<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998
REGISTRATION NO. 333-42373
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
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. [_]
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 FEBRUARY 11, 1998
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 Common Stock has been 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>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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.
(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 Union
, 1998
<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>
[COLOR PICTURES AND CAPTIONS TO BE PROVIDED BY COMPANY]
[inside front cover graphics]
GRAPHIC: The Company's name with stylized design.
In the last decade, quality customer relationships have become an
important determinant of long-term success.
SUPPORTING
TEXT: 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>
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 marketing support services provided to
existing telecommunications clients by cross-selling its other services to such
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
Offering.................... 9,000,000 shares(1)
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 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. 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 year ended December 31, 1997 and the pro
forma balance sheet data at December 31, 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 December 31, 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,
------------------------------------------
PRO FORMA
CONSOLIDATED
AS ADJUSTED
1993 1994 1995 1996 1997 1997(1)
------ ------- ------- ------- ------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net........... $5,586 $17,380 $44,886 $71,297 $87,978 $87,978
Cost of revenues........ 3,495 11,274 30,658 55,520 67,986 67,986
------ ------- ------- ------- ------- -------
Gross profit............ 2,091 6,106 14,228 15,777 19,992 19,992
------ ------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative
expenses.............. 1,538 2,289 6,510 10,391 12,572 12,572
Depreciation and
amortization.......... 157 214 293 429 631 631
------ ------- ------- ------- ------- -------
Total operating
expenses.............. 1,695 2,503 6,803 10,820 13,203 13,203
------ ------- ------- ------- ------- -------
Operating income........ 396 3,603 7,425 4,957 6,789 6,789
------ ------- ------- ------- ------- -------
Other (income) expense:
Interest expense....... 123 622 1,090 1,456 1,788 46
Other.................. (6) 67 (73) 94 118 118
------ ------- ------- ------- ------- -------
Total other expense.... 117 689 1,017 1,550 1,906 164
------ ------- ------- ------- ------- -------
Income before income
taxes.................. 279 2,914 6,408 3,407 4,883 6,625
Income tax benefit
(provision)............ (30) (356) (793) (211) 77 (2,717)
------ ------- ------- ------- ------- -------
Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,960 $ 3,908
====== ======= ======= ======= ======= =======
Weighted average
shares................. 9,103(2)
Net income per share.... $ 0.43(3)
=======
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------- PRO FORMA
1997 CONSOLIDATED
1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4)
------ ------- ------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,521 $26,639
Property and equipment,
net.................... 1,465 5,059 9,099 10,939 7,609 7,609
Total assets............ 3,457 13,548 30,414 49,037 32,496 45,342
Long term obligations... 708 4,278 4,729 4,779 3,944 343
Shareholders'
equity(5).............. 409 1,624 3,195 4,540 4,827 30,938
</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 $87,000, 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 net revenues and an aggregate of 95% of such
revenues for 1997, of which BellSouth accounted for 82% and 85%, 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 $5.7 million at December 31, 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
Company does not maintain key man life insurance on any of its executive
officers, although two of the parties to the Consolidation maintain such
policies in the aggregate amount of $4.5 million on the life of Scott D.
Dorfman, the beneficiaries of which are one of the parties to the
Consolidation and the father of Scott D. Dorfman, respectively, the proceeds
of which would be used to repay debt owed to them by the Company. After the
Consolidation, the Company intends that one of the policies, in the amount of
$3.5 million, will be converted to name the Company as beneficiary. 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."
YEAR 2000 COMPLIANCE
The Company is discussing with its suppliers, clients, financial
institutions and others the possibility of any interface difficulties relating
to Year 2000 compliance that may affect the Company. To date, no significant
concerns have been identified; however, there can be no assurance that there
will not be any Year 2000-related operating problems or expenses that will
arise with the Company's computer systems and software or in connection with
the Company's interface with the computer systems and software of its
suppliers, clients, financial institutions and others. Because such third-
party systems or software may not be Year 2000 compliant, the Company could be
required to incur unanticipated expenses to remedy any problems, which could
have a material adverse effect on the Company's business, results of
operations and financial condition.
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
11
<PAGE>
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 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 $9.49 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."
12
<PAGE>
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 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.
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. The Consolidation will be
effected simultaneously with, and as a condition to, the Offering. In
conjunction with the Consolidation, the Company performed a valuation of the
Affiliated Companies prior to the Offering, which was based on, among other
things, historical and projected revenue and net income streams of the various
entities that are parties to the Consolidation. As a result of the valuation,
the 6,500,000 shares to be outstanding after the Consolidation (without giving
effect to the Offering) will be distributed to the owners of the Affiliated
Companies based on each Affiliated Company's value relative to the whole as
follows, assuming an initial public offering price of $13.00 per share:
<TABLE>
<CAPTION>
ENTITY SHARES
------ ------
<S> <C>
HomeTel Providers Partners, L.P.................................. 3,538,462
HomeTel Systems, Inc............................................. 1,200,805
Innotrac Corporation............................................. 1,080,000
SellTel #1, Inc.................................................. 286,105
RenTel #1, Inc................................................... 187,448
SellTel #2, L.L.C................................................ 147,985
RenTel #2, L.L.C................................................. 49,328
IELC, Inc........................................................ 9,867
---------
Total.......................................................... 6,500,000
=========
</TABLE>
Such amounts exclude the minority interests of two entities that are parties
to the Consolidation. HomeTel Providers Partners, L.P. ("Providers L.P.") is
the acquiring entity for accounting purposes and its balance sheet will carry
over at historical cost. Since the other entities are wholly-owned by either
the majority shareholder of Providers L.P., Scott D. Dorfman, or his wife or
children, those entities are considered to be under common control, and the
balance sheets of such entities will also carry over at historical cost. 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.
14
<PAGE>
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 $12.0 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.
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 revolving credit agreement with a bank
prohibits the payment of cash dividends and other distributions of assets in
excess of 40% of the Company's net income. 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.
15
<PAGE>
DILUTION
At December 31, 1997, the combined net tangible book value of the Company
was approximately $4.8 million, or $0.74 per share. After giving effect to the
exercise of 95,000 presently exercisable options, the distribution of $6.4
million by two of the entities that are parties to the Consolidation, and the
Consolidation, as if they had occurred at December 31, 1997, the pro forma net
tangible book value per share before the Offering would have been
approximately $2.5 million, or $0.38 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, including presently exercisable options. 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 presently exercisable options, the distribution of $6.4 million, the
Consolidation and the sale of 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 net tangible book value of the Company would have
been approximately $31.9 million, or $3.51 per share. This represents an
immediate increase in pro forma net tangible book value of $3.13 per share to
existing shareholders and an immediate dilution of $9.49 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
Historical net tangible book value per share................. $0.74
Effect of currently exercisable options...................... 0.15
Proposed shareholder distribution per share.................. (0.97)
Pro forma tax effect of Consolidation........................ 0.46
-----
Pro forma net tangible book value per share before the
Offering.................................................... 0.38
Increase in net tangible book value per share attributable to
new investors............................................... 3.13
-----
Pro forma net tangible book value after the Offering......... 3.51
------
Dilution per share to new investors.......................... $ 9.49
======
</TABLE>
The following table sets forth, on a pro forma basis to give effect to the
Consolidation as of December 31, 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,
of which options for 55,000 and 40,000 shares are presently exercisable at
$9.10 per share and $13.00 per share, respectively.
16
<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 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 assumed 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>
DECEMBER 31, 1997
---------------------
PRO FORMA
CONSOLIDATED
ACTUAL AS ADJUSTED
------- ------------
(IN THOUSANDS)
<S> <C> <C>
Indebtedness:
Line-of-credit facility................................ $ 8,545 $ --
Long term debt(1)...................................... 1,141 27
Subordinated debt...................................... 3,500 --
Redeemable capital stock(2)............................ 917 527
------- -------
Total indebtedness................................... 14,103 554
------- -------
Shareholders' equity:
Partners' capital...................................... 1,759 --
Members' deficit....................................... (490) --
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 25,646
Retained earnings...................................... 3,539 4,392
------- -------
Total shareholders' equity........................... 4,827 30,938
------- -------
Total capitalization............................... $18,930 $31,492
======= =======
</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.
17
<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, 1996 and 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 pro forma statement of operations data for the year ended
December 31, 1997 and the pro forma balance sheet data at December 31, 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 December 31, 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.
<TABLE>
<CAPTION>
PRO FORMA
YEARS ENDED DECEMBER 31, CONSOLIDATED
------------------------------------------ AS ADJUSTED
1993 1994 1995 1996 1997 1997(1)
------ ------- ------- ------- ------- ------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues, net........... $5,586 $17,380 $44,886 $71,297 $87,978 $87,978
Cost of revenues........ 3,495 11,274 30,658 55,520 67,986 67,986
------ ------- ------- ------- ------- -------
Gross profit............ 2,091 6,106 14,228 15,777 19,992 19,992
------ ------- ------- ------- ------- -------
Operating expenses:
Selling, general and
administrative
expenses.............. 1,538 2,289 6,510 10,391 12,572 12,572
Depreciation and
amortization.......... 157 214 293 429 631 631
------ ------- ------- ------- ------- -------
Total operating
expenses.............. 1,695 2,503 6,803 10,820 13,203 13,203
------ ------- ------- ------- ------- -------
Operating income........ 396 3,603 7,425 4,957 6,789 6,789
------ ------- ------- ------- ------- -------
Other (income) expense:
Interest expense....... 123 622 1,090 1,456 1,788 46
Other.................. (6) 67 (73) 94 118 118
------ ------- ------- ------- ------- -------
Total other expense.... 117 689 1,017 1,550 1,906 164
------ ------- ------- ------- ------- -------
Income before income
taxes.................. 279 2,914 6,408 3,407 4,883 6,625
Income tax benefit
(provision)............ (30) (356) (793) (211) 77 (2,717)
------ ------- ------- ------- ------- -------
Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,960 $ 3,908
====== ======= ======= ======= ======= =======
Weighted average
shares................. 9,103(2)
Net income per share.... $ 0.43(3)
=======
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------- PRO FORMA
1997 CONSOLIDATED
1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4)
------ ------- ------- ------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,521 $26,639
Property and equipment,
net.................... 1,465 5,059 9,099 10,939 7,609 7,609
Total assets............ 3,457 13,548 30,414 49,037 32,496 45,342
Long-term obligations... 708 4,278 4,729 4,779 3,944 343
Shareholders'
equity(5).............. 409 1,624 3,195 4,540 4,827 30,938
</TABLE>
18
<PAGE>
- --------
(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 $87,000, 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.
19
<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.
At a customer's option, the Company sells a Caller ID unit generally in four
to six installments or rents it for an open-ended term. If a rental customer
chooses to purchase a Caller ID unit, the customer must return the old unit
(which is refurbished and rented again by the Company) and purchase a new one.
The Company's margins on installment sales and rentals of Caller ID units are
similar. Rentals accounted for 19.3% of the Company's net revenues in 1997
compared to 21.3% in 1996 and sales accounted for 77.2% of the Company's net
revenues in 1997 as compared to 72.6% in 1996.
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
telecommunications 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 December 1997 its Caller ID penetration had increased to approximately 29%.
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. Services provided to
BellSouth and its customers accounted for 85% and 82% of the Company's 1997
and 1996 net revenues, respectively.
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 by cross-selling its other services to existing 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."
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped or rentals are provided. An estimate of
actual write-offs of unbilled installment receivables that will never be
billed due to a failure to return the product, fraud or other reasons is
netted against revenues.
20
<PAGE>
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.
RESULTS OF OPERATIONS
The following table sets forth summary operating data, expressed as a
percentage of revenues, for the years ended December 31, 1995, 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
DECEMBER 31,
-------------------
1995 1996 1997
----- ----- -----
<S> <C> <C> <C>
Revenues, net.............................................. 100.0% 100.0% 100.0%
Cost of revenues........................................... 68.3 77.9 77.3
Gross profit............................................... 31.7 22.1 22.7
Selling, general and administrative expenses............... 14.5 14.6 14.3
Operating income........................................... 16.5 7.0 7.7
Interest expense........................................... 2.4 2.0 2.0
Income before income taxes................................. 14.3% 4.8% 5.6%
</TABLE>
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues. The Company's net revenues increased 23.4% to $88.0 million for
the year ended December 31, 1997 from $71.3 million for the year ended
December 31, 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 net revenues during the year ended December 31, 1997 compared to
the prior year resulting from the conclusion of a fulfillment program
performed by the Company in connection with the 1996 Olympic Games and an
increase in the Company's reserve for returns and allowances from $3.5 million
for the year ended December 31, 1996 to $6.3 million for the year ended
December 31, 1997. In addition, the Company's sales to Pacific Bell customers
during 1997 and 1996 were less than expected due to regulatory issues
affecting Pacific Bell that delayed the rollout of Caller ID services by
Pacific Bell and a low level of promotion of Caller ID services by Pacific
Bell. See "Business--Government Regulation."
Cost of Revenues. The Company's cost of revenues increased 22.5% to $68.0
million for the year ended December 31, 1997 compared to $55.5 million for the
year ended December 31, 1996. This increase was due to increased revenue
volume and a $1.6 million write-down (1.8% of revenues) on Caller ID equipment
purchased for the start-up of the Pacific Bell program that could not be sold
above their cost due to Pacific Bell's regulatory delays that resulted in
product obsolescence issues. The increase in cost of revenues was also
associated with the Company's new call center.
Gross Profit. For the year ended December 31, 1997, the Company's gross
profit was $20.0 million or 22.7% of revenues as compared to $15.8 million or
22.1% of revenues for the year ended December 31, 1996. The increase in gross
margin was due to increased sales along with the impact of a price increase
for Caller ID units with enhanced features. This was partially offset by the
$1.6 million inventory writedown and the 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.
21
<PAGE>
Selling, General and Administrative Expenses. SG&A expenses for the year
ended December 31, 1997 were $12.6 million or 14.3% of revenues compared to
$10.4 million or 14.6% of revenues for the year ended December 31, 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 to BellSouth and Pacific Bell customers.
Bad debt expense was $7.8 million for the year ended December 31, 1997 as
compared to $5.8 million for the year ended December 31, 1996. The increase in
bad debt expense and the allowance for doubtful accounts 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. The Company believes that higher
credit risk customers result in larger write-offs for nonpayment due to
increased chargebacks by telecommunications companies to suppliers of
nonregulated services when customers do not pay for these services.
