt payments of contributions required by
the terms of each Employee Benefit Plan or to meet the minimum funding standards
set forth under ERISA with respect to each Employee Benefit Plan to which such
standards apply; (ii) notify Lender immediately of any fact, including, but not
limited to, any Reportable Event, arising in connection with any Plan which,
more likely than not, would constitute grounds for the termination thereof by
the PBGC or for the appointment by the appropriate United States district court
of a trustee to administer the Plan; (iii) notify Lender immediately of
Borrower's or any Subsidiary's intent to terminate any Plan; (iv) notify Lender
immediately of the adoption of an amendment to any Plan (or of any other Event)
which causes any Plan to fail to have sufficient assets to qualify for a
standard termination under Section 4041 of ERISA; (v) notify Lender immediately
if the aggregate unfunded liability with regard to all Plans increases to an
amount in excess of One Hundred Thousand Dollars ($100,000); (vi) notify Lender
immediately such if such Borrower obtains information indicating that the
aggregate withdrawal liability with regard to all Plans increases to an amount
in excess of One Hundred Thousand Dollars ($100,000); (vii) notify Lender
immediately of any filing of a request for a waiver of the minimum funding
standard with regard to any Employee Benefit Plan to which such standard
applies; (viii) promptly after receipt thereof, furnish to Lender a copy of any
notice received by such Borrower or any of its Subsidiaries from the PBGC
relating to the intention of the PBGC to terminate any Plan or to appoint a
trustee to administer any Plan; (ix) promptly after receipt thereof furnish to
Lender a copy of any notice received by such Borrower or any Subsidiary of such
Borrower from the Internal Revenue Service relating to the intention of the
Internal Revenue Service to disqualify any Employee Benefit Plan or to refuse to
grant a favorable determination letter with regard to any Employee Benefit Plan;
(x) notify Lender immediately of any lawsuit, claim for damages or
administrative proceeding in which an Employee Benefit Plan or a fiduciary with
respect thereto is a defendant, wherein the amount of damages claimed exceeds,
either alone or in the aggregate with all other such lawsuits, claims and
administrative proceedings, One Hundred Thousand Dollars ($100,000); and (xi)
furnish to Lender, promptly upon its request therefor, such additional
information concerning each and every Employee Benefit Plan, including, but not
limited to, the annual report required to be filed under ERISA, as may be
reasonably requested.
11.17 Litigation.
----------
Promptly, upon its receipt of notice or knowledge thereof, each Borrower
will report to Lender any lawsuit or administrative proceeding in which Borrower
or any of its Subsidiaries is a defendant wherein the amount of damages claimed
against Borrower or any of its Subsidiaries exceeds One Hundred Thousand Dollars
($100,000).
33
<PAGE>
11.18 Environmental Compliance.
------------------------
(a) Definitions. The following definitions shall apply for
purposes of this Section 11.18:
(i) "Environmental Law" shall mean any federal, state or
local statute, regulation or ordinance or any judicial or administrative decree
or decision now or hereafter promulgated with respect to any "Hazardous
Substance" (as hereinafter defined), drinking water, ground water, landfills,
open dumps, storage tanks, underground storage tanks, solid waste, waste water,
storm water runoff, waste emissions, or wells. Without limiting the generality
of the foregoing, the term Environmental Law shall encompass each of the
following statutes, as may be amended from time to time, and all regula tions
from time to time promulgated thereunder: the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (codified in scattered sections
of 26 U.S.C.; 33 U.S.C.; 42 U.S.C. and 42 U.S.C. (S) 9601 et seq.), the Clean
------
Water Act of 1977 (33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 U.S.C. (S)
------
7401 et seq.), the Resource Conservation and Recovery Act of 1976 (42 U.S.C. 9
------
6901 et seq.), the Safe Drinking Water Act (21 U.S.C. (S) 349; 42 U.S.C. (S)(S)
------
201 and 300f through 300j-9) and the Toxic Substances Control Act (15 U.S.C. (S)
2601 et seq.).
------
(ii) "Release" shall mean any spilling, leaking, pumping,
emitting, emptying, discharging, injecting, storing, escaping, leaching,
dumping, or discharging, burying, abandoning, or disposing into the environment
by any Borrower or any Subsidiary or any predecessor in interest of any
Borrower.
(iii) "Hazardous Substance" shall mean each and every
-------------------
element, compound, chemical mixture, petroleum and gas product, substance,
contaminant, pollutant including, without limitation, substances which are
toxic, carcinogenic, ignitable, corrosive or otherwise dangerous to human, plant
or animal health or well-being, and any other substance defined as a "hazardous
substance," "hazardous waste," "hazardous material," "toxic material," "toxic
waste," or "special waste" under any Environmental Law and any other substance
which by law requires special handling in its collection, storage, treatment or
disposal.
(b) Indemnity for Liabilities. Each Borrower shall indemnify
-------------------------
Lender and hold Lender harmless from and against any and all claims, demands,
losses, liabilities, strict liabilities, damages, sanctions, penalties, fines,
injuries, expenses, costs (including attorney's fees), settlements, or judgments
of any and every kind whatsoever paid incurred or suffered by, or asserted
against, Lender by any Person arising out of, in connection with or related in
any way to (a) the Release or presence at, from, on, in or under any Collateral
Location of any Hazardous Substance, or (b) any act, omission, condition,
conduct, transaction or occurrence at, from, on or under any Collateral Location
in violation of any Environmental Law, in each case, if and to the extent caused
by or within the control of any Borrower or any Subsidiary.
34
<PAGE>
(c) Notice to Lender. If any Borrower receives any notice of (i)
----------------
Release of any Hazardous Substance, notification of which must be given to any
governmental agency under any Environmental Law, or notification of which has,
in fact, been given to any governmental agency, or (ii) any complaint, order,
citation or notice with regard to air emissions, water discharges, or any other
environmental health or safety matter affecting any Borrower or any Collateral
Location from any person or entity (including, without limitation, the
Environmental Protection Agency), then such Borrower shall immediately notify
Lender orally and in writing of said Release, complaint, order, citation or
notice.
(d) Environmental Audit. Lender shall have the right, after the
-------------------
occurrence of any event required to be reported to Lender pursuant to Section
11.18(c) hereof which is caused by or within the control of any Borrower, in its
sole discretion, exercised in a commercially reasonable manner, to require such
Bor rower to perform, at such Borrower's expense using an environmental
consultant selected by such Borrower and acceptable to Lender, an environmental
audit and, if deemed necessary by Lender, an environmental risk assessment, each
of which must be satisfactory to Lender. Should any such Borrower fail to order
any such environmental audit or risk assessment within thirty (30) days after
Lender's written request, Lender shall have the right but not the obligation to
retain an environmental consultant to perform any such environmental audit or
risk assessment. All costs and expenses incurred by Lender in the exercise of
such rights may be charged by Lender as Revolving Advances.
(e) Survival. Assignability, and Transferability. The indemnity
--------------------------------------------
set forth in subsection (a) of this Section 11.18 shall survive any exercise by
Lender or Lender of any remedies under this Agreement or any Loan Document,
including without limitation any power of sale, and shall not merge with any
deed or bill of sale given by Borrower to Lender in lieu of foreclosure or any
deed or bill of sale given pursuant to a foreclosure. It is agreed and intended
by Borrowers and Lender that the indemnity set forth above in subsection (a) of
this Section 11.18 may be assigned or otherwise transferred by Lender to its
successors and assigns and to any subsequent purchasers of all or any portion of
any Collateral by, through or under Lender, without notice to Borrowers and
without any further consent of any other Person. To the extent consent to any
such assignment or transfer is required by applicable law, advance consent to
any such assignment or transfer is hereby given by Borrower in order to maximize
the extent and effect of the warranties, representations, and indemnity given
hereby.
12. FINANCIAL COVENANTS.
--------------------
From and after the date hereof, and until such time as Lender shall have
terminated this Agreement in writing, the covenants set forth in Sections 12.1
and 12.5, inclusive, shall apply to Borrowers on a combined basis in respect of
their financial condition and performance.
12.1 Debt/Tangible Net Worth Ratio.
-----------------------------
35
<PAGE>
On a combined basis, Borrowers shall have at all times a Leverage Ratio of
not more than 4:1.
12.2 Tangible Net Worth.
------------------
The sum of the combined Tangible Net Worth plus Subordinated Debt of all
Borrowers shall be at least Seven Million Dollars ($7,000,000), all as
determined under GAAP, during the Fiscal Year ending in 1997 and thereafter
shall be equal to the required amount for the preceding year increased by forty
percent (40%) of Net Income.
12.3 Current Ratio.
-------------
Borrowers, on a combined basis, shall at all times maintain a ratio of
their combined current assets to their combined current liabilities, all as
determined under GAAP, of at least .75:1, determined in respect of each fiscal
quarter.
12.4 Fixed Charge Coverage Ratio.
---------------------------
Borrowers, on a combined basis, shall maintain as of the end of each fiscal
quarter in each Fiscal Year a Fixed Charge Coverage Ratio of at least 2.5:1, as
determined under GAAP on a rolling four (4) quarters' basis.
12.5 Capital Expenditures and Leases.
-------------------------------
Borrowers, on a combined basis, will not expend, for the applicable Fiscal
Year, in Capital Expenditures or contract for any future Capital Expenditures,
which in the aggregate represent an amount exceeding the sum of $5,000,000
during any Fiscal Year.
12.6 Minimum Net Income.
------------------
Borrowers, on a combined basis, shall achieve an Adjusted Net Income of at
least $500,000 for the Fiscal Year ending in 1997 and each Fiscal Year
thereafter.
13. NEGATIVE COVENANTS.
------------------
Each Borrower covenants to Lender that from and after the date hereof and
until such time as Lender shall have terminated this Agreement in writing, such
Borrower will not, without the prior written consent of Lender, do or permit to
be done by any Subsidiary any of the things or acts set forth in Sections 13.1
through 13.11, inclusive.
13.1 No Liens.
--------
Create, assume, or suffer to exist any Lien of any kind in or on any of its
Property except for Permitted Encumbrances.
------ ---
36
<PAGE>
13.2 Debt.
----
Incur, assume, or suffer to exist any Debt, except for: (i) the
------ ---
Obligations, the ITC Loan and any other Debt for borrowed funds existing on the
date of this Agreement; (ii) Debt for borrowed funds incurred pursuant to
financial contractual agreements made and entered into, and disclosed in writing
to Lender, prior to the date of this Agreement; (iii) Debt for borrowed funds
owing to Lender, whether hereunder or otherwise; (iv) trade payables and
contractual obligations to suppliers and customers incurred in the ordinary
course of business; (v) accrued pension fund and other employee benefit plan
obligations and liabilities (provided, however, that such Debt does not result
in the existence of any Event of Default or Default Condition under any other
provision of this Agreement); (vi) deferred taxes; (vii) Debt resulting from
endorsements of negotiable instruments received in the ordinary course of its
business; (viii) Debt arising in respect of "Permitted Encumbrances"; (ix) Debt
arising from the receipt of intercompany loans or advances from any other
Borrower; and (x) purchase money Debt not exceeding at any one time, in the
aggregate, Five Hundred Thousand Dollars ($500,000).
13.3 Contingent Liabilities.
----------------------
Guarantee, endorse, become surety with respect to or otherwise become
directly or contingently liable for or in connection with the obligations of any
other Person, except guarantees in favor of Lender and endorsements of
negotiable instruments for collection in the ordinary course of business.
13.4 Distributions.
-------------
Except as otherwise provided herein and in Section 13.5, pay any dividend,
make any distribution or take any action which would have an effect equivalent
to any of the foregoing; provided, however, that, notwithstanding the foregoing
-------- -------
(i) if any Borrower, because of its organization or election, does not itself
pay taxes on its income, then such Borrower may make distributions to its
shareholders or partners (as the case may be) responsible for the payment of
such taxes in amounts sufficient to permit such taxes to be paid by such Persons
on Borrower's behalf, and each Borrower making such distributions shall provide
Lender with an annual accounting thereof; and (ii) in addition to the foregoing,
so long as no Event of Default then exists or would be caused by or result from
the making of such payment, any Borrower may pay dividends and make
distributions from time to time in an amount not in excess of forty percent
(40%) of such Borrower's Net Income.
37
<PAGE>
13.5 Stock Redemptions, Etc.
----------------------
Except for the A. Dorfman Buyout, purchase, redeem, or otherwise acquire
for value any shares of any class of capital stock or any partnership interests
if (i) any Event of Default then exists or would be caused by or result from the
making of such payment or (ii) such Borrower is then prohibited from doing so by
applicable law.
13.6 Restricted Investment.
---------------------
Except for a Consolidation Transaction, make any Restricted Investment,
except that any Borrower may make loans and advances to any other Borrower or
any of its subsidiaries at any time or from time to time.
13.7 Merger, Transfer, Etc.
---------------------
Except for a Consolidation Transaction, dissolve or otherwise terminate its
corporate or partnership status; or enter into any merger, reorganization or
consolidation; make any substantial change in the basic type of business
conducted by it as of the date hereof; or sell, assign, lease or otherwise
dispose of (whether in one transaction or a series of transactions) all,
substantially all or a substantial part of its property or assets, other than
sales in the ordinary course of business.
13.8 ERISA.
-----
Permit any Plan to become underfunded such that it would not have
sufficient assets in order to quality for a standard termination under Section
4041 of ERISA.
13.9 Transactions with Affiliates.
----------------------------
Except for a Consolidation Transaction or the A. Dorfman Buyout, enter
into, or be a party to, any transaction with any Affiliate of any Borrower,
except in the ordinary course of and pursuant to the reasonable requirements of
its business and upon fair and reasonable terms that are no less favorable to a
Borrower or said Subsidiary than would be obtained in a comparable arm's length
transaction with a Person not an Affiliate or as otherwise may be approved in
writing by Lender from time to time hereafter, upon full disclosure to Lender,
or has been disclosed to Lender on or before the date hereof.
13.10 Fiscal Year.
-----------
Change its Fiscal Year end from that in effect on the Closing Date, except
that Innotrac may change its Fiscal Year to December 31, consistent with the
other Borrowers.
13.11 Certain Debts.
-------------
38
<PAGE>
Either: (i) make, consent to, or acquiesce in, any amendment or
modification to any of the following: (A) the ITC Loan Agreement, which would
have the effect of increasing the principal amount of, the effective interest
rate thereon or the frequency of the payment of principal or interest thereon;
or (ii) prepay the ITC Loan; or (iii) make any payment on the ITC Loan in
violation of the Subordination Agreements executed with respect thereto, as
described more particularly in Section 17.1(g) below.
14. EVENTS OF DEFAULT.
-----------------
The occurrence of any events or conditions described in Sections 14.1
through 14.14 shall constitute an Event of Default hereunder, provided that any
requirement for the giving of notice or the lapse of time, or both, has been
satisfied.
14.1 Notes.
-----
Any Borrower shall fail to make any payment of principal of or interest on
the Revolving Note or any Note within five (5) calendar days after the date when
due.
14.2 Obligations.
-----------
Any Borrower shall fail to make any payments of principal of or interest on
any of the Obligations (other than the Notes) or any other Obligations to
Lender, within five (5) calendar days after receipt of notice from Lender of
such failure to make payment (or after satisfaction of any shorter or longer
requirement for the giving of notice or the lapse of time, or both, contained in
the applicable agreement pertaining to such Obligations).
14.3 Misrepresentations.
------------------
Any Borrower shall make any representations or warranties in any of the
Loan Documents or in any certificate or statement furnished at any time
hereunder or in connection with any of the Loan Documents which, when taken as a
whole, proves to have been untrue or misleading in any material respect when
made or furnished.
14.4 Covenants.
---------
Any Borrower shall default in the observance or performance of any covenant
or agreement contained herein or in any of the other Loan Documents (other than
a failure described in Sections 14.1 or 14.2), unless such default is cured
within ten (10) calendar days after Borrower's receipt of notice from Lender of
such Default Condition.
14.5 Damage, Loss, Theft or Destruction of Collateral.
------------------------------------------------
39
<PAGE>
There shall have occurred material uninsured damage to, or loss, theft or
destruction of, any part of the Collateral of any Borrower, or all Borrowers
considered as a whole, having a then current value in excess of One Hundred
Thousand Dollars ($100,000), unless such default is cured within ten (10) days
after Borrowers, receipt of notice from Lender of such Default Condition.
14.6 Certain Debts.
-------------
An "event of default" (or event having similar effect, whether or not
denominated as such) shall occur under, or in respect of, the ITC Loan Agreement
and such default shall continue, without waiver or cure, beyond any cure or
grace period prescribed therein.
14.7 Other Debts.
-----------
Any Borrower shall default in connection with any agreement evidencing,
securing or relating to any other Debt to, or under any operating lease with,
either Lender or, with respect to any Debt of One Hundred Thousand Dollars
($100,000) or more with any creditor other than a Lender, unless such default is
cured within thirty (30) days after Borrowers' receipt of notice from Lender of
such Default Condition.
14.8 Voluntary Bankruptcy.
--------------------
Any Borrower, the General Partner or any Guarantor shall file a voluntary
petition in bankruptcy or a voluntary petition or answer seeking liquidation,
reorganization, arrangement, readjustment of its debts, or for any other relief
under the Bankruptcy Code, or under any other act or law pertaining to
insolvency or debtor relief, whether state, federal, or foreign, now or
hereafter existing; any Borrower, the General Partner or any Guarantor shall
enter into any agreement indicating its consent to, approval of, or acquiescence
in, any such petition or proceeding; any Borrower,, the General Partner or any
Guarantor shall apply for or permit the appointment by consent or acquiescence
of a receiver, custodian or trustee of any Borrower, the General Partner or any
Guarantor for all or a substantial part of its Property; any Borrower, the
General Partner or any Guarantor shall make an assignment for the benefit of
creditors; or any Borrower, the General Partner or any Guarantor shall be unable
or shall fail to pay its debts generally as such debts become due; or any
Borrower, the General Partner or any Guarantor shall admit, in writing, its
inability or failure to pay its debts generally as such debts become due.
14.9 Involuntary Bankruptcy.
----------------------
There shall have been filed against any Borrower, the General Partner or
any Guarantor an involuntary petition in bankruptcy or seeking liquidation,
reorganization, arrangement, readjustment of its debts or for any other relief
under the Bankruptcy Code, or under any other act or law pertaining to
insolvency or debtor relief,, whether state, federal or foreign, now or
hereafter existing, which has not been dismissed within ninety (90) days of the
date the petition
40
<PAGE>
is filed; any Borrower, the General Partner or any Guarantor shall suffer or
permit the involuntary appointment of a receiver, custodian or trustee of any
Borrower, the General Partner or any Guarantor or for all or a substantial part
of its Property; or any Borrower, the General Partner or any Guarantor shall
suffer or permit the issuance of a warrant of attachment, execution or similar
process against all or any substantial part of the Property of any Borrower, the
General Partner or any Guarantor.
14.10 Judgments.
---------
Final judgments or orders for the payment of money are rendered against any
Borrower the aggregate amount of One Hundred Thousand Dollars ($100,000) or more
(exclusive of amounts covered by insurance) which are not satisfied within sixty
(60) days after their being rendered.
14.11 ERISA.
-----
The occurrence of any of the following events: (i) the termination of any
Plan in a distress termination under Section 4041(c) of ERISA or an involuntary
termination under Section 4042 of ERISA; (ii) the filing of a request for a
waiver of the minimum funding standard with regard to any Employee Benefit Plan:
(iii) the occurrence of any event which causes any Plan to cease to have
sufficient assets at all times so as to qualify for a standard termination under
Section 4041 of ERISA; (iv) the occurrence of any event which causes the
unfunded liability with regard to all such Plans in the aggregate to become an
amount in excess of One Hundred Thousand Dollars ($100,000); (v) the occurrence
of any event which causes the withdrawal liability with regard to all Plans to
become an amount in excess of One Hundred Thousand Dollars ($100,000); (vi) the
appointment of a trustee by an appropriate United States district court to
administer any Plan; or (vii) the institution of any proceedings by the PBGC to
terminate any such Plan or to appoint a trustee to administer any such Plan;
unless, in each case, such default is cured within thirty (30) days after
Borrowers' receipt of notice from Lender of such Default Condition.
14.12 Change of Control.
-----------------
Prior to the occurrence of an initial public offering as contemplated by
Section 10.19 either: (i) Scott Dorfman shall cease to own, beneficially and of
record with unlimited power to vote, at least fifty-one percent (51%) of the
issued and issued capital stock of each Borrower (except HPP) and of the General
Partner; or (ii) the General Partner or Innotrac shall cease to be the sole
general partner of HPP.
14.13 Material Adverse Change.
-----------------------
The occurrence of any material change in the business, financial condition
or results of operations of any Borrower which Lender reasonably determines, in
good faith, materially and adversely affects the ability of such Borrower to pay
and perform its Obligations to Lender
41
<PAGE>
unless such default is cured within thirty (30) days after Borrowers' receipt of
notice from Lender of such Default Condition. Without limitation of the
foregoing, the loss, revocation, cancellation or material diminution or
impairment of any of the material Bell South contracts described in Section
17.1(n) hereof shall be deemed to be a material adverse change for purposes
hereof unless such contracts are reinstated or replaced within thirty (30) days
after Borrowers' receipt of notice from Lender of such Default Condition.
14.14 Certain Debts.
-------------
Either ITC shall default in the observance or performance of any term of
their Subordination Agreements described more particularly in Section 17.1(g)
below.
14.15 Change of Management.
--------------------
If Scott Dorfman shall cease to serve as the Chief Executive Officer of
Innotrac or, if another officer of Innotrac is given such title, to hold a
position with Innotrac in which he would nevertheless be entitled to exercise
the authority of the highest executive officer of Innotrac.
15. REMEDIES.
--------
Upon the occurrence and during the continuation of any Default Condition or
Event of Default, Lender's obligation to extend financing under the Revolving
Line of Credit shall immediately cease and the Revolving Line of Credit shall
terminate; provided, however, that if such obligations have ceased and
-------- -------
commitments terminated due to the occurrence of a Default Condition, and such
Default Condition does not become an Event of Default due to its having been
cured or waived before it has matured into an Event of Default, then such
obligation shall be reinstated as of the date such Default Condition is cured or
waived. Upon the occurrence or existence of any Event of Default, or at any
time thereafter, without prejudice to the rights of Lender to enforce its claims
against Borrowers for damages for failure by Borrowers to fulfill any of its
obligations hereunder, subject only to prior receipt by Lender of payment in
full of all Obligations then outstanding in a form acceptable to Lender, Lender
shall have all of the rights and remedies described in Sections 15.1 through
15.4, inclusive, and Lender may exercise any one, more, or all of such remedies,
in its sole discretion, without thereby waiving any of the others.
15.1 Acceleration of the Obligations.
-------------------------------
42
<PAGE>
Lender, at its option, may by written notice, effective upon receipt,
declare all of the obligations (including but not limited to that portion
thereof evidenced by any Notes) to be immediately due and payable (and in the
event a voluntary or involuntary case is commenced under the Bankruptcy Code by
or against any Borrower as a debtor, all Obligations automatically will be due
and payable without any notice or declaration by Lender), whereupon the same
shall become immediately due and payable without presentment, demand, protest,
notice of nonpayment or any other notice required by law relative thereto, all
of which are hereby expressly waived by each Borrower, anything contained herein
to the contrary notwithstanding and, in connection therewith, Lender shall have
the right to increase the rate of interest charged on the Notes, without further
notice, to a rate per annum equal to the Default Rate. Thereafter, Lender, at
its option, may, but shall not be obligated to, accept less than the entire
amount of Obligations due, if tendered, provided, however, that unless then
agreed to in writing by Lender, no such acceptance shall or shall be deemed to
constitute a waiver of any Event of Default or a reinstatement of any
commitments of Lender hereunder.
15.2 Remedies of a Secured Party.
---------------------------
Lender shall thereupon have the rights and remedies of a secured party
under the UCC in effect on the date thereof (regardless of whether the same has
been enacted in the jurisdiction where the rights or remedies are asserted),
including, without limitation, the right to take the Collateral or any portion
thereof into its possession, by such means (without breach of the peace) and
through agents or otherwise as it may elect (and, in connection therewith,
demand that each Borrower assemble the Col lateral owned by it at a place or
places and in such manner as the Lender shall prescribe), and sell, lease or
otherwise dispose of the Collateral or any portion thereof in its then condition
or following any commercially reasonable preparation or processing, which
disposition may be by public or private proceedings, by one or more contracts,
as a unit or in parcels, at any time and place and on any terms, so long as the
same are commercially reasonable. Lender may apply the proceeds of any such sale
or disposition of any Borrower's Collateral to any of the obligations of such
Borrower in such order as Lender, in its sole discretion, may elect. Lender
shall give the affected Borrowers written notice of the time and place of any
public sale of the Collateral or the time after which any other intended
disposition thereof is to be made, except where the Collateral is perishable or
threatens to decline speedily in value or is of a type customarily sold on a
recognized market. The requirement of sending reasonable notice shall be met if
such notice is given to Borrowers pursuant to Section 16.9 at least ten (10)
calendar days before such disposition. Expenses of retaking, holding, insuring,
preserving, protecting, preparing for sale or selling or the like with respect
to the Collateral shall include, in any event, reasonable attorneys' fees and
other legally recoverable collection expenses, all of which shall constitute
Obligations.
15.3 Set Off.
-------
In addition to such other rights and remedies with respect to the Balances
Collateral as may exist from time to time hereafter in favor of Lender, whether
by way of setoff, banker's lien,
43
<PAGE>
consensual security interest or otherwise, upon the occurrence of any Event of
Default hereunder, each Lender may charge any part or all of the obligations of
such Lender to any Borrower represented by items constituting the Balances
Collateral in the possession and control of Lender against the Obligations of
such Borrower without prior notice to or demand upon such Borrower.
15.4 Other Remedies.
--------------
Unless and except to the extent expressly provided for to the contrary
herein, the rights of Lender specified herein shall be in addition to, and not
in limitation of, Lender's rights under the UCC, as amended from time to time,
or any other statute or rule of law or equity, or under any other provision of
any of the Loan Documents, or under the provisions of any other document,
instrument or other writing executed by any Borrower or any third party in favor
of Lender, all of which may be exercised successively or concurrently.
16. MISCELLANEOUS.
--------------
16.1 Waiver.
------
Each and every right granted to Lender under this Agreement, or any of the
other Loan Documents, or any other document delivered hereunder or in connection
herewith or allowed it by law or in equity, shall be cumulative and may be
exercised from time to time. No failure on the part of Lender to exercise, and
no delay in exercising, any right shall operate as a waiver thereof, nor shall
any single or partial exercise by Lender of any right preclude any other or
future exercise thereof or the exercise of any other right. No waiver by Lender
of any Default Condition or Event of Default shall constitute a waiver of any
subsequent Default Condition or Event of Default.
16.2 Governing Law.
-------------
This Agreement and the other Loan Documents, and the rights and obligations
of the parties hereunder and thereunder, shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Georgia.
16.3 Survival.
--------
All representations, warranties and covenants made herein shall survive the
execution and delivery of all of the Loan Documents.
16.4 No Assignment by Borrowers.
--------------------------
No assignment hereof shall be made by any Borrower without the prior
written consent of Lender. Lender may assign, or sell participations and
undivided ownership interests in, its rights,
44
<PAGE>
title and interest herein and in the Loan Documents at any time hereafter with
written notice to, but without necessity of consent from, any Borrower.
16.5 Counterparts.
------------
This Agreement may be executed in two or more counterparts, each of which
when fully executed shall be an original, and all of said counterparts taken
together shall be deemed to constitute one. and the same agreement.
16.6 Reimbursement.
-------------
Borrowers, jointly and severally, agree to pay to the Lender on demand all
reasonable out-of-pocket costs and expenses that Lender may pay or incur in
connection with the negotiation, preparation, consummation, enforcement and
termination of this Agreement and the other Loan Documents, including, without
limitation: (a) reasonable attorneys, fees and disbursements; (b) costs and
expenses (including reasonable attorneys, fees and disbursements) for any
amendment, supplement, waiver, consent or subsequent closing in connection with
the Loan Documents and the transactions contemplated thereby; (c) costs and
expenses of lien and title searches and title insurance; (d) taxes, fees and
other charges for recording any deeds to secure debt, deeds of trust,
mortgages,, filing financing statements and continuations, and other actions to
perfect, protect and continue the Lien of Lender in the Collateral; (e) sums
paid or incurred to pay for any amount or to take any action required of any
Borrower under the Loan Documents that any such Borrower fails to pay or take;
(f) costs of appraisals, inspections, and verifications of the Collateral,
including, without limitation, reasonable costs of travel, lodging, and meals
for inspections of the Collateral and Borrowers' operations by Lender; (g) costs
and expenses of preserving and protecting the credit or the Collateral; and (h)
costs and expenses (including reasonable attorneys, and paralegals, fees and
disbursements) paid or incurred to obtain payment of the Obligations, enforce
the Lien in the Collateral, sell or otherwise realize upon the Collateral, and
otherwise enforce the provisions of the Loan Documents or to defend any claims
made or threatened against Lender or either Lender arising out of the
transactions contemplated hereby. Borrowers further agree, jointly and
severally, to reimburse Lender for its actual out-of-pocket costs and expenses
incurred in conducting field examinations and inspections of Borrowers and their
Properties in addition to the foregoing. The foregoing shall not be construed to
limit any other provisions of the Loan Documents regarding costs and expenses to
be paid by Borrower. All of the foregoing costs and expenses may, in the
discretion of Lender, be charged to each Borrower's loan account as Revolving
Advances. Borrowers will also pay all expenses incurred by them in this
transaction. In the event any Borrower becomes a debtor under the Bankruptcy
Code, Lender's secured claim in such case shall include interest on the
Obligations and all fees, costs and charges provided for herein (including,
without limitation, reasonable attorneys' fees) all for the extent allowed by
the Bankruptcy Code.
16.7 Successors and Assigns.
----------------------
45
<PAGE>
This Agreement shall be binding upon and inure to the benefit of the
successors and permitted assigns of the parties hereto.
16.8 Severability.
------------
If any provision of any of the Loan Documents or the application thereof to
any party thereto or circumstances shall be invalid or unenforceable to any
extent, the remainder of such Loan Documents and the application of such
provisions to any other party thereto or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
16.9 Notices.
-------
All notices, requests and demands to or upon the respective parties hereto
shall be deemed to have been properly given or made when personally delivered or
five (5) calendar days after being deposited in the mail, registered or
certified mail, return receipt requested, with sufficient postage prepaid,
addressed as follows or to such other address as may be designated hereafter in
writing by the respective parties hereto:
Borrowers:
Innotrac Corporation, as Agent for the Borrowers
1828 Meca Way
Norcross, Georgia 30093
Attn: Scott Dorfman, President
With a copy to:
Kilpatrick Stockton LLP
Suite 2800
1100 Peachtree Street
Atlanta, Georgia 30309-4530
Attn: Gregory K. Cinnamon, Esq.
Lender:
SouthTrust Bank, N.A.
One Georgia Center
22nd Floor
600 West Peachtree Street
Atlanta, Georgia 30308
Attn: Ronald Fontenot, V.P.
46
<PAGE>
With a copy to:
Smith, Gambrell & Russell, LLP
Suite 3100, Promenade II
1230 Peachtree Street, N.E.
Atlanta, Georgia 30326
Attn: L. Brett Lockwood, Esq.
except in cases where it is expressly provided herein or by applicable law that
such notice, demand or request is not effective until received by the party to
whom it is addressed in which instance rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice was given
shall be deemed to be receipt of the notice, demand or request sent. By giving
at least thirty (30) days written notice thereof, Borrowers, or Lender shall
have the right from time to time and at any time to change their respective
addresses and each shall have the right to specify any other address within the
continental United States of America.
16.10 Entire Agreement; Amendments.
----------------------------
This Agreement, together with the Loan Documents executed in
connection therewith, collectively constitute the entire agreement between the
parties hereto with respect to the subject matter hereof. Neither this Agreement
or any Loan Document nor any provision hereof or thereof may be changed, waived,
discharged, modified or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement is sought.
16.11 Time of the Essence.
-------------------
Time is of the essence in this Agreement and the other Loan Documents.
16.12 Interpretation.
--------------
No provision of this Agreement shall be construed against or interpreted to
the disadvantage of any party hereto by any court or other governmental or
judicial authority by reason of such party having or being deemed to have
structured or dictated such provision.
16.13 Lender Not Joint Venturer.
-------------------------
Neither this Agreement nor any agreements, instruments, documents or
transactions contemplated hereby (including the Loan Documents) shall in any
respect be interpreted, deemed or construed as making Lender a partner or joint
venturer with Borrower or as creating any similar relationship or entity, and
Borrower agrees that it will not make any contrary assertion, contention, claim
or counterclaim in any action, suit or other legal proceeding involving either
Lender or any Borrower.
47
<PAGE>
16.14 Jurisdiction.
------------
Each Borrower agrees that any legal action or proceeding with respect to
this Agreement or any Loan Document may be brought in the courts of the State of
Georgia or the United States District Court, Northern District of Georgia,
Atlanta Division. By execution of this Agreement, each Borrower hereby submits
to each such jurisdiction, hereby expressly waiving whatever rights may
correspond to it by reason of its present or future domicile. Nothing herein
shall affect the right of Lender to commence legal proceedings or otherwise
proceed against each Borrower in any other jurisdiction or to serve process in
any manner permitted or required by law.
16.15 Acceptance.
----------
This Agreement, together with the other Loan Documents, shall not become
effective unless and until delivered to Lender at its office in Atlanta, Georgia
and accepted in writing by Lender thereafter at such office as evidenced by its
execution hereof (notice of which delivery and acceptance is hereby waived by
Borrower).
16.16 Payment on Non-Business Days.
----------------------------
Whenever any payment to be made hereunder or under any Note shall be stated
to be due on a day which is not a Business Day, such payment may be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest hereunder or under the Notes.
16.17 UCC Terminations.
----------------
Each Borrower agrees that Lender shall not be required to execute any such
UCC termination statements with respect to any Collateral unless and until all
Obligations have been paid in full and Lender shall have terminated this
Agreement in writing, which Lender shall do within a reasonable amount of time
after the Obligations have been paid in full.
16.18 Cure of Default by Lender.
-------------------------
If, hereafter, any Borrower defaults in the performance of any duty or
obligation to Lender hereunder or under any Loan Document or to any other Person
(including, without limitation, any lessor, licensor, vendor, processor,
shipper, carrier or warehouseman), Lender may, at its option, but without
obligation, in order to protect or preserve Lender's credit or the Collateral,
Cure such default and any costs, fees and expenses incurred by Lender in
connection therewith including, without limitation, for the purchase of
insurance, the payment of taxes and the removal or settlement of liens and
claims, shall be deemed to be Revolving Advances, made to such Borrower, whether
or not this creates an over-advance hereunder, and shall be payable in
accordance with its terms.
48
<PAGE>
16.19 Recitals.
--------
All recitals contained herein are hereby incorporated by reference into
this Agreement and made part thereof.
16.20 Attorney-in-Fact.
----------------
Each Borrower hereby designates, appoints and empowers Lender irrevocably
as its attorney-in-fact, at such Borrower's cost and expense, to do in the name
of such Borrower from and after the occurrence of, and during the continuation
of, any Event of Default, any and all actions which Lender may deem reasonably
necessary or advisable to carry out the terms hereof upon the failure, refusal
or inability of such Borrower to do so, and such Borrower hereby agrees to
indemnify and hold Lender harmless from any costs., damages, expenses or
liabilities arising against or actually incurred by Lender in connection
therewith, except those arising from the willful misconduct or gross negligence
of Lender. This power of attorney, being coupled with an interest, shall be
irrevocable, shall continue until all obligations have been satisfied in full
and this Agreement has been terminated by Lender in writing and shall be in
addition to Lender's other rights, powers and remedies.
16.21 Sole Benefit.
------------
The rights and benefits set forth in this Agreement and in all the other
Loan Documents are for the sole and exclusive benefit of the parties thereto and
may be relied upon only by them.
16.22 Termination of this Agreement.
-----------------------------
This Agreement, together with all Loan Documents, shall continue in full
force and effect as to each Borrower notwithstanding (i) the passage of the
Termination Date, (ii) the early termination of this Agreement by any one
Borrower pursuant to Section 2.5(b) or (iii) the termination of the Revolving
Line of Credit pursuant to Article 15, unless and until such Borrower has
complied fully and in all respects with Section 2.5(b), in the case of any
voluntary early termination of this Agreement by such Borrower, or such Borrower
has made full payment and satisfaction of all Obligations of such Borrower to
Lender after termination of the Revolving Line of Credit, on or after the
Termination Date or prior thereto in the case of any early involuntary
termination. When all Borrowers have so complied with this Section, this
Agreement will terminate.
16.23 Partition.
---------
Borrowers acknowledge and agree that it may be necessary hereafter, in
order for Lender to accommodate the desires of ITC in their exercise of
subrogation rights against certain of the Borrowers, that Lender subdivide or
partition this Agreement (and the Loan Documents) into one or more separate
agreements, in substantially identical form to this Agreement (and the Loan
49
<PAGE>
Documents). In such event., the Borrowers affected will cooperate with Lender in
executing all agreements, documents, instruments and necessary certificates to
effect such subdivision or partition promptly at Lender's request at Borrowers'
expense.
16.24 Acknowledgment by Borrowers.
---------------------------
Each of the Borrowers hereby acknowledges and agrees that this Agreement is
intended to be an integrated amendment and restatement of the Prior Version Loan
Agreement, and this Agreement is not intended as a forgiveness or novation of
the indebtedness heretofore outstanding under the Prior Version Loan Agreement,
and that the Obligations under this Agreement are entitled in all respects to
the benefit of the security intended to be afforded by the Collateral and the
other Loan Documents whether heretofore executed or otherwise executed in
connection with this Agreement.
17. CONDITIONS PRECEDENT.
--------------------
17.1 Conditions to Initial Revolving Advance.
---------------------------------------
The conditions precedent set forth below shall constitute express
conditions precedent to any obligation of Lender to make Revolving Advance
hereunder.
(a) Resolutions and Incumbency Certificate of Each Borrower. Receipt by
-------------------------------------------------------
Lender of resolutions and incumbency certificates from the Secretary or
Assistant Secretary of each Borrower that is a corporation or limited liability
company, to be substantially in the form of Exhibit "H" attached hereto.
-----------
(b) Partnership Certificate of HPP. Receipt by Lender of a certificate
------------------------------
from the General Partner of HPP, to be substantially in the form of Exhibit "I",
-----------
attached hereto.
(c) Subordination Agreements. ITC shall have executed and delivered a lien
------------- ----------
subordination agreement, or acknowledgment of subordination, in favor of Lender,
in form and substance satisfactory to Lender.
(d) Opinion of Counsel. Receipt by Lender of an opinion of counsel from
------------------
independent legal counsel to Borrowers, in form and substance acceptable to
Lender.
(e) Loan Documents. Receipt by Lender of any and all other Loan Documents,
--------------
duly executed in form and substance acceptable to Lender.
(f) Other Documents. Receipt by Lender of any and all other documents,
---------------
agreements and instructs that Lender may reasonably request in connection with
the transactions contemplated by this Agreement.
(g) No Default. No Default Condition or Event of Default shall have
----------
occurred and be continuing.
50
<PAGE>
(h) Representations and Warranties. All representations and warranties
------------------------------
contained in the Agreement shall be true and correct in all material respects on
the date of each Revolving Advance.
(i) Guaranty. Scott Dorfman shall have extended and delivered in favor of
--------
Lender an Amended and Restated Guaranty, in form and substance satisfactory to
Lender.
(j) Loan Arrangement Fee. Borrowers shall have paid to Lender a loan
--------------------
arrangement fee of $125,000 in respect of the Commitment to be under the
Revolving Line of Credit available hereunder, the receipt which is hereby
acknowledged by Lender.
(k) Subordination Agreement. Lender shall have received an amendment or
-----------------------
reaffirmation to that certain Subordination Agreement, dated as of January 19,
1995, among Borrower, Lender, ITC (as successor in interest to certain rights
and obligations of ITC Holding Company, Inc.) and Scott Dorfman, in form and
substance satisfactory to Lender and its counsel.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
51
<PAGE>
IN WITNESS WHEREOF, each Borrower and Lender have set their hands, and each
Borrower has affixed its seal, all as of the day and year first above written.
"BORROWERS"
"INNOTRAC"
INNOTRAC CORPORATION (SEAL)
By: /s/ Scott Dorfman
---------------------------------------------
Scott Dorfman, President
Attest: /s/ David Ellin
-----------------------------------------------------------------
Name: David Ellin
-------------------------------------------
Title: Senior Vice President
------------------------------------------
"IELC"
IELC, INC. (SEAL)
By: /s/ Scott Dorfman
---------------------------------------------
Scott Dorfman, President
Attest: /s/ Gregory Cinnamon
-----------------------------------------
Gregory Cinnamon, Assistant Secretary
"HOMETEL"
HOMETEL SYSTEMS, INC. (SEAL)
By: /s/ Scott Dorfman
---------------------------------------------
Scott Dorfman, President
Attest: /s/ Gregory Cinnamon
-----------------------------------------
Gregory Cinnamon, Assistant Secretary
52
<PAGE>
"RENTEL"
RENTEL #1, INC. (SEAL)
By: /s/ Scott Dorfman
---------------------------------------------
Scott Dorfman, President
Attest: /s/ Gregory Cinnamon
-----------------------------------------
Gregory Cinnamon, Assistant Secretary
"RENTEL #2"
RENTEL #2, L.L.C. (SEAL)
By: /s/ Scott Dorfman
--------------------------------------------
Scott Dorfman, President
Attest: /s/ Gregory Cinnamon
----------------------------------------
Name: Gregory Cinnamon
------------------------------------------
Title: Assistant Secretary
-----------------------------------------
"SELLTEL"
SELLTEL #1, INC. (SEAL)
By: /s/ Scott Dorfman
--------------------------------------------
Scott Dorfman, President
Attest: /s/ Gregory Cinnamon
----------------------------------------
Gregory Cinnamon, Assistant Secretary
53
<PAGE>
"SELLTEL #2"
SELLTEL #2, L.L.C. (SEAL)
By: /s/ Scott Dorfman
--------------------------------------------
Scott Dorfman, President
Attest: /s/ Gregory Cinnamon
----------------------------------------
Name: Gregory Cinnamon
------------------------------------------
Title: Assistant Secretary
-----------------------------------------
"HPP"
HOMETEL PROVIDERS PARTNERS, L.P. (SEAL)
By: HOMETEL PROVIDERS, INC.,
its General Partner
By: /s/ Scott Dorfman
--------------------------------------------
Scott Dorfman, President
By: /s/ Gregory Cinnamon
--------------------------------------------
Gregory Cinnamon, Assistant Secretary
"LENDER"
SOUTHTRUST BANK, N.A.
By: /s/ Ronald Fontenot
--------------------------------------------
Ronald Fontenot, Vice President
54
<PAGE>
EXHIBIT 10.4
C O N F I D E N T I A L T R E A T M E N T
-------------------------------------------
Portions of this Exhibit (Exhibit 10.4) have been omitted pursuant to a request
for confidential treatment filed with the Securities and Exchange Commission
(the "Commission"). The omitted portions, which are designated by an asterisk
(*), were filed separately with the Commission.
EQUIPMENT NEGOTIATION AND REFERRAL AGREEMENT
BETWEEN
BELLSOUTH TELECOMMUNICATIONS, INC.
AND
INNOTRAC CORPORATION,
as agent of HomeTel Systems, Inc.
- CONFIDENTIAL -
NOTICE
THE INFORMATION CONTAINED HEREIN SHOULD NOT BE DISCLOSED TO UNAUTHORIZED
PERSONS. IT IS MEANT FOR USE OF THE PARTIES CONTRACTING HEREIN IN CONNECTION
WITH PERFORMANCE UNDER THIS AGREEMENT.
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NEGOTIATION AND REFERRAL AGREEMENT
----------------------------------
This Equipment Negotiation and Referral Agreement is by and between
INNOTRAC Corporation as agent for HomeTel Systems, Inc. ("INNOTRAC"), a Georgia
corporation, with offices at 1828 Meca Way, Norcross, GA 30093, and BellSouth
Telecommunications, Inc. ("BST"), a Georgia corporation, with an office at 3535
Colonnade Parkway, Birmingham, Alabama 35243. This Agreement replaces and
supercedes an agreement between the partners dated March 29, 1994.
WHEREAS, BST desires to make more convenient for its customers the ordering
of BST Network Services, particularly Calling Line Identification, by
facilitating the installment purchase and/or rental of telephone sets or
apparatus that are compatible with, complement and are used in connection with,
the Network Services, particularly Calling Line Identification display devices
("Sets"); and
WHEREAS, INNOTRAC wishes to engage the services of BST to directly
negotiate the installment sale and/or rentals of the Sets with new or existing
Network Services subscribers, as agents of INNOTRAC, through its Service
Representatives; and
WHEREAS, BST wishes to engage the services of INNOTRAC to accept telephone
referrals of new or existing Network Services subscribers, where direct
negotiation of Sets may not be feasible, and to offer Sets for installment sale
and/or rental to these new subscribers; and
WHEREAS, both parties recognize that these referrals are likely to increase
installment sales and/or rentals of the Sets and to advance subscriptions for
Network Services, particularly Calling Line Identification, and Sets;
NOW, THEREFORE, in consideration of Ten and 00/l00th Dollars ($10.00) in
hand paid, the above premises, and the covenants, terms and conditions contained
herein, the receipt, adequacy and sufficiency of all such consideration being
hereby acknowledged, the parties agree as follows:
1. TERM OF AGREEMENT
The term of this Agreement shall commence on May 1, 1995 and shall, except
as otherwise provided herein, continue in effect thereafter through March 14,
2000, inclusive.
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2. TERRITORY
This Agreement applies to negotiation with subscribers, or referrals of
subscribers,. exclusively in association with INNOTRAC, in the Territory
described in Appendix A (the "Territory").
3. BST OBLIGATIONS
Service Representatives of BST and/or the Affiliated Companies
communicating with existing or prospective Network Services subscribers,
particularly existing or prospective Calling Line Identification subscribers,
will directly negotiate, as agents of INNOTRAC, the installment sale or rental
of appropriate complementary Sets. Where such direct negotiation may not be
feasible, these same Service Representatives will also offer the subscribers
referral to INNOTRAC for the sale and/or rental of appropriate complementary
Sets. If the subscribers indicate an interest in such referral, the BST service
representative shall on-line transfer, or refer, the subscriber or prospective
subscriber to a telephone number designated by INNOTRAC, subject to the
provisions of Section 9. (b).
This agreement affords INNOTRAC the right to this agency agreement, and to
receive such referrals, for Calling Line Identification equipment, except as
provided by separate Letter(s) of Agreement, to be negotiated on an "as
required" basis.
4. INNOTRAC OBLIGATIONS
(a) INNOTRAC agrees to accept toll-free telephone calls between the hours
of 8:00 a.m. and 12:00 a.m. Eastern Time, Monday through Friday and from 9:00
a.m. to 6:00 p.m. on Saturdays, except on holidays recognized by BST, from
subscribers and prospective subscribers who are on-line transferred, or
referred, by BST service representatives, as provided in Section 3. The
foregoing hours can be modified by mutual agreement of the parties.
(b) INNOTRAC agrees to train, to the reasonable satisfaction of BST, all of
its Call Center and Customer Service telemarketing specialists who will be
handling all forms of inquiries from BST subscribers. These inquiries include,
but are not limited to, referrals and sales, product function, installation,
billing, delivery and return. Minimum training standards shall be reasonably
determined and supplied by BST to INNOTRAC in writing. Training of Call Center
telemarketing specialists will be of sufficient duration and detail to enable
the telemarketing specialists to accurately and fully understand the function of
the Sets, particularly Calling Line Identification display units; to explain the
Sets to subscribers and prospective subscribers; and to explain INNOTRAC terms
and conditions. Training of Customer Service telemarketing specialists will be
of sufficient duration and detail to enable the telemarketing specialists to
accurately and fully understand the function of the Sets, particularly Calling
Line Identification display units; to assist BST's subscriber in
troubleshooting; to assist with billing; to assist with product delivery
inquiries; and to assist with product returns. All costs of such training will
be borne by INNOTRAC; provided, however, BST shall provide INNOTRAC training
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guidelines, materials and other assistance as is necessary to assist INNOTRAC to
adequately train its telemarketing specialists. A maximum of two (2) BST
employees will be permitted to observe any or all training sessions to ensure
the accuracy and completeness of the training.
(c) INNOTRAC shall make all reasonable efforts to ensure that all
subscriber calls transferred or referred from BST to INNOTRAC, as well as all
subsequent customer service calls associated with BST subscribers, are handled
in a prompt, helpful and courteous manner. INNOTRAC will utilize its best
efforts to maintain a monthly average of answering [ * ] of customer calls in
[ * ] seconds or less, for both the Sales and Service Centers. BST may place
test calls to INNOTRAC, visit INNOTRAC's premises, observe the handling of calls
from subscribers, assess the courtesy, knowledge, and promptness of INNOTRAC's
telemarketing specialists, and discuss the results of such calls and
observations with INNOTRAC management. INNOTRAC agrees to remove from its work
group that handles subscriber calls any telemarketing specialist who does not
perform to a level of courtesy, promptness and knowledge reasonably satisfactory
to BST and INNOTRAC; provided, however, removal of any such telemarketing
specialist from the work group handling subscriber calls shall be BST's sole
remedy for the failure of a telemarketing specialist to perform to a level of
courtesy, promptness and knowledge. INNOTRAC agrees to allow representatives of
BST, at BST's discretion with no provision for advance notice, to observe calls
taken by INNOTRAC telemarketing specialists for the purpose of ensuring
compliance to this Section. INNOTRAC agrees to place signs in conspicuous places
in the workplace notifying its employees that calls taken by telemarketing
specialists are subject to periodic monitoring for quality control purposes.
(d) INNOTRAC agrees to keep in service, solely at its expense, sufficient
telecommunications facilities dedicated to answering customer calls, including
but not limited to, toll-free lines and telephone sets, to ensure adequate
access to INNOTRAC's Sales and Call Centers as described in Section 3(c). If, at
any time, the incoming subscriber calls become too numerous to be handled by the
then prevailing numbers of telecommunications facilities and/or telemarketing
specialists allocated by INNOTRAC, INNOTRAC agrees to increase the number of
telecommunications facilities and/or telemarketing specialists to handle the
increased volume of calls to comply with the access provisions of Section 3(c).
When all telecommunications facilities and/or telemarketing specialists become
busy and incoming calls encounter a busy or hold condition, INNOTRAC shall be
relieved of its normal responsibility of handling each Sales or Customer Service
call to conclusion and make commitments to call subscribers back within four (4)
working hours of the time the subscriber's call was originally received by
INNOTRAC.
(e) INNOTRAC will purchase and own the inventory of Sets that it sells
and/or rents to subscribers, and will maintain an inventory adequate to fill
orders placed by subscribers within a reasonable time. INNOTRAC agrees to
purchase the Sets from distributor(s) designated by BST. BST will assist
INNOTRAC in obtaining Sets at a price per unit comparing favorably to the price
being offered to other purchasers of Sets, taking into consideration volume
discounts. All Sets marketed and sold by INNOTRAC pursuant to this Agreement
shall be BellSouth Sets. BST shall utilize its best efforts to assist INNOTRAC
in its efforts to obtain from designated distributors in a timely manner the
quantities of Sets ordered and required by INNOTRAC to fulfill its obligations
to subscribers and BST under this Agreement. If any designated distributor fails
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to deliver timely the quantities of Sets ordered by INNOTRAC, INNOTRAC shall be
relieved of its duty to perform under this Agreement to the extent that its
performance becomes impossible or delayed because of said failure by designated
distributor(s). In addition, BST shall ensure that any manufacturer of the Sets
delivers the Sets to INNOTRAC in good condition and that the Sets function
properly and are reasonably suited for their intended purpose. No Sets,
apparatus, equipment, devices, materials or products acquired in any manner from
any other sources, supplier, distributor or manufacturer may be advertised,
marketed, promoted, or sold in any way to subscribers referred to INNOTRAC
pursuant to this Agreement, without the prior written consent of BST.
(f) Following direct negotiation or referral by BST, INNOTRAC agrees to
handle all necessary communications with subscribers, including but not limited
to, post-sale calls, in connection with the sale and/or rental of the Sets.
INNOTRAC shall provide the Sets to subscribers on an "as-ordered" basis only,
and to the extent that INNOTRAC's inventory permits. INNOTRAC will ship, bill
and collect payment for all sets sold and/or rented except to the extent such
billing and collection is assumed by BST. A credit card order will be shipped by
INNOTRAC to the subscriber within two (2) working business days of the order
being placed. An order to be paid by personal check will be shipped by INNOTRAC
to the subscriber within five (5) business days of INNOTRAC's receipt of the
check.
(g) Notwithstanding any contrary provision of this Agreement, if any of the
material obligations of INNOTRAC are not performed to the reasonable
satisfaction of BST, other than services assumed and performed by BST, in BST's
reasonable discretion, then BST may terminate this Agreement, provided that BST
shall provide INNOTRAC with thirty (30) days written notice of its intention to
terminate and INNOTRAC shall have those thirty (30) days to satisfy BST that it
has improved its performance to levels reasonably acceptable to BST.
Notwithstanding the foregoing, if INNOTRAC commences efforts to cure any breach
of its obligations to perform any material duty required of it by this Agreement
within the thirty (30) day grace period and such breach cannot be completely
cured within said thirty (30) day grace period, the cure/grace period herein
shall be extended from day to day for a period of up to thirty (30) additional
days so long as INNOTRAC pursues efforts with diligence to cure the breech.
(h) The billing and collection of monies for all Sets sold via installment
and/or rented by INNOTRAC to subscribers directly negotiated by BST as agents of
INNOTRAC or referred by BST to INNOTRAC shall be handled in accordance with that
certain Billing and Collection Services Agreement between BST and INNOTRAC dated
March 29, 1994.
(i) INNOTRAC agrees to compensate BST for those Sets directly negotiated by
BST telemarketing specialists per the terms found in Appendix E, "Part X
Settlements."
(j) INNOTRAC will bill BST subscribers who obtain Sets by direct
negotiation or referral in accordance with the subscriber's purchase selection.
These rates are exclusive of any special offers which may prevail at the time of
the subscriber's order. INNOTRAC will ship Sets to subscriber using United
Parcel Service (UPS) Two-Day Air Service or U.S. Mail Priority Mail. Such
special offers will be mutually agreed to by INNOTRAC and BST at least thirty
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(30) days in advance of any special offer. INNOTRAC agrees to provide at least
sixty (60) days' advance notice of any pricing, shipping or shipping method
changes.
5. NONCOMMITMENT AGREEMENT
(a) This Agreement is a noncommitment agreement as to levels of installment
sales and rentals of Sets and in no way implies any promise on the part of BST
that any number of Sets will be purchased and/or rented as a result of equipment
negotiations or referrals made pursuant to this Agreement.
(b) It is expressly understood and agreed that this Agreement does not
grant to INNOTRAC an exclusive privilege to market and sell the Sets, but does
grant to INNOTRAC the exclusive right to the BST agency arrangement in the
territory and referrals of subscribers from BST in the Territory seeking to
purchase and/or rent Sets, as defined in Part 3. "BST Obligations". It is
expressly understood and agreed that this Agreement does not grant to INNOTRAC
an exclusive privilege to the BST agency arrangement and to receive referrals
from subscribers except in the Territory. However, the parties also understand
and agree that INNOTRAC may market and sell and/or rent Sets to end-users other
than subscribers negotiated by BST for INNOTRAC, or referred by BST to INNOTRAC,
pursuant to this Agreement. BST shall determine, at its own discretion, the
extent to which BST and the Affiliated Companies (as hereinafter defined) will
assist INNOTRAC by marketing, advertising, promoting, supporting or otherwise
assisting in offering the Sets and the extent to which BST will refer
subscribers to INNOTRAC except as expressly provided in this Agreement. This
Agreement does not represent, and should in no way imply, a commitment on the
part of BST to purchase any products or services of INNOTRAC except as expressly
provided herein.
6. SPECIAL RECOGNITION
(a) INNOTRAC expressly recognizes that BST is both a seller and reseller of
products and services and that nothing agreed to herein is intended to limit,
prohibit or restrict BST's merchandising activities in any way, except as
provided in this Agreement.
(b) INNOTRAC expressly recognizes that BST is a communications common
carrier licensed and regulated by the Federal Communications Commission and
various state regulatory commissions. This Agreement may be subject to such
changes or modifications as any such regulatory body may from time to time
direct in the exercise of its jurisdiction. This Agreement is also subject to
modification under the continuing jurisdiction of the U.S. District Court for
the District of Columbia in United States v. Western Electric, C.A. No. 82-0192
("Modification of Final Judgment") or under the jurisdiction of other judicial
authorities. In the event of a substantial change or deviation from the state of
facts or the degree of regulation from that existing at the time of the
execution of this Agreement which materially and adversely alters the
obligations of either party under this Agreement, the adversely affected party
shall have the option (i) to continue in full force and effect this Agreement,
as modified by any regulatory or judicial change, or (ii) terminate any and all
future obligations contemplated under this Agreement.