Interest Expense. Interest expense increased to $1.8 million for the year
ended December 31, 1997 from $1.5 million for the year ended December 31,
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 1997 compared to 1996 due to a repayment of such debt by
the Company in September 1996.
Income Taxes. The Company's effective tax rates for the years ended December
31, 1997 and 1996 were (1.6%) and 6.2%, 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 net 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 14.6% of revenues compared to
$6.5 million or 14.5% 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 $5.8
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.
22
<PAGE>
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 $554,000 at December 31, 1995, December 31, 1996 and
December 31, 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 December
31, 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 December 31,
1997, the interest rate was 16.5%. At December 31, 1997, approximately $8.5
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."
As of December 31, 1997, the Company had entered into various operating
leases in the ordinary course of business and 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 the new facility 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 year ended December 31, 1997, the Company generated cash flow
from operating activities of $18.9 million compared to $88,000 and $6.4
million for the same periods in 1996 and 1995, respectively. The increase in
cash flow from operating activities in 1997 was due to lower working capital
requirements resulting from decreased accounts receivable due to shorter
installment periods and reduced inventory. 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 $6.9 million for the year ended
December 31, 1997 compared to $8.0 million for the year ended December 31,
1996. This decrease was primarily due to decreased purchases of
telecommunications rental 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 (used in) provided from financing activities was ($13.4 million)
for the year ended December 31, 1997 compared to $9.8 million for the year
ended December 31, 1996 and $588,000 for the year ended December 31, 1995. The
use of cash for financing activities for the year ended December 31, 1997
reflects
23
<PAGE>
repayments under the line of credit and term loan. 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 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.
YEAR 2000 COMPLIANCE
The efficient operation of the Company's business is dependent in part on
its computer software programs and operating systems. These programs and
systems are used in inventory management, pricing, sales, shipping and
financial reporting, as well as in various administrative functions.
Recognizing the importance and need for an integrated information systems
solution, the Company has developed an implementation plan for upgrading its
systems architecture. This plan also addresses the functionality of its
systems beyond December 31, 1999 ("Year 2000 compliance") as the majority of
the internal information systems are being replaced with new systems, [which
the systems vendor represents will be Year 2000 compliant and agrees to
indemnify the Company from losses if the systems fail to properly function
beyond such date]. The Company does not anticipate additional material
expenditures for Year 2000 compliance issues. This new systems implementation
is expected to be completed by December 31, 1998. The Company is discussing
with its suppliers, clients, financial institutions and others the possibility
of any interface difficulties relating to Year 2000 compliance that may affect
the Company. To date, no significant concerns have been identified; however,
there can be no assurance that there will not be any Year 2000-related
operating problems or expenses that will arise with the Company's computer
systems and software or in connection with the Company's interface with the
computer systems and software of its suppliers, clients, financial
institutions and others. Because such third-party systems or software may not
be Year 2000 compliant, the Company could be required to incur unanticipated
expenses to remedy any problems, which could have a material adverse effect on
the Company's business, results of operations and financial condition.
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.
24
<PAGE>
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.
25
<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.
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
26
<PAGE>
through long-standing relationships with several clients in the industry. The
Company is also seeking to expand the level of marketing support services
provided to existing telecommunications clients by cross-selling its other
services to such 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 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:
27
<PAGE>
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 to sell telephone network
services such as voice mail and upgraded Caller ID service, starting in March
1998. 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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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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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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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
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, a Federal
Communications Commission ("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.
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 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 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 material 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.
Dorfman(1)(3)......... 40 President, Chief Executive Officer 2000
and Chairman of the Board
David L. Ellin(1)...... 39 Senior Vice President, Chief 2000
Operating Officer, Secretary and
Director
Donald L. Colter,
Jr. .................. 37 Vice President--Operations
Larry C. Hanger........ 42 Vice President--Business Development 1998
and Director
John H. Nichols, III... 43 Vice President and Chief Financial
Officer
Bruce V.
Benator(1)(2)......... 40 Director 1998
Martin J. Blank(2)(3).. 50 Director 1999
Campbell B. Lanier,
III(2)................ 47 Director 1999
William H. Scott,
III(3)................ 50 Director 1999
Key Employees:
Nancy C. Bergeron...... 46 Director of Marketing
Robert C. Covington,
III................... 41 Director of Information Technology
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
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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.
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
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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.
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.
BOARD COMMITTEES
The Company's Board of Directors has established three committees, an Audit
Committee, a Compensation Committee and an Executive Committee.
The Audit Committee presently consists of three independent directors and is
responsible for reviewing and monitoring the Company's financial reports and
accounting practices. The Audit Committee is also responsible for reviewing
related party transactions and potential conflicts of interest involving
officers, directors, employees or affiliates of the Company.
The Compensation Committee presently consists of three directors (including
two independent directors) and is responsible for determining the compensation
of the Company's directors and officers. The Compensation Committee is also
authorized to make specific grants under the Company's Stock Option Plan.
The Executive Committee presently consists of three directors (including the
President, Chief Executive Officer and Chairman, the Senior Vice President,
Chief Operating Officer and Secretary, and one independent director) and is
authorized to consider any matter that may be brought before a meeting of the
full Board of Directors, subject to restrictions under Georgia law.
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, 1997 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"):
37
<PAGE>
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL LONG-TERM
COMPENSATION COMPENSATION
------------ ------------
SECURITIES
UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION SALARY OPTIONS COMPENSATION
- --------------------------- ------------ ------------ ------------
<S> <C> <C> <C>
Scott D. Dorfman....................... $226,180 -- $8,686(1)
President, Chief Executive Officer and
Chairman
David L. Ellin......................... 197,692 155,000 --
Senior Vice President, Chief Operating
Officer, Secretary and Director
Larry C. Hanger........................ 114,343 25,000 --
Vice President--Business Development
and Director
</TABLE>
- --------
(1) Represents the full dollar amount of premiums paid by the Company with
respect to split-dollar life insurance on the life of Mr. Dorfman.
The following table sets forth certain information regarding the options
granted to the Named Executive Officers during the fiscal year ended December
31, 1997.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL
INDIVIDUAL GRANTS REALIZABLE VALUE AT
------------------------------------------------------ ASSUMED RATES OF
PERCENT OF STOCK PRICE
NUMBER OF TOTAL OPTIONS APPRECIATION FOR
SECURITIES GRANTED TO EXERCISE OR OPTION TERMS
UNDERLYING EMPLOYEES IN BASE EXPIRATION -------------------
NAME OPTION GRANTED(#) FISCAL YEAR PRICE($/SH) DATE 5%($) 10%($)
- ---- ----------------- ------------- ----------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Scott D. Dorfman........ -- -- -- -- -- --
David L. Ellin.......... 100,000(1) 27.55% $9.10 11/24/07 $572,294 $2,360,305
55,000(2) 15.15 9.10 11/24/07 314,762 1,298,168
Larry C. Hanger......... 25,000(1) 6.89 9.10 11/24/07 143,073 590,076
</TABLE>
- --------
(1) The option becomes exercisable with respect to 50% of the underlying
shares on November 24, 1999; with respect to an additional 25% of the
underlying shares on November 24, 2000; and with respect to the remaining
25% of the underlying shares on November 24, 2001.
(2) The option is immediately exercisable.
None of the Named Executive Officers exercised any options during the fiscal
year ended December 31, 1997.
The following table sets forth certain information regarding the value at
fiscal year end of unexercised options held by the Named Executive Officers.
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT FY-
OPTIONS AT FY-END END
NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE
- ---- ------------------------- -------------------------
<S> <C> <C>
Scott D. Dorfman............ -- --
David L. Ellin.............. 0/100,000 N/A/$0(1)
55,000/0 $0(1)/N/A
Larry C. Hanger............. 0/25,000 N/A/$0(1)
</TABLE>
- --------
(1) Exercise price is equal to fair market value at fiscal year end.
38
<PAGE>
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.
STOCK OPTION PLAN
In November 1997, the Company adopted the 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 the Compensation Committee) 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, which is based on the fair market value of the Common Stock on the date
of grant, as determined by the Board.
39
<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......... 10,000(7) * *
Martin J. Blank.......... 10,000(7) * *
Campbell B. Lanier, III.. 363,846(7)(8) 5.4 3.9
William H. Scott, III.... 363,846(7)(8) 5.4 3.9
All directors and
executive officers as a
group (9 persons)....... 6,595,000 100.0% 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. Options for 95,000 shares
granted under the Company's Stock Option Plan are 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's 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% (ITC's current ownership percentage of Providers L.P.) of
$46.0 million (the estimated aggregate value of Providers L.P.) 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) Includes presently exercisable options for 10,000 shares of Common Stock.
(8) 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.
40
<PAGE>
CERTAIN TRANSACTIONS
Scott D. Dorfman, President, Chief Executive Officer, Chairman of the Board,
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 owned by his wife, and 159,567 shares
held 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. See "The Consolidation" for a discussion
regarding the determination of the number of shares to be issued in the
Consolidation.
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 in 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 in a second affiliated entity that is a
party to the Consolidation. These amounts represent the scheduled redemption
values under the terms of agreements reached between the parties in 1993. See
Note 7 of the financial statements.
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.
41
<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, which will occur on the first anniversary of the
Consolidation, 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.
42
<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,
43
<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, effective
January 1, 1998. 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
January 1, 2008 (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
44
<PAGE>
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 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
limitation of liability or 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 Common Stock has been 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.
45
<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 Union, a division of 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."
46
<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, 1996 and 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.
47
<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.
48
<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 December 31, 1997 and 1996.................. F-3
Combined Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995............................................................ F-4
Combined Statements of Partners', Members' and Shareholders' Equity for
the Years Ended December 31, 1997, 1996 and 1995......................... F-5
Combined Statements of Cash Flows for the Years Ended December 31, 1997,
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 Year
Ended December 31, 1997.................................................. F-20
Unaudited Consolidated Pro Forma Balance Sheet as of December 31, 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 December 31, 1997 and 1996 and the
related combined statements of operations, partners', members' and
shareholders' equity and cash flows for the years ended December 31, 1997,
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 December 31, 1997 and 1996 and the results of
their operations and their cash flows for the years ended December 31, 1997,
1996 and 1995 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
January 26, 1998
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 DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------ ----------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents............................. $ 553,746 $ 2,004,746
Accounts receivable, net (Note 3)..................... 20,081,229 25,460,016
Inventories........................................... 2,935,611 10,020,635
Deferred tax assets (Note 6).......................... 386,000 15,000
Prepaid expenses and other current assets............. 372,605 344,951
----------- -----------
Total current assets.................................. 24,329,191 37,845,348
----------- -----------
Property and equipment:
Rental equipment...................................... 10,432,645 13,005,802
Computer, machinery and transportation equipment...... 1,557,765 1,368,471
Furniture, fixtures and leasehold improvements........ 720,097 732,182
----------- -----------
12,710,507 15,106,455
Less accumulated depreciation and amortization........ 5,101,992 4,167,937
----------- -----------
7,608,515 10,938,518
----------- -----------
Other assets, net of amortization of $126,736 and
$160,255 as of December 31, 1997 and 1996,
respectively.......................................... 557,537 252,656
----------- -----------
Total assets.......................................... $32,495,243 $49,036,522
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
EQUITY AT
DECEMBER 31,
1997 1997 1996
----------- ------------ -----------
LIABILITIES AND PARTNERS', MEMBERS', AND
SHAREHOLDERS' EQUITY (NOTE 11)
<S> <C> <C> <C>
Current liabilities:
Current portion of long-term debt
(Note 4)............................. $ 737,687 $ 787,523
Line of credit (Note 4)............... 8,545,200 17,230,621
Accounts payable...................... 4,765,772 15,420,211
Distributions payable (Note 2)........ 1,007,395 300,229
Accrued expenses...................... 7,433,611 5,083,672
Other................................. 318,088 65,173
----------- -----------
Total current liabilities............. 22,807,753 38,887,429
----------- -----------
Noncurrent liabilities:
Subordinated debt (Note 4)............ 3,500,000 3,500,000
Long-term debt (Note 4)............... 403,779 1,060,720
Deferred tax liabilities (Note 6)..... 40,000 206,000
Other................................. 0 12,300
----------- -----------
Total noncurrent liabilities.......... 3,943,779 4,779,020
----------- -----------
Total liabilities..................... 26,751,532 43,666,449
----------- -----------
Commitments and contingencies (Note
5)....................................