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7. AFFILIATES AND SUCCESSORS
For purposes of this Agreement, an "Affiliated Company" shall be defined as
any company that is owned in whole or in part by BellSouth Corporation
("BellSouth") or by one or more of its direct or indirect subsidiaries. This
Agreement shall be binding upon INNOTRAC and BST, and their respective
successors and affiliates and shall inure to the benefit of INNOTRAC and BST,
and their respective successors and affiliates, including the Affiliated
Companies. INNOTRAC shall take all steps reasonably necessary to ensure that its
successors, assigns, representatives, agents and affiliates comply with this
Agreement. BST shall take all steps reasonably necessary to ensure that its
successors, assigns, representatives, agents and affiliates, including the
Affiliated Companies, comply with this Agreement.
8. ASSIGNMENT
The rights and obligations of either party hereto may not be assigned or
assumed without the prior written consent of the other party, which consent
shall not be unreasonably withheld; provided, however, that BST, may, without
INNOTRAC's consent, assign this Agreement and may subcontract the performance of
any of its obligations hereunder to any of the Affiliated Companies.
Notwithstanding the foregoing, BST hereby consents: (i) to INNOTRAC's assignment
of this Agreement, in whole or in part, to any corporation wholly owned by Scott
David Dorfman ("Dorfman") or any partnership or corporation having Dorfman or a
corporation wholly owned by Dorfman as a majority shareholder or general
partner, and (ii) to INNOTRAC's conveyance of a security interest in and to any
monies due from BST to INNOTRAC under this Agreement.
9. OWNERSHIP AND USE OF MARKS
(a) BST authorizes INNOTRAC to use the BellSouth Telecommunications name,
the BellSouth Telecommunications mark, and any other trademark associated with
the Sets (collectively the "Marks") solely in conjunction with the advertising,
sale and/or rental of the Sets pursuant to terms hereof and the Billing
Agreement of even date herewith (the "Billing Agreement"). INNOTRAC shall
strictly comply with all graphic standards as referenced in Appendix B and any
such other graphic standards for the Marks which may be furnished from time to
time, and shall place appropriate trademark notices on the Marks as instructed,
unless impossible. Any use of the Marks which is not authorized herein or by an
authorized representative of BST shall be strictly prohibited. INNOTRAC admits
the value of, the popularity of, and the good will associated with the Marks.
INNOTRAC acknowledges that said good will is a property right belonging to
BellSouth and that, as between the parties hereto, BellSouth is the owner of all
trademark and other rights in said Marks worldwide. INNOTRAC recognizes that
nothing contained in this Agreement is intended as an assignment or grant to
INNOTRAC of any right, title or interest in or to said Marks or to any other
marks of BellSouth or the good will attached thereto, except that INNOTRAC may
use the Marks as provided in this Agreement and/or the Billing Agreement. Any
use of the Marks shall inure to the benefit of and be on behalf of BellSouth and
its Affiliated Companies, except that INNOTRAC may use and receive the benefit
of the Marks as provided in this Agreement and/or the Billing Agreement.
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INNOTRAC further recognizes that this Agreement does not confer any right on
INNOTRAC to use the Marks in any manner outside of the United States, or to
grant sublicenses, and is not assignable except as provided in Section 8.
INNOTRAC will do nothing inconsistent with BellSouth's ownership of the Marks.
INNOTRAC acknowledges that in the event, after a thirty (30) day notice has been
issued to INNOTRAC and INNOTRAC remains in breach of Section 9 or 10 hereof and
continues to act in any manner which materially and negatively impacts on the
reputation of BST, its Marks or its Affiliated Companies, BST shall have the
right to (1) bring an action against INNOTRAC at law or in equity to protect the
Marks and to recover damages as the result of any misuse or unauthorized use
thereof and/or (2) terminate this Agreement for any such misuse or unauthorized
use by INNOTRAC.
(b) During the term of this Agreement INNOTRAC's employees will be
permitted to answer calls from referred subscribers with the phrase, "BellSouth
Phones." INNOTRAC may continue to use the In-WATS number 1-800-XXX-XXXX;
provided, however, that INNOTRAC hereby agrees and warrants that it shall
immediately cease any and all current and future use of any alphabetical and/or
alpha/numeric equivalent of said In-WATS number, including but not limited to
1-800-XXX-XXXX, and that it shall, promptly destroy any and all materials and
other tangible items which reflect any alphabetical and/or alpha/numeric
equivalent of said In-WATS number, it being understood that INNOTRAC may retain
for internal use only and for so long as is necessary any INNOTRAC business
records reflecting any alphabetical and/or alpha/numeric equivalent of said In-
WATS number. The parties will cooperate in every reasonable manner in
determining whether any specific material which reflects the alphabetical and/or
alpha/numeric equivalent is being used in violation of or in noncompliance with
this paragraph. INNOTRAC acknowledges that in the event, after a thirty (30) day
notice has been issued to INNOTRAC and INNOTRAC continues to utilize in a manner
inconsistent with the foregoing an alphabetical and/or alpha/numeric equivalent
of said In-WATS number, BST shall have the right to (1) bring an action against
INNOTRAC at law or in equity to enjoin INNOTRAC's use of the alphabetical and/or
alpha/numeric equivalent of said In-WATS number and to recover damages as the
result of any such misuse or unauthorized use thereof, and/or (2) terminate this
Agreement for any such misuse by INNOTRAC of the alphabetical and/or
alpha/numeric equivalent of said In-WATS number.
(c) Upon the expiration, termination or cancellation of this Agreement for
any reason whatsoever, INNOTRAC shall, except as otherwise provided in this
Agreement and the Billing Agreement, immediately (i) cease answering calls with
the phrase, "BellSouth Phones"; (ii) cease any uses of the Marks, and (iii)
cease its use of all materials and other tangible items bearing the Marks.
INNOTRAC shall certify compliance with this paragraph in writing to BST within
thirty (30) days of the expiration, termination or cancellation date. Upon the
expiration, termination or cancellation of this Agreement, INNOTRAC will be
allowed to sell and/or rent any remaining Sets in its possession independently
of this Agreement so long as the Marks used on or in connection with the sale
and/or rental of the Sets are (i) removed or (ii) comply with the graphic
standards set forth in this Agreement.
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10. RESTRICTION ON BST MERCHANDISING
BST and its Affiliated Companies shall not engage in any marketing or
merchandising activities that (i) diminish the pool of customer referrals to
INNOTRAC pursuant to the Referral Agreement, (ii) cause or might cause
purchasers and/or lessees of Sets to terminate their use of and/or payment for
the Sets under the Program (as defined in the Billing Agreement) and switch to
another BellSouth-related marketing or merchandising program for the delivery or
marketing of telephone company services, including caller identification
services, which services are identical or similar to those that are the subject
of this Agreement and which do not materially involve INNOTRAC as a service
provider upon not less favorable terms, or (iii) cause or might cause potential
purchasers and/or lessees of Sets to choose another BST marketing or
merchandising program for telephone company services, including caller
identification services, which services are identical or similar to those that
are the subject of this Agreement and do not materially involve INNOTRAC as a
service provider upon not less favorable terms; provided, however, that during
the calendar years 1995 and 1996, BST shall have the right in its sole
discretion to conduct a one month Caller Identification promotion involving the
distribution of Caller Identification-display units in each year in each of its
nine states. The parties agree that the terms of this Section 10 shall be
subject to good faith negotiations concerning desired changes by either party
beginning after January 1, 1997. Either party desiring such negotiations shall
provide a thirty (30) day notification to the other party pursuant to Section 15
of this Agreement.
11. ADVERTISING AND PUBLICITY
(a) All media advertising and printed material in which the Marks are to be
used shall be prepared consistent with Appendix B and with such other guidelines
as may provide to INNOTRAC by BST. BST shall prepare an approved boilerplate
for such advertising and printed materials consistent with said guidelines for
use by INNOTRAC. All media advertising and printed material using the Marks
other than in conformance with the BST boilerplate shall be submitted to BST for
review in advance and shall not be distributed or used in any manner without the
prior written approval of BST, not to be unreasonably withheld.
(b) INNOTRAC agrees not to identify BST or any other Affiliated Companies
in any advertising or publicity without the prior written consent of BST, except
as expressly provided herein. INNOTRAC agrees that the Marks shall not be used
in any advertising or publicity without the prior written consent of BST, except
as expressly provided herein.
12. INDEMNITY
(a) In the event of any infringement or claim of infringement of any
patent, trademark, copyright, trade secret or other proprietary interest based
on the sale of any Sets pursuant to this Agreement or in contemplation hereof,
INNOTRAC shall indemnify and hold harmless BST and the Affiliated Companies from
any loss, damage, expense or liability, including costs and reasonable
attorney's fees, that may result by reason of any such infringement by or claim
of infringement against INNOTRAC, except that this indemnity shall not apply to
infringements by or claims of infringement against INNOTRAC or BST, and/or the
Affiliated Companies which infringement arises out of the action of BST and/or
the Affiliated companies.
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(b) The parties agree that BST and the Affiliated Companies except as
provided by law, shall not be responsible for providing any warranty on any Sets
purchased by subscribers pursuant to this Agreement. INNOTRAC agrees to
indemnify and hold BST and the Affiliated companies harmless from any claim,
suit, action or proceeding arising by or on behalf of any subscriber with
respect to the failure of INNOTRAC to comply with any INNOTRAC warranty on the
Sets. BST and the Affiliated Companies hereby assign to INNOTRAC any and all
warranties of the manufacturer(s) of the Sets.
(c) INNOTRAC agrees to indemnify and hold harmless BST and the Affiliated
Companies, and their respective officers, employees and agents, from any and all
claims, liabilities, or loss, and all damages, direct or consequential, incurred
by BST, the Affiliated Companies, or any other person or entity, and all costs
and expenses including reasonable attorney's fees, arising in any manner,
directly or indirectly, from the negligent or unlawful conduct of INNOTRAC
arising out of or in connection with or incident to this Agreement.
(d) BST and the Affiliated Companies agree to indemnify and hold harmless
INNOTRAC and its affiliates, and their respective officers, employees and
agents, from any and all claims, liabilities, or loss, and all damages, direct
or consequential, incurred by INNOTRAC, its affiliates and/or any other person
or entity, and all costs and expenses including reasonable attorney's fees,
arising in any manner, directly or indirectly, from the negligent and/or
unlawful conduct of BST arising out of or in connection with or incident to this
Agreement.
(e) The foregoing indemnifications shall survive the termination,
cancellation or expiration of this Agreement.
13. CHOICE OF LAW
The validity, construction, interpretation, and performance of this
Agreement shall be governed by and construed in accordance with the law of the
State of Georgia.
14. INNOTRAC RELATIONSHIP
Persons furnished by INNOTRAC shall be considered solely the employees or
agents of INNOTRAC, under the sole and exclusive direction of control of
INNOTRAC, and shall not be considered employees of BST or the Affiliated
Companies for any purpose. INNOTRAC shall be responsible for compliance with all
employment-related laws, rules and regulations involving, but not limited to,
employment of labor, hours of labor, health and safety, working conditions and
payment including federal, state and local taxes chargeable or assessed with
respect to its employees, such as social security, unemployment, worker's
compensation, disability insurance and federal and state withholding.
15. NOTICES
(a) Any notices or demands that are required by law or under the terms of
this Agreement shall be given or made by BST or INNOTRAC in writing and shall be
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given by hand delivery, telegram or similar communication, or by certified or
registered mail, or by courier or telecopier, and addressed to the respective
parties set forth below. Such notices shall be deemed to have been given in this
case of telegrams or similar communications when sent, and in the case of
certified or registered mail when deposited in the United States mail with
postage prepaid.
To BST: BellSouth Telecommunications, Inc.
[ * ]
South S4IA 3535 Colonnade Parkway
Birmingham, Alabama 35235
FAX (205) 977-0979
To INNOTRAC: INNOTRAC Corporation
Mr. Scott Dorfman
1828 Meca Way
Norcross, GA 30093
FAX (404) 717-2111
(b) The above addresses may be changed at any time by giving written notice
as above provided.
(c). In addition to the foregoing, any notices of a legal nature shall be
copied to:
BellSouth Telecommunications, Inc.
Legal Department
3535 Colonnade Parkway
South E9D1
Birmingham, Alabama 35243
and
Scott Dorfman
President
INNOTRAC Corporation
1828 Meca Way
Norcross, Georgia 30093
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16. DAMAGES LIMITATIONS
IN NO EVENT SHALL BST OR INNOTRAC, OR THEIR PARENT CORPORATIONS, AFFILIATES OR
SUPPLIERS, BE LIABLE FOR SPECIAL, CONSEQUENTIAL OR INDIRECT DAMAGES.
17. CONFIDENTIALITY
BST and INNOTRAC agree that they will keep the terms of this
Agreement, and any communications, business dealings and transactions pursuant
thereto, confidential and will not disclose such terms, communications, dealings
or transactions ("Information") to any person or entity not employed by,
affiliated with or otherwise under the control of, the parties with a need to
know such Information, except to the extent that disclosure (i) may be
reasonably necessary for performance hereunder, (ii) may be necessary in order
to obtain enforcement of the terms of this Agreement, or (iii) may be required
be applicable law or regulation or by order of a court of competent
jurisdiction. In the event any such disclosure is required by law, regulation or
court order, the party making the disclosure shall promptly inform the other
party. Notwithstanding the foregoing, BST consents to INNOTRAC's disclosure of
this Agreement, and any communications, business dealings and transactions
pursuant thereto to any entity that has received an assignment of this Agreement
pursuant to Section 8 above, and professionals, including attorneys and
accountants, employed by any of the persons or entities referenced in this
Section 17.
18. TERMINATION
Either party may terminate this Agreement, without cause, upon not
less than twenty-four (24) months prior written notice given in accordance with
Section 15.
19. NONDISCRIMINATION COMPLIANCE
INNOTRAC agrees to comply with the applicable provisions of the
"NONDISCRIMINATION COMPLIANCE AGREEMENT" set forth in Appendix C.
20. CONFLICT OF INTEREST
INNOTRAC acknowledges BST's "CONFLICT OF INTEREST" statement shown in
Appendix D, and further stipulates no officer or employee of BST has been
employed, retained, induced, or directed by INNOTRAC to solicit or secure this
Agreement with BST upon agreement, offer, understanding, or implication
involving any form of remuneration whatsoever. INNOTRAC agrees, in the event of
an allegation of substance (the determination of which will be made solely by
BST ) that there has been a violation hereof, INNOTRAC will cooperate in every
reasonable manner with BST in establishing whether the allegation is true.
Notwithstanding any provisions of this Agreement to the contrary, if a violation
of this provision is found to have occurred and is deemed material by BST, BST
may cancel this Agreement. If BST, in its sole discretion, believes that any
12
<PAGE>
such violation can be cured, BST agrees to provide INNOTRAC a thirty (30) period
in which to effect such a cure.
21. SEVERABILITY
If any part of this Agreement is determined to be invalid, illegal or
unenforceable, such determination shall not affect the validity, legality or
enforceability of any other part of this Agreement, and the remaining parts of
this Agreement shall be enforced as if such invalid, illegal or unenforceable
part were not contained herein.
22. SECTION HEADINGS
The headings of the sections included in this Agreement are inserted for
convenience only and are not intended to affect the meaning or interpretation of
this Agreement.
23. ENTIRE AGREEMENT
This Agreement embodies the entire agreement and understanding between
the parties hereto relating to the subject matter hereof and supersedes all
prior agreements and understandings relating to such subject matter. The parties
acknowledge that they have read this Agreement, understand it and agree to be
bound by its terms and conditions. The provisions of this Agreement may be
amended, waived or discharged only by an instrument in writing signed by both
parties. A waiver at any time of compliance with any of the terms and conditions
of this Agreement shall not be considered a modification, cancellation or waiver
of such terms and conditions, or of an preceding or waiver of such terms and
conditions, or of an preceding or succeeding breach thereof, unless expressly so
stated in a writing signed by both parties. Appendices A through E, referred to
herein and attached hereto, are integral parts of this Agreement and are
incorporated herein by this reference.
24. SUPERCEDES PREVIOUS AGREEMENT
This Agreement supercedes, it its entirety, any prior Referral agreements
between the parties.
13
<PAGE>
IN WITNESS WHEREOF, the parties have hereunto placed their hands and seals.
INNOTRAC CORPORATION, as agent for BELLSOUTH TELECOMMUNICATIONS, INC.,
HomeTel Systems, Inc. for itself.
By: /s/ Scott Dorfman By: [_______________*_______________]
(signature) (signature)
By: Scott Dorfman By: [_______________*_______________]
(printed name) (printed name)
Title: President Title: [____________*_______________]
Date: 6-17-95 Date: 6/22/95
14
<PAGE>
APPENDIX A
---------
TERRITORY
The Territory of this Agreement shall be the states of Alabama, Florida,
Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, and
Tennessee.
15
<PAGE>
APPENDIX B
----------
TRADENAME AND TRADEMARK
USAGE REQUIREMENTS - BELLSOUTH AND BELL SYMBOL
The standards of usage for the BellSouth name and logo will be as follows:
(1) The legal name of the Company is BellSouth Products, Inc. "BellSouth" is
always one word with the "B" and "S" capitalized. The work "Products" is
initial cap only. A trademark notice should appear after the word Products
in the first or most prominent usage of the BellSouth Products Mark
(BellSouth Products)
(2) The Bell Symbol must be used with the geographic modifier BellSouth
Products. The Bell Symbol may not be used alone, or in a different
proporation to the names as shown in the sample logos.
(3) Color for the logo may be used in one of three ways:
- PANTONE* 300 blue for the Bell Symbol with black for BellSouth Products.
- Print the entire logo in black or a color dark enough to provide strong
contrast between logo and background.
- Reverse the entire logo out of color background in all white. The
background color should be dark enough to provide strong contrast
between it and the logo.
(4) The Bell Symbol shall be constructed of solid heavy lines and shall not be
constructed out of any other graphic elements (such as dots, stripes, or
patterns).
(5) Whenever the Bell Symbol is depicted in print advertising, it shall always
appear a distance of at least one-half its diameter away from all edges.
(6) No text, illustration, work, name, symbol or graphic element shall touch
any part of the Bell Symbol or appear in the space surrounding and
extending from the outermost perimeter of the Bell Symbol in all directions
a distance of one-half the diameter of any depiction of the Bell Symbol.
(7) The two elements that make up the Bell Symbol (the bell and a surrounding
circle) are a single unit and shall not be used separately.
(8) The Bell Symbol shall not be displayed or placed against a background
containing a strong texture or pattern or multiple colors such that the
Bell Symbol is not clearly distinguishable from the background.
* Pantone, Inc.'s check-standard trademark for color reproduction and color
reproduction materials.
16
<PAGE>
APPENDIX C
----------
NONDISCRIMINATION COMPLIANCE AGREEMENT
Contractor shall comply with the applicable provisions of the following:
Exec. Order No. 11246, Exec. Order No. 11625, Section 8 of the Small Business
Act as amended, Railroad Revitalization and Regulatory Reform Act of 1976, Exec.
Order No. 11701, Exec. Order No. 11758, Exec. Order No. 12138 Section 503 of the
Rehabilitation Act of 1973 as amended by PL93-516, Vietnam Era Veterans'
Readjustment Assistance Act of 1974 and the rules, regulations and relevant
Orders of the Secretary of Labor pertaining to the Executive Orders and Statutes
listed above.
For contracts of or which aggregate to S2,500 or more annually, the
following table describes the clause which are included in the contract:
1. Inclusion of the Equal Employment clause in all contracts and orders;
2. Certification of non-segregated facilities;
3. Certification that an affirmative action program has been developed and
is being followed;
4. Certification that an annual Employers Information Report (EEO-1
Standard Form 100) is being followed;
5. Inclusion of the "Utilization of Minority and Women's Business
Enterprises" clause in all contracts and orders;
6. Inclusion of the "Minority and Women's Business Subcontraction Program"
clause in all contracts and orders;
7. Inclusion of the "Listing of Employment Openings" clause in all
contracts and orders;
8. Inclusion of the "Employment of the Handicapped" clause in all
contracts and orders;
$2,500 to $10,000 $10,000 to $50,000 $50,000 or more
8 1, 2, 5, 6, 7, 8 1, 2, 3*, 4*, 5, 6, 7, 8
*Applies only for business with 50 or more employees
1. Equal Employment Opportunity Provisions
17
<PAGE>
In accordance with Exec. Order No. 1246, dated September 24, 1965 and Part
60-1 of Title 41 of the codes of Federal Regulations (Public Contracts and
Property Management, Office of Federal Contract Compliance, Obligations of
Contracts and Subcontractors), as may be amended from time to time, the parties
incorporated herein by this reference the regulations and contract clauses
required by those provisions to be made a part of Government contracts and
subcontracts.
2. Certification of Non-segregated Facilities
The Contractor certifies that it does not and will not maintain any
facilities it provides for its employees in a segregated manner or permit its
employees to perform their services at any location under its control where
segregated facilities are maintained and that it will obtain a similar
certification prior to the award of any nonexempt subcontract.
3. Certification of Affirmative Action Program
The Contractor affirms that it has developed and is maintaining an
affirmative action plan as required by Part 60-2 of Title 41 of the Code of
Federal Regulations.
4. Certification of Filing of Employers Information Reports
The Contractor agrees to file annually on or before the 31st day of March
complete and accurate reports on Standard Form 100 (EEO-1) or such forms as may
be promulgated in its place.
5. Utilization of Minority and Women's Business Enterprises
(a) It is the policy of the Government and us, as a Government contractor,
that minority and women's business enterprises shall have the maximum
practicable opportunity to participate in the performance of
contracts.
(b) The Contractor agrees to use his or her best efforts to carry out this
policy in the award of his or her subcontracts to the fullest extent
consistent with the efficient performance of this contract. As used in
this contract, the term "minority or women's business enterprise"
means a business with at least 50 percent of which is owned by
minority or women group members or in case of publicly owned
businesses, at least 51 percent of the stock of which is owned by
minority or women's group members. For purposes of this definition
minority group members are American Blacks, Hispanics, Asians, Pacific
Islanders, American Indians and Alaskan Natives. Contractor may rely
on written representation by subcontractors regarding their status as
minority or women's business enterprises in lieu of an independent
investigation.
18
<PAGE>
6. Minority and Women's Business Enterprises Subcontracting Program
(a) The Contractor agrees to establish and conduct a program which will
enable minority and women's business enterprises (as defined in
paragraph 5 above) to be considered fairly as subcontractors and
suppliers under the contract. In this connection, the Contractor
shall:
(1) Designate a liaison officer who will administer the Contractor's
minority and women's business enterprises program;
(2) Provide adequate and timely consideration of the potentialities
of known minority and women's business enterprise in all "make-
or-buy" decisions;
(3) Assure that known minority and women's business enterprises will
have an equitable opportunity to compete for subcontracts,
particularly by arranging solicitations, time for the preparation
of bids, quantities, specifications, and delivery schedules so as
to facilitate the participation of minority and women's business
enterprises;
(4) Maintain records showing (I) procedures which have been adopted
to comply with the policies set forth in this clause, including
the establishment of a source list of minority and women's
business enterprises (II) awards to minority and women's business
enterprises on the source list, and (III) specific efforts to
identify and award contracts to minority and women's business
enterprises;
(5) Include the utilization of Minority and Women's Business
Enterprises clause in subcontracts which offer substantial
minority and women's business enterprises subcontracting
opportunities;
(6) Cooperate with the Government's Contracting Officer for us in any
studies and surveys of the contractor's minority and women's
business enterprises procedures and practices that the
Contracting Officer may from time to time conduct;
(7) Submit periodic reports of subcontracting to known minority and
women's business enterprises with respect to the records referred
to in subparagraph (4) above, in such form and manner and at such
time (not more than quarterly) as the Government's Contracting
Officer for us may prescribe.
(a) The Contractor further agrees to insert, in any subcontract
hereunder which may exceed $5,000,000 (or in the case of WBE
$1,000,000 in the case of contracts for the construction of
any public facility and which offer substantial
subcontracting possibilities) provisions which shall conform
substantially to the language of this agreement, including
this paragraph; and
19
<PAGE>
(b) to notify the Contracting Officer of the names of such
subcontractors.
7. List of Employment Openings for Veterans
In accordance with Exec. Order 11701, dated January 24, 1973, and part 60-
250 of Title 41 of the Code of Federal Regulations, as it may be amended from
time to time, the parties incorporated herein by this reference and regulations
and contract clauses required by those provisions to be made a part of
Government contracts and subcontracts.
8. Employment of the Handicapped
In accordance with Exec. Order 11758, dated January 15, 1974, and Part 60-
741 of Title 41 of the Code of Federal Regulations, as may be amended from time
to time, the parties incorporated herein by this reference the regulations and
contract clauses required by those provisions to be made a part of Government
contracts and subcontracts.
20
<PAGE>
APPENDIX D
----------
CONFLICT OF INTEREST
BellSouth does business with thousands of contractors and suppliers.
It is a fundamental policy of BellSouth that such dealings shall be conducted on
a fair and impartial basis, free from improper influences, so that all
participating contractors and suppliers may be considered on the basis of the
quality and cost of their product or service.
We are also committed to doing business with contractors and suppliers
in an atmosphere that is in keeping with the highest standards of business
ethics. Although we recognize that the exchange of gifts and entertainment is
customary in some businesses, we believe this practice often raises embarrassing
questions about the motives of both the giver and receiver. Therefore, this
company has for some time followed a policy that its employees shall not accept
from customers, suppliers of property, goods or services, or from any other
persons, any gifts, benefits or unusual hospitality that may in any way tend to
influence them, or have the appearance of influencing them, in the performance
of their jobs.
Employees of BellSouth who are authorized to make purchases or
negotiate contracts are aware of this policy.
We believe that firm adherence to this policy will help establish
better business relationships between BellSouth and its contractors and
suppliers. We solicit your cooperation in achieving that objective.
21
<PAGE>
APPENDIX E
----------
CPE NEGOTIATION TRIAL AND PART X COMPENSATION
BST and INNOTRAC agree that it is in the mutual best interest of both
parties to enable BST service representatives to directly negotiate the sale of
Caller ID display units and other telecommunications devices directly with the
customer. In concept, this would largely eliminate the need for BST service
representatives to "refer" customers desiring such equipment to INNOTRAC to
complete the sale.
To that extent, BST and INNOTRAC agree to conduct a trial to ascertain
the effectiveness of such a program. At the end of the trial period, it shall be
BST's sole discretion to continue the trial in the trial locations; to terminate
the trial altogether; or to judge the trial a success. It will be BST's sole
discretion as to the extent to which locations are added should the trial be a
success.
TRIAL TIMING AND DURATION
The trial will begin May 1, 1995 and will run for a period of
ninety (90) days.
TRIAL LOCATION(S)
The trial will encompass all BST Marketing and Service Business
Offices and their associated Service Representatives in the states of Georgia
(GA), Louisiana (LA) and Tennessee (TN).
BST COMPENSATION
INNOTRAC agrees to compensate BST for the appropriate Part X
charges as provided by the formula provided below.
PART X COMPENSATION FORMULA
INNOTRAC compensation to BST will be calculated based on the number of
sales directly negotiated by BST Service Representatives, multiplied by the
average time spent negotiating the Caller ID or other display equipment,
multiplied by the BST determined compensation rate per minute of service
representative negotiation time.
AVERAGE NEGOTIATION TIME
The average time spent negotiating Caller ID and other display
equipment is established at [ * ].
22
<PAGE>
COMPENSATION RATE
The per minute rate by which BST will be compensated by INNOTRAC is
[ * ].
ADJUSTMENT
BST will perform periodic timing and costing studies which may result
in adjustments to the average negotiation time or compensation rate or both.
BST shall implement such adjustments at its sole discretion, provided, however,
that INNOTRAC is provided with thirty (30) days' advance notification of any
such adjustment.
BILLING
INNOTRAC will be billed monthly by BST based on the previous
month's sales activity.
23
<PAGE>
EXHIBIT 10.5
INDEMNIFICATION AGREEMENT
THIS AGREEMENT is made this 11th day of December, 1997, by and between
INNOTRAC CORPORATION, a Georgia corporation (the "CORPORATION"), and
_____________________ (the "INDEMNIFIED PARTY").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Indemnified Party currently serves as a director, officer, or
both of the Corporation, and in such capacity is performing a valuable service;
and
WHEREAS, pursuant to the Corporation's Articles of Incorporation and
Bylaws, each as amended to date (collectively the "CHARTER"), the Corporation
may indemnify its directors and officers to the fullest extent authorized by
applicable law; and
WHEREAS, Section 14-2-851 of the Georgia Business Corporation Code, as
amended to date (the "STATE STATUTE"), provides the statutory basis for the
indemnification of directors and officers of a Georgia corporation; and
WHEREAS, in order to induce the Indemnified Party to continue to serve, the
Corporation has determined and agreed to enter into this Agreement with the
Indemnified Party;
NOW, THEREFORE, in consideration of Indemnified Party's continued service
on behalf of the Corporation after the date hereof, the parties hereto agree as
follows:
1. INDEMNITY. The Corporation hereby agrees to hold harmless and
---------
indemnify the Indemnified Party to the fullest extent authorized or permitted by
the provisions of the State Statute with respect to the indemnification of
directors and officers, or by any amendment thereof or other statutory provision
authorizing or permitting such indemnification that is adopted after the date
hereof.
2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in
--------------------
SECTION 3 hereof, the Corporation hereby further agrees to hold harmless and
indemnify Indemnified Party against any and all expenses (including reasonable
attorneys' fees), judgments, fines, and amounts paid in settlement actually and
reasonably incurred by Indemnified Party in connection with any threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative (including an action by or in the right of the
Corporation) to which Indemnified Party is, was or at any time becomes a party,
or is threatened to be made a party, by reason of the fact that Indemnified
Party is, was or at any time becomes a director, officer, employee, or agent of
the Corporation, or is or was serving or at any time serves at the request of
the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust or other enterprise.
<PAGE>
3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to
-----------------------------------
SECTIONS 1 or 2 hereof shall be paid by the Corporation:
(a) In respect of expenses, judgments, fines, and settlement amounts
to the extent attributable to remuneration paid or other financial benefit
provided to the Indemnified Party by the Corporation if it shall be determined
by a final judgment or other final adjudication that such remuneration or
financial benefit was paid or provided in violation of the Indemnified Party's
duties and obligations to the Corporation;
(b) On account of any suit in which judgment is rendered against
Indemnified Party for an accounting of profits, made from the purchase or sale
by the Indemnified Party of securities of the Corporation, pursuant to the
provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended,
or similar provisions of any federal or state law, or on account of any payment
by the Indemnified Party to the Corporation in respect of any claim for such
accounting;
(c) On account of the Indemnified Party's conduct if it shall be
determined by a final judgment or other final adjudication to have been
knowingly fraudulent, deliberately dishonest, or grossly negligent, or to have
constituted willful misconduct; or
(d) If a final decision by a court having jurisdiction in the matter
shall determine that such indemnification is not lawful.
4. CONTRIBUTION. (a) If the indemnification provided in SECTIONS 1 OR 2
------------
is unavailable and may not be paid to the Indemnified Party for any reason
(other than pursuant to SECTIONS 3(A), (B), (C) AND (D)), then in respect of any
threatened, pending, or completed action, suit, or proceeding in which the
Corporation is jointly liable with the Indemnified Party (or would be if joined
in such action, suit, or proceeding), the Corporation shall contribute to the
amount of expenses, judgments, fines, penalties, and settlements paid or payable
by the Indemnified Party in such proportion as is appropriate to reflect (i) the
relative benefits received by the Corporation on the one hand and the
Indemnified Party on the other from the transaction from which such action,
suit, or proceeding arose, and (ii) the relative fault of the Corporation on the
one hand and of the Indemnified Party on the other in connection with the events
that resulted in such expenses, judgments, fines, penalties, or settlement
amounts, as well as any other relevant equitable considerations. The relative
fault of the Corporation on the one hand and of the Indemnified Party on the
other shall be determined by reference to, among other things, the parties'
relative intent, knowledge, access to information, and opportunity to correct or
prevent the circumstances resulting in such expenses, judgments, fines,
penalties, or settlement amounts. The Corporation agrees that it would not be
just and equitable if contribution pursuant to this SECTION 4 were determined by
pro rata allocation or any other method of allocation that does not take account
of the foregoing equitable considerations.
-2-
<PAGE>
(b) The determination as to the amount of the contribution, if any,
shall be made by: (i) a court of competent jurisdiction upon the application
of both the Indemnified Party and the Corporation (if an action or suit had been
brought in, and final determination had been rendered by, such court); (ii) the
Board of Directors by a majority vote of a quorum consisting of directors who
were not parties to such action, suit, or proceeding; or (iii) regular outside
counsel of the Corporation, if a quorum is not obtainable for purposes of clause
(ii) above, or, even if obtainable, a quorum of disinterested directors so
directs.
5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of the
---------------------------
Corporation contained herein shall continue during the period the Indemnified
Party is a director, officer, employee, or agent of the Corporation (or is
serving at the request of the Corporation as a director, officer, employee, or
agent of another corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise), and shall continue thereafter for so long as
the Indemnified Party shall be subject to any possible claim or threatened,
pending, or completed action, suit, or proceeding, whether civil, criminal,
administrative, or investigative, by reason of the fact that the Indemnified
Party was serving in any such capacity on behalf of the Corporation.
6. ADVANCEMENT OF EXPENSES. Expenses (including attorneys' fees),
-----------------------
judgments, fines, penalties, and amounts paid in settlement actually and
reasonably incurred by the Indemnified Party with respect to any action, suit,
or proceeding referred to in SECTIONS 1 or 2 shall be advanced by the
Corporation prior to the time of the disposition of such action, suit, or
proceeding promptly upon the receipt of a (a) written affirmation from the
Indemnified Party of his good faith belief that he is entitled to be indemnified
by the Corporation for such expenses, judgments, fines, penalties, or amounts
paid in settlement under the provisions of the State Statute, the Charter, this
Agreement, or otherwise, and (b) written undertaking to return promptly any
amounts advanced hereunder if it shall ultimately be determined that the
Indemnified Party is not entitled to indemnification from the Corporation for
such amounts under the provisions of the State Statute, the Charter, this
Agreement, or otherwise.
7. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the
---------------------------------
Indemnified Party of notice of the commencement of any action, suit, or
proceeding, the Indemnified Party will, if a claim in respect thereof is to be
made against the Corporation under this Agreement, notify the Corporation of the
commencement thereof, but the failure to notify the Corporation will not relieve
it from any liability that it may have to the Indemnified Party otherwise than
under this Agreement. With respect to any such action, suit, or proceeding as
to which the Indemnified Party so notifies the Corporation:
(a) The Corporation will be entitled to participate at its own
expense;
(b) Except as otherwise provided below, the Corporation may assume the
defense thereof, with counsel reasonably satisfactory to the Indemnified Party.
After notice from the Corporation to the Indemnified Party of its election to
assume such defense, the Corporation will not be liable to the Indemnified Party
under this Agreement for any legal or other expenses subsequently incurred by
the Indemnified Party in connection with the defense thereof, other than
reasonable costs of investigation or as otherwise provided below. The
Indemnified Party shall have
-3-
<PAGE>
the right to employ its own counsel in such action, suit, or proceeding, but the
fees and expenses of such counsel incurred after notice from the Corporation of
its assumption of the defense thereof shall be at the expense of the Indemnified
Party, unless (i) the employment of counsel by the Indemnified Party has been
------
authorized by the Corporation, (ii) counsel to the Indemnified Party shall have
reasonably concluded that there may be a conflict of interest between the
Corporation and the Indemnified Party in the conduct of the defense of such
action and has advised the Indemnified Party in writing that such a conflict of
interest exists, or (iii) the Corporation shall not in fact have employed
counsel to assume the defense of such action, in each of which cases the fees
and expenses of counsel for the Indemnified Party shall be at the expense of the
Corporation. The Corporation shall not be entitled to assume the defense of any
action, suit, or proceeding brought by or on behalf of the Corporation or as to
which the Indemnified Party shall have made the conclusion provided for in
clause (ii) above; and
(c) The Corporation shall have no obligation to indemnify the
Indemnified Party under this Agreement for any amounts paid in settlement of any
action or claim effected without the Corporation's prior written consent. The
Corporation shall not settle any action or claim in any manner that would impose
any penalty or limitation on the Indemnified Party without the Indemnified
Party's prior written consent. Neither the Corporation nor the Indemnified
Party will unreasonably withhold their consent to any proposed settlement.
8. REPAYMENT OF EXPENSES. The Indemnified Party agrees to reimburse the
---------------------
Corporation for all reasonable expenses, judgments, fines, penalties, and
settlement amounts paid by the Corporation in defending any civil, criminal,
administrative, or investigative action, suit, or proceeding against the
Indemnified Party or advanced by the Corporation to the Indemnified Party in
such event, but only to the extent that it shall be ultimately determined that
the Indemnified Party is not entitled to be indemnified by the Corporation for
such expenses, judgments, fines, penalties, or amounts paid in settlement under
the provisions of the State Statute, the Charter, this Agreement, or otherwise.
9. ENFORCEMENT. (a) The Corporation expressly confirms and agrees that
-----------
it has entered into this Agreement and assumed the obligations imposed on it
hereby in order to induce the Indemnified Party to continue to serve on behalf
of the Corporation, and acknowledges that the Indemnified Party is relying upon
this Agreement in continuing to serve in such capacity.
(b) If the Indemnified Party is required to bring any action to
enforce rights or to collect moneys due under this Agreement and is successful
in such action, then the Corporation shall reimburse the Indemnified Party for
all of the Indemnified Party's reasonable fees and expenses in bringing and
pursuing such action.
10. SEVERABILITY. Each of the provisions of this Agreement is a separate
------------
and distinct agreement and independent of the others, so that if any provision
hereof shall be held to be invalid or unenforceable in whole or in part for any
reason, such invalidity or unenforceability shall not affect the validity or
enforceability of the other provisions hereof.
-4-
<PAGE>
11. GENERAL AND MISCELLANEOUS. (a) This Agreement shall be governed by
-------------------------
and construed and enforced in accordance with the laws of the State of Georgia,
without regard to its conflicts of laws rules.
(b) This Agreement shall be binding upon the Indemnified Party, his
heirs, personal representative, and assigns and upon the Corporation and its
successors and assigns, and shall inure to the benefit of and be enforceable by
the Indemnified Party, his heirs, personal representatives, and assigns, and by
the Corporation and its successors and assigns.
(c) No amendment, modification, termination, or cancellation of this
Agreement shall be effective unless in a writing signed by both parties hereto.
12. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable under
--------------------------
this Agreement to make any payment to the extent the Indemnified Party has
otherwise actually received payment (under any insurance policy, Charter
provision, or otherwise) of the amounts otherwise indemnifiable hereunder.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and
as of the day and year first above written.
CORPORATION:
------------
INNOTRAC CORPORATION
By:
-----------------------------------
Name:
------------------------------
Title:
-----------------------------
INDEMNIFIED PARTY:
-----------------
--------------------------------------
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<PAGE>
EXHIBIT 10.6
LOAN AND SECURITY AGREEMENT
by and between
HOMETEL PROVIDERS PARTNERS, L.P.
and
ITC HOLDING COMPANY, INC.
dated as of
April 11, 1994
<PAGE>
TABLE OF CONTENTS
-----------------
Page
----
SECTION 1. GENERAL DEFINITIONS
-------------------
1.1. Defined Terms............................................... 1
-------------
1.2. Accounting Terms............................................ 4
----------------
1.3. Other Terms................................................. 4
-----------
1.4. Certain Matters of Construction............................. 4
-------------------------------
SECTION 2. LOAN FACILITY
-------------
2.1. Loan Facility............................................... 5
-------------
2.2. Availability and Drawing.................................... 5
------------------------
2.3. Loan Account................................................ 5
------------
SECTION 3. SUBORDINATION PROVISIONS
------------------------
3.1. Agreement to Subordinate..................................... 5
------------------------
SECTION 4. INTEREST AND REPAYMENT
----------------------
4.1. Interest and Charges........................................ 6
--------------------
4.2. Repayment................................................... 6
---------
4.3. Prepayment.................................................. 6
----------
SECTION 5. COLLATERAL: GENERAL TERMS
--------------------------
5.1. Security Interest in Collateral............................. 6
-------------------------------
5.2. Representations, Warranties and Covenants -- Collateral..... 7
-------------------------------------------------------
5.3. Financing Statements........................................ 8
--------------------
5.4. Insurance of Collateral..................................... 8
-----------------------
SECTION 6. REPRESENTATIONS AND WARRANTIES
------------------------------
6.1. Borrower's General Representations and Warranties........... 8
-------------------------------------------------
6.2. Lender's Representations and Warranties..................... 10
---------------------------------------
-i-
<PAGE>
6.3. Survival of Representations and Warranties.................. 11
------------------------------------------
SECTION 7. COVENANTS AND CONTINUING AGREEMENTS
-----------------------------------
7.1. Affirmative Covenants........................................ 11
---------------------
7.2. Negative Covenants........................................... 13
------------------
SECTION 8. CONDITIONS PRECEDENT
--------------------
8.1. Documentation............................................. 14
-------------
8.2. Other Conditions.......................................... 15
----------------
8.3. Conditions to Subsequent Advances......................... 15
---------------------------------
SECTION 9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES
--------------------------------------
ON DEFAULT
----------
9.1. Events of Default......................................... 16
-----------------
9.2. Acceleration of the Obligations........................... 17
-------------------------------
9.3. Remedies.................................................. 17
--------
9.4. Remedies Cumulative; No Waiver............................ 18
------------------------------
SECTION 10. MISCELLANEOUS
-------------
10.1. Modification of Agreement................................. 19
-------------------------
10.2. Waivers................................................... 19
-------
10.3. Severability.............................................. 19
------------
10.4. Successors and Assigns.................................... 19
----------------------
10.5. Cumulative Effect; Conflict of Terms...................... 19
------------------------------------
10.6. Execution in Counterparts................................. 20
-------------------------
10.7. Notice.................................................... 20
------
10.8. Time of Essence........................................... 20
---------------
10.9. Entire Agreement.......................................... 20
----------------
10.10. Governing Law............................................. 20
-------------
SIGNATURES............................................................... 18
Exhibit A - Term Loan Note with Guarantee endorsed thereon
Exhibit B - Form of Draw Notice
Exhibit C - Principal Place of Business and Other Addresses
Exhibit D - Form of Legal Opinion
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<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made as of the 11th day of April,
1994, by and between ITC HOLDING COMPANY, INC., a corporation organized and
existing under the laws of the State of Georgia ("Lender"), and HOMETEL
PROVIDERS PARTNERS, L.P., a limited partnership organized and existing under the
laws of the State of Georgia ("Borrower").
SECTION 1. GENERAL DEFINITIONS
- ---------- -------------------
1.1. DEFINED TERMS . When used herein, the following terms shall have the
-------------
following meanings (terms defined in the singular to have the same meaning when
used in the plural and vice versa):
ACCOUNTS - all accounts, accounts receivable for Inventory sold or
--------
rented or to be sold or rented or for services performed or to be
performed, contract rights, Chattel Paper, instruments and documents,
whether now owned or hereafter created or acquired by Borrower or in which
Borrower now has or hereafter acquires any interest.
ADJUSTMENT DATE - the third anniversary of the date of this Agreement.
---------------
AGREEMENT - this Loan and Security Agreement, as the same may be
---------
modified or amended from time to time in accordance with its terms.
ASSIGNMENT - an Assignment of a to-be-issued Life Insurance Policy
----------
insuring the life of Scott Dorfman in the face amount of $3,500,000.
BUSINESS DAY - a day on which the Federal Reserve Bank of Atlanta is
------------
open for business in Atlanta, Georgia.
CHATTEL PAPER - all chattel paper, whether now owned or hereafter
-------------
created or acquired by Borrower or in which Borrower now has or hereafter
acquires any interest.
CLOSING DATE - the date hereof.
------------
CODE - the Uniform Commercial Code as adopted and in force in the
----
State of Georgia, as from time to time in effect.
COLLATERAL - all of the Property and interests in Property described
----------
in Section 5 hereof, and all other Property and interests in Property that
now or hereafter secure the payment and performance of any of the
Obligations.
1
<PAGE>
DEFAULT - an event or condition the occurrence of which would, with
-------
the lapse of time or the giving of notice, or both, become an Event of
Default.
DEFAULT RATE - as defined in Section 4.1.(B) of this Agreement.
------------
EVENT OF DEFAULT - as defined in Section 9.1 of this Agreement.
----------------
GAAP - generally accepted accounting principles in the United States
----
of America in effect from time to time.
GUARANTOR - Scott Dorfman and any other Person who may hereafter
---------
guarantee payment or performance of the whole or any part of the
Obligations.
GUARANTEE - the Guarantee which is to be endorsed on the Term Loan
---------
Note by Guarantor in favor of Lender in the form appearing at the foot of
Exhibit A.
---------
INITIAL ADVANCE - the initial drawing in an amount equal to
---------------
$1,000,000.
INTEREST PAYMENT DATE - the 1st day of each calendar month, commencing
---------------------
on May 1, 1994, and continuing through and including the Maturity Date.
INTEREST RATE - (i) for the period from the date hereof through and
-------------
including the Adjustment Date, fourteen percent (14%) per annum, and (ii)
from and after the Adjustment Date through and including the Maturity Date,
an annual rate equal to the sum of (A) the Prime Rate as announced from
time to time by the Reference Bank plus (B) eight percent (8%).
----
INVENTORY - all inventory owned by Borrower, including, but not
---------
limited to, all goods intended for sale or lease by Borrower, or for
display or demonstration; all work in process; all raw materials and other
materials and supplies of every nature and description used or which might
be used in connection with the manufacture, printing, packing, shipping,
advertising, selling, leasing or furnishing of such goods or otherwise used
or consumed in Borrower's business (including, without limitation, all of
the above which may be located on Borrower's premises or upon the premises
of any carriers, forwarding agents, truckers, warehousemen, vendors,
selling agents, or other third parties who may have possession, temporary
or otherwise, thereof); and all documents evidencing and general
intangibles relating to any of the foregoing, whether now owned or
hereafter acquired by Borrower.
LEASES - all leases or rental contracts pursuant to which Borrower
------
rents, leases or rents Inventory.
LIEN - any interest in Property securing an obligation owed to, or a
----
claim by, a Person other than the owner of the Property, whether such
interest is based on the common law, statute or contract, and including,
but not limited to, the security interest, security title or lien arising
-2-
<PAGE>
from a security agreement, mortgage, deed of trust, deed to secure debt,
encumbrance, pledge, hypothecation, assignment, conditional sale or trust
receipt or a lease, consignment or bailment for security purposes.
LOAN - so much of the term loan credit facility as is drawn upon by
----
Borrower from time to time pursuant to Section 2.2 of this Agreement.
LOAN ACCOUNT - the loan account established on the books of Lender
------------
pursuant to Section 2.3 hereof and in which Lender will record the Loan,
repayments and prepayments made on the Loan and other appropriate debits
and credits as provided by this Agreement.
LOAN DOCUMENTS - this Agreement, the Other Agreements and the Security
--------------
Documents.
MATURITY DATE - 5:00 p.m., Atlanta time, on the day that is the fifth
-------------
anniversary of the date of this Agreement.
OBLIGATIONS - all loans and all other advances, debts, liabilities and
-----------
obligations arising, due or payable from Borrower to Lender in its capacity
as Lender evidenced by and arising under this Agreement or any other Loan
Document.
OTHER AGREEMENTS - any and all agreements, instruments and documents
----------------
(other than this Agreement and the Security Documents), heretofore, now or
hereafter executed by Borrower or delivered to Lender in respect to the
transactions contemplated by this Agreement, including, without limitation,
the Assignment and the Term Loan Note.
PERSON - an individual, partnership, association, corporation, joint
------
stock company, trust or unincorporated organization, or a government or
agency or political subdivision thereof.
PRIME RATE - the rate of interest announced or quoted by the Reference
----------
Bank from time to time as its Prime Rate, whether or not such rate is the
lowest rate charged by the Reference Bank to its most preferred borrowers;
and, if the Prime Rate is discontinued by the Reference Bank as a standard,
a comparable reference rate designated by the Reference Bank as a
substitute therefor shall be the Prime Rate. Such rate shall be increased
or decreased, as the case may be, by an amount equal to any increase or
decrease in the Reference Bank's Prime Rate, with such adjustments to be
effective as of the opening of business on the day that any such change in
the Reference Bank's Prime Rate becomes effective.
PROPERTY - any interest in any kind of property or asset, whether
--------
real, personal or mixed, or tangible or intangible.
REFERENCE BANK - NationsBank of Georgia, N.A., or its successor.
--------------
-3-
<PAGE>
SECURITY DOCUMENTS - the Guarantee and all other instruments and
------------------
agreements now or at any time hereafter securing the whole or any part of
the Obligations.
SENIOR LENDER - any bank, savings and loan, or other financial
-------------
institution or lender that Borrower designates in writing to Lender as a
Senior Lender and that makes available to Borrower at any time and from
time to time one or more credit facilities of any type or character, and
any renewals, modifications, replacements or extensions thereof, which
includes by way of illustration only, a revolving credit facility, a term
loan facility, an equipment purchase facility or a letter of credit
facility, evidencing the Senior Obligations.
SENIOR OBLIGATIONS - all liabilities and other obligations of
------------------
Borrower, whether direct or indirect, absolute or contingent, now or
hereafter existing, or due or to become due, to a Senior Lender, and any
renewals, modifications, replacements or extensions thereof, in an
aggregate amount not to exceed SEVEN MILLION DOLLARS ($7,000,000).
SUBORDINATION DOCUMENT - each and every agreement, document and
----------------------
instrument which evidences the senior status of the Senior Obligations and
perfects or prioritizes the Senior Lender's rights in respect of the Senior
Obligations vis-a-vis the Obligations, which shall be on such terms and
conditions as the Senior Lender may request or require.
TERM LOAN NOTE - the Term Loan Note to be executed by Borrower on the
--------------
Closing Date in favor of Lender to evidence the Loan, which shall be in the
form of Exhibit A attached hereto, as the same may be modified or amended
---------
from time to time after execution and delivery thereof.
1.2. ACCOUNTING TERMS. All accounting terms not specifically defined
----------------
herein shall be construed in accordance with GAAP.
1.3. OTHER TERMS. All other terms contained in this Agreement shall
-----------
have, when the context so indicates, the meanings provided for by the Code to
the extent the same are used or defined therein.
1.4. CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and
-------------------------------
"hereunder" and other words of similar import refer to this Agreement as a whole
and not to any particular section, paragraph or subdivision. As used herein,
the singular number shall include the plural, the plural the singular, and any
pronoun used shall be deemed to cover all genders, as the context may require.
The section titles, table of contents and list of exhibits appear as a matter of
convenience only and shall not affect the interpretation of this Agreement.
-4-
<PAGE>
SECTION 2. LOAN FACILITY
- ---------- -------------
2.1. LOAN FACILITY. Subject to the terms and conditions of, and in
-------------
reliance upon the representations and warranties made by Borrower in, this
Agreement and the other Loan Documents, Lender has made a total term loan credit
facility of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000) to
Borrower, available as provided in Section 2.2.
2.2. AVAILABILITY AND DRAWING. (a) Subject to SECTION 8.3 hereof, from
------------------------
and after the date hereof through and including the first anniversary of the
date hereof, Borrower shall be entitled to draw upon the term loan credit
facility, in an amount not to exceed the difference between (A) $3,500,000 and
(B) the total amount of all amounts drawn by Borrower as of the date of such
draw notice. To draw under such term loan credit facility, at least two (2)
Business Days prior to the date of borrowing Borrower shall deliver to Lender by
facsimile transmission a draw notice in the form of that attached hereto as
Exhibit B. Upon receipt of such draw notice, Lender shall wire transfer on the
- ---------
date specified in the draw notice (and if such day is not a Business Day, on the
next succeeding Business Day) to the account specified in the draw notice the
amount drawn by Borrower pursuant thereto.
(b) If by 5:00 p.m., Atlanta time, on the first anniversary of the date
hereof, Borrower has not fully drawn all amounts available to it under the term
loan credit facility, the term loan credit facility shall be permanently reduced
by an amount equal to the difference between (A) $3,500,000 and (B) the total
amount of all amounts drawn by Borrower as of such date and time. Once so
reduced, Borrower shall have no right to borrow, and Lender shall have no
obligation to make available or lend, such amount.
2.3. LOAN ACCOUNT. Lender shall enter the Loan as debits to the Loan
------------
Account and shall also record in the Loan Account all payments made by Borrower
on the Loan and all proceeds of Collateral which are finally paid to Lender.
SECTION 3. SUBORDINATION PROVISIONS
- ---------- ------------------------
3.1. AGREEMENT TO SUBORDINATE. Lender covenants and agrees that the
------------------------
Obligations and the Liens granted to Lender pursuant to this Agreement and the
other Loan Documents, at Borrower's written request, shall be subordinated and
made inferior to the Senior Obligations, which Senior Obligations are to be
acquired in the future by Borrower from the Senior Lender(s). Promptly upon the
request of Borrower and of the Senior Lender(s), at any time and from time to
time, Lender shall execute and deliver each and every Subordination Document
required to make the Obligations and the Liens granted to Lender pursuant to
this Agreement and the other Loan Documents subordinate, inferior and subject to
the Senior Obligations. Borrower shall reimburse Lender for reasonable legal
fees and related costs and expenses incurred by Lender in connection with
Lender's execution and delivery of the Subordination Documents.
-5-
<PAGE>
SECTION 4. INTEREST AND REPAYMENT
- ---------- ----------------------
4.1. INTEREST AND CHARGES.
--------------------
(A) Interest shall accrue on the principal amount of the Loan
outstanding at the end of each day in accordance with the terms of the Term Loan
Note. Interest shall be calculated on the Loan on a daily basis (computed on
the actual number of days elapsed over a year of 360 days), commencing on the
date hereof, and shall be payable monthly, in arrears, on each Interest Payment
Date. If an Interest Payment Date occurs on a day that is not a Business Day,
the payment of interest shall be payable on the next succeeding Business Day.
(B) Upon and after the occurrence of an Event of Default, and during
the continuation thereof, the principal amount of all of the Obligations shall
bear interest, calculated daily (computed on the actual days elapsed over a year
of 360 days), at a fluctuating rate per annum equal to one percentage point
(1.00%) above the Interest Rate then in effect (the "Default Rate").
(C) In no contingency or event whatsoever shall the aggregate of all
amounts deemed interest hereunder or under the Term Loan Note and charged or
collected pursuant to the terms of this Agreement or pursuant to the Term Loan
Note exceed the highest rate permissible under any law which a court of
competent jurisdiction shall, in a final determination, deem applicable hereto.
In the event that such a court determines that Lender has charged or received
interest hereunder in excess of the highest applicable rate, Lender shall
promptly refund such excess interest to Borrower and such rate shall
automatically be reduced to the maximum rate permitted by such law.
4.2. REPAYMENT. Borrower shall repay the then outstanding principal
---------
amount of the Loan in a single payment on the Maturity Date.
4.3. PREPAYMENT. From and after the Adjustment Date, Borrower shall
----------
have the right to prepay the Loan in whole or in part at any time and from time
to time, without penalty, premium or notice. Prior to the Adjustment Date,
Borrower shall not have the right to prepay all or any portion of the Loan.
SECTION 5. COLLATERAL: GENERAL TERMS
- ---------- --------------------------
5.1. SECURITY INTEREST IN COLLATERAL. Subject to the provisions of
-------------------------------
Section 3.1 (and any Subordination Documents entered into by Lender), to secure
the prompt payment and performance to Lender of the Obligations Borrower hereby
grants to Lender a continuing security interest in and Lien upon all the
following Property and interests in Property of Borrower, whether now owned or
existing or hereafter created, acquired or arising and wheresoever located:
(A) Accounts;
-6-
<PAGE>
(B) Inventory;
(C) Chattel Paper;
(D) Leases;
(E) All accessions to, substitutions for and all replacements
(including, but not limited to, all goods returned, repossessed, or
acquired by Borrower by way of substitution or replacement), products and
cash and non-cash proceeds of any of the Collateral described in (A), (B),
(C) or (D) above, including, without limitation, proceeds of and unearned
premiums with respect to insurance policies insuring any of the Collateral;
and
(F) All books and records (including, without limitation, customer
lists, credit files, computer programs, print-outs, and other computer
materials and records) of Borrower pertaining to any of the Collateral
described in (A), (B), (C) or (D) above.