Redeemable capital stock (Note 7)...... 916,949 830,033
----------- -----------
Partners', members' and shareholders'
equity (Note 8):
Partners' capital..................... 1,758,896 (2,241,104) 1,902,038
Members' deficit...................... (489,701) (489,701) (272,381)
Common stock.......................... 4,590 4,590 4,590
Additional paid-in capital............ 14,370 14,370 14,370
Retained earnings..................... 3,538,607 1,138,607 2,891,423
----------- ---------- -----------
Total partners', members' and
shareholders' equity................. 4,826,762 (1,573,238) 4,540,040
----------- ---------- -----------
Total liabilities and partners',
members' and shareholders' equity.... $32,495,243 $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>
YEAR ENDED DECEMBER 31,
-------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Revenues, net........................... $87,978,487 $71,297,170 $44,886,334
Cost of revenues........................ 67,986,434 55,519,503 30,658,112
----------- ----------- -----------
Gross profit........................ 19,992,053 15,777,667 14,228,222
----------- ----------- -----------
Operating expenses:
Selling, general and administrative
expenses............................. 12,571,947 10,390,817 6,510,069
Depreciation and amortization......... 630,824 429,170 292,609
----------- ----------- -----------
Total operating expenses............ 13,202,771 10,819,987 6,802,678
----------- ----------- -----------
Operating income........................ 6,789,282 4,957,680 7,425,544
----------- ----------- -----------
Other (income) expense:
Interest expense...................... 1,788,003 1,456,508 1,089,853
Other................................. 118,341 94,367 (72,645)
----------- ----------- -----------
Total other expense................. 1,906,344 1,550,875 1,017,208
----------- ----------- -----------
Income before income taxes.............. 4,882,938 3,406,805 6,408,336
Income tax provision.................... 76,700 (211,494) (793,629)
----------- ----------- -----------
Net income.......................... $ 4,959,638 $ 3,195,311 $ 5,614,707
=========== =========== ===========
Unaudited Pro Forma Data (Note 11):
Income tax provision................... $(2,716,917)
===========
Net income............................. $ 3,908,024
===========
Net income per share................... $ 0.43
===========
</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).......... 3,540,858 (232,320) 0 0 1,651,100 4,959,638
Distributions to
shareholders, members and
partners.................. (3,684,000) 15,000 0 0 (917,000) (4,586,000)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (86,916) (86,916)
----------- --------- ------ ------- ---------- -----------
BALANCE, DECEMBER 31,
1997...................... $ 1,758,896 $(489,701) $4,590 $14,370 $3,538,607 $ 4,826,762
=========== ========= ====== ======= ========== ===========
</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>
YEAR ENDED DECEMBER 31,
--------------------------------------
1997 1996 1995
----------- ----------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................ $ 4,959,638 $ 3,195,311 $ 5,614,707
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 630,824 429,170 292,609
Depreciation--rental equipment........ 3,711,330 3,004,699 1,763,028
Loss on disposal of rental equipment.. 4,478,785 2,538,129 1,755,956
Subordinated debt accretion........... 0 163,781 179,776
Deferred income taxes................. (537,000) (107,000) 227,000
Decrease (increase) in accounts
receivable........................... 5,378,787 (6,753,077) (12,594,156)
Decrease (increase) in inventories.... 7,085,024 (7,683,173) (1,092,926)
Increase (decrease) in prepaid
expenses and other assets............ (484,466) (327,074) 44,466
(Decrease) increase in accounts
payable.............................. (8,959,441) 3,610,642 8,814,933
Increase in accrued expenses.......... 2,249,939 2,484,253 1,397,043
Other................................. 368,845 (468,149) 12,119
----------- ----------- ------------
Net cash provided by (used in)
operating activities................ 18,882,265 87,512 6,414,555
----------- ----------- ------------
Cash flows from investing activities:
Accrued equipment purchases........... (1,595,000) (272,000) 0
Purchases of property and equipment... (5,342,233) (7,699,769) (7,812,510)
----------- ----------- ------------
Net cash used in investing
activities.......................... (6,937,233) (7,971,769) (7,812,510)
----------- ----------- ------------
Cash flows from financing activities:
Net (repayments) borrowings under
lines of credit...................... (8,685,421) 13,168,781 3,164,848
Proceeds from long-term debt.......... 0 2,096,000 0
Repayment of long-term debt........... (702,027) (327,766) (397,401)
Repayment of subordinated debt........ 0 (1,000,000) 0
Loan commitment fees.................. (125,000) (200,000) 0
Proceeds from members' contributions.. 0 2,000 0
Distributions to shareholders, members
and partners......................... (3,883,584) (3,890,244) (2,179,797)
----------- ----------- ------------
Net cash (used in) provided by
financing activities................ (13,396,032) 9,848,771 587,650
----------- ----------- ------------
Net (decrease) increase in cash and
cash equivalents...................... (1,451,000) 1,964,514 (810,305)
Cash and cash equivalents, beginning of
period................................ 2,004,746 40,232 850,537
----------- ----------- ------------
Cash and cash equivalents, end of
period................................ $ 553,746 $ 2,004,746 $ 40,232
=========== =========== ============
Supplemental cash flow disclosures:
Cash paid for interest................ $ 1,787,975 $ 1,207,483 $ 846,010
=========== =========== ============
Cash paid for income taxes, net of
refunds received..................... $ 84,675 $ 891,552 $ 523,134
=========== =========== ============
Non cash transactions:
Accreted dividends on Redeemable
Capital Stock........................ $ 86,916 $ 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. ("RenTel"),
SellTel #1, Inc. ("SellTel"), HomeTel Systems, Inc., HomeTel Providers, Inc.,
RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P.
("Providers L.P.") are collectively referred to herein as the "Companies".
Each of these entities provides various types of marketing support services.
The Companies are all owned 100% by one shareholder or his immediate family
except for RenTel, SellTel, and Providers L.P. (which each have a 10% minority
interest owned by one party). The minority interests of RenTel and SellTel are
owned by a related party of the shareholder. In conjunction with Innotrac's
planned initial public offering (the "Offering"), the Companies will
reorganize as one consolidated entity. See Note 11 for a description of the
Companies' planned consolidation.
Innotrac provides direct marketing services, including fulfillment, order
processing, data processing and teleservices. IELC, Inc. ("IELC") provides
employee-leasing services. RenTel rents caller identification display devices
("Caller I.D. units") and SellTel sells Caller I.D. units and other
telecommunications equipment on an installment basis to consumers in Tennessee
and South Carolina. RenTel #1, L.L.C. ("RenTel #2") rents Caller I.D. units
and SellTel #1, L.L.C. ("SellTel #2") sells Caller I.D. units and other
telecommunications equipment on an installment basis to consumers in
California. HomeTel Systems, Inc. ("HomeTel") rents and sells various types of
telecommunications equipment to consumers in the southeastern and western
United States. HomeTel Providers, Inc. ("Providers Inc.") is the general
partner of Providers, L.P. which rents and sells on an installment basis
Caller I.D. units and other telecommunications equipment 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 85%,
82% and 82% of total revenues for the years ended December 31, 1997, 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 $4,479,000, $2,538,000 and
$1,756,000 for the years ended December 31, 1997, 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.
Stock-based Compensation Plans
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). The Company has adopted the disclosure option of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-based
Compensation" ("SFAS 123"). SFAS 123 requires that companies which do not
choose to account for stock-based compensation as prescribed by this
statement, shall disclose the pro forma effects on earnings and earnings per
share as if SFAS 123 had been adopted. Additionally, certain other disclosures
are required with respect to stock compensation and the assumptions used to
determine the pro forma effects of SFAS 123.
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 years ended December
31, 1997, 1996 and 1995, distributions of approximately $4,586,000, $1,741,000
and $3,938,000, respectively, were recorded, of
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)
which approximately $1,007,000 and $300,000 were accrued and unpaid as of
December 31, 1997 and 1996, respectively. Additionally, in conjunction with
the reorganization (Note 11), 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).
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 December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Billed receivables................................. $15,812,276 $16,857,463
Unbilled installment receivables................... 9,976,198 12,844,916
----------- -----------
Total receivables.................................. 25,788,474 29,702,379
Less allowances.................................... (5,707,245) (4,242,363)
----------- -----------
$20,081,229 $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 December 31, 1997 and 1996 consisted of the
following:
<TABLE>
<CAPTION>
1997 1996
---------- -----------
<S> <C> <C>
Borrowings under revolving credit agreement (up to
$25,000,000 individually or in aggregate, except as to
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 rates equal to the prime rate (8.5%
and 8.25% at December 31, 1997 and 1996,
respectively), or at the Company's option, LIBOR plus
a margin, expires on November 15, 1999, secured by all
assets of the Companies and a personal guarantee of
the sole shareholder of Innotrac...................... $8,545,200 $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 December 31, 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........................................... 1,055,555 1,722,222
Other.................................................. 85,911 126,021
---------- -----------
13,186,666 22,578,864
Current portion........................................ 9,282,887 18,018,144
---------- -----------
$3,903,779 $ 4,560,720
========== ===========
</TABLE>
Scheduled maturities of financing obligations are as follows:
<TABLE>
<S> <C>
1998............................................................. 9,282,887
1999............................................................. 3,903,779
-----------
Total.......................................................... $13,186,666
===========
</TABLE>
The revolving line of credit agreement and the term note contain various
restrictive financial and change of ownership control covenants. The Companies
were in compliance with all covenants as of December 31, 1997.
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 December 31, 1997 are
as follows:
<TABLE>
<S> <C>
1998............................................................ $ 1,229,870
1999............................................................ 1,187,745
2000............................................................ 908,750
2001............................................................ 908,750
2002............................................................ 908,750
Thereafter...................................................... 4,998,125
-----------
Total minimum lease payments.................................... $10,141,990
===========
</TABLE>
Rent expense under all operating leases totaled approximately $1,121,000,
$770,000 and $393,000 during the years ended December 31, 1997, 1996 and 1995,
respectively.
Marketing Support Agreement
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 benefit (provision) for the years ended December
31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current..................................... $(460,300) $(318,494) $(566,629)
Deferred.................................... 537,000 107,000 (227,000)
--------- --------- ---------
$ 76,700 $(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
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Noncurrent deferred tax (liabilities) assets:
Property, plant, equipment basis differences....... $ 43,000 $ 16,000
Conversion from cash to accrual taxpayer method--
long term......................................... (83,000) (227,000)
Other.............................................. 0 5,000
--------- ---------
(40,000) (206,000)
--------- ---------
Current deferred tax (liabilities) assets:
Reserves for uncollectable accounts................ 524,000 131,000
Conversion from cash to accrual taxpayer method--
current........................................... (143,000) (143,000)
Other.............................................. 5,000 27,000
--------- ---------
386,000 15,000
--------- ---------
Net deferred tax asset (liability)................... $ 346,000 $(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 (benefit) provision computed at statutory
rates to the income tax provision for the years ended December 31, 1997, 1996
and 1995 is as follows:
<TABLE>
<CAPTION>
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)....................... (37.9) (31.8) (24.9)
Other................................................ 0.9 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 both in RenTel and SellTel. The
subordinated debt required monthly payments of interest with principal
maturing at 36 months. The subordinated debt was repaid in full in September
1996. Additionally, the related party received callable common stock
representing 10% 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
beginning in September 1996. If the Companies do not call the common stock
interests, the Companies are obligated to issue the related party an
additional 10% common stock interest to redeem the common stock. Due to the
related party nature of the transaction, the Companies are accounting for the
callable common stock as redeemable equity.
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)
The Companies allocated the capital raised between "Subordinated Debt" and
"Redeemable Capital Stock" on the accompanying balance sheets 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 through the 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 Offering (see Note
11), the Companies anticipate redeeming 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.
8. PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
Common stock and paid-in capital consisted of the following at December 31,
1997 and 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 11 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 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 years ended December 31, 1997, 1996 and
1995 were not material.
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)
10. STOCK BASED COMPENSATION
In November 1997, the Company adopted a stock option plan (the "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 (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.
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 Stock Option Plan.
As of December 31, 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 vested immediately at the date of grant;
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 40,000 shares on the effective
date of the Offering 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. At December 31, 1997, all of the 343,000 options granted were
outstanding with a weighted average contractual life of 9.9 years. 55,000
options were exercisable at December 31, 1997 at $9.10 per share.
The Company has elected to account for its option plans under APB 25;
however, the Company has computed for pro forma disclosure purposes the value
of all options granted during 1997 using the Black-Scholes option-pricing
model as prescribed by SFAS 123 using the following weighted average
assumptions used for grants in 1997:
<TABLE>
<S> <C>
Risk-free interest rate......................................... 5.3%
Expected dividend yield......................................... 0%
Expected lives.................................................. 2.7 Years
Expected volatility............................................. 49%
</TABLE>
The total value of options granted during 1997 was computed as approximately
$2,172,000 which would be amortized on a pro forma basis over the four year
vesting period of the options. If the Company had accounted for these plans in
accordance with SFAS 123, the Company's net income and net income per share
(see Note 11
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)
for a discussion of pro forma earnings per share) for the year ended December
31, 1997 would have decreased by the following unaudited pro forma amounts:
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTED
FOR THE
IMPACT OF
PRO FORMA SFAS 123
---------- ----------
<S> <C> <C>
Net income.......................................... $3,874,507 $3,666,972
Net income per share................................ $ 0.43 $ 0.40
</TABLE>
11. 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 $5,707,000 at December 31, 1997.
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
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)
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 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.
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)
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 Company does not maintain
key man life insurance on any of its executive officers, although two of
the parties to the Consolidation maintain such policies in the aggregate
amount of $4.5 million on the life of Scott D. Dorfman, the beneficiaries
of which are one of the parties to the Consolidation and the father of
Scott D. Dorfman, respectively, the proceeds of which would be used to
repay debt owed to them by the Company. After the Consolidation the Company
intends that one of the policies, in the amount of $3.5 million, will be
converted to name the Company as beneficiary. 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.
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. After the
Consolidation, there will be an aggregate of 6,500,000 shares outstanding. On
December 12, 1997, Innotrac effected a 70.58823 -for- 1 stock split resulting
in 1,080,000 shares outstanding. Additionally, in exchange for their previous
ownership interests, 5,420,000 shares of $0.10 par value common stock will be
issued to the remaining entity owners pari-passu based on their relative value
to the consolidated group except for the minority stockholder of RenTel and
SellTel, whose ownership interests will be repurchased as scheduled prior to
or effective with the Offering and in the fourth quarter of 1998,
respectively. As noted below, two of the entities will make certain
distributions of undistributed accumulated earnings (approximately $6,400,000)
to their principals in conjunction with the Consolidation.
Pro Forma Shareholders' Equity
The pro forma shareholders' equity at December 31, 1997 gives effect to the
proposed distribution of undistributed accumulated earnings of HomeTel
($2,400,000) and Providers LP ($4,000,000) in conjunction with the
Consolidation. Because Providers LP is a partnership, this distribution is
reflected as a reduction in Partners' Capital, whereas HomeTel's is reflected
as a reduction in Retained Earnings as it is a corporation.
Pro Forma Statement of Operations
The pro forma statement of operations for the year ended December 31, 1997
gives effect to the Consolidation and the Offering as if they occurred on
January 1, 1997. In conjunction with the Consolidation, HomeTel Providers,
Inc., Providers LP, RenTel, RenTel #2, and SellTel #2 will lose their non C-
corporation status for tax purposes. Accordingly, the pro forma income taxes
reflect income taxes applied to pro forma earnings which give effect to the
elimination of interest expense on certain borrowings assumed to be repaid
F-18
<PAGE>
with the net proceeds of the Offering at statutory rates. Pro forma net income
reflects the impact of the aforementioned adjustments and pro forma earnings
per share reflects the shares issued in conjunction with the Consolidation and
the stock split (aggregate 6,500,000), the Offering (2,500,000), and 102,900
weighted average shares granted under the Stock Option Plan within the 12
months prior to the effective date of the Offering using the treasury stock
method as if all shares had been outstanding for the entire period.