5.2. REPRESENTATIONS, WARRANTIES AND COVENANTS -- COLLATERAL. To induce
-------------------------------------------------------
Lender to enter into this Agreement, Borrower represents, warrants, and
covenants to Lender:
(A) Subject to Lender's obligation to subordinate the Liens granted to
Lender pursuant to Section 3.1 (and any Subordination Documents entered into by
Lender), (i) the Collateral is now, and will be so long as the Obligations are
outstanding, owned solely by Borrower, (ii) no other Person has or will have any
right, title, interest, claim, or Lien therein, thereon or thereto, other than
for the rights of rental or lease customers, and (iii) Borrower has good and
marketable title to the Collateral, other than for the rights of rental or lease
customers.
(B) Subject to Lender's obligation to subordinate the Liens granted to
Lender pursuant to Section 3.1 and the other Loan Documents and as may be
otherwise specifically consented to in writing by Lender (and any Subordination
Documents entered into by Lender), the Liens granted to Lender are now and shall
be first and prior on the Collateral. Except for the filing of appropriate
financing statements (which financing statements have been filed in the State of
Georgia), no further action need be taken to perfect the Liens granted to
Lender, other than the filing of continuation statements under the Code or other
applicable law at appropriate times and continued possession by Lender of that
portion of the Collateral constituting instruments (other than instruments which
constitute part of Chattel Paper) or documents.
(C) Borrower shall pay and discharge when due or within any period
when payment may be made without penalty all taxes, levies, and other charges
upon said Collateral and upon the goods evidenced by any documents constituting
Collateral, unless being contested by or on behalf of Borrower in good faith.
5.3. FINANCING STATEMENTS. Borrower agrees to execute and deliver,
--------------------
in form and content satisfactory to Lender, any financing, continuation,
termination or security interest filing statement, security agreement or other
document as Lender may reasonably request in order to perfect, preserve,
-7-
<PAGE>
maintain or continue the perfection of Lender's security interest in the
Collateral and/or its priority (subject to Section 3.1. hereof and any
Subordination Documents entered into by Lender). Borrower shall pay the costs
of filing of any such financing, continuation, termination or security interest
filing statement as well any recordation or transfer tax required by law to be
paid in connection with the filing or recording of any such statement. Unless
prohibited by applicable law, Borrower hereby authorizes Lender to execute and
file any such financing statement on Borrower's behalf. The parties agree that
a carbon, photographic or other reproduction of this Agreement shall be
sufficient as a financing statement and may be filed in any appropriate office
in lieu thereof.
5.4. INSURANCE OF COLLATERAL. Borrower agrees to cause to be maintained
-----------------------
and paid for insurance upon all Collateral (other than for Collateral in the
possession of rental or lease customers) wherever located, in storage or in
transit in vehicles, including goods evidenced by documents, covering casualty,
hazard, public liability and such other risks and in such amounts and with such
insurance companies as is customary in Borrower's business.
SECTION 6. REPRESENTATIONS AND WARRANTIES
- ---------- ------------------------------
6.1. BORROWER'S GENERAL REPRESENTATIONS AND WARRANTIES. To induce Lender
-------------------------------------------------
to enter into this Agreement and to make advances hereunder, Borrower warrants,
represents and covenants to Lender that:
(A) Organization and Qualification. Borrower is a limited partnership
------------------------------
duly organized, validly existing and in good standing under the laws of the
State of Georgia. Borrower has duly qualified and is authorized to do business
and is in good standing as a foreign limited partnership in all states and
jurisdictions where the character of its properties or the nature of its
activities make such qualification necessary and in which the failure to be so
qualified would have a material adverse affect on Borrower's business operations
or financial condition.
(B) Power and Authority. Borrower has the right and power and is duly
-------------------
authorized and empowered to enter into, execute, deliver and perform this
Agreement and each of the other Loan Documents to which it is a party. The
execution, delivery and performance of this Agreement and each of the other Loan
Documents have been duly authorized by all necessary action and do not and will
not (i) require any consent or approval of the partners of Borrower or of any
other Person which has not been obtained prior to the date hereof; (ii)
contravene Borrower's certificate of limited partnership or limited partnership
agreement; (iii) violate, or cause Borrower to be in default under, any
provision of any law, rule, regulation, order, writ, judgment, injunction,
decree, determination or award in effect having applicability to Borrower; (iv)
result in a breach of or constitute a default under any material agreement,
lease or instrument to which 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 Lien (other than Liens arising under or pursuant to this
Agreement) upon or with respect to any of Collateral now owned or hereafter
acquired by Borrower.
-8-
<PAGE>
(C) Legally Enforceable Agreement. This Agreement is, and each of the
-----------------------------
Other Agreements when delivered under this Agreement will be, a legal, valid and
binding obligation of Borrower enforceable against it in accordance with their
respective terms, except to the extent that such enforcement may be limited by
applicable bankruptcy, insolvency and other similar laws affecting creditors'
rights generally or by principles of equity pertaining to the availability of
equitable remedies.
(D) Governmental Consents. Borrower has, and is in good standing with
---------------------
respect to, all governmental consents, approvals, authorizations, permits,
certificates, inspections, and franchises necessary to continue to conduct its
business as heretofore or proposed to be conducted by it and to own or lease and
operate its Properties as now owned or leased by it.
(E) Restrictions. Borrower is not a party or subject to any contract,
------------
agreement, or restriction, whether oral or otherwise, which materially and
adversely affects its business or the use or ownership of any of its Properties.
Borrower has not agreed or consented to cause or permit in the future (upon the
happening of a contingency or otherwise) any of its Property, whether now owned
or hereafter acquired, to be subject to a Lien other than for Liens arising
under or pursuant to, or otherwise permitted by, this Agreement.
(F) Litigation. There are no actions, suits, proceedings or
----------
investigations pending, or to the knowledge of Borrower, threatened, against or
affecting Borrower, or the business, operations, Properties, prospects, profits
or condition of Borrower, in any court or before any governmental authority or
arbitration board or tribunal. Borrower is not in default with respect to any
order, writ, injunction, judgement, decree or rule of any court, governmental
authority or arbitration board or tribunal which materially and adversely
affects the Properties, business, profits or condition (financial or otherwise)
of Borrower.
(G) Title to Properties. Borrower has good title to all of its
-------------------
Property, in each case, free and clear of all Liens other than for Liens arising
under or pursuant to, or otherwise permitted by, this Agreement.
(H) Compliance With Laws. Borrower has complied with, and its
--------------------
Properties, business operations and leaseholds are in compliance with, in all
material respects, the provisions of all federal, state and local laws, rules
and regulations applicable to Borrower, its Properties or the conduct of its
business, and there have been no citations, notices or orders of material
noncompliance issued to Borrower under any such law, rule or regulation.
(I) No Defaults. No event has occurred and no condition exists which
-----------
would, upon the execution and delivery of this Agreement or Borrower's
performance hereunder, constitute a Default or an Event of Default. Borrower is
not in default, and no event has occurred and no condition exists which
constitutes, or which with the passage of time or the giving of notice or both
would constitute, a default in the payment of any indebtedness of Borrower to
any Person.
-9-
<PAGE>
6.2. LENDER'S REPRESENTATIONS AND WARRANTIES. To induce Borrower to
---------------------------------------
enter into this Agreement and to deliver the Term Loan Note, Lender warrants,
represents and covenants to Borrower that:
(A) Exemptions from Registration. The Term Loan Note will be issued
----------------------------
in reliance upon the exemption from registration contained in Section 4(2) of
the Securities Act of 1933, as amended (the "Securities Act"), and the Term Loan
Note will or may also be issued in reliance upon the exemptions from
registration contained in Sections 10-5-9(13) and (14) of the Georgia Securities
Act of 1973, as amended, and/or other exemptions contained in the applicable
securities or blue sky laws of other states, and that the transfer of the Term
Loan Note may be restricted or limited as a condition to the availability of
such exemptions.
(B) Investment Intent. Lender is acquiring the Term Loan Note for
-----------------
its own account with the intent of holding the same for investment and without
the intent or a view to participating directly or indirectly in any distribution
or resale of such Term Loan Note, and it does not intend to divide its
participation with others, or to resell, assign or otherwise dispose of all or
any part of the Term Loan Note. In making such representation, Borrower
acknowledges that a purchase now with an intent to resell by reason of any
foreseeable specific contingency, some predetermined event or an anticipated
change in market value, or in the condition of Borrower, is inconsistent with
such intent.
(C) Access to Information. Lender has been supplied with, or has had
---------------------
access to, all information, including financial information, of Borrower to
which a reasonable investor would attach significance in making investment
decisions, and has had the opportunity to ask questions of, and receive answers
from, knowledgeable individuals concerning Borrower and the Term Loan Note.
(D) No Offering Materials. Other than the Newtel Systems, Inc.
---------------------
Confidential Memorandum dated November 1993 (the "Memorandum"), no offering
statement, prospectus or offering circular containing information with respect
to Borrower or the Term Loan Note has been or is to be prepared, and Lender has
made its own inquiry and analysis with respect to Borrower and the Term Loan
Note. Lender understands that the information contained in the Memorandum,
including the Projected Financial Statements of Newtel Systems, Inc. for the
three years ended January 31, 1997 contained therein (the "Projections"), were
prepared as of November 1993 and that they have not been updated since that
time. Various of the statements contained in the Memorandum and various
estimates and assumptions underlying the Projections have changed as a result of
the passage of time and the restructuring of the business transaction
contemplated by the Memorandum. Some of such changes are material and would
result in materially different disclosures if the Memorandum and the Projections
were to be updated through the date of this Agreement.
(E) Sophistication and Experience. Lender is an "accredited
-----------------------------
investor" as defined in Rule 501(a) of Regulation D promulgated pursuant to the
Securities Act, and that it personally, or together with its purchaser
representative, has such knowledge and experience in financial and business
matters to be capable of evaluating the merits and risks of its investment in
-10-
<PAGE>
Borrower and the Term Loan Note. Further, it is financially able to bear the
economic risk of its investment, can afford to hold the Term Loan Note for an
indefinite period, and can afford a complete loss of its investment.
6.3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower covenants,
------------------------------------------
warrants and represents to Lender that all representations and warranties of
Borrower contained in this Agreement or any of the other Loan Documents shall be
true at the time of Borrower's execution of this Agreement and the other Loan
Documents in all material respects, and shall survive the execution, delivery
and acceptance thereof by Lender and the parties thereto and the closing of the
transactions described therein or related thereto.
SECTION 7. COVENANTS AND CONTINUING AGREEMENTS
- ---------- -----------------------------------
7.1. AFFIRMATIVE COVENANTS. For so long as there are any Obligations to
---------------------
Lender, Borrower covenants that, unless otherwise consented to by Lender in
writing, it shall:
(A) Taxes and Liens. Pay and discharge all taxes, assessments,
---------------
levies, license fees and other impositions and governmental charges upon it, its
income and Properties as and when such taxes, assessments, levies, license fees
and other impositions and governmental charges are due and payable, or within
any period prior to the imposition of penalties, except and to the extent that
such taxes, assessments, levies, license fees and other impositions and
governmental charges are being contested in good faith. Subject to the
provisions of Section 3 (and any Subordination Documents entered into by
Lender), Borrower shall also pay and discharge any lawful claims which, if
unpaid, would materially and adversely affect the priority of the Lien granted
to Lender hereunder.
(B) Tax Returns. File all federal, state and local tax returns and
-----------
other reports Borrower is required by law to file, and maintain adequate
reserves for the payment of all taxes, assessments, governmental charges,
levies, license fees and other impositions levied upon the Collateral, Borrower,
Borrower's income or profits, or upon any Property belonging to it.
(C) Business and Existence. Preserve and maintain its existence and
----------------------
all rights, privileges, and franchises in connection therewith, and maintain its
qualification and good standing in all states in which such qualification is
necessary and in which the failure to so qualify would materially and adversely
affect its business operations or financial condition.
(D) Care of Collateral. Borrower will maintain the Collateral in its
------------------
possession in good condition (reasonable wear and tear excepted) and will not do
or permit anything to be done to the Collateral that may impair its value or
that may violate the terms of any insurance covering the Collateral or any part
thereof.
(E) Compliance with Laws. Comply with all laws, ordinances,
--------------------
governmental rules and regulations, in all material respects, to which it or its
Properties are subject, and obtain and keep in force any and all governmental
licenses, permits, franchises, or other governmental authorizations necessary to
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<PAGE>
the ownership of its Properties or to the conduct of its business, which
violation or failure to obtain might materially and adversely affect the
business, prospects, profits, Properties, or condition (financial or otherwise)
of Borrower.
(F) Further Assurances. At Lender's reasonable request, promptly
------------------
execute or cause to be executed and deliver to Lender any and all documents,
instruments and agreements deemed reasonably necessary by Lender to give effect
to or carry out the terms or intent of this Agreement or any of the other Loan
Documents. Borrower shall defend its title to the Collateral against all
Persons other than Senior Lender(s), Lender and sale or rental customers.
(G) Financial Statements, Books and Records. Borrower will: (a) at
---------------------------------------
all times maintain, in accordance with GAAP, accurate and complete books and
records pertaining to the operation, business and financial condition of
Borrower; (b) at all times maintain accurate and complete books and records
pertaining to the Collateral and any contracts and collections relating to the
Collateral; (c) furnish to Lender promptly upon request and in the form and
content and at the intervals reasonably specified by Lender, such financial
statements, reports, schedules and other information with respect to the
operation, business, affairs and financial condition of Borrower as Lender may
from time to time reasonably require and as are customarily provided to lenders;
(d) with prior notice, at all reasonable times and without hindrance and delay,
permit Lender or any person designated by Lender to enter any place of business
of Borrower or any other premises where any books, records and other data
concerning Borrower and/or the Collateral may be kept and to examine, audit,
inspect and make extracts from, and photocopies of, any such books, records and
other data; (e) furnish to Lender promptly upon request and in the form and
content reasonably specified by Lender lists of purchasers or lessees of
inventory, aging of accounts, aggregate cost or wholesale market value of
inventory and other data concerning the Collateral as Lender may from time to
time specify; and (f) mark its books and records in a manner reasonably
satisfactory to Lender so that Lender's rights in and to the Collateral as it
may appear from time to time will be shown.
(H) Place(s) of Business and Location of Collateral. The address of
-----------------------------------------------
Borrower's primary place of business and the address of each other place of
business of Borrower are as shown on Exhibit C attached hereto. The Collateral
---------
(other than for that in the possession of rental or lease customers) and all
books and records pertaining to the Collateral are and will be located as
specified on such Exhibit C. Borrower will immediately advise Leader in writing
---------
of the opening of any new place of business or the closing of any of its
existing places of business, and of any change in the location of the places
where the Collateral (other than for that in the possession of rental or lease
customers), or any part thereof, or the books and records concerning the
Collateral, or any part thereof, are kept.
(I) Insurance. Borrower will insure the portion of the Collateral
---------
comprising Inventory (other than that portion in a rental or lease customer's
possession) against risk of loss or damage by accident, theft and other
casualties in commercially reasonable amounts. All policies or certificates of
such insurance (or copies thereof or binders with respect thereto) shall be
furnished to Lender. Borrower will pay all premiums due or to become due for
such insurance.
-12-
<PAGE>
(J) Performance by Lender. If Borrower fails to perform, observe, or
---------------------
comply with any of the conditions, terms or covenants contained in this
Agreement, Lender, without waiving or releasing any of the Obligations or any
default, may (but shall be under no obligation to) at any time thereafter
perform such conditions, terms or covenants for the account and at the expense
of Borrower, and may enter upon any premises of Borrower for that purpose and
take all such action thereon as Lender may consider necessary, or appropriate,
for such purpose. All sums paid or advanced by Lender in connection with the
foregoing and all court costs and costs and expenses of collection (including,
without limitation, reasonable attorney's fees and expenses) incurred in
connection therewith shall be paid by Borrower to Lender on demand and shall
constitute and become a part of the Obligations secured hereby.
(K) Relations with Third Parties. Partnership agrees to enforce its
----------------------------
rights under and otherwise to deal with the other party to both the Assignment
and Management Agreement between Partnership and HomeTel Systems, Inc. and the
Services Agreement between Partnership and Innotrac Corporation, each dated as
of April 11, 1994, in a manner which is intended to further the best interests
of Partnership and as if the other party to each such agreement were an
unaffiliated third party.
7.2. NEGATIVE COVENANTS. For so long as there are any Obligations to
------------------
Lender, Borrower covenants that, unless Lender has first consented thereto in
writing, it will not:
(A) Mergers; Consolidations; Acquisitions. Merge or consolidate with
-------------------------------------
any Person or acquire all or any substantial part of the Properties of any
Person.
(B) Loans. Make any loans or other advances of money (other than for
-----
salary, travel advances, advances against commissions and other similar advances
in the ordinary course of business) to any Person, except as otherwise permitted
herein.
(C) Partnerships or Joint Ventures. Become or agree to become a
------------------------------
general or limited partner in any general or limited partnership or a joint
venturer in any joint venture.
(D) Adverse Transactions. Subject to the provisions of Section 3 (and
--------------------
any Subordination Documents entered into by Lender), enter into any transaction
which (i) may materially and adversely affect, or (ii) materially and adversely
affects, the Collateral or Borrower's ability to repay the Obligations.
(E) Limitation on Liens. Subject to the provisions of Section 3 (and
-------------------
any Subordination Documents entered into by Lender), create or suffer to exist
any Lien upon any of its Property, income or profits, whether now owned or
hereafter acquired, except: (i) Liens at any time granted in favor of Lender;
(ii) Liens for taxes not yet due or being contested as permitted by Section
7.1.(A) hereof; (iii) Liens securing the claims or demands of materialmen,
mechanics, carriers, warehousemen, landlords and other like Persons for labor,
materials, supplies or rentals incurred in the ordinary course of Borrower's
business, but only if the payment thereof is not at the time required (or if
payment is required, only if and for so long as the execution or other
enforcement of such Liens is and continues to be stayed and bonded, the validity
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<PAGE>
and amount of the claims secured thereby are being contested in good faith, and
such Liens do not, in the aggregate, materially detract from the value of the
Property of Borrower or materially impair the use thereof in the operation of
Borrower's business) and only if such Liens are junior to the Liens in favor of
Lender; and (iv) such other Liens as Lender may hereafter approve in writing.
(F) Change of Business. Enter into any new business or make any
------------------
material change in any of Borrower's business objectives and purposes.
(G) Disposition of Assets. Sell, lease, transfer, exchange or
---------------------
otherwise dispose of any of its Properties, including any disposition of
Property as part of a sale and leaseback transaction, to or in favor of any
Person, except (i) sales or leases of Inventory in the ordinary course of
Borrower's business, or (ii) dispositions expressly authorized by this
Agreement.
SECTION 8. CONDITIONS PRECEDENT
- ---------- --------------------
Notwithstanding any other provision of this Agreement or any of the other
Loan Documents, and without affecting in any manner the rights of Lender under
the other Sections of this Agreement, it is understood and agreed that Lender
will not make the Initial Advance unless and until each of the conditions set
forth in SECTIONS 8.1 AND 8.2 has been satisfied at the time of the Initial
Advance, all in form and substance satisfactory to Lender:
8.1. DOCUMENTATION. Lender shall have received the following documents,
-------------
each to be in form and substance satisfactory to Lender and its counsel:
(A) Copies of all filing receipts or acknowledgments issued by any
governmental authority to evidence any and all filings or recordations necessary
to perfect the Liens of Lender in the Collateral and evidence in a form
acceptable to Lender that such Liens constitute valid and perfected security
interests and Liens, having the Lien priority specified in Section 5.2.(B)
hereof;
(B) Copies of the Certificate of Limited Partnership of Borrower and
the Articles of Incorporation of HomeTel Providers Inc., each as certified by
the Secretary of State of the State of Georgia on April 7, 1994;
(C) A Draw Notice in the form of Exhibit B;
---------
(D) The Security Documents duly executed, accepted, acknowledged and
delivered by or on behalf of each of the signatories thereto;
(E) The Other Agreements (other than the Assignment) duly executed and
delivered by Borrower;
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<PAGE>
(F) The legal opinion of Kilpatrick & Cody substantially in the form
of Exhibit D attached hereto; and
---------
(G) Such other documents, instruments and agreements as Lender shall
reasonably request in connection with the foregoing matters.
8.2. OTHER CONDITIONS. The following conditions have been and shall
----------------
continue to be satisfied:
(A) No Default or Event of Default shall exist;
(B) Each of the conditions precedent set forth in the other Loan
Documents shall have been satisfied; and
(C) No action, proceeding, investigation, regulation or legislation
shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Agreement or the consummation of the transactions contemplated hereby or which,
in Lender's sole discretion, would make it inadvisable to consummate the
transactions contemplated by this Agreement or any of the other Loan Documents.
8.3. CONDITIONS TO SUBSEQUENT ADVANCES. Notwithstanding any other
---------------------------------
provision of this Agreement or any of the other Loan Documents, and without
affecting in any manner the rights of Lender under the other Sections of this
Agreement, it is understood and agreed that Lender will not make any advance or
permit any drawing under Section 2 of this Agreement, other than the Initial
Advance, unless and until each of the following conditions has been satisfied at
the time of any subsequent advance or draw, all in form and substance
satisfactory to Lender:
(A) The Assignment shall have been executed and delivered by Guarantor
to Lender and acknowledged by the company issuing such life insurance policy;
(B) Copies shall have been delivered to Lender of all filing receipts
or acknowledgments issued by any governmental authority to evidence any and all
filings or recordations necessary to perfect the Liens of Lender in the
Collateral and evidence in a form acceptable to Lender that such Liens
constitute valid and perfected security interests and Liens, having the Lien
priority specified in Section 5.2.(B) hereof;
(C) No Default or Event of Default shall exist;
(D) Each of the conditions precedent set forth in the other Loan
Documents shall have been satisfied;
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<PAGE>
(E) No action, proceeding, investigation, regulation or legislation
shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Agreement or the consummation of the transactions contemplated hereby or which,
in Lender's sole discretion, would make it inadvisable to consummate the
transactions contemplated by this Agreement or any of the other Loan Documents;
(F) Borrower shall have delivered evidence to Lender that Borrower has
qualified and is in good standing as a foreign limited partnership in those
states where the conduct of Borrower's business activities or the ownership of
its Properties necessitates qualification in order to avoid a material
forfeiture or liability or a material adverse consequence; and
(G) A Draw Notice in the form of Exhibit B.
---------
SECTION 9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
- ---------- -------------------------------------------------
9.1. EVENTS OF DEFAULT. Subject to Section 3 (and any Subordination
-----------------
Documents entered into by Lender), the occurrence of any one or more of the
following events shall constitute an "Event of Default":
(A) Payment of Obligations. Borrower shall fail to pay any of the
----------------------
Obligations within five (5) days of the due date thereof (whether due at stated
maturity, on demand, upon acceleration or otherwise).
(B) Misrepresentations. Any warranty, representation, or other
------------------
statement made or furnished to Lender by or on behalf of Borrower in this
Agreement or in any instrument or certificate furnished in compliance with or in
reference to this Agreement or any of the other Loan Documents proves to have
been false or misleading in any material respect when made or furnished
(including without limitation, by omitting to state any material fact or facts
necessary to make such representation, warranty or other statement not
misleading).
(C) Breach of Covenants. Borrower shall fail or neglect to perform,
-------------------
keep or observe (i) any covenant contained in Sections 5.2, 5.3, 5.4,
7.1(F)(second sentence), 7.1(G), 7.1(H), 7.2(D)(clause (ii)), or 7.2(G) of this
Agreement or (ii) any other covenant contained in this Agreement (other than a
covenant a default in the performance or observance of which is dealt with
specifically elsewhere in this Section 9.1) and the breach of such other
covenant is not cured to Lender's reasonable satisfaction within thirty (30)
days after Borrower's receipt of notice of such breach from Lender.
(D) Default Under Other Agreements. Any event of default shall occur
------------------------------
under, or Borrower shall default in the performance or observance of any term,
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<PAGE>
covenant, condition or agreement contained in, any of the Other Agreements and
such default shall continue beyond any applicable period of grace.
(E) Default Under Senior Obligations. Senior Lender shall have
--------------------------------
declared an event of default in respect of, and shall have accelerated, the
Senior Obligations.
(F) Default Under Security Documents. Any event of default shall
--------------------------------
occur under, or Borrower shall default in the performance or observance of any
term, covenant, condition or agreement contained in, any of the Security
Documents and such default shall continue beyond any applicable period of grace.
(G) Bankruptcy. The death of, insolvency of, appointment of a
----------
receiver, trustee, custodian or similar fiduciary for any part of the Property
or property of, assignment for the benefit of creditors by, or the commencement
of any proceedings under any federal or state bankruptcy or insolvency laws by
or against (if instituted against Borrower, such proceeding shall continue for
sixty (60) days), or the making of any offer of settlement, extension or
composition to their respective unsecured creditors by, Borrower or Guarantor.
9.2. ACCELERATION OF THE OBLIGATIONS. Subject to Section 3 (and any
-------------------------------
Subordination Documents entered into by Lender), upon and after the occurrence
of an Event of Default as above provided, all or any portion of the Obligations
due or to become due from Borrower to Lender under this Agreement, or any of the
other Loan Documents, shall, at the option of Lender, become at once due and
payable and Borrower shall forthwith pay to Lender, in addition to any and all
sums and charges due, the entire principal of and interest accrued on the
Obligations.
9.3. REMEDIES. Subject to Section 3 (and any Subordination Documents
--------
entered into by Lender), upon and after the occurrence of an Event of Default,
Lender shall have and may exercise from time to time the following rights and
remedies:
(A) All of the rights and remedies of a secured party under the Code
or under other applicable law, and all other legal and equitable rights to which
Lender may be entitled, all of which rights and remedies shall be cumulative,
and none of which shall be exclusive, and shall be in addition to any other
rights or remedies contained in this Agreement or any of the other Loan
Documents.
(B) The right to take immediate possession of the Collateral (other
than that in the possession of a rental or lease customer), and (i) to require
Borrower to assemble the Collateral (other than that in the possession of a
rental or lease customer), at Borrower's expense, and make it available to
Lender at a place designated by Lender which is reasonably convenient to both
parties, and (ii) to enter any of the premises of Borrower and to keep and store
the same on said premises until sold.
(C) The right to sell or otherwise dispose of all or any of the
Collateral in its then condition at public or private sale or sales, with such
notice as may be required by law, in lots or in bulk, for cash or on credit, all
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<PAGE>
as Lender may deem advisable. Borrower agrees that ten (10) days written notice
to Borrower of any public or private sale or other disposition of such
Collateral shall be reasonable notice thereof, and such sale shall be at such
locations as Lender may designate in said notice; provided, however, that Lender
-------- -------
need not provide Borrower with advance notice if any portion of the Collateral
will rapidly decline in value or is of a type normally sold on a recognized
market. Lender shall have the right to sell, lease or otherwise dispose of such
Collateral, or any part thereof, for cash, credit or any combination thereof,
and Lender may purchase all or any part of such Collateral at public or, if
permitted by law, private sale and, in lieu of actual payment of such purchase
price, may set off the amount of such price against the Obligations.
(D) The proceeds realized from the sale of any Collateral may be
applied, after allowing two (2) Business Days for collection, first to the
reasonable costs, expenses and attorneys' fees and expenses actually incurred by
or on behalf of Lender for collection and for acquisition, completion,
protection, removal, storage, managing, sale and delivery of the Collateral
(including, but not limited to, any and all taxes incurred in connection with
any such sale of the Collateral); secondly, to interest due upon any of the
Obligations; and thirdly, to the principal of the Obligations. If any
deficiency shall arise, Borrower and the Guarantor shall remain liable to Lender
therefor; and any surplus shall be paid to Borrower.
9.4. REMEDIES CUMULATIVE; NO WAIVER. All covenants, conditions,
------------------------------
provisions, terms, warranties, guaranties, indemnities, agreements and other
undertakings of Borrower contained in this Agreement and the other Loan
Documents, or in any document referred to herein or contained in any agreement
supplementary hereto or in any Guarantee given to Lender, heretofore,
concurrently, or hereafter entered into, shall be deemed cumulative to and not
in derogation or substitution of any of the terms, covenants, conditions,
provisions, warranties, guaranties, indemnities, undertakings or agreements of
Borrower herein contained. Each right, power and remedy of Lender as provided
for in this Agreement or in the Loan Documents or now or hereinafter existing at
law or in equity or by statute or otherwise shall be cumulative and concurrent
and shall be in addition to every other right, power or remedy provided for in
the Agreement or in the Loan Documents or now or hereinafter existing at law or
in equity or by statute or otherwise, and the exercise or beginning of the
exercise by Lender of any one or more of such rights, powers or remedies shall
not preclude the simultaneous or later exercise by Lender of any or all such
other rights, powers or remedies.
SECTION 10. MISCELLANEOUS
- ----------- -------------
10.1. MODIFICATION OF AGREEMENT. This Agreement may not be modified,
-------------------------
altered or amended, except by an agreement in writing signed by Borrower and
Lender.
10.2. WAIVERS. Lender's failure, at any time or times hereafter, to
-------
require strict performance by Borrower of any provision of this Agreement shall
not waive, affect or diminish any right of Lender thereafter to demand strict
compliance and performance therewith. Any suspension or waiver by Lender of an
Event of Default by Borrower under this Agreement or any of the other Loan
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<PAGE>
Documents shall not suspend, waive or affect any other Event of Default by
Borrower under this Agreement or any of the other Loan Documents, whether the
same is prior or subsequent thereto and whether of the same or of a different
type. None of the undertakings, agreements, warranties, covenants and
representations of Borrower contained in this Agreement or any of the other Loan
Documents and no Event of Default by Borrower under this Agreement or any of the
other Loan Documents shall be deemed to have been suspended or waived by Lender,
unless such suspension or waiver is by an instrument in writing specifying such
suspension or waiver and is signed by a duly authorized representative of Lender
and directed to Borrower. Borrower waives presentment, notice of dishonor and
notice of non-payment with respect to Accounts, contract rights and Chattel
Paper.
10.3. SEVERABILITY. Wherever possible, each provision of this Agreement
------------
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Agreement shall be prohibited by or
invalid under applicable law, such provision shall be ineffective only to the
extent of such prohibition or invalidity, without invalidating the remainder of
such provision or the remaining provisions of this Agreement.
10.4. SUCCESSORS AND ASSIGNS. This Agreement, the Other Agreements and
----------------------
the Security Documents shall be binding upon and inure to the benefit of the
respective successors and permitted assigns of Borrower and Lender; provided,
--------
however, neither Borrower nor Lender shall sell, assign, transfer or otherwise
- -------
dispose of all or any part of their respective interest in this Agreement or any
of the other Loan Documents hereunder or thereunder without the prior written
consent of the other party.
10.5. CUMULATIVE EFFECT; CONFLICT OF TERMS. The provisions of the Other
------------------------------------
Agreements and the Security Documents are hereby made cumulative with the
provisions of this Agreement. Except as otherwise provided in any of the other
Loan Documents by specific reference to the applicable provision of this
Agreement, if any provision contained in this Agreement is in direct conflict
with, or inconsistent with, any provision in any of the other Loan Documents,
the provision contained in this Agreement shall govern and control.
10.6. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any
-------------------------
number of counterparts and by different parties hereto in separate 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.
10.7. NOTICE. Except as otherwise provided herein, all notices,
------
requests and demands to or upon a party hereto to be effective shall be in
writing (and, if sent by mail, shall be sent by certified or registered mail,
return receipt requested) or by telegraph or telex or telecopy and, unless
otherwise expressly provided herein, shall be deemed to have been validly
served, given or delivered when delivered against receipt or one Business Day
after deposit in the mail, postage prepaid, or, in the case of telegraphic
notice, when delivered to the telegraph company, or, in the case of telex
notice, when sent, answerback received, or, in the case of telecopy notice, when
telecopied, addressed as follows:
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<PAGE>
(A) If to Lender: ITC Holding Company, Inc.
910 First Avenue
P.O. Box 510
West Point, Georgia 31833
Attn: Chief Financial Officer
Telecopier No.: (706) 645-8614
(B) If to Borrower: 1828 Meca Way
Norcross, Georgia 30093
Attn: President
Telecopier No.: (404) 233-9462
or to such other address as each party may designate for itself by like notice
given in accordance with this Section 10.7.
10.8. TIME OF ESSENCE. Time is of the essence of this Agreement, the
---------------
Other Agreements and the Security Documents.
10.9. ENTIRE AGREEMENT. This Agreement and the other Loan Documents,
----------------
together with all other instruments, agreements and certificates executed by the
parties in connection therewith or with reference thereto, embody the entire
understanding and agreement between the parties hereto and thereto with respect
to the subject matter hereof and thereof and supersede all prior agreements,
understandings and inducements, whether express or implied, oral or written.
10.10. GOVERNING LAW. This Agreement shall be governed by the laws of
-------------
the State of Georgia (not including choice of law rules thereof).
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<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed on the day and
year specified at the beginning hereof.
HOMETEL PROVIDERS PARTNERS, L.P.
By:HomeTel Providers Inc., its general partner
By: /s/ Scott Dorfman
-------------------------------------------
Scott Dorfman, President
[CORPORATE SEAL]
ITC HOLDING COMPANY, INC.
By: /s/ Doug Cox
-------------------------------------------
Doug Cox, Chief Financial Officer
[CORPORATE SEAL]
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<PAGE>
EXHIBIT A
THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS
AMENDED (THE "FEDERAL ACT"), OR UNDER OR PURSUANT TO THE SECURITIES OR BLUE SKY
LAWS (COLLECTIVELY, THE "STATE SECURITIES LAWS") OF ANY STATE. THIS NOTE HAS
BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, OR SOLD,
HYPOTHECATED, PLEDGED, TRANSFERRED OR ASSIGNED, NOR WILL BORROWER RECOGNIZE ANY
ASSIGNEE OR TRANSFEREE AS HAVING AN INTEREST IN THIS NOTE IN THE ABSENCE OF AN
EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THIS NOTE UNDER THE FEDERAL ACT
AND/OR THE STATE SECURITIES LAWS OR AN OPINION OF LEGAL COUNSEL SATISFACTORY TO
BORROWER THAT SUCH REGISTRATION IS NOT REQUIRED.
TERM LOAN NOTE
$3,500,000 April 11, 1994
Atlanta, Georgia
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to
ITC HOLDING COMPANY, INC. ("Lender"), at Lender's office located at 910 First
Avenue, West Point, Georgia 31833, or at such other place as the holder hereof
may designate, the principal sum of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS
($3,500,000) or so much thereof as may be outstanding from time to time, as well
as all fees or expenses chargeable to Borrower under that certain Loan and
Security Agreement, dated the date hereof, between Borrower and Lender
(hereinafter, together with all supplements, riders, amendments, exhibits or
schedules thereto, referred to as the "Loan Agreement"), said principal sum to
be due and payable in a single installment due on the Maturity Date, together
with interest on the unpaid amount hereof from the date each advance of the
principal amount hereof is made until paid in full, said interest being due on
each Interest Payment Date, and on the Maturity Date, and to be calculated at
the rate (computed on the basis of a 360-day year and of the actual number of
days elapsed) of: (i) for the period from the date hereof through and including
the Adjustment Date, fourteen percent (14%) per annum, and (ii) from and after
the Adjustment Date through and in including the Maturity Date, at an annual
rate equal to the sum of (A) the Prime Rate as announced from time to time by
the Reference Bank plus (B) eight percent (8%). All payments hereunder shall be
made in lawful money of the United States.
This Term Loan Note (the "Note") is the Term Loan Note referred to in,
and is issued pursuant to, the Loan Agreement and is entitled to all of the
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benefits and security of the Loan Agreement. All of the terms, covenants and
conditions of the Loan Agreement and all other instruments evidencing or
securing the indebtedness hereunder are hereby made a part of this Note and are
deemed incorporated herein in full. All capitalized terms used herein, unless
otherwise specifically defined in this Note, shall have the meanings ascribed to
them in the Loan Agreement.
This Note and all amounts due hereunder are expressly subject to the
provisions of Section 3 of the Agreement and any subordination agreement,
document or instrument which may evidence such subordination.
If any Event of Default shall occur, then, at Lender's option, the
outstanding principal balance of this Note shall bear interest from and after
the occurrence of such Event of Default at a variable rate per annum equal to
the Default Rate until either the Event of Default is cured with Lender's
permission and to Lender's satisfaction or the principal balance of this Note is
paid in full.
In no contingency or event whatsoever, whether by reason of
advancement of the proceeds hereof or otherwise, shall the amount paid or agreed
to be paid to Lender for the use, forbearance or detention of money advanced
hereunder exceed the highest lawful rate permissible under any law which a court
of competent jurisdiction may deem applicable hereto. In the event that such a
court determines that Lender has charged or received interest hereunder in
excess of the highest applicable rate, such rate shall automatically be reduced
to the maximum rate permitted by law and Lender shall promptly refund to
Borrower any interest received by it in excess of the maximum lawful rate. It
is the intent hereof that Borrower not pay or contract to pay, and that Lender
not receive or contract to receive, directly or indirectly in any manner
whatsoever, interest in excess of that which may be paid by Borrower under
applicable law.
If any Event of Default occurs or exists or the Loan Agreement is
terminated, this Note may, at Lender's option, be declared by Lender to be
immediately due and payable. In addition thereto, and not in substitution
therefor, Lender shall be entitled to exercise any one or more of the other
rights and remedies exercisable by lender under the Loan Agreement or any other
agreement or instrument between Lender and Borrower, or provided by applicable
law. No failure to exercise or delay in exercising said option or to pursue
such other remedies shall constitute a waiver of such option or such other
remedies or of the right to exercise any of the same in the event of any
subsequent Event of Default. No single or partial exercise by Lender of any
right hereunder, under any other Agreement or instrument or otherwise shall
preclude any other or further exercise thereof or of any other rights. This
paragraph is in addition to and in no way a limitation upon the nature of this
Note or upon any other rights of Lender under this Note, the Loan Agreement, any
other instrument between Lender and Borrower, or under applicable law. If this
Note is collected by or through an attorney at law, then Borrower shall be
obligated to pay, in addition the principal balance and accrued interest hereof,
reasonable attorney's fees actually incurred and court costs.
Time is of the essence of this Note. To the fullest extent permitted
by applicable law, Borrower, for itself and its legal representatives,
successors and assigns, expressly waives presentment, demand, protest, notice of
dishonor, notice of non-payment, notice of maturity, notice of protest,
presentment for the purpose of accelerating maturity, diligence in collection,
and the benefit of any exemption or insolvency laws, and all defenses and pleas
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<PAGE>
on the grounds of any extension or extensions of the time of payments or the due
dates of this Note, in whole or in part, before or after maturity, with or
without notice. No renewal or extension of this Note, and no delay in
enforcement of this Note or in exercising any right or power hereunder, shall
affect the liability of Borrower.
Wherever possible each provision of this Note shall be interpreted in
such a manner as to be effective and valid under applicable law, but if any
provision of this Note shall be prohibited or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or remaining provisions of
this Note. No delay or failure on the part of Lender in the exercise of any
right or remedy hereunder shall operate as a waiver thereof, nor as an
acquiescence in any default, nor shall any single or partial exercise by Lender
of any right or remedy preclude any other right or remedy. Lender, at its
option, may enforce its rights against any collateral securing this Note without
enforcing its rights against Borrower, any guarantor of the indebtedness
evidenced hereby or any other property or indebtedness due or to become due to
Borrower. Borrower agrees that, without releasing or impairing Borrower's
liability hereunder, Lender may at any time release, surrender, substitute or
exchange any collateral securing this Note and may at any time release any party
primarily or secondarily liable for the indebtedness evidenced by this Note.
This Note shall be governed by, and construed and enforced in
accordance with, the laws of the State of Georgia, and is intended to take
effect as an instrument under seal.
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed,
sealed and delivered in Atlanta, Georgia, on the date first above written.
HOMETEL PROVIDERS PARTNERS, L.P.
By: HomeTel Providers Inc., its general partner
By: /s/ Scott Dorfman
----------------------------------------------
Scott Dorfman, President
[CORPORATE SEAL]
[GUARANTEE OF SCOTT DORFMAN APPEARS ON FOLLOWING PAGE]
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<PAGE>
GUARANTEE
FOR VALUE RECEIVED, Scott Dorfman ("Guarantor") hereby irrevocably and
unconditionally guarantees to ITC HOLDING COMPANY, INC. ("Lender") the full and
timely payment by HomeTel Providers Partners, L.P. ("Borrower") of all
Obligations as defined in and under and pursuant to that certain Loan and
Security Agreement, of even date herewith, between Lender and Borrower, and the
Note upon which this Guarantee is endorsed, and any renewals, modifications,
replacements or extensions of the Obligations.
EXECUTED AND DELIVERED under seal this 11th day of April, 1994.
/s/ Scott Dorfman (SEAL)
--------------
Scott Dorfman
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<PAGE>
EXHIBIT B
Form of Draw Notice
[Date]
VIA FACSIMILE
- -------------
ITC Holding Company, Inc.
910 First Avenue
P.O. Box 510
West Point, Georgia 31833
Attn: [ ]
Re: Draw on Term Loan Credit Facility
---------------------------------
Dear [ ]:
Pursuant to Section 2.2 of that certain Loan and Security Agreement (the
"Agreement") dated April [ ], 1994, between ITC Holding Company, Inc. and
HomeTel Providers Partners, L.P. ("Borrower"), Borrower hereby advises you that
it is making a draw on the term loan credit facility extended by you to Borrower
under and pursuant to the Agreement in the amount of [INSERT AMOUNT]. Such
amount should be wire transferred to the account of Borrower on or before
[INSERT DATE THAT IS AT LEAST TWO BUSINESS DAYS AFTER TO DATE HEREOF], pursuant
to the following instructions:
[INSERT WIRE TRANSFER INSTRUCTIONS]
In connection with the drawing hereunder, Borrower states as follows:
(1) As of the date hereof, the total amount drawn by Borrower under
the Agreement (and not giving effect to the drawing hereunder) is $[INSERT
TOTAL DRAWINGS];
(2) As of the date hereof, the total amount available for drawing
under the Agreement is $[INSERT AVAILABLE AMOUNT]; and
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<PAGE>
(3) Giving effect to the drawing hereunder, the remaining amount
available to be drawn by Borrower is $[INSERT REMAINING AMOUNT TO BE
DRAWN].
Borrower hereby represents and warrants to Lender as follows:
(1) The representations and warranties set forth in Sections 5.2 and
6.1 of the Agreement are true and correct on and as of the date hereof;
(2) As of the date hereof, Borrower is in compliance with all the
terms and provisions set forth in the Agreement;
(3) As of the date hereof, no Default or Event of Default under or
pursuant to the Agreement or the other Loan Documents has occurred or is
continuing; and
(4) The conditions set forth in Sections 8.2(B) and 8.2(C) have been
and continue to be satisfied as of the date hereof.
HOMETEL PROVIDERS PARTNERS, L.P.
By: HomeTel Providers Inc., its general partner
By: /s/ Scott Dorfman
----------------------------------------------
Scott Dorfman, President
[CORPORATE SEAL]
-27-
<PAGE>
EXHIBIT C
Principal Place of Business and All Other Addresses
1828 Meca Way
Norcross, Georgia 30093
-28-
<PAGE>
EXHIBIT D
[Date]
ITC Holding Company, Inc.
910 First Avenue
P.O. Box 510
West Point, Georgia 31833
Attn: Mr. Doug Cox, Chief Financial Officer
RE: Loan and Security Agreement, dated April [ ], 1994, between
ITC Holding Company, Inc. and HomeTel Providers Partners, L.P.
--------------------------------------------------------------
Ladies and Gentlemen:
We have acted as counsel to HomeTel Providers Partners, L.P., a Georgia
limited partnership ("Borrower"), and Scott Dorfman, an individual resident of
--------
the State of Georgia ("Guarantor"), in connection with the negotiation,
---------
execution and delivery of that certain Loan and Security Agreement (the "Loan
----
Agreement"), dated April [ ], 1994, between Borrower and ITC Holding Company,
- ---------
Inc., a Georgia corporation ("Lender"), and that certain Term Loan Note (the
------
"Note"), dated April [ ], 1994, in the original aggregate principal amount of
- ------
$3,500,000, executed and delivered by Borrower in favor of Lender. This opinion
is furnished pursuant to Section 8.1(G) of the Loan Agreement. Terms used
herein which are defined in the Loan Agreement have the respective meanings set
forth or referred to in the Loan Agreement, unless otherwise defined herein.
This opinion letter is limited by, and is in accordance with, the January
1, 1992 edition of the Interpretive Standards applicable to Legal Opinions to
Third Parties in Corporate Transactions adopted by the Legal Opinion Committee
of the Corporate and Banking Law Section of the State Bar of Georgia (the
"Interpretive Standards"), which Interpretive Standards are incorporated in this
opinion letter by this reference.
In connection with our representation, we have examined fully executed
counterparts (or copies as so executed) of the following documents (items (a)
through (d) are hereinafter referred to collectively as the "Loan Documents" and
all the items listed below are hereinafter referred to collectively as the
"Transaction Documents"):
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<PAGE>
(a) The Loan Agreement;
(b) The Note;
(c) All Other Agreements described on Schedule I hereto;
----------
(d) Uniform Commercial Code ("UCC") financing statements naming
---
Borrower as debtor and Lender as secured party (collectively, the
"Financing Statements") to be filed in the filing offices
--------------------
indicated on Schedule II attached hereto (collectively the "Filing
----------- ------
Offices");
-------
(e) Reports ("Search Reports") dated April [ ], 1994 delivered to us
and prepared by EquiFax Business Information Services and
Information America (each an independent contractor and is not
affiliated or supervised by our firm) as to UCC-1 financing
statements on file in respect of Borrower in the offices listed on
Schedule II hereto, which Search Reports are attached hereto as
-----------
Schedule III; and
------------
(f) The certificates, instruments, documents and agreements listed on
Schedule IV (the documents listed on Schedule IV as Items 5 and 6
-----------
are collectively referred to as the "Material Contracts").
--------------------
In the capacity described above, we have also considered such matters of
law and of fact, including the examination of originals or copies, certified or
otherwise identified to our satisfaction, of the Certificate of Limited
Partnership and Limited Partnership Agreement of Borrower, the Articles of
Incorporation and Bylaws of the general partner of Borrower, written consents of
the general partner of Borrower with respect to the transactions contemplated by
the Loan Agreement, and written consents of the Board of Directors of the
general partner of Borrower with respect to the transactions contemplated by the
Loan Agreement, together with such other records and documents of Borrower, the
general partner of Borrower, certificates of officers and representatives of
Borrower and the general partner of Borrower, certificates of public officials
and such other documents as we have deemed appropriate for the opinions herein
set forth.
With your permission, in rendering this opinion, we have assumed the
following, in addition to the assumptions set forth in the Interpretive
Standards, without any investigation or inquiry:
(1) the due authorization, execution and delivery of all Loan Documents by
all parties thereto (other than Borrower and Guarantor);
(2) that the Loan Documents constitute the binding obligations of the
parties thereto other than Borrower and Guarantor, and each such other party
thereto has all requisite power and authority to perform its obligations
thereunder;
(3) that the only interest, fees and other charges contracted for or to be
reserved, charged, taken or paid in connection with the transactions
contemplated by the Transaction Documents are those set forth in the Loan
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<PAGE>
Documents and that all such interest, fees and charges will be reserved,
charged, taken and applied by Lender solely as described therein, and that no
interest shall be reserved, charged, taken or paid under the Loan Documents or
the Transaction Documents on unpaid interest and that under no circumstances
shall the rate of interest payable (including any fees, charges, premiums or
similar amounts which may be characterized as interest) exceed 5.0% per month
(whether due to prepayment, acceleration, or otherwise);
(4) Borrower has, prior to or concurrently with the execution and delivery
of the Loan Agreement, rights in, and the unrestricted right to convey the
Collateral, including that portion of the Collateral which constitutes property
of a type (i) in which a security interest may be granted and perfected under
the provisions of Article 9 of the UCC and (ii) as to which the federal law of
the United States has not preempted the UCC with respect to the validity,
enforceability, perfection and priority of security interests therein (such
portion of the Collateral, the "UCC Collateral");
----------------
(5) The location of the principal place of business and chief executive
office of the Borrower within the State of Georgia is and will remain entirely
within the county specified on Schedule II;
-----------
(6) Each of the Financing Statements gives a correct address of the secured
party from which information concerning the security interest to be perfected
thereby may be obtained.
Based upon the foregoing, and subject to the other exceptions, assumptions
and qualifications set forth or incorporated herein by reference, it is our
opinion that:
(a) Borrower is a limited partnership duly organized and validly existing
under the laws of the State of Georgia.
(b) Borrower has the partnership power and partnership authority to execute
and deliver the Loan Agreement, the Note and each of the Material Contracts, to
perform its obligations thereunder, to own and operate its assets and to conduct
its business.
(c) The general partner of Borrower is HomeTel Providers Inc., a Georgia
corporation, holding of record and, to our knowledge, beneficially, a
partnership interest representing 90% of the total partnership interests in
Borrower.
(d) Borrower has duly authorized the execution and delivery of the Loan
Agreement, the Note, and each of the Material Contracts and performance by
Borrower thereunder and has duly executed and delivered the Loan Agreement, the
Note and the Material Contracts.
(e) The Guarantee is enforceable against Scott Dorfman.
(f) Each of the Loan Agreement, the Note and the Material Contracts is
enforceable against Borrower.
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<PAGE>
(g) The execution and delivery by Borrower of the Loan Documents and the
Material Contracts do not, and if Borrower were now to perform its obligations
thereunder such performance would not, result in any:
(I) violation of Borrower's Certificate of Limited Partnership or Limited
Partnership Agreement;
(II) violation of any existing federal or Georgia constitution, statute,
regulation, rule, order or law to which Borrower or its properties
are subject;
(III) violation of any judicial or administrative decree, writ, judgment
or order to which, to our knowledge, Borrower or its properties are
subject; or
(IV) to our knowledge, violation of any of the terms and conditions of the
Material Contracts.
(h) No consent, approval, authorization or other action by, or filing with,
any governmental authority of the United States or the State of Georgia is
required for Borrower's execution and delivery of the Loan Agreement and the
Note or its performance thereunder.
(i) (I) The Loan Agreement is effective to create a security interest in
the UCC Collateral;
(II) The Financing Statements are in appropriate form for filing in
the State of Georgia and no taxes or fees, other than normal filing
fees, are required to be paid in connection with such filing, and the
filing of the Financing Statements in the Filing Offices will be
effective to perfect the security interest created by the Loan
Agreement in that portion of the UCC Collateral in which a security
interest may be perfected by the filing of a UCC financing statement
in the State of Georgia (the "Security Interest"); and
-----------------
(III) Assuming that the Financing Statements are filed in the
Filing Offices, the Security Interest will have the priority accorded
to a UCC security interest perfected by the filing of a UCC financing
statement in the State of Georgia.
Our opinions and confirmations set forth above are subject to the following
exceptions and qualifications:
A. The opinions set forth herein are limited to the laws of the State of
Georgia and applicable federal laws, other than for the rules and regulations of
the Federal Communications Commission.
B. Except as expressly stated in Paragraph (j) above, we express no
opinion herein with respect to the perfection or priority of any security
interests, security titles or other liens created or granted under any of the
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<PAGE>
Loan Documents or with respect to any person's title to any collateral covered
thereby.
C. In rendering our opinions herein regarding the enforceability of the
Loan Documents, we have assumed that, to the extent that applicable law would
require the rights and remedies set forth therein to be exercised in good faith
or in a reasonable or commercially reasonable manner as a condition to the
enforceability thereof, and to the extent that any such condition cannot be
waived, such legal requirements will be observed and satisfied.
D. Notwithstanding anything herein to the contrary, we express no opinion
in this letter regarding: (i) the effect on the enforceability of any Loan
Document of any applicable laws which limit or prohibit the exercise of self-
help or other non-judicial remedies (such as any right, without judicial
process, to enter upon, to take possession of, to collect, retain, use and enjoy
rents, issues and profits from property, or to manage property); (ii) the
enforceability of any provisions in any of the Loan Documents which purport to
permit any sale or other disposition of collateral other than in compliance with
applicable law; (iii) the enforceability of any provisions in any of the Loan
Documents which purport to permit any secured party to collect a deficiency
except upon compliance with applicable law; (iv) the enforceability of any
provisions in any of the Loan Documents which purport to entitle any party, as a
matter of right and without court approval after any required showings and
hearings, to the appointment of a receiver or the issuance of a writ of
possession; (v) the enforceability of any provisions in any of the Loan
Documents which purport to provide for payment of interest on unpaid interest in
violation of Official Code of Georgia Annotated ("O.C.G.A.") (S) 7-4-17; (vi)
---------------------------------- --------
the enforceability of any provisions in any of the Loan Documents which, due to
prepayment, acceleration or otherwise, would cause the rate of interest payable
under any of the Loan Documents to exceed five percent (5.0%) per month in
violation of O.C.G.A. (S) 7-4-18; and (vii) the enforceability of any provisions
in any of the Credit Documents which purport to provide that any party shall be
deemed to have been given or to have received any notice which such party did
not actually receive.
E. The opinions expressed in Paragraph (j) above are subject to the
following additional exceptions and qualifications:
(i) The effect of bankruptcy, insolvency, reorganization, moratorium, or
other similar laws affecting the rights of creditors, including the
U.S. Bankruptcy Code in its entirety and State laws regarding
fraudulent transfers, obligations and conveyances or regarding
receiverships;
(ii) In the case of proceeds, as such term is defined in the UCC,
continuation of the perfection of the Security Interest therein is
limited to the degree set forth in O.C.G.A. (S) 11-9-306;
(iii) Continuation statements relating to each Financing Statement must be
filed within six (6) months prior to the expiration of five (5) years
from the date of filing thereof or from the effectiveness of the last
continuation; and
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<PAGE>
(iv) Additional filings may be necessary with respect to the UCC
Collateral if Borrower changes its name, identity or corporate
structure or the jurisdiction in which the UCC Collateral is located
or in the event Borrower changes the location of its principal place
of business or chief executive office.
This opinion has been delivered solely for the benefit of the
addressees pursuant to the Loan Agreement and may not be relied upon by any
other person or entity for any other purpose without the express written
permission of the undersigned.
Very truly yours,
KILPATRICK & CODY
By:/s/ David A. Stockton, a Partner
--------------------------------
David A. Stockton, a Partner
-34-
<PAGE>
SCHEDULE I
OTHER CREDIT DOCUMENTS REVIEWED
-------------------------------
1. Term Loan Note, dated April [ ], 1994, executed and delivered by Borrower
in favor of Lender;
2. Guarantee, dated April [ ], 1994, endorsed on the Term Loan Note, and
executed and delivered by Guarantor in favor of Borrower;
3. Draw Notice, dated April [ ], 1994, executed by Borrower and delivered to
Lender; and
4. Bailee Letter, dated April [ ], 1994, acknowledged by Innotrac
Corporation, and related UCC-1 Financing Statement
-35-
<PAGE>
SCHEDULE II
FILING OFFICES
--------------
Office of the Clerk of the Superior Court of Gwinnett County, Georgia.
-36-
<PAGE>
SCHEDULE III
UCC SEARCH REPORTS
------------------
-37-
<PAGE>
SCHEDULE IV
OTHER DOCUMENTS REVIEWED
------------------------
1. Certificate of Limited Partnership for Borrower issued on April [ ], 1994
by the Office of the Secretary of State of Georgia;
2. Limited Partnership Agreement, dated April [ ], 1994, between HomeTel
Providers Inc. ("General Partner") and Lender, as Limited Partner;
-----------------
3. Articles of Incorporation and By-laws of General Partner;
4. Certificate of Secretary of General Partner, dated as of April [ ], 1994;
5. Assignment and Management Agreement, dated April [ ], 1994, between
Borrower and HomeTel Systems, Inc.; and
6. Services Agreement, dated April [ ], 1994, between Borrower and Innotrac
Corporation.
-38-
<PAGE>
EXHIBIT 10.7
COVER PAGE
The capitalized terms of this Lease shall have the meanings ascribed
to them below, and each reference to such term in the Lease shall incorporate
such meaning therein as if fully set forth therein.
LANDLORD: WEEKS REALTY, L.P., a Georgia limited partnership,
with its principal office located at 4497 Park
Drive, Norcross, Georgia 30093
TENANT: INNOTRAC CORPORATION, a corporation duly organized
and existing under the laws of the State of
Georgia.