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,
IELC, RenTel #1, SellTel #1, HomeTel, Providers Inc., RenTel #2, SellTel #2
and Providers L.P. Effective simultaneously with the Offering, the Companies
will be reorganized and consolidated. For accounting purposes, Providers, L.P.
will be deemed to be the acquiring entity. See "The Consolidation."
The pro forma adjustments to the statements of operations for the year ended
December 31, 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 December 31, 1997.
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 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 YEAR ENDED DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
<S> <C> <C> <C>
Revenues net............................ $87,978 $ -- $87,978
Cost of revenues........................ 67,986 -- 67,986
------- ------- -------
Gross profit............................ 19,992 -- 19,992
------- ------- -------
Operating expenses:
Selling, general and administrative
expenses.............................. 12,572 -- 12,572
Depreciation and amortization.......... 631 -- 631
------- ------- -------
Total operating expenses............ 13,203 -- 13,203
------- ------- -------
Operating income........................ 6,789 -- 6,789
------- ------- -------
Other (income) expense:
Interest expense...................... 1,788 (1,742)(a) 46
Other................................. 118 -- 118
------- ------- -------
Total other expense................. 1,906 (1,742) 164
------- ------- -------
Income before income taxes.............. 4,883 1,742 6,625
Income tax benefit (provision).......... 77 (2,794)(b) (2,717)
------- ------- -------
Net income.............................. $ 4,960 $(1,052) $ 3,908
======= ======= =======
Weighted average number of shares....... 2,500 (c)
6,603 (d) 9,103
Net income per share.................... $ 0.43 (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 Systems, Providers Inc., Providers, L.P.,
RenTel, RenTel #2 and SellTel #2 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 Stock Option Plan
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 $87,000 or $(0.01) per share.
F-20
<PAGE>
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 1997
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PRO FORMA
ADJUSTMENTS
-----------------------
CONSOLIDATION PRO FORMA
HISTORICAL AND CONSOLIDATED
COMBINED DISTRIBUTION OFFERING AS ADJUSTED
---------- ------------- -------- ------------
<S> <C> <C> <C> <C>
Cash and cash equivalents.. $ 553 $ -- $ 4,186 (d) $ 4,739
Restricted cash............ 0 -- 5,339 (d) 5,339
Accounts receivable, net... 20,081 -- -- 20,081
Inventory.................. 2,936 -- -- 2,936
Prepaids and other......... 759 3,321 (c) -- 4,080
------- ------- -------- -------
Total current assets... 24,329 3,321 9,525 37,175
------- ------- -------- -------
Property and equipment,
net....................... 7,609 -- -- 7,609
------- ------- -------- -------
Other assets, net.......... 558 -- -- 558
------- ------- -------- -------
Total assets........... $32,496 3,321 $ 9,525 $45,342
======= ======= ======== =======
Accounts payable........... $ 4,766 $ -- $ -- $ 4,766
Accrued expenses........... 8,441 -- -- 8,441
Current portion of debt.... 738 -- (727)(d) 11
Line of credit............. 8,545 6,400 (a) (14,945)(d) 0
Other...................... 318 -- -- 318
------- ------- -------- -------
Total current
liabilities........... 22,808 6,400 (15,672) 13,536
------- ------- -------- -------
Subordinated debt.......... 3,500 -- (3,500)(d) 0
Long-term debt............. 404 -- (388)(d) 16
Deferred income taxes...... 40 285 (c) -- 325
------- ------- -------- -------
Total long-term
liabilities........... 3,944 285 (3,888) 341
------- ------- -------- -------
Total liabilities...... 26,752 6,685 (19,560) 13,877
------- ------- -------- -------
Redeemable Capital Stock... 917 -- (390)(d) 527
------- ------- -------- -------
Shareholders' equity:
Partners' capital........ 1,759 (4,000)(a) -- 0
2,241 (b) --
Members' deficit......... (490) 490 (b) -- 0
Common stock............. 5 645 (b) 250 (d) 900
Additional paid-in capi-
tal..................... 14 (3,593)(b) 29,225 (d) 25,646
Retained earnings........ 3,539 (2,400)(a) -- 4,392
217 (b) --
3,036 (c) --
------- ------- -------- -------
Total shareholders'
equity................ 4,827 (3,364) 29,475 30,938
------- ------- -------- -------
Total liabilities and
shareholders' equity.. $32,496 $ 3,321 $ 9,525 $45,342
======= ======= ======== =======
</TABLE>
- --------
(a) Reflects a distribution of $6.4 million of the undistributed earnings of
Systems and Providers L.P.
(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 corporations, and to additional paid-in-
capital and the issuance of 5,420,000 shares of Common Stock as well as
the 1,080,000 shares of Common Stock after the stock split.
(c) Reflects the recording of deferred tax assets and liabilities associated
with the change in tax status to C corporation of Systems, Providers Inc.,
Providers L.P., RenTel, RenTel #2, and SellTel #2 in conjunction with the
Consolidation. See "The Consolidation" for discussion.
(d) 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 December 31, 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.
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.......................................................... 15
Dividend Policy.......................................................... 15
Dilution................................................................. 16
Capitalization........................................................... 17
Selected Financial Data.................................................. 18
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 20
Business................................................................. 26
Management............................................................... 35
Principal Shareholders................................................... 40
Certain Transactions..................................................... 41
Shares Eligible for Future Sale.......................................... 42
Description of Capital Stock............................................. 43
Underwriting............................................................. 46
Legal Matters............................................................ 47
Experts.................................................................. 47
Additional Information................................................... 47
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 Union
, 1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<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................................... 5,000.00
Printing and Engraving Expenses.............................. 135,000.00
Legal Fees and Expenses...................................... 250,000.00
Accounting Fees and Expenses................................. 165,000.00
Transfer Agent Fees and Expenses............................. 3,100.00
Miscellaneous................................................ 135,501.25
-----------
Total.................................................... $750,000.00
===========
</TABLE>
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 CONSIDERATION
- ---- ---------- ---------------------------------------
<S> <C> <C>
Scott D. Dorfman 4,989,428 1,000 shares of HomeTel Providers, Inc.
95.5 shares of HomeTel Systems, Inc.
1,000 shares of IELC, Inc.
90 shares of RenTel #1, Inc.
990 shares of RenTel #2, L.L.C.
90 shares of SellTel #1, Inc.
990 shares of RenTel #2, L.L.C.
ITC Service Company 353,846 10% limited partnership interest in
HomeTel Providers Partners, L.P.
Susan Mary Trotochaud 493 10 shares in RenTel #2, L.L.C.
Custodianship for 25,411 1.5 shares of HomeTel Systems, Inc.
Bradley H. Dorfman
50 shares of SellTel #2, L.L.C.
Custodianship for Brent M. 25,411 1.5 shares of HomeTel Systems, Inc.
Dorfman
50 shares of SellTel #2, L.L.C.
Custodianship for Jesse E. 25,411 1.5 shares of HomeTel Systems, Inc.
Dorfman
50 shares of SellTel #2, L.L.C.
</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, as
amended**
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 December 31, 1997**
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(a) Stock Option and Incentive Award Plan*
(b) Amendment No. 1 to 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 Registrant and each of Messrs. Scott D.
Dorfman, David L. Ellin, Donald L. Colter, Jr., John H. Nichols III,
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 December 8, 1997, by and between Weeks Development
Partnership and the Registrant**
10.9 Split Dollar Life Insurance Agreement, dated July 10, 1997, by and
between the Registrant, Bruce V. Benator, as Trustee of The Scott
David Dorfman Family Trust #2, and Scott David Dorfman**
10.10 Innotrac Corporation Deferred Compensation Plan, effective as of
October 16, 1997**
10.11 Grantor Trust Agreement dated October 16, 1997, by and between the
Registrant and Wachovia Bank, N.A.**
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>
- --------
* Previously filed
** Filed herewith
+ 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
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized in the City of Atlanta,
State of Georgia, on the 10th day of February, 1998.
INNOTRAC CORPORATION
/s/ Scott D. Dorfman
By:__________________________________
SCOTT D. DORFMAN
CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to Registration Statement has been signed by the following persons on the 10th
day of February, 1998, in the capacities indicated.
SIGNATURES POSITION
/s/ Scott D. Dorfman Chairman, President and
- ------------------------------------- Chief Executive Officer
Scott D. Dorfman (Principal Executive
Officer)
* Senior Vice President,
- ------------------------------------- Secretary, Chief Operating
David L. Ellin Officer and Director
* Vice President--Business
- ------------------------------------- Development and Director
Larry C. Hanger
* Vice President and Chief
- ------------------------------------- Financial Officer
John H. Nichols, III (Principal Financial and
Accounting Officer)
<PAGE>
<TABLE>
<CAPTION>
SIGNATURES POSITION
<S> <C>
* Director
- -------------------------------------
Bruce V. Benator
* Director
- -------------------------------------
Martin J. Blank
* Director
- -------------------------------------
Campbell B. Lanier, III
* Director
- -------------------------------------
William H. Scott, III
</TABLE>
*By: /s/ Scott D. Dorfman
--------------------------------
as attorney-in-fact
<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 January 26, 1998. 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
January 26, 1998
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ------------------
AT CHARGED CHARGED 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................... $4,141 $7,750 $0.00 $(6,833)(1) $5,058
1996................... $2,552 $5,841 $0.00 $(4,252)(1) $4,141
1995................... $575 $3,043 $0.00 $(1,066)(1) $2,552
</TABLE>
- --------
Notes:
(1) Represents write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.
<TABLE>
<CAPTION>
ADDITIONS
BALANCE ------------------
AT CHARGED CHARGED TO
BEGINNING TO OTHER BALANCE AT END
DESCRIPTION OF PERIOD INCOME ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- ------- ---------- ---------- --------------
<S> <C> <C> <C> <C> <C>
Provision for returns
and allowances
1997................... $101 $6,327 $0.00 $(5,779)(1) $649
1996................... $0 $3,536 $0.00 $(3,435)(1) $101
1995................... $0 $0 $0.00 $0 (1) $0
</TABLE>
- --------
Notes:
(1) Represents write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.
<PAGE>
<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, as
amended**
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 December 31, 1997**
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(a) Stock Option and Incentive Award Plan*
(b) First Amendment to 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 Registrant and each of Messrs. Scott D.
Dorfman, David L. Ellin, Donald L. Colter, Jr., John H. Nichols III,
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 December 8, 1997, by and between Weeks Development
Partnership and the Registrant**
10.9 Split Dollar Life Insurance Agreement, dated July 10, 1997, by and
between the Registrant, Bruce V. Benator, as Trustee of The Scott
David Dorfman Family Trust #2, and Scott David Dorfman**
10.10 Innotrac Corporation Deferred Compensation Plan, effective as of
October 16, 1997**
10.11 Grantor Trust Agreement, dated October 16, 1997, by and between the
Registrant and Wachovia Bank, N.A.**
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>
- --------
* Previously filed
** Filed herewith
+ 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.
<PAGE>
EXHIBIT 1.1
INNOTRAC CORPORATION
2,500,000 Shares of Common Stock
UNDERWRITING AGREEMENT
, 1998
---------------
J.C. BRADFORD & CO.
WHEAT FIRST SECURITIES, INC.
As Representatives of the several Underwriters
c/o J.C. Bradford & Co.
J.C. Bradford Financial Center
330 Commerce Street
Nashville, Tennessee 37201
Ladies and Gentlemen:
Innotrac Corporation, a Georgia corporation (the "Company"), proposes to
sell to the several underwriters named in Schedule I hereto (the
"Underwriters"), for whom you are acting as the representatives (the
"Representatives"), 2,500,000 shares (the "Firm Shares") of the Company's common
stock, par value $0.10 per share (the "Common Stock"). The Company has also
agreed to grant to you an option (the "Option") to purchase up to a total of
375,000 additional shares of Common Stock (the "Option Shares") on the terms and
for the purposes set forth in Section 1(b) hereof. The Firm Shares and the
Option Shares are hereinafter collectively referred to as the "Shares."
The Company confirms its agreement with you as follows:
1. Agreement to Sell and Purchase; Public Offering.
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to all the terms and conditions of this Underwriting
Agreement (the "Agreement"), the Company agrees to sell to the Underwriters the
Firm Shares, and each of the Underwriters, severally and not jointly, agrees to
purchase at the purchase price of $_____ per share the number of Firm Shares set
forth opposite such Underwriter's name in Schedule I hereto.
(b) Subject to all the terms and conditions of this Agreement, the Company
also grants the Underwriters the Option to purchase, severally and not jointly,
up to 375,000 Option Shares from the Company, each at the same price per share
as you shall pay for the Firm Shares. The Option may be exercised only to cover
over-allotments in the sale of the Firm Shares and may be exercised in whole or
in part at any time or from time to time on or before the 30th day after the
date of the Prospectus (as defined below) upon written or telegraphic
<PAGE>
notice (the "Option Shares Notice") by you to the Company no later than 12:00
noon, Nashville, Tennessee time at least two and no more than ten business days
before the date and time specified for closing in the Option Shares Notice (the
"Option Closing Date") setting forth the aggregate number of Option Shares to be
purchased. On the Option Closing Date, the Company will issue and sell to the
Underwriters the number of Option Shares set forth in the Option Shares Notice,
and unless otherwise adjusted by the Representatives, each of the Underwriters
will purchase such percentage of the Option Shares as is equal to the percentage
of Firm Shares that such Underwriter is purchasing.
(c) After the Registration Statement becomes effective, upon the
authorization by you of the release of the Shares, the several Underwriters
propose to offer the Firm Shares and the Option Shares purchased by the
Underwriters for sale initially at the price per share set forth in the
Prospectus (the initial offering price) and upon the terms set forth therein.
2. Delivery and Payment.
Delivery of the Firm Shares shall be made to you by or on behalf of the
Company against payment of the purchase price by federal funds wire transfer
payable in same day funds to the order of the Company at the offices of J.C.
Bradford & Co., J.C. Bradford Financial Center, 330 Commerce Street, Nashville,
Tennessee 37201, or at such other place as may be agreed upon by the
Representatives and the Company, at 10:00 a.m., Nashville time, on the third
full business day following the date of this Agreement (the "Closing Date"), or
at such other time on such date, or at such other place, as may be agreed upon
by the Company and the Representatives.