LEASED PREMISES: (a) Address: 2505 Meadowbrook Parkway
(b) Rentable Area: 53,481 square feet
(c) Project: Meadowbrook
TERM: Three (3) years
COMMENCEMENT DATE: May 1, 1996
TERMINATION DATE: April 30, 1999
BASE RENT (PER YEAR) $267,405.00
i
<PAGE>
INNOTRAC CORPORATION
LEASE AGREEMENT
TABLE OF CONTENTS
SECTION PAGE
- ------- ----
1. LEASED PREMISES............................... 1
2. TERM.......................................... 1
3. RENTAL........................................ 1
4. DELAY IN DELIVERY............................. 2
5. USE OF LEASED PREMISES........................ 3
6. UTILITIES..................................... 4
7. ACCEPTANCE OF PREMISES........................ 4
8. ALTERATION, MECHANICS' LIENS.................. 4
9. QUIET CONDUCT/QUIET ENJOYMENT................. 5
10. FIRE INSURANCE, HAZARDS....................... 5
11. INSURANCE..................................... 5
12. INDEMNIFICATION BY TENANT..................... 6
13. WAIVER OF CLAIMS.............................. 7
14. REPAIRS....................................... 7
15. SIGNS, LANDSCAPING............................ 8
16. ENTRY BY LANDLORD............................. 8
17. TAXES......................................... 8
18. ABANDONMENT................................... 9
19. DESTRUCTION................................... 10
20. ASSIGNMENT AND SUBLETTING..................... 10
ii
<PAGE>
21. INSOLVENCY OF TENANT.......................... 11
22. BREACH BY TENANTS............................. 12
23. ATTORNEY'S FEES/COLLECTION CHARGES............ 12
24. CONDEMNATION.................................. 13
25. NOTICES....................................... 13
26. WAIVER........................................ 14
27. EFFECT OF HOLDING OVER........................ 14
28. SUBORDINATION................................. 14
29. ESTOPPEL CERTIFICATE.......................... 15
30. PARKING....................................... 15
31. MORTGAGE PROTECTION........................... 15
32. PROTECTIVE COVENANTS.......................... 15
33. GOVERNMENT REGULATIONS
34. RELOCATION.................................... 16
35. BROKERAGE COMMISSIONS......................... 16
36. MISCELLANEOUS PROVISIONS...................... 16
EXHIBITS:
EXHIBIT "A": Site Plan
EXHIBIT "B" Floor Plan of the Leased Premises
EXHIBIT "B-1": Parking
EXHIBIT "C": Tenant's Acceptance of Premises
EXHIBIT "D": Subordination, Non-disturbance and
Attornment Agreement
EXHIBIT"D": Special Stipulations
iii
<PAGE>
STATE OF GEORGIA
GWINNETT COUNTY
This Lease Agreement is made this __ day of April, 1996, by and
between WEEKS REALTY, L.P., a Georgia limited partnership, hereinafter referred
to as "Landlord", and INNOTRAC CORPORATION, hereinafter referred to as "Tenant".
LEASED PREMISES
1.01 Landlord hereby leases to Tenant, and Tenant hereby leases from
Landlord, the property hereinafter referred to as the LEASED PREMISES, described
as approximately 53,481 rentable square feet of office/warehouse at 2505
Meadowbrook Parkway, Duluth, Georgia, Gwinnett County, as shown on the plan
attached hereto as Exhibit "A" and by reference incorporated herein. The
building in which the Leased Premises are located is herein referred to as the
"Building"; and the real property on which the building is situated is herein
referred to as the "Land".
TERM
2.01 TO HAVE AND TO HOLD said Leased Premises for a term of three (3)
years, commencing on May 1, 1996, and continuing until midnight on April 30,
1999.
RENTAL
3.01 As rental for the Leased Premises, Tenant agrees to pay to
Landlord, without offset or abatement, the sum of Two Hundred Sixty Seven
Thousand Four Hundred Five and 00/100 Dollars ($267,405.00) per year, payable in
monthly installments each in the amount of Twenty Two Thousand Two Hundred
Eighty Three and 75/100 Dollars ($22,283.75) on or before the first day of each
calendar month beginning on May 1, 1996 and thereafter for the remainder of the
term, together with any other additional rental as hereinafter set forth.
Tenant shall pay interest at a rate of ten percent (10%) per annum on all rental
payments not received by Landlord within ten (10) days of the due date thereof.
If the Lease shall commence on any date other than the first day of a calendar
month, or end on any date, other than the last day of a calendar month, rent for
such month shall be prorated. Tenant has deposited with Landlord, upon delivery
of this Lease Agreement, an amount equal to Twenty Two Thousand Two Hundred
Eighty Three and 75/100 ($22,23.750) Dollars to be applied as first month's
rental.
3.02 The rental provided in paragraph 3.01 "Rental" above, includes
an allowance in the amount of Seventy Thousand Five Hundred and 00/100 Dollars
($70,500.00) (the "Allowance") towards the cost of tenant improvements to the
Leased Premises on the basis set forth in the plans and specifications attached,
or to be attached, hereto in Exhibit "B". The Allowance shall be used for
alterations, improvements, fixtures and equipment which become part of or are
attached or affixed to the Leased Premises, including walls, wall coverings and
floor coverings, but excluding trade fixtures, furniture or furnishings or other
personal property.
<PAGE>
In the event the cost of tenant improvements exceeds the Allowance, the excess
shall be paid by Tenant to Landlord within thirty (30) days upon Tenant's
receipt of Landlord's invoice.
3.03 In addition to the base rental, Tenant agrees to pay Landlord as
additional rental the amounts described in subparagraph (a) below. Each year
during the term hereof, Landlord shall give Tenant written notice of its
estimate of the amount of common area utility charges (collectively "Charges")
for the Lease Premises for the calendar year. Tenant shall, thereafter, during
that calendar year, pay to Landlord one-twelfth (1/12) of the amount set forth
in said statement at such time as its monthly installments of base rental
hereunder are due and payable. At such time as Landlord is able to determine
the actual Charges for such calendar year, Landlord shall deliver to Tenant a
statement thereof and in the event the estimated Charges differ from the actual
Charges, any adjustment necessary shall be made to additional rental payments
next coming due under this paragraph.
(a) In the event any utilities furnished to the Building or the Leased
Premises are not separately metered, Tenant shall pay to Landlord, as additional
rental, the gas, water, electricity, fuel, light and heat, garbage collection
services and for all other sanitary services rendered to the Leased Premises
used by Tenant. Tenant's amount shall be determined on the basis of the size of
the Leased Premises, unless Landlord determines that Tenant's use of the Leased
Premises justifies a disproportionate allocation of utility costs to Tenant.
(b) Landlord agrees to maintain those areas around the Building and in
the Project, including parking areas, planted areas, signs and landscaped areas
which are from time to time designated by Landlord. Tenant agrees to pay to
Landlord as additional rental the amount of $805.00 per month for the first year
of the lease term for common area charges and expenses for the Building and the
Land ("CAM Charges") which shall increase at a rate of six percent (6%) each
year during the term of the lease. The term "grounds maintenance" shall
include, without limitation, all landscaping, planting, lawn and grounds care,
irrigation costs, all repairs and maintenance to the grounds, signs and other
common areas around the Building and in the Project and to all sidewalks,
driveways, loading areas and parking areas. CAM Charges shall not include items
of a capital nature.
3.04 Tenant agrees to pay as additional rent to Landlord, upon
demand, any utility surcharges, or any other costs levied, assessed or imposed
by, or at the discretion of, or resulting from statutes or regulations, or
interpretations thereof, promulgated by any Federal, State, Municipal or local
governmental authorities in connection with the use or occupancy of the Leased
Premises.
DELAY IN DELIVERY OF POSSESSION
4.01 If Landlord, for any reason whatsoever, cannot deliver
possession of the Leased Premises to Tenant at the commencement of the term of
this Lease, this Lease shall not be void or voidable, nor shall Landlord be
liable to Tenant for any loss or damage resulting therefrom, but in that event
there shall be a proportionate reduction of rent covering the period between the
commencement of the term and the time when Landlord can deliver possession. If
delay is
-2-
<PAGE>
longer than three (3) months, Landlord will provide Tenant such space (not
exceeding in area the Leased Premises) as Landlord may have available, until the
Leased Premises can be completed, at no charge to Tenant. The term of this
Lease shall be extended by such delay.
USE OF LEASED PREMISES
5.01 The Leased Premises may be used and occupied only for general
manufacturing and assembly, testing, warehousing and distribution, showroom and
offices and for no other purpose or purposes, without Landlord's prior written
consent. Tenant shall promptly comply at its sole expense with all laws,
ordinances, orders, and regulations affecting the Leased Premises and their
cleanliness, safety, occupation and use. Tenant shall not do or permit anything
to be done in or about the Leased Premises that will in any way increase the
fire insurance upon the building. Tenant will not perform any act or carry on
any practices that may injure the building or be a nuisance or menace to tenants
of adjoining premises. Tenant shall not cause, maintain or permit any outside
storage on or about the Leased Premises, including pallets or other refuse. The
rear loading areas of the Tenant's unit must be clean and unobstructed. On or
before the Commencement Date, Tenant shall take possession of, and, thereafter,
continuously occupy the Leased Premises during the term of this Lease, and
operate between the normal business operations of Tenant.
5.02 Tenant shall, at Tenant's sole cost and expense, comply fully
with all environmental laws and regulations, and all other legal requirements,
applicable to Tenant's operations at, on or within, or to Tenant's use and
occupancy of, the Leased Premises. Tenant shall not (either with or without
negligence) cause or permit the escape, disposal or released of any biologically
or chemically active or other hazardous substances, or materials. Tenant shall
not allow the storage or use of such substances or materials in any manner not
sanctioned by law or by the highest standards prevailing in the industry for the
storage and use of such substances or materials, nor allow to be brought into
the Project any such materials or substances except to use in the ordinary
course of Tenant's business, and then only after written notice is given to
Landlord of the identity of such substances or materials. Without limitation,
hazardous substances and materials shall include those described in the
Comprehensive Environmental Response, Compensation and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery
Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local
laws and the regulations adopted under these acts. If any lender or
governmental agency shall ever require testing to ascertain whether or not there
has been any release or hazardous materials, then the reasonable costs thereof
shall be reimbursed by Tenant to Landlord upon demand as additional charges if
such requirement applies to the Leased Premises. In addition, Tenant shall
execute affidavits, representations and the like from time to time at Landlord's
request concerning Tenant's best knowledge and belief regarding the presence of
hazardous materials on the Leased Premises. In all events, Tenant shall
indemnify Landlord in the manner elsewhere provided in this lease from any
release of hazardous materials on the Leased Premises occurring while Tenant is
in possession, or elsewhere if caused by Tenant or persons acting under Tenant.
The within covenants shall survive the expiration or earlier termination of the
lease term.
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UTILITIES
6.01 Landlord shall not be liable in the event of any interruption in
the supply of any utilities. Tenant agrees that it will not install any
equipment which will exceed or overload the capacity of any utility facilities
and that if any equipment installed by Tenant shall require additional utility
facilities, the same shall be installed by Tenant at Tenant's expense in
accordance with plans and specifications approved in writing by Landlord.
Tenant shall be solely responsible for and shall pay all charges for use or
consumption of sanitary sewer, water, gas, electricity and any other utility
services. In the event Landlord determines that it is advisable to separately
meter any utility services provided to the Leased Premises, Landlord shall have
the right to install a sub-meter and bill Tenant for the actual cost thereof,
which shall be paid to Landlord within fifteen (15) days following billing.
ACCEPTANCE OF PREMISES
7.01 By entry hereunder, Tenant acknowledges that it has examined the
Leased Premises and accepts the same as being in the condition called for by
this Lease, and as suited for the uses intended by Tenant. Upon delivery of
possession of the Leased Premises to Tenant, Tenant agrees to execute and
deliver to Landlord a Tenant's Acceptance of Premises, in the form attached
hereto as Exhibit "C".
ALTERATION, MECHANICS' LIENS'
8.01 Alterations may not be made to the Leased Premises without prior
written consent of Landlord, and any alterations of the Leased Premises
excepting movable furniture and trade fixtures shall at Landlord's option become
part of the realty and belong to the Landlord.
8.02 Should Tenant desire to alter the Leased Premises and Landlord
gives written consent to such alterations, at Landlord's option, Tenant shall
contract with a contractor approved by Landlord for the construction of such
alterations.
8.03 Notwithstanding anything in paragraph 8.02 above, Tenant may,
upon written consent of Landlord, install trade fixtures, machinery or other
trade equipment in conformance with all applicable laws, statutes, ordinances,
rules, regulations, and the same may be removed upon the termination of this
Lease provided Tenant shall not be in default under any of the terms and
conditions of this Lease, and the Leased Premises are not damaged by such
removal. Tenant shall return the Leased Premises on the termination of this
Lease in the same condition as when rented to Tenant, reasonable wear and tear
only excepted. Tenant shall keep the Leased Premises, the building and property
in which the Leased Premises are situated free from any liens arising out of any
work performed for, materials furnished to, or obligations incurred by Tenant.
All such work provided for above, shall be done at such times and in such manner
as Landlord may from time to time designate. Tenant shall give Landlord written
notice five (5) days prior to employing any laborer or contractor to perform
work resulting in an alteration of the Leased Premises so that Landlord may post
a notice of non-responsibility.
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QUIET CONDUCT/QUIET ENJOYMENT
9.01 Tenant shall not commit, or suffer any waste upon the Leased
Premises, or any nuisance, or other act or thing which may disturb the quiet
enjoyment of any other tenant in the Building or any building in the project in
which the Leased Premises are located.
9.02 So long as Tenant is not in default in the payment of rent, or
other charges or in the performance of any of the other terms, covenants, or
conditions of the Lease, Tenant shall not be disturbed by Landlord or anyone
claiming by, through or under Landlord in Tenant's possession, enjoyment, use
and occupancy of the Leased Premises during the original or any renewal term of
the Lease or any extension or modification thereof.
FIRE INSURANCE, HAZARDS
10.1 No use shall be made or permitted to be made of the Leased
Premises, nor acts done which might increase the existing rate of insurance upon
the building or cause the cancellation of any insurance policy covering the
building, or any part thereof, nor shall Tenant sell, or permit to be kept, used
or sold, in or about the Leased Premises, any article which may be prohibited by
the Standard form of fire insurance policies. Tenant shall, at its sole cost
and expense, comply with any and all requirements pertaining to the Leased
premises, of any insurance organization or company, necessary for the
maintenance of reasonable fire and public liability insurance, covering the
Leased Premises, building and appurtenances.
INSURANCE
11.01 (a) Tenant, at its own expense, shall provide and keep in
force with companies acceptable to Landlord public liability insurance for the
benefit of Landlord and Tenant jointly against liability for bodily injury and
property damage in the amount of not less than Three Million Dollars
($3,000,000.00) in respect to injuries to or death of more than one person in
any one occurrence, in the amount of not less than One Million Dollars
($1,000,000.00) in respect to injuries to or death of any one person, and in the
amount of not less than Fifty Thousand Dollars ($50,000.00) per occurrence in
respect to damage to property, such limits to be for any greater amounts as may
be reasonably indicated by circumstances from time to time existing. Tenant
shall furnish Landlord with a certificate of such policy (which certificate
shall contain the insurer's waiver of subrogation rights exercisable against the
Landlord) within thirty (30) days of the commencement date of this Lease and
whenever required shall satisfy Landlord that such policy is in full force and
effect. Such policy shall name Landlord as an additional insured and shall be
primarily and non-contributing with any insurance carried by Landlord. The
policy shall contain a contractual liability endorsement. The policy shall
further provide that it shall not be canceled or altered without twenty (20)
days prior written notice to Landlord.
(b) Tenant shall maintain in full force and effect on all of its
inventory, fixtures and equipment in the Leased Premises a policy or policies of
fire and extended coverage insurance with standard coverage endorsement to the
extent of at least eighty percent (80%) of their insurable value. During the
term of this Lease the proceeds from any such policy or policies of
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insurance shall be used for the repair or replacement of the fixtures, and
Landlord will sign all documents necessary or proper in connection with the
settlement of any claim or loss by Tenant. Landlord will not carry insurance on
Tenant's possessions. Tenant shall furnish Landlord with a certificate of such
policy within thirty (30) days of the commencement of this Lease, and whenever
required, shall satisfy Landlord that such policy is in full force and effect.
(c) Landlord shall obtain and keep in force at Tenant's sole cost and
expense during the term of this Lease a policy or policies of insurance covering
loss or damage to the Leased Premises, in the amount of the full replacement
value thereof, as the same may exist from time to time, but in no event less
than the total amount of promissory notes secured by liens on the Leased
Premises against all perils included within the classification of fire, extended
coverage, vandalism, malicious mischief, special extended perils (all risk) and
sprinkler leakage. Said insurance shall provide for payment of loss thereunder
to Landlord or to the holders of mortgages or deeds of trust on the Leased
Premises. The insuring party shall in addition, obtain and keep in force
during the term of this Lease a policy of rental income insurance covering a
period of one (1) year, which insurance shall also cover all real estate taxes
and insurance costs for said period. If such insurance coverage has a
deductible clause, Tenant shall be liable for the deductible amount. Upon
demand by Landlord, Tenant shall promptly pay the cost of such insurance
coverage as additional rent.
(d) If the Leased Premises are part of a larger building, or if the
Leased Premises are part of a group of buildings owned by Landlord, which are
adjacent to the Leased Premises, then Tenant shall pay for any increase in the
property insurance of such other building or buildings if said increase is
caused by Tenant's acts, omissions, use or occupancy of the Leased Premises.
(e) All policies of insurance shall provide that the insurers waive
any right of subrogation against Landlord or Tenant.
INDEMNIFICATION BY TENANT
12.01 Tenant shall indemnify and hold harmless Landlord against and
from any and all claims arising from Tenant's use of the Leased Premises (other
than those arising solely from negligence of Landlord or its agents or
employees), or the conduct of its business or from any activity, work, or thing
done, permitted or suffered by the Tenant in or about the Leased Premises, and
shall further indemnify and hold harmless Landlord against and from any and all
claims arising from any breach or default in the performance of any obligation
on Tenant's part to be performed under the terms of this Lease, or arising from
any act, neglect, fault or omission of the Tenant, or of its agents or
employees, and from and against all costs, attorney's fees, expenses and
liabilities incurred in or about such claim or any action or proceeding brought
relative thereto and in case any action or proceeding be brought against
Landlord by reason of any such claim, Tenant upon notice from Landlord shall
defend the same at Tenant's expense by counsel, chosen by Tenant and who is
reasonably acceptable to Landlord. Tenant, as a material part of the
consideration to Landlord, hereby assumes all risk of damage to property or
injury to persons in or about the Leased premises from any cause whatsoever
except that which is caused by the failure of Landlord to observe any of the
terms and conditions of this Lease where such
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failure has persisted for an unreasonable period of time after written notice of
such failure, and Tenant hereby waives all claims in respect thereof against
Landlord.
12.02 Landlord shall indemnify and hold harmless Tenant against and
from any and all claims for bodily injury, death or property damage, to the
extent caused solely by Landlord's negligence or misconduct, or arising from the
conduct of its business or from any activity, work, or thing done by the
Landlord within the Building or on the Land.
12.03 The obligations of Landlord and Tenant under this paragraph
arising by reason of any occurrence taking place during the term of this Lease
shall survive the termination or expiration of this Lease.
WAIVER OF CLAIMS
13.01 Tenant, as a material part of the consideration to be rendered
to Landlord, hereby waives all claims against Landlord for damages to goods,
wares and merchandise in, upon or about the Leased Premises and for injury to
Tenant, its agents, employees, invitees, or third person in or about the Leased
Premises from any cause arising at any time.
REPAIRS
14.01 Tenant shall, at its sole cost, keep and maintain the Leased
Premises and appurtenances and every part thereof (excepting exterior walls and
roofs which Landlord agrees to repair) including by way of illustration and not
by way of limitation all windows, and skylights, doors, any store front and the
interior of the Leased Premises, including all pluming, heating, air
conditioning, sewer, electrical systems and all fixtures and all other similar
equipment serving the Leased Premises in good and sanitary order, condition, and
repair. Tenant shall be responsible for all pest control within the Leased
Premises; including, but not limited to the eradication of any ants or
terminates should infestation be observed during the term of the Lease. To the
best of Landlord's knowledge, the Leased Premises is free of any insects or
rodents. Tenant shall, at its sole cost, keep and maintain all utilities,
fixtures and mechanical equipment used by Tenant in good order, condition and
repair. All windows shall be washed and cleaned as often as necessary to keep
them clean and fee from smudges and stains. In the event Tenant fails to
maintain the Leased Premises as required herein or fails to commence repairs
(requested by Landlord in writing) within thirty (30) days after such request,
or fails diligently to proceed thereafter to complete such repairs, Landlord
shall have the right in order to preserve the Leased Premises or portion
thereof, and/or the appearance thereof, to make such repairs or have a
contractor make such repairs and charge Tenant for the cost thereof as
additional rent, together with interest at the rate of twelve percent (12%) per
annum from the date of making such payments. Landlord agrees to inspect the
mechanical equipment in the Leased Premises to insure it is in good working
order at lease commencement.
14.02 Landlord agrees to keep in good repair the roof, foundations,
and exterior walls of the Leased Premises except repairs rendered necessary by
the negligence of Tenant, its agents, employees or invitees. Landlord gives to
Tenant exclusive control of Leased Premises and shall
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be under no obligations to inspect said Leased Premises. Tenant shall promptly
report in writing to Landlord any defective condition known to it which Landlord
is required to repair, and Landlord shall move with reasonable diligence to
repair such item. Failure to report such obvious, known defects shall make
Tenant responsible to Landlord for any liability incurred by Landlord by reason
of such defects.
14.03 Tenant shall obtain upon occupancy and keep current during the
lease term a service maintenance contract on the heating, ventilation and air
conditioning (HVAC) equipment serving the Leased Premises. The contract shall
be between Tenant and a dealer-authorized company acceptable to Landlord, and
shall at a minimum provide for an equipment check and tune-up service each
spring and fall, and filter and lubrication service every three months. A copy
of said contract shall be provided to Landlord, as well as any modification,
extension, renewal or replacement thereof.
SIGNS, LANDSCAPING
15.01 Landlord shall have the right to control landscaping and Tenant
shall make no alterations or additions to the landscaping. Landlord shall have
the right to approve the placing of signs and the size and quality of the same.
Tenant shall place no exterior signs on the Leased Premises without the prior
written consent of Landlord. Any signs not in conformity with the Lease may be
immediately removed by Landlord. Landlord shall provide, at its cost and
expense, building standard signage.
ENTRY BY LANDLORD
16.01 Upon reasonable notice, Tenant shall permit Landlord and
Landlord's agents to enter the Leased Premises at all reasonable times for the
purpose of inspecting the same or for the purpose of maintaining the building,
or for the purpose of making repairs, alterations, or additions to any portion
of the building, including the erection and maintenance of such scaffolding,
canopies, fences and props as may be required, or for the purpose of posting
notices of non-responsibility for alterations, additions, or repairs, or for the
purpose of showing the Leased Premises to prospective tenants, or placing upon
the building any usual or ordinary "for sale" signs, without any rebate of rent
and without any liability to Tenant for any loss of occupation or quiet
enjoyment of the Leased Premises thereby occasioned; and shall permit Landlord
at any time within six (6) months prior to the expiration of this Lease, to
place upon the Leased Premises any usual or ordinary "to let" or "to lease"
signs. For each of the aforesaid purposes, Landlord shall at all times have and
retain a key with which to unlock all of the exterior doors about the Leased
Premises.
TAXES
17.01 (a) Tenant shall, as additional rent, pay and discharge, on or
before the last day on which the same may be paid without penalty, "all taxes",
(as hereinafter defined) which shall or may during the term be levied, assessed
or imposed on or become a lien upon or grow due or payable out of or for or by
reason of the Leased Premises or any part thereof, only if
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caused by Tenant or the Landlord's interest in the real property described on
Exhibit "A" hereto. For the purposes hereof "taxes" means all taxes at any time
imposed by the United States of America or by any state, city, county or other
political or taxing subdivision thereof upon or against this Lease, the Leased
Premises, the use or occupancy thereof, the buildings, improvements or
personalty thereon, and all assessments imposed subsequent to the execution and
delivery of this lease by both Landlord and Tenant (including assessments for
benefits from public works or improvements, whether commenced or completed prior
to the commencement of the term hereof and whether or not to be completed within
said term), levies, license fees, permit fees, water rents and charges, sewer
rents, excises, franchises, imposts, interest, costs, penalties and charges,
general and special, ordinary and extraordinary, of whatever name, nature and
kind, and whether or not within the contemplation of the parties hereto, which
are now or may hereafter be levied, assessed, charged or imposed upon or against
this Lease, the Leased Premises, the use or occupancy thereof, or the building,
improvements or personal property thereon or which are or may become a lien on
any thereof. Notwithstanding anything hereinabove to the contrary, "taxes"
shall not include any penalties or interest imposed or incurred because of
Landlord's dilatory payment, unless the delay in payment is due to Tenant's
breach of its obligations under this Section 17.
(b) All assessments imposed upon the Leased Premises during the final
year of the term of this Lease for public improvements which shall benefit the
Leased Premises after the expiration of this Lease shall be equitably pro rated,
so that only the portion of such assessments properly allocable to the term of
this Lease shall be included in determining Tenant's share of "taxes" in
accordance with Section 16.01(a) above.
17.02 Tenant shall pay as additional rent the amount of all taxes,
other than income taxes, upon or measured by the rent payable hereunder, whether
as a sales tax, transaction privilege tax, excise tax, or otherwise, which
additional rent shall be due and payable at the same time as each installment of
basic rent.
17.03 Joint Assessment. If the Leased Premises are not separately
assessed, Tenant's liability shall be an equitable proportion of the real
property taxes for all of the land and improvements included with the tax parcel
assessed, such proportion to be determined by Landlord from the respective
valuations assigned in the assessor's work sheets or such other information as
may be reasonably available. Landlord's reasonable determination thereof, in
good faith, shall be conclusive.
17.04 Personal Property Taxes. Tenant shall pay prior to delinquency
all taxes assessed against and levied upon trade fixtures, furnishings,
equipment and all other personal property of Tenant contained in the Leased
Premises or elsewhere.
ABANDONMENT
18.01 Tenant shall not vacate nor abandon the Leased Premises at any
time during the term of this Lease, unless agreed to in writing by both Landlord
and Tenant; and if Tenant shall abandon, vacate or surrender the Leased
Premises, or be dispossessed by process of law, or
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otherwise, any personal property belonging to Tenant and left on the Leased
Premises shall, at the option of the Landlord, be deemed abandoned and be and
become the property of Landlord.
DESTRUCTION
19.01 If the Leased Premises or any portion thereof are destroyed by
storm, fire, lightning, earthquake or other casualty, Tenant shall immediately
notify Landlord. In the event the Leased Premises cannot, in Landlord's
judgment, be restored within one hundred twenty (120) days of the date of such
damage or destruction, this Lease shall terminate as of the date of such
destruction, and all rent and other sums payable by Tenant hereunder shall be
accounted for as between Landlord and Tenant as of that date. Landlord shall
notify Tenant within thirty (30) days of the date of the damage or destruction
whether the Leased Premises can be restored within one hundred twenty (120)
days. If this Lease is not terminated as provided in this paragraph, Landlord
shall, to the extent insurance proceeds payable on account of such damage or
destruction are available to Landlord (with the excess proceeds belonging to
Landlord), within a reasonable time, repair, restore, rebuild, reconstruct or
replace the damaged or destroyed portion of the Leased Premises to a condition
substantially similar to the condition which existed prior to the damage or
destruction. Provided, however, Landlord shall only be required to repair,
restore, rebuild, reconstruct and replace the Landlord's Work shown on Exhibit
"B", and Tenant shall, at its sole cost and expense, upon completion of the
Landlord's Work, repair, restore, rebuild, reconstruct and replace, as required,
any and all improvements installed in the Leased Premises by Tenant and all
trade fixtures, personal property, inventory, signs and other contents in the
Leased Premises, and all other repairs not specifically required of Landlord
hereunder, in a manner and to at least the condition existing prior to the
damage. Tenant's obligation to pay Base Rent shall abate until Landlord has
repaired, restored, rebuilt, reconstructed or replaced the Leased Premises, as
required herein, in proportion to the part of the Leased Premises which are
unusable by Tenant. If the damage or destruction is due to the act, neglect,
fault or omission of Tenant, there shall be no rent abatement except to the
extent of rent loss insurance. In the event of any dispute between Landlord and
Tenant relative to the provisions of this paragraph, they may each select an
arbitrator, the two arbitrators so selected shall select a third arbitrator and
the three arbitrators so selected shall hear and determine the controversy and
their decision thereon shall be final and binding on both Landlord and Tenant
who shall bear the cost of such arbitration equally between them. Landlord
shall not be required to repair any property installed in the Leased Premises by
Tenant. Tenant waives any right under applicable laws inconsistent with the
terms of this paragraph and in the event of a destruction agrees to accept any
offer by Landlord to provide Tenant with comparable space within the project in
which the Leased Premises are located on the same terms as this Lease.
Notwithstanding the provisions of this paragraph, if any such damage or
destruction occurs within the final two (2) years of the term hereof, then
Landlord, in its sole discretion, may, without regard to the aforesaid 120 day
period, terminate this Lease by written notice to Tenant.