To the extent the Option is exercised, delivery of the Option Shares
against payment therefor (in the manner specified above) will take place at the
offices specified above on the Option Closing Date (which, subject to the
requirements set forth above for the Option Shares Notice, may be the Closing
Date).
Certificates evidencing the Shares shall be in definitive form and shall be
registered in such names and in such denominations as you shall request not less
than 48 hours prior to the Closing Date or the Option Closing Date, as the case
may be, by written notice to the Company. For the purpose of expediting the
checking and packaging of certificates for the Shares, the Company agrees to
make such certificates available for inspection at least 24 hours prior to the
Closing Date or the Option Closing Date, as the case may be, at a location to be
designated by you, which may be in New York, New York, or elsewhere. If the
Representatives so elect, delivery of the Shares may be made by credit through
full fast transfer to the accounts designed by the Representatives at The
Depository Trust Company.
The cost of original issue tax stamps, if any, in connection with the
issuance and delivery of the Shares by the Company to the Underwriters shall be
borne by the Company. The Company will pay and save each of the Underwriters
and any subsequent holder of the Shares harmless from any and all liabilities
with respect to or resulting from any failure or
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delay in paying federal and state stamp and other transfer taxes, if any, which
may be payable or determined to be payable in connection with the original
issuance or sale to such Underwriter of the Firm Shares and Option Shares.
3. Representations and Warranties of the Company.
The Company represents, warrants and covenants to each of the Underwriters
that:
(a) The Company has prepared and has filed with the Securities and Exchange
Commission (the "Commission") a registration statement (Registration No. 333-
42373 on Form S-1 relating to the Shares, including a preliminary prospectus and
such amendments to such registration statement as may have been required to the
date of this Agreement, under the provisions of the Securities Act of 1933, as
amended (the "Act"), and the rules and regulations (collectively referred to as
the "Rules and Regulations") of the Commission thereunder. The registration
statement and all amendments thereto have been duly authorized and executed by
the Company in accordance with the Rules and Regulations. The term "preliminary
prospectus" as used herein means a preliminary prospectus included at any time
as part of the registration statement as contemplated by Rule 430 or Rule 430A
of the Rules and Regulations. Copies of such registration statement and
amendments and of each related preliminary prospectus have been delivered to
you. If such registration statement has not become effective, a further
amendment to such registration statement, including a form of final prospectus,
necessary to permit such registration statement to become effective, will be
filed promptly by the Company with the Commission. If such registration
statement has become effective, a final prospectus containing information
permitted to be omitted at the time of effectiveness by Rule 430A of the Rules
and Regulations will be filed promptly by the Company with the Commission in
accordance with Rule 424(b) of the Rules and Regulations, if required. The term
"Registration Statement" as used herein means the registration statement as
amended at the time it becomes or became effective (the "Effective Date"),
including financial statements and all exhibits and any information deemed to be
included by Rule 430A. The term "Prospectus" means the prospectus as first
filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations
or, if no such filing is required, the form of final prospectus included in the
Registration Statement at the Effective Date.
(b) On the Effective Date, the date the Prospectus is first filed with the
Commission pursuant to Rule 424(b) (if required), at all times subsequent
thereto through and including the Closing Date and, if later, the Option Closing
Date and when any post-effective amendment to the Registration Statement becomes
effective or any amendment or supplement to the Prospectus is filed with the
Commission, the Registration Statement and the Prospectus (as amended or as
supplemented if the Company shall have filed with the Commission any amendment
or supplement thereto), including the financial statements included in the
Prospectus, did or will comply with all applicable provisions of the Act and the
Rules and Regulations and did or will contain all statements required to be
stated therein in accordance with the Act and the Rules and Regulations. On the
Effective Date and when any post-effective amendment to the Registration
Statement becomes effective, no part of the
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Registration Statement, the Prospectus or any such amendment or supplement did
or will contain an untrue statement of a material fact or omit to state a
material fact required to be stated therein or necessary in order to make the
statements therein not misleading. On the date any amendment or supplement to
the Prospectus is filed with the Commission and at the Closing Date and, if
later, the Option Closing Date, the Prospectus did not or will not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. The foregoing representations and warranties in this
Section 3(b) do not apply to any statements or omissions made in reliance on and
in conformity with information relating to the Underwriters furnished in writing
to the Company by the Representatives specifically for inclusion in the
Registration Statement or Prospectus or any amendment or supplement thereto. The
Company acknowledges that the only information relating to the Underwriters
furnished in writing to the Company by the Representatives specifically for
inclusion in the Registration Statement, any preliminary prospectus and the
Prospectus is the information in the last paragraph on the cover page, the
paragraph relating to stabilization on the inside front cover and the statements
set forth under the heading "Underwriting" in any preliminary prospectus or the
Prospectus.
(c) The Company had no subsidiaries (as defined in the Rules and
Regulations) as of the Effective Date. As of the Closing Date, the Company will
have two subsidiaries (the "Subsidiaries"). The Company and each of the
Affiliated Companies (as such term is defined in the Registration Statement) is,
and the Company and each of the Subsidiaries at the Closing Date and, if later,
the Option Closing Date will be, a corporation or other entity duly organized,
validly existing and in good standing under the laws of the respective
jurisdiction of their incorporation or organization. At the Closing Date the
Company will be the sole legal and beneficial owner of all securities of the
Subsidiaries free and clear of all liens, charges and encumbrances, except that
Arnold Dorfman will own 10% of the outstanding shares of each Subsidiary. The
Company and the Affiliated Companies have, and at the Closing Date and, if
later, the Option Closing Date, the Company and each Subsidiary will have, full
power and authority to conduct all the activities conducted by it, to own or
lease all the assets owned or leased by it and to conduct its business as
described in the Registration Statement and the Prospectus. The Company and each
Affiliated Company is, and at the Closing Date and, if later, the Option Closing
Date the Company and each Subsidiary will be, duly licensed or qualified to do
business and in good standing as a foreign corporation in all jurisdictions in
which the nature of the activities conducted by it or the character of the
assets owned or leased by it makes such licensing or qualification necessary,
except where the failure to so qualify would not have a material adverse effect
upon the business, properties, business prospects, condition (financial or
otherwise) or results of operations of the Company and its Subsidiaries taken as
a whole, and no proceeding has been instituted in any jurisdiction revoking,
limiting or curtailing, or seeking to revoke, limit or curtail, the Company's or
any Affiliated Company's power, authority, licensing or qualification. Except as
disclosed in the Registration Statement, the Company and the Affiliated
Companies do not own, and except for the stock of the Subsidiaries at the
Closing Date and, if later, the Option Closing Date the Company will not own,
directly or indirectly, any shares of stock or any other equity or long-
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<PAGE>
term debt securities of any corporation or have any equity interest in any firm,
partnership, joint venture, association or other entity. Complete and correct
copies of the Articles of Incorporation, as amended and restated (the "Articles
of Incorporation") and the Bylaws, as amended and restated (the "Bylaws") of the
Company and the articles of incorporation and bylaws of each Affiliated Company
and all amendments thereto have been delivered to you, and no changes therein
will be made subsequent to the date hereof and prior to the Closing Date or, if
later, the Option Closing Date.
(d) The outstanding shares of the Company's Common Stock have been, and the
Shares to be issued and sold by the Company upon such issuance will be, duly
authorized, validly issued, fully paid and nonassessable and will not be subject
to any preemptive or similar right. The description of the Common Stock in the
Registration Statement and the Prospectus is, and at the Closing Date and, if
later, the Option Closing Date will be, complete and accurate in all material
respects. All offers and sales of securities of the Company have been at all
relevant times duly registered under or exempt from the registration
requirements of the Act and were duly registered under or exempt from the
registration requirements of all applicable state securities or Blue Sky laws.
Except as set forth in the Prospectus and except for options issued under the
Company's stock option plans, the Company does not have outstanding, and at the
Closing Date and, if later, the Option Closing Date will not have outstanding,
any options to purchase, or any rights or warrants to subscribe for, or any
securities or obligations convertible into, or any contracts or commitments to
issue or sell any shares of Common Stock or any such warrants, convertible
securities or obligations. The description of the Company's stock option, stock
bonus and other stock plans or arrangements, and the options or other rights
granted thereunder, set forth in the Prospectus accurately and fairly presents
the information required to be shown with respect to such plans, arrangements,
options and rights.
(e) The financial statements together with the related notes and schedules
included in the Registration Statement or the Prospectus present fairly the
consolidated financial condition of the Company as of the respective dates
thereof and the consolidated results of operations and cash flows of the Company
for the respective periods covered thereby, all in conformity with generally
accepted accounting principles applied on a consistent basis throughout the
entire period involved, except as otherwise disclosed in the Prospectus. The
financial and statistical data set forth in the Prospectus under the captions
"Prospectus Summary," "Summary Financial Data," "Use of Proceeds,"
"Capitalization," "Selected Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations,"
"Business,""Business" and "Management" have been compiled on a basis consistent
with that of the audited financial statements contained in the Registration
Statement and Prospectus and fairly present the information set forth therein.
The information set forth under the caption "Principal Shareholders" fairly
presents the information set forth therein. No other financial statements or
schedules of the Company are required by the Act, the Securities Exchange Act of
1934, as amended (the "Exchange Act"), or the Rules and Regulations to be
included in the Registration Statement or the Prospectus. Arthur Andersen LLP
(the "Accountants"), who
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<PAGE>
have reported on certain of such financial statements and schedules, are
independent auditors with respect to the Company as required by the Act and the
Rules and Regulations.
(f) The Company and each of the Affiliated Companies maintain a system of
internal accounting controls sufficient to assure that: (i) all material
transactions are executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit preparation
of the Company's consolidated financial statements in conformity in all material
respects with generally accepted accounting principles consistently applied and
to maintain accountability for assets; and (iii) assets are properly accounted
for and safeguarded against errors or loss from unauthorized use. Neither the
Company, the Affiliated Companies, nor, to the knowledge of the Company or any
Affiliated Company, any employee or agent of the Company or the Affiliated
Companies has made any payment of funds of the Company or the Affiliated
Companies or received or retained any funds in violation of any law, rule or
regulation, the receipt or payment of which could have a material adverse effect
on the Company.
(g) There are no outstanding loans, advances (except normal advances for
business expenses in the ordinary course of business) or guarantees of
indebtedness by the Company to or for the benefit of any of the officers or
directors of the Company or any of the members of the families of any of them,
except as disclosed in the Registration Statement and the Prospectus.
(h) Subsequent to the respective dates as of which information is given in
the Registration Statement and the Prospectus and prior to the Closing Date and,
if later, the Option Closing Date, except as set forth in the Registration
Statement and the Prospectus, (i) there has not been and will not have been any
material adverse change in the business, properties, business prospects,
condition (financial or otherwise) or results of operations of the Company and
the Affiliated Companies taken as a whole, arising for any reason whatsoever,
(ii) the Company and the Affiliated Companies have not incurred nor will they
incur any material liabilities or obligations, direct or contingent, except in
the ordinary course of business, (iii) the Company and the Affiliated Companies
have not entered into any material transaction not in the ordinary course of
business, (iv) the Company has not and will not have paid or declared any
dividends or other distributions of any kind on any class of its capital stock,
(v) there has not been and will not have been any change in the capitalization
of the Company or the Affiliated Companies other than pursuant to the exercise
of employee stock options or the issuance of shares under the Company's stock
option plan.
(i) The Company and the Affiliated Companies have timely filed all material
federal, state and foreign income and franchise tax returns and have paid all
taxes shown thereon as due and which are not being contested in good faith, and
there is no tax deficiency that has been or, to the best of the Company's
knowledge, might be asserted against the Company or any of the Affiliated
Companies that might have a material adverse effect on the business, properties,
business prospects, condition (financial or otherwise) or results of operations
of the Company and the Affiliated Companies taken as a whole, and all tax
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<PAGE>
liabilities are adequately provided for on the books of the Company and the
Affiliated Companies.
(j) The Company is not an "investment company" or an "affiliated person"
of, or "promoter" or "principal underwriter" for, an "investment company," as
such terms are defined in the Investment Company Act of 1940, as amended.
(k) There are no actions, suits or proceedings pending or, to the knowledge
of the Company, threatened against or affecting the Company or any Affiliated
Company or any of their respective officers in their capacity as such, before or
by any federal or state court, commission, regulatory body, administrative
agency or other governmental body, domestic or foreign, wherein an unfavorable
ruling, decision or finding would materially and adversely affect the Company or
the Affiliated Companies or its or their business, properties, business
prospects, condition (financial or otherwise) or results of operations or
prevent or materially hinder the consummation of this Agreement.
(l) The Company and the Affiliated Companies have not at any time during
the past five years: (i) made any unlawful contributions to any candidate for
any political office, or failed fully to disclose any contribution in violation
of law; or (ii) made any payment to any state, federal or foreign government
official, or other person charged with similar public or quasi-public duty
(other than payment required or permitted by applicable law).
(m) The Company and the Affiliated Companies have, and the Company and
each Subsidiary at the Closing Date and, if later, the Option Closing Date will
have: (i) all material governmental licenses, permits, consents, orders,
approvals and other authorizations necessary to carry on its business as
contemplated in the Prospectus; (ii) complied in all material respects with all
laws, regulations and orders applicable to it or its business or properties; and
(iii) performed all material obligations required to be performed by it, and the
Company and the Affiliated Companies are not, and at the Closing Date and, if
later, the Option Closing Date, the Company and each Subsidiary will not be, in
default, under any contract or other instrument material to it to which it is a
party or by which its property is bound or affected where such default would
materially and adversely affect the Company, the Affiliated Companies or its
Subsidiaries, as applicable, or their business, properties, business prospects,
condition (financial or otherwise) or results of operations or prevent or
materially hinder the consummation of this Agreement. To the knowledge of the
Company and the Affiliated Companies, as of the date of this Agreement, and the
Company and each Subsidiary as of the Closing Date and, if later, the Option
Closing Date no other party under any contract or other instrument to which it
is a party is in material default thereunder. Neither the Company nor any
Affiliated Company is, nor at the Closing Date and, if later, the Option Closing
Date will the Company or any Subsidiary be, in violation of any provision of
their respective articles of incorporation or bylaws or other organizational
documents.
(n) No consent, approval, authorization or order of, or any filing or
declaration with, any court or governmental agency or body is required for the
consummation by the
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Company of the transactions on its part herein contemplated, except such as have
been obtained under the Act or the Rules and Regulations and such as may be
required under state securities or Blue Sky laws or the bylaws and rules of the
National Association of Securities Dealers, Inc. (the "NASD") in connection with
the purchase and distribution by the Underwriters of the Shares, all of which
requirements have been satisfied in all material respects (except that
no representation is made with respect to NASD compliance).
(o) The filing of the Registration Statement and the execution and delivery
of this Agreement have been duly authorized by the Board of Directors of the
Company, and the Company has full corporate power and authority to enter into
this Agreement and to perform its obligations hereunder. This Agreement has
been duly executed and delivered by the Company and constitutes a valid and
binding agreement of the Company enforceable against the Company in accordance
with the terms hereof. Assuming compliance with all applicable state securities
laws and the bylaws and rules of the NASD, the performance of this Agreement and
the consummation of the transactions contemplated hereby will not result in the
creation or imposition of any material lien, charge or encumbrance upon any of
the assets of the Company or any Subsidiary pursuant to the terms or provisions
of, or result in a breach or violation of any of the terms or provisions of, or
constitute a default under, or give any other party a right to terminate any of
its obligations under, or result in the acceleration of any obligation under,
the Articles of Incorporation or Bylaws of the Company or the respective
articles of incorporation or bylaws of its Subsidiaries, any indenture,
mortgage, deed of trust, voting trust agreement, loan agreement, bond,
debenture, note agreement or other evidence of indebtedness, lease, contract or
other agreement or instrument to which the Company or any Subsidiary is a party
or by which the Company or any Subsidiary or any of its or their properties are
bound or affected, or violate or conflict with any judgment, ruling, decree,
order, statute, rule or regulation of any court or other governmental agency or
body applicable to the business or properties of the Company or any Subsidiary;
the occurrence of which would materially and adversely affect the Company or its
Subsidiaries or its business, properties, business prospects, condition
(financial or otherwise) or results of operations or prevent or materially
hinder the consummation of this Agreement.
(p) The Company has good and marketable title to all properties and assets
described in the Registration Statement and Prospectus as owned by it, free and
clear of all liens, charges, encumbrances or restrictions, except such as are
described in the Prospectus or are not material to the business of the Company
and the Affiliated Companies taken as a whole. The Company has valid,
subsisting and enforceable leases for the properties described in the Prospectus
as leased by it (the "Leased Properties") subject only to the rights of any
mortgagee, lienholder, or other person or entity which has an interest in the
Leased Properties that is or may become superior to the interest of the Company
or the landlord of such Leased Properties. The Company has no actual notice or
knowledge of any material claim of any sort which has been, or may be, asserted
by anyone adverse to the Company's rights as lessee or sublessee under any lease
or sublease described above, or affecting or questioning the Company's rights to
the continued possession of the leased or subleased premises under any
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such lease or sublease in conflict with the terms thereof. The Company owns or
leases all such properties as are necessary to its operations as now conducted.
(q) The Company and the Affiliated Companies own or possess adequate rights
to use all patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names and copyrights which are necessary to
conduct their businesses as described in the Registration Statement and
Prospectus; neither the Company nor the Affiliated Companies have received any
notice of, and have no knowledge of, any infringement of or conflict with
asserted rights of the Company or the Affiliated Companies by others with
respect to any patent, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, trade names or copyrights, and the Company and the
Affiliated Companies have not received any notice of, and have no knowledge of,
any infringement of or conflict with asserted rights of others with respect to
any patent, patent rights, inventions, trade secrets, know-how, trademarks,
service marks, trade names or copyrights owned or used by the Company or the
Affiliated Companies, which, singly or in the aggregate, if the subject of an
unfavorable decision, ruling or finding, could have a material adverse effect on
the business, properties, business prospects, condition (financial or otherwise)
or results of operations of the Company and the Affiliated Companies taken as a
whole.
(r) To the best of the Company's and the Affiliated Companies' knowledge,
no labor disturbance by the employees of the Company or any of the Affiliated
Companies exists or is imminent.
(s) The Company and the Affiliated Companies maintain insurance with
insurers of recognized financial responsibility against such losses and risks
and in such amounts as management believes is appropriate to the business of the
Company and all such policies are in full force and effect. The Company has no
reason to believe that it will not be able to renew its existing insurance
coverage as and when such coverage expires or to obtain similar coverage from
similar insurers as may be necessary to continue its business at a cost that
would not materially and adversely affect the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries taken as a whole.
(t) Except as described in the Registration Statement and the Prospectus,
there is no factual basis for any action, suit or other proceeding involving the
Company, the Affiliated Companies or any of their material assets for any
failure of the Company or any Affiliated Company to comply with any requirements
of federal, state or local regulation relating to air, water, solid waste
management, hazardous or toxic substances, or the protection of health or the
environment. To the best knowledge of the Company, there has not been a release
of any "hazardous substances in a reportable quantity", as those terms are
defined in the Comprehensive Environmental Response, Compensation and Liability
Act, 42 U.S.C. 9601 et seq. ("CERCLA"), by the Company on or at properties
leased by the Company. The Company has not received notice or request of
information under Section 104 of CERCLA or comparable state laws regarding an
investigation evaluating whether any remedial action is
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needed to respond to a release or threatened release of any hazardous substance
at properties leased by the Company.
(u) All documents or contracts required to be filed as exhibits to the
Registration Statement to which the Company or any Affiliated Company is a party
have been filed as exhibits to the Registration Statement and have been duly
authorized, executed and delivered by the Company or such Affiliated Company,
constitute valid and binding agreements of the Company or such Affiliated
Company and are enforceable against the Company or such Affiliated Company in
accordance with the terms thereof, except where the lack of authorization,
execution, delivery or enforceability of any such contract would not materially
and adversely affect the Company, the Affiliated Companies or their business,
properties, business prospects, condition (financial or otherwise) or results of
operations or prevent or materially hinder the consummation of this Agreement.
(v) No statement, representation, warranty or covenant made by the Company
in this Agreement or made in any certificate or document required by this
Agreement to be delivered to you was or will be, when made, inaccurate, untrue
or incorrect in any material respect.
(w) The Company has not taken and will not take, directly or indirectly,
any action designed to or which might reasonably be expected to cause or result
in stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Shares or the Common Stock, and the Company
is not aware of any such action taken or to be taken by affiliates of the
Company. To assure compliance with Regulation M under the Exchange Act, the
Company will not make bids for or purchases of or induce bids for or purchases
of, directly or indirectly, any shares of Common Stock or securities convertible
into Common Stock of the Company until the distribution of all shares of Common
Stock being sold in the public offering has been completed.
(x) No holder of securities of the Company has rights to require the
registration of any securities of the Company because of the filing of the
Registration Statement. There are no contracts, agreements or understandings
between the Company and any person granting such person the right to require the
Company to file a registration statement under the Act with respect to any
securities of the Company owned or to be owned by such person or to require the
Company to include such securities in the securities registered pursuant to the
Registration Statement or in any securities being registered pursuant to any
other registration statement filed by the Company under the Act.
(y) The Shares have been approved for listing on the National Association
of Securities Dealers Automated Quotation National Market System (the "Nasdaq
National Market") upon notice of issuance.
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(z) Other than as contemplated by this Agreement, there is no broker or
finder that is entitled to receive from the Company any brokerage or finder's
fee or commission as a result of any of the transactions contemplated by this
Agreement.
(aa) The Company is not in default or breach of any of the terms and
provisions set forth in the Amended and Restated Loan and Security Agreement by
and between the Company and Southtrust Bank, N.A., dated December 5, 1997 (the
"Line of Credit"), and after giving effect to the Offering, the Company will
continue to be in compliance with the covenants, terms and provisions of the
Line of Credit.
(bb) Any certificate signed by any officer of the Company and delivered to
you or to counsel for the Underwriters shall be deemed a representation and
warranty to each Underwriter as to the matters covered thereby.
(cc) The Company has not distributed and will not distribute prior to the
later of (i) the Closing Date or the Option Closing Date, as the case may be, or
(ii) completion of the distribution of the Shares, any offering material in
connection with the offering and sale of the Shares other than any preliminary
prospectuses, the Prospectus, the Registration Statement and other materials, if
any, permitted by the Act.
4. Covenants of the Company.
The Company covenants and agrees with each of the Underwriters as follows:
(a) The Company will not, either prior to the Effective Date or thereafter
during such period as the Prospectus is required by law to be delivered in
connection with sales of the Shares by an underwriter or dealer, file any
amendment or supplement to the Registration Statement or the Prospectus, unless
a copy thereof shall first have been submitted to you within a reasonable period
of time prior to the filing thereof and you shall not have objected thereto in
good faith.
(b) The Company will use its reasonable best efforts to cause the
Registration Statement and any amendment thereto, if not effective at the time
and date that this Agreement is executed by the parties hereto, to become
effective as promptly as possible and will notify you promptly and confirm such
advice in writing: (i) when the Registration Statement has become effective and
when any post-effective amendment thereto becomes effective; (ii) of any request
by the Commission for amendments or supplements to the Registration Statement or
the Prospectus or for additional information; (iii) of the issuance by the
Commission of any stop order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that purpose or the threat
thereof; (iv) of the happening of any event during the period mentioned in the
second sentence of Section 4(e) that in the judgment of the Company makes any
statement made in the Registration Statement or the Prospectus untrue or that
requires the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances in which they are made, not
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misleading; and (v) of receipt by the Company or any representatives or attorney
of the Company of any other communication from the Commission relating to the
Company, the Registration Statement, any preliminary prospectus or the
Prospectus. If at any time the Commission shall issue any order suspending the
effectiveness of the Registration Statement, the Company will make every
reasonable effort to obtain the withdrawal of such order at the earliest
possible moment. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430A of the Rules and Regulations, the
Company will use its best efforts to comply with the provisions of and make all
requisite filings with the Commission pursuant to said Rule 430A and to notify
the Representatives promptly of all such filings. If the Company files a term
sheet pursuant to Rule 434 of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus and term sheet meeting
the requirements of Rule 434(b) or (c), as applicable, of the Rules and
Regulations, have been filed, within the time period prescribed, with the
Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and
Regulations; if for any reason the filing of the final form of Prospectus is
required under Rule 424(b)(3) of the Rules and Regulations, the Company will
provide evidence satisfactory to you that the Prospectus contains such
information and has been filed with the Commission within the time period
prescribed.
(c) The Company will furnish to you at or before the Closing Date, without
charge, three signed copies of the Registration Statement and of any post-
effective amendment thereto, including financial statements and schedules, and
all exhibits thereto, and will furnish you with such number of copies of the
Registration Statement, without exhibits, and all amendments thereto as you may
reasonably request.
(d) The Company will comply with all the provisions of any undertakings
contained in the Registration Statement. The Company will, from time to time,
after the effective date of the Registration Statement file with the Commission
such reports as are required by the Act, the Exchange Act, the Rules and
Regulations and the rules and regulations promulgated by the Commission pursuant
to the Exchange Act (the "Exchange Act Rules and Regulations"), and shall also
file with state securities commissions in states where the Shares have been sold
by you (as you shall have advised us in writing) such reports as are required to
be filed by the securities acts and the regulations of those states, as you
shall advise in writing.
(e) On the Effective Date, and thereafter from time to time until
expiration of the period mentioned in the second sentence of this Section 4(e),
the Company will deliver to each of you, without charge, as many copies of the
Prospectus or any amendment or supplement thereto as you may reasonably request.
The Company consents to the use of the Prospectus or any amendment or supplement
thereto by you and by all dealers to whom the Shares may be sold, both in
connection with the offering or sale of the Shares and for any period of time
thereafter during which the Prospectus is required by law to be delivered in
connection therewith. If during such period of time any event shall occur which
in the judgment of the Company or your counsel should be set forth in the
Prospectus in order to make any statement therein, in light of the circumstances
under which it was made, not misleading, or if it is necessary to supplement or
amend the Prospectus to comply with law, the Company will
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forthwith prepare and duly file with the Commission an appropriate supplement or
amendment thereto, and will deliver to each of you, without charge, such number
of copies thereof as you may reasonably request.
(f) Prior to any public offering of the Shares by you, the Company will
cooperate with you and your counsel in connection with the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions as you may reasonably request; provided, that in no
event shall the Company be obligated to qualify to do business in any
jurisdiction where it is not now so qualified or to take any action which would
subject it to general service of process in any jurisdiction where it is not now
so subject.
(g) During a period of two years after the date hereof, the Company
will furnish to the Representatives such reports as are generally transmitted to
its shareholders, copies of all reports furnished to or filed with any
securities exchange or the NASD, and will notify you of the availability on
the Internet of all other reports filed with the Commission or copies of every
material press release and every material news item or article in respect of
the Company or its affairs which was generally released to shareholders or
prepared by the Company and, upon request will furnish any additional
information of a public nature concerning the Company or its business which you
may reasonably request. During such two year period, the Company's financial
statements shall be on a consolidated basis to the extent that the accounts of
the Company and its Subsidiaries are consolidated and shall be accompanied by
similar financial statements for any significant Subsidiary which is not so
consolidated.
(h) The Company will make generally available to holders of its securities
as soon as may be practicable but in no event later than the last day of the
15th full calendar month following the calendar quarter in which the Effective
Date falls, an earnings statement (which need not be audited but shall be in
reasonable detail) for a period of 12 months ended commencing after the
Effective Date, and satisfying the provisions of Section 11(a) of the Act
(including Rule 158 of the Rules and Regulations).