ASSIGNMENT AND SUBLETTING
20.01 Landlord shall have the right to transfer and assign, in whole
or in part its rights and obligations in the building and property that are the
subject of this Lease. Tenant shall not
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assign this Lease or sublet all or any part of the Leased Premises without the
prior written consent of the Landlord. In the event of any assignment or
subletting, Tenant shall nevertheless at all times, remain fully responsible and
liable for the payment of the rent and for compliance with all of its other
obligations under the terms, provisions and covenants of this Lease. If all or
any part of the Leased Premises are then assigned or sublet, Landlord, in
addition to any other remedies provided by this Lease or provided by law, may at
its option, collect directly from the assignee or subtenant all rents becoming
due to Tenant by reason of the assignment or sublease, and Landlord shall have a
security interest in all properties on the Leased Premises to secure payment of
such sums. Any collection directly by Landlord from the assignee or subtenant
shall not be construed to constitute a novation or a release of Tenant from the
further performance of its obligations under this Lease. In the event that
Tenant sublets the Leased Premises or any part thereof, or assigns this Lease
and at any time receives rent and/or other consideration which exceeds that
which Tenant would at that time be obligated to pay to Landlord, Tenant shall
pay to Landlord 50% of the gross excess in such rent as such rent is received by
Tenant and 50% of any other consideration received by Tenant from such subtenant
in connection with such sublease or, in the case of any assignment of this Lease
by Tenant, Landlord shall receive 50% of any consideration paid to Tenant by
such assignee in connection with such assignment. In addition, should Landlord
agree to an assignment or sublease agreement, Tenant will pay to Landlord on
demand the sum of $500.00 to partially reimburse Landlord for its costs,
including reasonable attorneys' fees, incurred in connection with processing
such assignment or subletting request.
INSOLVENCY OF TENANT
21.01 Either (a) the appointment of a trustee to take possession of
all or substantially all of the assets of Tenant, or (b) a general assignment by
Tenant for the benefit of creditors, or (c) any action taken or suffered by
Tenant under any insolvency or bankruptcy act shall, if any such appointments,
assignments or action continues for a period of thirty (30) days, constitute a
breach of this Lease by Tenant, and Landlord may at its election without notice,
terminate this Lease and in that event be entitled to immediate possession of
the Leased Premises and damages as provided below.
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BREACH BY TENANTS
22.01 In the event of a default, Landlord in addition to any and all
other rights or remedies that it may have hereunder, at law or in equity shall
have the right to either terminate this Lease or from time to time, without
terminating this Lease relet the Leased Premises or any part thereof for the
account and in the name of Tenant or otherwise, for any such term or terms and
conditions as Landlord in its sole discretion may deem advisable with the right
to make reasonable alterations and repairs to the Leased Premises. Tenant shall
pay to Landlord, as soon as ascertained, the costs and expenses incurred by
Landlord in such reletting or in making such reasonable alterations and repairs.
Should such rentals received from time to time from such reletting during any
month be less than that agreed to be paid during that month by Tenant hereunder,
the Tenant shall pay such deficiency to Landlord. Such deficiency shall be
calculated and paid monthly.
22.02 No such reletting of the Leased Premises by Landlord shall be
construed as an election on its part to terminate this Lease unless a notice of
such intention be given to Tenant or unless the termination thereof be decreed
by a court of competent jurisdiction. Notwithstanding any such reletting
without termination, Landlord may immediately or at any time thereafter
terminate this Lease, and this Lease shall be deemed to have been terminated
upon receipt by Tenant of notice of such termination; upon such termination
Landlord shall recover from Tenant all damages that Landlord may suffer by
reason of such termination including, without limitation, all arrearages in
rentals, costs, charges, additional rentals, and reimbursements, the cost
(including court costs and attorneys' fees actually incurred) of recovering
possession of the Leased Premises, the actual or estimated (as reasonably
estimated by Landlord) cost of any alteration of or repair to the Leased
Premises which is necessary or proper to prepare the same for reletting and, in
addition thereto, Landlord shall have and recover from Tenant the difference
between the present value (discounted at a rate per annum equal to the discount
rate of the Federal Reserve Bank of Atlanta at the time the Event of Default
occurs) of the rental to be paid by Tenant for the remainder of the lease term,
and the present value (discounted at the same rate) of the rental for the Leased
Premises for the remainder of the lease term, taking into account the cost, time
and other factors necessary to relet the Leased Premises; provided, however,
that such payment shall not constitute a penalty or forfeiture, but shall
constitute full liquidated damages due to Landlord as a result of Tenant's
default. Landlord and Tenant acknowledge that Landlord's actual damages in the
event of a default by Tenant under this Lease will be difficult to ascertain,
and that the liquidated damages provided above represent the parties' best
estimate of such damages. The parties expressly acknowledge that the foregoing
liquidated damages are intended not as a penalty, but as full liquidated
damages, as permitted by Section 13-6-7 of the Official Code of Ga. Annotated.
ATTORNEY'S FEES/COLLECTION CHARGES'
23.01 If Landlord and Tenant litigate any provision of this Lease or
the subject matter of this Lease, the unsuccessful litigant will pay to the
successful litigant all costs and expenses, including reasonable attorneys' fees
and court costs, incurred by the successful litigant at trial and on any appeal.
If, without fault, either Landlord or Tenant is made a party to any litigation
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instituted by or against the other, the other will indemnify the faultless one
against all loss, liability, and expense, including reasonable attorneys' fees
and court costs, incurred by it in connection with such litigation.
CONDEMNATION
24.01 If, at any time during the term of this Lease, title to the
entire Leased Premises should become vested in a public or quasi-public
authority by virtue of the exercise of expropriation, appropriation,
condemnation or other power in the nature of eminent domain, or by voluntary
transfer from the owner of the Leased Premises under threat of such a taking
then this Lease shall terminate as of the time of such vesting of title, after
which neither party shall be further obligated to the other except for
occurrence antedating such taking. The same results shall follow if less than
the entire Leased Premises be thus taken, or transferred in lieu of such a
taking, but to such extent that it would be legally and commercially impossible
for Tenant to occupy the portion of the Leased Premises remaining, and
impossible for Tenant to reasonably conduct his trade or business therein.
24.02 Should there be such a partial taking or transfer in lieu
thereof, but not to such an extent as to make such continued occupancy and
operation by Tenant an impossibility, then this Lease shall continue on all of
its same terms and conditions subject only to an equitable reduction in rent
proportionate to such taking.
24.03 In the event of any such taking or transfer, whether of the
entire Leased Premises, or a portion thereof, it is expressly agreed and
understood that all sums awarded, allowed or received in connection therewith
shall belong to Landlord, and any rights otherwise vested in Tenant are hereby
assigned to Landlord, and Tenant shall have no interest in or claim to any such
sums or any portion thereof, whether the same be for the taking of the property
or for damages, or otherwise. Nothing herein shall be construed, however, to
preclude Tenant from prosecuting any claim directly against the condemning
authority for loss of business, moving expenses, damage to, and cost of, trade
fixtures, furniture and other personal property belonging to Tenant and Landlord
will have no interest in or claim to any such sums or any portion thereof;
provided, however, that Tenant shall make no claim which shall diminish or
adversely affect any award claimed or received by Landlord.
NOTICES
25.02 All notices, statements, demands, requests, consents,
approvals, authorization, offers, agreements, appointment, or designations under
this Lease by either party to the other shall be in writing and shall be
sufficiently given and served upon the other party, (i) by depositing same in
the United States mail, addressed to the party to be notified, postage prepaid
and registered or certified with return receipt requested; (ii) by recognized
overnight, third party prepaid courier service (such as Federal Express),
requiring signed receipt; (iii) by delivering the same in person to such party;
or (iv) by prepaid telegram, telecopy or telex with delivery of an original copy
of any such notice delivered pursuant to (ii) or (iii) above to be received no
later than the next business day. Notice personally delivered or sent by
courier service, telegram,
-13-
<PAGE>
telecopy or telex shall be effective upon receipt. Any notice mailed in the
foregoing manner shall be effective three (3) business days after its deposit in
the United States mail. Either party may change its address for notices by
giving notice to the other as provided above. For purposes of notice, the
addresses of the parties shall be as follows:
(a) To Tenant at 1828 Meca Way, Norcross, Georgia 30093
(b) To Landlord, addressed to Landlord at 4497 Part Drive, Norcross,
Georgia 30093, with a copy to such other place as Landlord may from
time to time designate by notice to Tenant.
WAIVER
26.01 The waiver by Landlord of any breach of any term, covenant, or
condition herein contained shall not be deemed to be a waiver of such term,
covenant, or condition or any subsequent breach of the same or any other term,
covenant, or condition herein contained. The subsequent acceptance of rent
hereunder by Landlord shall not be deemed to be a waiver of any preceding breach
by Tenant of any term, covenant, or condition of this Lease, other than the
failure of Tenant to pay the particular rental so accepted, regardless of
Landlord's knowledge of such preceding breach at the time of acceptance of such
rent.
EFFECT OF HOLDING OVER
27.01 If Tenant should remain in possession of the Leased Premises after
the expiration of the lease term and without executing a new lease, then such
holding over shall be construed as a tenancy from month to month, subject to all
the conditions, provisions, and obligations of this Lease insofar as the same
are applicable to a month to month tenancy, except that the rent payable
pursuant to subparagraph 3.01 hereof shall be 125% of the rent payable pursuant
to subparagraph 3.01.
SUBORDINATION
28:01 This lease, at Landlord's option, shall be subordinate to any ground
lease, first priority mortgage, first priority deed of trust, or first priority
security deed now or hereafter placed upon the real property of which the Leased
Premises are a part and to any and all advances made on the security thereof and
to all renewals, modifications, consolidations, replacements and extensions
thereof.
28.02 Tenant agrees to execute any documents required to effectuate such
subordination or to make this Lease prior to the lien of any such ground lease,
mortgage, deed of trust, or security deed, as the case may be, including
specifically a subordination, non-disturbance and attornment agreement in the
form hereto attached as Exhibit "D", and failing to do so within ten (10)
business days after written demand, does hereby make, constitute and irrevocably
appoint Landlord as Tenant's attorney in fact and in Tenant's name, place and
stead, to do so. If requested to do so, Tenant agrees to attorn to any person
or other entity that acquires title to the
-14-
<PAGE>
real property encompassing the Leased Premises, whether through judicial
foreclosure, sale under power, or otherwise, and to any assignee of such person
or other entity.
ESTOPPEL CERTIFICATE
29.01 Upon ten (10) business days notice from Landlord to Tenant, Tenant
shall deliver a certificate dated as of the first day of the calendar month in
which such notice is received, executed by an appropriate officer, partner or
individual, in the form as Landlord may require and stating but not limited to
the following: (i) the commencement date of this Lease; (ii) the space occupied
by Tenant hereunder; (iii) the expiration date hereof; (iv) a description of any
renewal or expansion options; (v) the amount of rental currently and actually
paid by Tenant under this Lease; (vi) the nature of any default or claimed
default hereunder by Tenant and (vii) that Tenant is not in default hereunder
nor has any event occurred which with the passage of time or the giving of
notice would become a default by Tenant hereunder.
PARKING
30.01 Tenant agrees to park all Tenant's trucks in the parking spaces
designated on the attached Exhibit B-1. "Parking" as used herein means the use
by Tenant's employees, its visitors, invitees, and customers for the parking of
motor vehicles for such periods of time as are reasonably necessary in
connection with use of and/or visits to the Leased Premises. No vehicle may be
repaired of serviced in the parking area and any vehicle deemed abandoned by
Landlord will be towed from the project and all costs therein shall be borne by
the Tenant. No areas outside of the Leased Premises shall be used by Tenant for
storage without Landlord's prior written permission. There shall be no parking
permitted on any of the streets or roadways located in Meadowbrook.
MORTGAGEE PROTECTION
31.01 In the event of any default on the part of Landlord, Tenant will
give notice by registered or certified mail to any beneficiary of a deed or
trust or holder of a security deed or mortgage covering the Leased Premises
whose address shall have been furnished it, and shall offer such beneficiary or
holder a reasonable opportunity to cure the default, including time to obtain
possession of the Leased Premises by power of sale or a judicial foreclosure, if
such should prove necessary to effect a cure.
PROTECTIVE COVENANTS
32.01 This lease is subject to the Protective Covenants of Meadowbrook,
and to such rules and regulations as may hereafter be adopted and promulgated.
In addition, Tenant shall comply with all covenants, restrictions and other
matters of record in the deed records of the county in which the Leased Premises
are located which affect or encumber the Leased Premises, the Building or the
Land.
-15-
<PAGE>
RELOCATION
33.01 Intentionally Deleted
BROKERAGE COMMISSIONS
34.01 Tenant's Agent and Landlord's Agent (collectively, "Agent") shall
each be entitled to receive a commission in the amounts, and upon the terms and
conditions, contained in a commission agreement between Landlord and such
parties.
34.02 Tenant warrants and represents to Landlord that, other than Agent,
no other party is entitled as a result of the actions of Tenant, to a commission
or other fee resulting from the execution of this Lease; and in the event Tenant
extends or renews this Lease, or expands the Leased Premises, and Tenant's Agent
is entitled to a commission under the above-referenced commission agreement,
Tenant shall pay all commissions and fees payable to any party (other than
Tenant's Agent) engaged by Tenant to represent Tenant in connection therewith.
Landlord warrants and represents to Tenant that, except as set forth above, no
other party is entitled, as a result of the actions of Landlord, to a commission
or other fee resulting from the execution of this Lease. Landlord and Tenant
agree to indemnify and hold each other harmless from any loss, cost, damage or
expense (including reasonable attorneys' fees) incurred by the nonindemnifying
party as a result of the untruth or incorrectness of the foregoing warranty and
representation, or failure to comply with the provisions of this subparagraph.
34.03 Tenant's Agent is representing Tenant in connection with this Lease,
and is not representing Landlord. Landlord's Agent, or employees of Landlord or
its affiliates, are representing Landlord and are not representing Tenant.
34.04 The parties acknowledge that certain officers, directors,
shareholders, or partners of Landlord or its general partner(s), are licensed
real estate brokers and/or salesmen under the laws of the State of Georgia.
Tenant consents to such parties acting in such dual capacities.
MISCELLANEOUS PROVISIONS
A. Whenever the singular number is used in this Lease and when required
by the context, the same shall include the plural, and the masculine gender
shall include the feminine and neuter genders, and the word "person" shall
include corporation, firm or association. If there be more than one tenant, the
obligations imposed upon Tenant under this Lease shall be joint and several.
B. The headings or titles to paragraphs of this Lease are for convenience
only and shall have no effect upon the construction or interpretation of any
part of this Lease.
C. This instrument contains all of the agreements and conditions made
between the parties to this Lease and may not be modified orally or in any other
manner than by agreement in writing signed by all parties to this Lease.
-16-
<PAGE>
D. Where the consent of a party is required, such consent will not be
unreasonably withheld.
E. This Lease shall crate the relationship of Landlord and Tenant between
Landlord and Tenant; no estate shall pass out of Landlord; Tenant has only a
usufruct, not subject to levy and/or sale and not assignable by Tenant except as
provided in paragraph 20.01 hereof.
F. Except as otherwise expressly stated, each payment required to be made
by Tenant shall be in addition to and not in substitution for other payments to
be made by Tenant.
G. All covenants and agreements to be performed by Tenant under any of
the terms of this Lease shall be performed by Tenant at Tenant's sole cost and
expense and without any abatement of rent.
H. No payment by Tenant or receipt by Landlord of a lesser amount than
any installment or payment of rent due shall be deemed to be other than on
account of the amount due, and no endorsement or statement on any check or
payment of rent shall be deemed an accord and satisfaction. Landlord may accept
such check or payment without prejudice to Landlord's right to recover the
balance of such installment or payment of rent, or pursue any other remedies
available to Landlord.
I. Subject to paragraph 20, the terms and provisions of this Lease shall
be binding upon and inure to the benefit of the heirs, executors,
administrators, successors, and assigns of Landlord and Tenant. In the event of
any conveyance by Landlord of its interest in and to the Leased Premises, the
Building or the Land, all obligations under this Lease of the conveying party
shall cease and Tenant shall thereafter look solely to the party to whom the
Leased Premises were conveyed for performance of all of Landlord's duties and
obligations under this Lease.
J. Tenant acknowledges and agrees that Landlord shall not provide guards
or other security protection for the Leased Premises and that any and all
security protection shall be the sole responsibility of Tenant.
K. This Lease shall be governed by Georgia law.
L. Time is of the essence of each term and provision of this Lease.
M. Tenant shall not record this Lease or a memorandum thereof without the
written consent of Landlord. Upon the request of Landlord, Tenant shall join in
the execution of a memorandum or so-called "short form" of this Lease for the
purpose of recordation. Said memorandum or short form of this Lease shall
describe the parties, the Leased Premises and the lease term, and shall
incorporate this Lease by reference.
-17-
<PAGE>
N. Landlord's liability for performance of its obligations under the
terms of this Lease shall be limited to its interest in the Leased Premises.
(SIGNATURES CONTAINED ON FOLLOWING PAGE)
-18-
<PAGE>
IN WITNESS WHEREOF, the parties hereto who are individuals have set their
hands and seals, and the parties who are corporations have caused this
instrument to be duly executed by its proper officers and its corporate seal to
be affixed, as of the day and year first above written.
Signed, sealed and delivered LANDLORD:
as to Landlord, in the
presence of: WEEKS REALTY, L.P.,
a Georgia limited partnership
/s/ By: Weeks Corporation,
- ----------------------------- a Georgia corporation,
its sole general partners
/s/ By: /s/ A.R. Weeks, Jr.
- ----------------------------- ---------------------
Notary Public Name: A.R. Weeks, Jr.
Its: Chairman/CEO
(Corporate Seal)
Signed, sealed and delivered TENANT:
as to Landlord, in the
presence of: INNOTRAC CORPORATION
Nyra P. Williams By: /s/ David Ellin
- ----------------------------- ---------------------
Name: David Ellin
-------------------
Its: Vice President
--------------------
/s/ Nyra P. Williams
- -----------------------------
Notary Public
ATTEST:
By:
--------------------------------
Name:
------------------------------
Its:
-------------------------------
(Corporate Seal)
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<PAGE>
EXHIBIT "C"
ACCEPTANCE OF PREMISES
Lessee: Innotrac Corporation
---------------------------------------------------
Lessor: Weeks Realty, L.P.
---------------------------------------------------
Date Lease Signed: April 1, 1996
---------------------------------------------------
Term of Lease: 3 (Three) Years
---------------------------------------------------
Address of Leased Premises: Suite ________ containing approximately 53,481
2505 Meadowbrook Parkway square feet, located at
Duluth, Georgia
Duluth, Georgia
---------------------------------------------------
Commencement Date May 1, 1996
---------------------------------------------------
Expiration Date: April 30, 1999
---------------------------------------------------
The above described premises are accepted by Lessee as suitable for the purpose
for which they were let. The above described lease term commences and expires
on the dates set forth above. Lessee acknowledges that it has been received
from Lessor ____________ number of keys to the leased premises. It is
understood that there is a punch list which will be completed after move-in and
will be an exhibit to the Tenant Estoppel.
LESSEE
Innotrac Corporation
- -------------------------------
(Type Name of Lessee)
WITNESS
By: /s/ T. Hawkins /s/ Nyra O. Williams
--------------------------- ------------------------------
(Signature) (Signature)
-20-
<PAGE>
Terri Hawkins, Office Manager Innotrac Corporation
- ------------------------------- ------------------------------
(Type Name and Title) (Company)
-21-
<PAGE>
EXHIBIT "D"
SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT
-------------------------------------------------------
THIS AGREEMENT, made as of the __ day of _________, 1995, between
_________________ with offices at ____________________("Tenant") and
_______________________________ (herein, together with its successors,
transferees and assigns, the "Mortgagee");
W I T N E S S E T H:
WHEREAS, Mortgagee is about to or has theretofore granted to
________________, a Georgia limited partnership (the "owner") a first mortgage
loan, which loan is secured by a security deed (herein "Mortgage") dated as of
______, 199_ and duly recorded on ______, 199_ in the land records of Gwinnett
County, Georgia; and
WHEREAS, the Mortgage is to be a first and prior lien upon the Owner's fee
estate in the real property described in Exhibit "A" annexed hereto ("Mortgaged
Premises"); and
WHEREAS, Tenant is occupying a portion of the Mortgaged Premises under a
lease dated as of _____________, 199___ in which Owner is Landlord (the "Lease")
covering that portion of the Mortgaged Premises therein more particularly
described (the "Leased Premises"); and
WHEREAS, Tenant desires to be assured of its continued and undisturbed
occupancy of the Leased Premises should the Mortgage be foreclosed or the
Mortgaged Premises sold pursuant to any power of sale contained therein and
Mortgagee is agreeable thereto.
NOW, THEREFORE, in consideration of the mutual covenants contained in this
Agreement and in further consideration of the sum of ONE DOLLAR ($1.00) each to
the other in hand paid, the receipt whereof is hereby acknowledged, Tenant and
Mortgagee mutually covenant and agree as follows:
FIRST: The Lease and all of Tenant's rights, interest and estate therein
and thereunder are hereby made subject and subordinate to the lien of the
Mortgage and to any extensions, renewals, replacements, modifications, additions
or consolidations thereof and to all rights, title and interest of Mortgagee and
its successors and assigns therein and thereunder.
SECOND: In the event, however, proceedings shall ever be instituted by
Mortgagee to foreclose or liquidate the Mortgage, the Tenant's possession of its
leased portion of the Mortgaged Premises shall not be disturbed by the
foreclosure proceedings and the Mortgaged Premises shall be sold at any
foreclosure sale subject to Tenant's possession on condition that:
(a) there shall be, at the time of commencement of foreclosure
proceedings, as well as all subsequent times, no default by Tenant in
the due and timely observance and performance of any covenant and
agreement in the Lease to be observed and performed by Tenant; and
(b) the Tenant shall not have entered into any agreement modifying any
term, condition or agreement of the Mortgagee-approved Lease without
the prior written consent of Mortgagee.
<PAGE>
THIRD: Tenant shall attorn to Mortgagee while Mortgagee is in
possession of the Mortgaged Premises, or to a Receiver appointed in any
action or proceeding to foreclose the Mortgage. In the event of the
completion of foreclosure proceedings and sale of the Mortgaged Premises or
in the event the Mortgagee should otherwise acquire possession of the
Mortgaged Premises, the Tenant will promptly upon demand attorn to the
purchaser at the foreclosure sale or to the Mortgagee, as the case may be,
and will recognize such purchaser or the Mortgagee as the Tenant's
landlord. The Tenant agrees to execute and deliver, at any time and from
time to time, upon the request of the Mortgagee or the purchaser at the
foreclosure sale, as the case may be, any instrument which may be necessary
or appropriate to such successor landlord to evidence such attornment. The
Tenant shall, upon demand of the Mortgagee or any Receiver or purchaser at
the foreclosure sale, pay to the Mortgagee or to such Receiver or
purchaser, as the case may be, all rental monies then due or as they
thereafter become due.
FOURTH: Upon the attornment provided for in preceding Paragraph THIRD
the Tenant's occupancy shall thereafter be in full force and effect as
under a direct Lease between Mortgagee, the Receiver or the purchaser at
the foreclosure sale, as the case may be, and Tenant. It is specifically
understood and agreed that Mortgagee or any such Receiver or purchaser
shall not be:
(a) liable for any act, omission, negligence or default of any prior
landlord, or
(b) subject to any offsets, claims or defenses which Tenant might have
against any prior landlord; or
(c) bound by any rent or additional rent which Tenant might have paid
for more than one month in advance to any prior landlord; or
(d) bound by any amendment or modification of the Lease made without
the prior written consent of the Mortgagee.
FIFTH: On and after the date Tenant in good standing attorns to
Mortgagee or any Receiver or subsequent owner in pursuance of its agreement
herein set forth, Mortgagee, the Receiver or such subsequent owner will
undertake and perform all subsequent obligations of the Landlord as set
forth in the Lease for the benefit of and undisturbed occupancy of Tenant
under the Lease.
SIXTH: Tenant agrees it will not amend, modify nor abridge the
Lease in any way, nor cancel or surrender the same without prior written
approval of the Mortgagee other than by reason of a continued uncured
material default of the landlord under the Lease, nor will the Lease ever
merge into the fee in the event that Mortgagee acquires fee title to the
Mortgage Premises.
SEVENTH: Any notices or other communication to be given hereunder by
either party shall be in writing and shall be deemed to have been
sufficiently given or served for all purposes if sent by registered or
certified mail with return receipt requested to the other party hereto at
its address above stated or such other address of which written
notification has been timely given to the other party.
-2-
<PAGE>
EIGHTH: Mortgagee has and shall have the continuing right to execute
and record in the Land Records of Gwinnett County, Georgia at any time, in
its unilateral discretion, a Declaration of Subordination for the purpose
of thereby subordinating its rights, title and interest in and under the
Mortgage to the rights, title and interest of Tenant under the Lease. Such
Declaration of Subordination shall, at Mortgagee's election, operate,
function and be in full force and effect for whatever period of time
Mortgagee declares therein that it shall be in force not exceeding the term
of the Lease and any extensions thereof and the said Declaration may be
voided unilaterally by Mortgagee when it so elects.
NINTH: Tenant waives any and all rights it may have to execute and
record after the date hereof any document purporting to again or further
subordinate its right, title or interest under the Lease to the lien of
either the Mortgage or any other mortgage or deed of trust or any ground
lease or any agreement modifying or amending the Mortgage except with the
written consent of Mortgagee.
TENTH: This Agreement cannot be changed orally but only in writing
signed by both parties hereto.
ELEVENTH: This Agreement may be recorded by either party at its own
expense in the Land Records of Gwinnett County, Georgia whenever, in its
sole discretion, either party elects so to do.
TWELFTH: All of the terms, covenants and conditions hereof shall run
with the Mortgaged Premises and shall be binding upon and inure to the
benefit of the parties hereto and their respective successors and assigns.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed, acknowledged and delivered the day and year first above
written.
SIGNED, SEALED AND DELIVERED TENANT:
in the presence of:
- ----------------------------- BY:
------------------------------
- -----------------------------
MORTGAGEE:
- ----------------------------- BY:
------------------------------
- -----------------------------
The undersigned Owner of the leased and mortgaged premises hereby
consents to the foregoing Agreement and agrees to be bound by and subject
to the terms thereof.
-3-
<PAGE>
EXHIBIT "E"
SPECIAL STIPULATIONS
OPTION TO RENEW:
(a) Provided Tenant is not then in default beyond any applicable notice and
cure period provided for herein, Tenant shall have the option to renew this
Lease for one (1) two (2) year term. Such option may be exercised by written
notice to Landlord of its intention to renew at least six (6) months prior to
the expiration of the initial term of this Lease. The renewal term shall be
on the same terms and conditions as contained herein for the initial term of
this Lease, except as expressly provided herein to the contrary with respect
to Base Rent and except for such as are, by their terms, inapplicable to a
renewal term.
It is expressly understood that Tenant shall have no option to
extend the term of this Lease if at the time of such attempted exercise of the
option this Lease is not then in full force and effect and if Tenant is then
in default of any terms and conditions of this Lease beyond any applicable
notice and cure period provided for herein.
The Base Rental for the renewal term shall be $5.50 per square foot
per annum, payable in monthly installments on or before the first day of each
calendar month in the renewal term.
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our reports
(and to all references to our firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Atlanta, Georgia
December 16, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
This financial data schedule contains summary financial information extracted
from the combined balance sheets of Innotrac Corporation, IELC, Inc., RenTel #1,
Inc., SellTel #1, Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel
#2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. and the related
combined statements of operations for the nine-months ended September 30, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> $425,624
<SECURITIES> 0
<RECEIVABLES> 27,268,847
<ALLOWANCES> 5,596,008
<INVENTORY> 5,308,965
<CURRENT-ASSETS> 28,008,624
<PP&E> 13,220,002
<DEPRECIATION> 4,971,353
<TOTAL-ASSETS> 36,387,484
<CURRENT-LIABILITIES> 26,415,305
<BONDS> 0
894,402
0
<COMMON> 18,960
<OTHER-SE> 4,902,262
<TOTAL-LIABILITY-AND-EQUITY> 4,921,222
<SALES> 67,313,499
<TOTAL-REVENUES> 67,313,499
<CGS> 0
<TOTAL-COSTS> 51,799,309
<OTHER-EXPENSES> 9,525,751
<LOSS-PROVISION> 14,226,571
<INTEREST-EXPENSE> 1,422,302
<INCOME-PRETAX> 4,567,852
<INCOME-TAX> 75,300
<INCOME-CONTINUING> 4,492,552
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,492,552
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