(i) Whether or not the transactions contemplated by this Agreement are
consummated or this Agreement is terminated, the Company will pay, or reimburse
if paid by the Underwriters, all costs and expenses incident to the performance
of the obligations of the Company under this Agreement, including but not
limited to costs and expenses of or relating to: (i) the preparation, printing,
and filing of the Registration Statement and exhibits to it, each preliminary
prospectus; the Prospectus and any amendment or supplement to the Registration
Statement or the Prospectus; (ii) the preparation and delivery of certificates
representing the Shares; (iii) the printing of this Agreement and other
underwriting documents, including Underwriter's Questionnaires, Underwriter's
Powers of Attorney, Blue Sky Memorandum, Master Agreement Among Underwriters and
Master Selected Dealer Agreements; (iv) furnishing (including costs of shipping
and mailing) such copies of the Registration Statement, the Prospectus and any
preliminary prospectus, and all amendments and supplements thereto, as may be
requested for use in connection with the offering and sale of the Shares by the
Underwriters or by dealers to whom Shares may be sold; (v) the quotation
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of the Shares on the Nasdaq National Market; (vi) any filings required to be
made by you with the NASD, and the reasonable fees, disbursements and other
charges of your counsel in connection therewith; (vii) the registration or
qualification of the Shares for offer and sale under the securities or Blue Sky
laws of such jurisdictions designated pursuant to Section 4(f), including the
reasonable fees, disbursements and other charges of your counsel in connection
therewith, and the preparation and printing of preliminary, supplemental and
final Blue Sky memoranda.
(j) If this Agreement shall be terminated by the Company or if for any
reason the Company shall be unable to perform its obligations hereunder (other
than circumstances involving a matter within your control or any fault of
yours) or if this Agreement shall be terminated by the Underwriters based upon a
matter within the control of the Company or any fault of the Company, the
Company will reimburse you for all reasonable out-of-pocket expenses (including
the fees, disbursements and other charges of your counsel) reasonably incurred
by you in connection herewith.
(k) The Company will not at any time, directly or indirectly, take any
action designed, or which might reasonably be expected, to cause or result in,
or which will constitute, stabilization of the price of the shares of Common
Stock to facilitate the sale or resale of any of the Shares. The Company will
not make bids for or purchases of or induce bids for or purchases of, directly
or indirectly, any shares of Common Stock or securities convertible into Common
Stock of the Company until the distribution of all shares of Common Stock being
sold in the public offering has been completed.
(l) The Company will apply the net proceeds from the offering and sale of
the Shares to be sold by the Company in the manner set forth in the Prospectus
under "Use of Proceeds."
(m) During the period of 180 days commencing at the Closing Date, the
Company will not, without your prior written consent, grant options to purchase
shares of Common Stock, except under stock option plans previously approved by
the Company's shareholders and except at prices equal to or greater than "fair
market value," as defined in the Company's stock option plan.
(n) Except pursuant to this Agreement or with the prior written consent of
J.C. Bradford & Co., the Company will not, and the Company has provided
agreements executed by each of the Company's officers and directors and each
record or beneficial owner of the shares of the Company's Common Stock providing
that none of them will, for a period of 180 days from the date of the Prospectus
as first filed with the Commission pursuant to Rule 424(b), offer, pledge, sell,
transfer, contract to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any shares of Common Stock or any security
or other instrument which by its terms is convertible into, exercisable for, or
exchangeable for shares of Common Stock; provided, however, that nothing
contained herein shall prohibit the exercise of stock options or other purchases
of Common Stock under stock option plans or
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other incentive compensation arrangements for employees or directors previously
approved by the Company's Board of Directors; provided, further, however, that
such owner may give or pledge any such securities without the prior written
consent of J.C. Bradford & Co. if the donee or pledgee, as the case may be,
agrees in writing prior to such gift or pledge to be bound by all the terms of
such agreement and such writing is delivered to J.C. Bradford & Co. within five
days after said gift or pledge.
(o) The Company and its Subsidiaries will maintain and keep accurate books
and records reflecting their assets and maintain internal accounting controls
which provide reasonable assurance that: (i) all material transactions are
executed in accordance with management's general or specific authorization; (ii)
transactions are recorded as necessary to permit the preparation of the
Company's consolidated financial statements in conformity to all material
respects with generally accepted accounting principles consistently applied and
to maintain accountability for assets; and (iii) assets are properly accounted
for and safeguarded against errors or loss from unauthorized use.
(p) If at any time during the 90-day period after the Registration
Statement is declared effective, any rumor, publication or event relating to or
affecting the Company shall occur as a result of which, in your opinion, the
market price for the Shares has been or is likely to be materially affected
(regardless of whether such rumor, publication or event necessitates a
supplement to or amendment of the Prospectus), the Company will, after written
notice from you advising it as to the effect set forth above, prepare, consult
with you concerning the substance of and disseminate a press release or other
public statement, reasonably satisfactory to you, responding to or commenting on
such rumor, publication or event.
(q) The Company will supply you with copies of all correspondence to and
from, and all documents issued to and by, the Commission in connection with the
registration of the Shares under the Act.
(r) Prior to the Closing Date (and, if applicable, the Option Closing
Date), the Company will furnish to you, as soon as they have been prepared,
copies of any unaudited interim consolidated financial statements of the Company
and its Subsidiaries for any periods subsequent to the periods covered by the
financial statements appearing in the Registration Statement and the Prospectus.
(s) Prior to the Closing Date (and, if applicable, the Option Closing
Date), the Company will not issue any press releases or other communications
directly or indirectly and will hold no press conferences with respect to the
Company or any of its Subsidiaries, the business, properties, assets,
liabilities, financial condition or results of operations of the Company or any
of its Subsidiaries, or the offering of the Shares, without your prior written
consent, which consent will not be unreasonably withheld.
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(t) The Company will use its best efforts to maintain the quotation of the
Shares on the Nasdaq National Market for three years following the Effective
Date.
(u) The Company will maintain a transfer agent and, if necessary under the
jurisdiction of incorporation of the Company, a registrar (which may be the same
entity as the transfer agent) for its Common Stock.
(v) During a period of 90 days from the effective date of the Registration
Statement, the Company will not file a registration statement registering shares
under any stock option plan or other employee benefit plan.
(w) The Company will file a registration statement on Form 8-A with the
Commission providing for the registration of the Shares under the Exchange Act.
5. Conditions of the Obligations of the Underwriters.
The respective obligations of the Underwriters to purchase and pay for the
Shares shall be subject to the following conditions:
(a) Notification that the Registration Statement has become effective shall
be received by you not later than 5:30 p.m., Nashville, Tennessee time, on the
date of this Agreement or at such later date and time as shall be consented to
in writing by you and all filings required by Rule 424, Rule 430A, Rule 434 and
Rule 462(b) of the Rules and Regulations shall have been made.
(b) (i) No stop order suspending the effectiveness of the Registration
Statement shall have been issued and no proceedings for that purpose shall be
pending or, to the knowledge of the Company, threatened by the Commission, (ii)
no order suspending the effectiveness of the Registration Statement or the
qualification or registration of the Shares under the securities or Blue Sky
laws of any jurisdiction shall be in effect, and no proceeding for such purpose
shall be pending before or threatened or contemplated by the Commission or the
authorities of any such jurisdiction, (iii) any request for additional
information on the part of the staff of the Commission or any such authorities
shall have been complied with to the satisfaction of the staff of the Commission
or such authorities and to the satisfaction of the Representatives, (iv) after
the date hereof no amendment or supplement to the Registration Statement or the
Prospectus shall have been filed unless a copy thereof was first submitted to
you and you did not object thereto in good faith, (v) the NASD, upon review of
the terms of the public offering of the Shares, shall not have objected to such
offering, such terms or the Underwriters' participation in the same, and (vi)
you shall have received certificates, dated the Closing Date and, if applicable,
the Option Closing Date and signed by the Chief Executive Officer and the Chief
Financial Officer of the Company (who may, as to proceedings threatened or
contemplated, rely upon their knowledge, to the effect of clauses (i), (ii) and
(iii).
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(c) Since the respective dates as of which information is given in the
Registration Statement and the Prospectus, (i) there shall not have been a
material adverse change, or any development involving a prospective material
adverse change, in the general affairs, business, business prospects,
properties, management, key personnel, condition (financial or otherwise) or
results of operations of the Company and the Affiliated Companies, whether or
not arising from transactions in the ordinary course of business, in each case
other than as set forth in the Registration Statement and the Prospectus (or, in
the case of a prospective change, other than as contemplated by the Registration
Statement and the Prospectus) and (ii) the Company shall not have sustained any
material loss or interference with its business or properties from fire,
explosion, flood, hurricane or other casualty or calamity, whether or not
covered by insurance, or from any labor dispute or any court or legislative or
other governmental action, order or decree, which is not set forth in the
Registration Statement and the Prospectus, if in your reasonable judgment any
such development makes it inadvisable to consummate the sale and delivery of the
Shares by you at the public offering price. Since the respective dates as of
which information is given in the Registration Statement and the Prospectus,
there shall have been no litigation or other proceeding instituted against the
Company, the Affiliated Companies, or any of their officers or directors in
their capacities as such, before or by any federal, state or local court,
commission, regulatory body, administrative agency or other governmental body,
domestic or foreign, in which litigation or proceeding an unfavorable ruling,
decision or finding would materially and adversely affect the business,
properties, business prospects, condition (financial or otherwise) or results of
operations of the Company and the Affiliated Companies taken as a whole.
(d) All corporate proceedings and other legal matters in connection with
this Agreement, the Registration Statement and the Prospectus, and the
registration, authorization, issue, sale and delivery of the Shares, shall have
been reasonably satisfactory to counsel to the Underwriters, and such counsel
shall have been furnished with such papers and information as they may
reasonably have requested to enable them to pass upon the matters referred to in
this Section 5(d).
(e) Each of the representations and warranties of the Company contained
herein shall be true and correct in all material respects at the Closing Date
and, with respect to the Option Shares, at the Option Closing Date, as if made
at the Closing Date and, with respect to the Option Shares, at the Option
Closing Date, and all covenants and agreements herein contained to be performed
on the part of the Company and all conditions herein contained to be fulfilled
or complied with by the Company at or prior to the Closing Date and, with
respect to the Option Shares, at or prior to the Option Closing Date, shall have
been duly performed, fulfilled or complied with.
(f) The Underwriters shall have received an opinion, dated the Closing Date
and, with respect to the Option Shares, the Option Closing Date, satisfactory in
form and substance to your counsel, from Kilpatrick Stockton LLP, counsel to the
Company, in the form attached hereto as Exhibit A.
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In addition, such counsel shall state that such counsel has participated in
conferences with officials and other representatives of the Company, the
Representatives, counsel for the Underwriters and the Accountants, at which such
conferences the contents of the Registration Statement and Prospectus and
related matters were discussed, and although they have not verified the accuracy
or completeness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel which leads them
to believe that, at the time the Registration Statement became effective and at
all times subsequent thereto up to and on the Closing Date and on the Option
Closing Date, the Registration Statement and any amendment or supplement thereto
(other than the financial statements including supporting schedules and other
financial and statistical information derived therefrom, as to which such
counsel need express no comment) contained any untrue statement of a material
fact or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, or at the Closing Date
or the Option Closing Date, as the case may be, the Registration Statement, the
Prospectus and any amendment or supplement thereto (except as aforesaid)
contained any untrue statement of a material fact or omitted to state a material
fact necessary to make the statements therein, in the light of the circumstances
under which they were made, not misleading.
Counsel rendering the foregoing opinion may rely as to questions of law not
involving the laws of the United States or the State of Georgia upon opinions of
local counsel, and as to questions of fact upon representations or certificates
of officers of the Company, and of government officials, in which case their
opinion is to state that they are so relying and that they have no knowledge of
any material misstatement or inaccuracy in any such opinion.
(g) You shall have received an opinion, dated the Closing Date and, if
applicable, the Option Closing Date, from Nelson Mullins Riley & Scarborough,
L.L.P., as your counsel, with respect to the Registration Statement, the
Prospectus and this Agreement, which opinion shall be satisfactory in all
respects to you, and the Company shall have furnished to such counsel such
documents as they reasonably request for the purpose of enabling them to pass
upon such matters.
(h) You shall have received at or prior to the Closing Date from Nelson
Mullins Riley & Scarborough, L.L.P. a memorandum or memoranda, in form and
substance satisfactory to you, with respect to the qualification for offering
and sale by the Underwriters of the Shares under state securities or Blue Sky
laws of such jurisdictions as the Underwriters may have designated to the
Company.
(i) The Representative shall have received from the Accountants a letter
dated the date hereof, and at the Closing Date a second letter dated the Closing
Date (and, if applicable, the Option Closing Date), in form and substance
satisfactory to the Representatives, stating that they are independent auditors
with respect to the Company within the meaning of the Act and the applicable
Rules and Regulations, and the answer to Item 509 of Regulation S-K set forth in
the Registration Statement is correct insofar as it relates to them, and stating
that:
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(i) In their opinion, the financial statements and schedules examined
by them and included in the Registration Statement or Prospectus comply
as to form in all material respects with the applicable accounting
requirements of the Act and the Rules and Regulations and are presented
in accordance with generally accepted accounting principles; and they
have made a review in accordance with standards established by the
American Institute of Certified Public Accountants of the interim
financial statements, selected financial and operating data, and/or
condensed financial statements derived from audited financial
statements of the Company.
(ii) The financial information included in any preliminary prospectus
and the Prospectus under the captions "Prospectus Summary," "Summary
Financial and Operating Data" and "Selected Financial and Operating
Data" for each of the fiscal years ended December 31, 1995, 1996, and
1997 agrees with the corresponding amounts in the audited financial
statements included in the Prospectus or previously reported on by
them.
(iii) On the basis of a reading of the latest available interim
financial statements (unaudited) of the Company and its Subsidiaries, a
reading of the minute books of the Company and its Subsidiaries,
inquiries of officials of the Company and its Subsidiaries responsible
for financial and accounting matters and other specified procedures,
all of which have been agreed to by the Representatives, nothing came
to their attention that caused them to believe that:
a. the unaudited financial statements included in the
Registration Statement do not comply as to form in all material
respects with the accounting requirements of the federal
securities laws and the related published rules and regulations
thereunder or are not in conformity with generally accepted
accounting principles applied on a basis consistent with the
basis for the audited financial statements contained in the
Registration Statement;
b. any other unaudited financial statement data included in the
Prospectus do not agree with the corresponding items in the
unaudited consolidated financial statements from which data was
derived and any such unaudited data were not determined on a
basis consistent with the basis for the corresponding amounts in
the audited financial statements included in the Prospectus;
c. at a specified date not more than five days prior to the date
of delivery of such respective letter, there was any change in
the consolidated capital stock, decline in shareholders' equity
or increase in long-term debt of the Company and its
Subsidiaries, or any decreases in consolidated working capital,
net current assets or net assets or other items specified by the
Underwriters, in each case as compared with amounts shown in the
latest balance sheets included
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in the Prospectus, except in each case for changes, decreases or
increases which the Prospectus discloses have occurred or may
occur or which are described in such letters; and
d. for the period from the closing date of the latest statements
of operations included in the Prospectus to a specified date not
more than five days prior to the date of delivery of such
respective letter, there were any decreases in net revenues or
net income of the Company, or other items appearing on the face
of the statement of operations specified by the Representatives,
or any increases in any items appearing on the face of the
statement of operations specified by the Representatives, in each
case as compared with the corresponding period of the preceding
year, except in each case for decreases which the Prospectus
discloses have occurred or may occur or which are described in
such letter.
(iv) They have carried out certain specified procedures, not
constituting an audit, with respect to certain amounts, percentages and
financial information specified by you which are derived from the
general accounting records of the Company and its Subsidiaries, which
appear in the Prospectus and have compared such amounts, percentages
and financial information with the accounting records of the Company
and its Subsidiaries and have found them to be in agreement.
In the event that the letters to be delivered referred to above set forth
any such changes, decreases or increases, it shall be a further condition to the
obligations of the Underwriters that the Underwriters shall have reasonably
determined, after discussions with officers of the Company responsible for
financial and accounting matters and with the Accountants, that such changes,
decreases or increases as are set forth in such letters do not reflect a
material adverse change in the shareholders' equity or long-term debt of the
Company as compared with the amounts shown in the latest balance sheet of the
Company included in the Prospectus, or a material adverse change in total net
revenues or net income of the Company, in each case as compared with the
corresponding period of the prior year.
(j) At the Closing Date and, as to the Option Shares, the Option Closing
Date, there shall be furnished to you a certificate, dated the date of its
delivery, signed by each of the Chief Executive Officer and Chief Financial
Officer of the Company, in form and substance satisfactory to you, to the effect
that:
(i) Each of the representations and warranties of the Company contained
in Section 3 of this Agreement were, when originally made, and are, at
the time such certificate is delivered, true and correct in all
material respects;
(ii) Each of the covenants required herein to be performed by the
Company on or prior to the delivery of such certificate has been
performed and each condition herein
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required to be complied with by the Company on or prior to the date of
such certificate has been complied with.
(k) On or prior to the Closing Date, you shall have received the executed
agreements referred to in Section 4(n).
(l) The Shares shall be qualified for sale in such states as you may
reasonably request, each such qualification shall be in effect and not subject
to any stop order or other proceeding on the Closing Date or the Option Closing
Date.
(m) The Shares shall have been authorized for quotation and shall have been
approved for listing on the Nasdaq National Market upon official notice of
issuance.
(n) You shall not have advised the Company that the Registration Statement
or the Prospectus or any amendment or any supplement thereto, contains an untrue
statement of fact which, in your reasonable judgment, is material, or omits to
state a fact which, in your reasonable judgment, is material and is required to
be stated therein or necessary to make the statements therein not misleading and
the Company shall not have cured such untrue statement of fact or stated a
statement of fact required to be stated therein.
(o) The Company shall have furnished to you such certificates, in addition
to those specifically mentioned herein, as you may have reasonably requested as
to the accuracy and completeness at the Closing Date and the Option Closing Date
of any statement in the Registration Statement or the Prospectus, as to the
accuracy at the Closing Date and the Option Closing Date of the representations
and warranties of the Company herein, as to the performance by the Company of
its obligations hereunder, or as to the fulfillment of the conditions concurrent
and precedent to your obligations hereunder.
(p) The Consolidation (as defined in the Registration Statement) shall be
consummated.
All such opinions, certificates, letters and documents will be in
compliance with the provisions of this Agreement only if they are reasonably
satisfactory to you and counsel for the Underwriters. The Company will furnish
you with such conformed copies of such opinions, certificates, letters and
documents as you may request.
If any of the conditions specified in this Section 5 shall not have been
satisfied at or prior to the Closing Date (and, if applicable, the Option
Closing Date) or waived by you in writing, this Agreement may be terminated by
you on notice to the Company.
6. Indemnification and Contribution.
(a) The Company will indemnify and hold harmless each Underwriter
(including, without limitation, in its capacity as an Underwriter or as a
"qualified independent
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underwriter" within the meaning of Rule 2700 of the NASD), the directors,
officers, employees and agents of each Underwriter and each person, if any, who
controls each Underwriter within the meaning of Section 15 of the Act or Section
20 of the Exchange Act, from and against any and all losses, claims,
liabilities, expenses and damages (including any and all investigative, legal
and other expenses reasonably incurred in connection with, and any amount paid
in settlement of, any action, suit or proceeding or any claim asserted), to
which they, or any of them, may become subject under the Act, the Exchange Act
or other federal or state statutory law or regulation, at common law or
otherwise, insofar as such losses, claims, liabilities, expenses or damages
arise out of or are based in whole or in part upon (i) any inaccuracy in the
representations and warranties of the Company contained herein, (ii) any failure
of the Company to perform its obligations hereunder or under law or (iii) any
untrue statement or alleged untrue statement of a material fact contained in any
preliminary prospectus, the Registration Statement or the Prospectus or any
amendment or supplement to the Registration Statement or the Prospectus or in
any documents filed under the Exchange Act or any blue sky application or
filing, or the omission or alleged omission to state in such document a material
fact required to be stated in it or necessary to make the statements in it not
misleading; provided, however, that the foregoing indemnity agreement with
respect to any preliminary prospectus or the Prospectus shall not inure to the
benefit of any Underwriter from whom the person asserting any such losses,
claims, damages or liabilities purchased Shares, or any person controlling such
Underwriter, if a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the sale
of the Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage or liability; and further provided, that the Company will not be liable
to the extent that such loss, claim, liability, expense or damage arises from
the sale of the Shares in the public offering to any person by an Underwriter
and is based on an untrue statement or omission or alleged untrue statement or
omission made in reliance on and in conformity with information relating to an
Underwriter furnished in writing to the Company by an Underwriter expressly for
inclusion in the Registration Statement, any preliminary prospectus or the
Prospectus. The Company acknowledges that the information in the last paragraph
on the cover page, the paragraphs relating to stabilization and passive market
making practices on the inside front cover and the statements set forth under
the heading "Underwriting" in any preliminary prospectus and the Prospectus
constitute the only information relating to any Underwriter furnished in writing
to the Company by you expressly for inclusion in the Registration Statement, any
preliminary prospectus or the Prospectus. This indemnity agreement will be in
addition to any liability that the Company might otherwise have.
(b) Each Underwriter will indemnify and hold harmless the Company and each
person, if any, who controls the Company within the meaning of Section 15 of the
Act or Section 20 of the Exchange Act, each director of the Company and each
officer of the Company who signs the Registration Statement to the same extent
as the foregoing indemnity from the Company to the Underwriters, but only
insofar as losses, claims, liabilities, expenses
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or damages arise out of or are based on any untrue statement or omission or
alleged untrue statement or omission made in reliance on and in conformity with
information relating to you furnished in writing to the Company by you expressly
for use in the Registration Statement, any preliminary prospectus or the
Prospectus. The Company acknowledges that the information set forth in the last
paragraph on the cover page, the paragraphs relating to stabilization and
passive market making practices on the inside front cover and the statements set
forth under the heading "Underwriting" in any preliminary prospectus and the
Prospectus constitute the only information relating to the Underwriters
furnished in writing to the Company by the Underwriters expressly for inclusion
in the Registration Statement, any preliminary prospectus or the Prospectus.
This indemnity will be in addition to any liability that the Underwriters might
otherwise have.
(c) Any party that proposes to assert the right to be indemnified under
this Section 6 will, promptly after receipt of notice of commencement of any
action against such party in respect of which a claim is to be made against an
indemnifying party or parties under this Section 6, notify each such
indemnifying party of the commencement of such action, enclosing a copy of all
papers served, but the omission so to notify such indemnifying party will not
relieve it from any liability that it may have to any indemnified party under
the foregoing provisions of this Section 6 unless, and only to the extent that,
such omission results in the forfeiture of substantive rights or defenses by the
indemnifying party. If any such action is brought against any indemnified party
and it notifies the indemnifying party of its commencement, the indemnifying
party will be entitled to participate in and, to the extent that it elects by
delivering written notice to the indemnified party promptly after receiving
notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of
the action, with counsel reasonably satisfactory to the indemnified party, and
after notice from the indemnifying party to the indemnified party of its
election to assume the defense, the indemnifying party will not be liable to the
indemnified party for any legal or other expenses except as provided below and
except for the reasonable costs of investigation subsequently incurred by the
indemnified party in connection with the defense. The indemnified party will
have the right to employ its own counsel in any such action, but the fees,
expenses and other charges of such counsel will be at the expense of such
indemnified party unless (i) the employment of counsel by the indemnified party
has been authorized in writing by the indemnifying party, (ii) the indemnified
party has reasonably concluded (based on advice of counsel) that there may be
legal defenses available to it or other indemnified parties that are different
from or in addition to those available to the indemnifying party, (iii) a
conflict of interests exists (based on advice of counsel to the indemnified
party) between the indemnified party and the indemnifying party (in which case
the indemnifying party will not have the right to direct the defense of such
action on behalf of the indemnified party) or (iv) the indemnifying party has
not in fact employed counsel to assume the defense of such action within a
reasonable time after receiving notice of the commencement of the action, in
each of which cases the reasonable fees, disbursements and other charges of
counsel will be at the expense of the indemnifying party or parties. It is
understood that the indemnifying party or parties shall not, in connection with
any proceeding or related proceedings in the same jurisdiction, be liable for
the reasonable fees, disbursements
23
<PAGE>
and other charges of more than one separate firm admitted to practice in such
jurisdiction at any one time for all such indemnified party or parties. All such
fees, disbursements and other charges will be reimbursed by the indemnifying
party promptly as they are incurred. An indemnifying party will not be liable
for any settlement of any action or claim effected without its written consent
(which consent will not be unreasonably withheld).
(d) In order to provide for just and equitable contribution in
circumstances in which the indemnification provided for in the foregoing
paragraphs of this Section 6 is applicable in accordance with its terms but for
any reason is held to be unavailable from the Company or the Underwriters, then
the Company and the Underwriters will contribute to the total losses, claims,
liabilities, expenses and damages (including any investigative, legal and other
expenses reasonably incurred in connection with, and any amount paid in
settlement of, any action, suit or proceeding or any claim asserted, but after
deducting any contribution received by the Company from persons other than the
Underwriters, such as persons who control the Company within the meaning of the
Act, officers of the Company who signed the Registration Statement and directors
of the Company, who may be liable for contribution) to which the Company and the
Underwriters may be subject in such proportion as shall be appropriate to
reflect the relative benefits received by the Company and the Underwriters. The
relative benefits received by the Company on the one hand and the Underwriters
on the other hand shall be deemed to be in the same respective proportions as
the total net proceeds from the offering (before deducting expenses) received by
the Company bears to the total underwriting discounts and commissions received
by the Underwriters, in each case as set forth in the table on the cover page of
the Prospectus. If, but only if, the allocation provided by the foregoing
sentence is not permitted by applicable law, the allocation of contribution
shall be made in such proportion as is appropriate to reflect not only the
relative benefits referred to in the foregoing sentence but also the relative
fault of the Company and the Underwriters with respect to the statements or
omissions which resulted in such loss, claim, liability, expense or damage, or
action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be
determined by reference to whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or the Underwriters, the intent of the
parties and their relative knowledge, access to information and opportunity to
correct or prevent such statement or omission. The Company and the Underwriters
agree that it would not be just and equitable if contributions pursuant to this
Section 6(d) were to be determined by pro rata or per capita allocation (even if
the Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified
party as a result of the loss, claim, liability, expense or damage, or action in
respect thereof, referred to above in this Section 6(d) shall be deemed to
include, for purpose of this Section 6(d), any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
Section 6(d), an Underwriter shall not be required to contribute any amount in
excess of the underwriting discounts received by it (less the aggregate amount
of any damages which such Underwriter and its controlling persons have otherwise
been required to pay in respect of the
24
<PAGE>
same or any similar claim), and no person found guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) will be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations to contribute as provided in
this Section 6(d) are several in proportion to their respective underwriting
obligations and not joint. For purposes of this Section 6(d), any person who
controls a party to this Agreement within the meaning of the Act will have the
same rights to contribution as that party, and each officer and director of the
Company who signed the Registration Statement will have the same rights to
contribution as the Company, subject in each case to the provisions hereof. Any
party entitled to contribution, promptly after receipt of notice of commencement
of any action against such party in respect of which a claim for contribution
maybe made under this Section 6(d), will notify any such party or parties from
whom contribution may be sought, but the omission to notify will not relieve the
party or parties from whom contribution may be sought from any other obligation
it or they may have under this Section 6(d). No party will be liable for
contribution with respect to any action or claim settled without its written
consent (which consent will not be unreasonably withheld).
(e) The indemnity and contribution agreements contained in this Section 6
and the representations and warranties of the Company contained in this
Agreement shall remain operative and in full force and effect regardless of (i)
any investigation made by the Underwriters or on their behalf, (ii) acceptance
of any of the Shares and payment therefor or (iii) any termination of this
Agreement.
(f) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions hereof including, without limitation, the
provisions of this Section 6, and are fully informed regarding said provisions.
They further acknowledge that the provisions of this Section 6 fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement and Prospectus as required by the Act and the Exchange
Act.
7. Termination.
The Underwriters' obligations under this Agreement may be terminated at any
time on or prior to the Closing Date (or, with respect to the Option Shares, on
or prior to the Option Closing Date), by notice to the Company from the
Representatives, without liability on the part of any of the Underwriters to the
Company (provided, however, that this Section 7 and Sections 4(i), 4(j) and 6
shall be and always remain effective), if, prior to delivery and payment for the
Shares (or the Option Shares, as the case may be), in your reasonable judgment,
(i) the Company shall have failed, refused or been unable to perform any
agreement on its part to be performed, or because of such condition the
Underwriters' obligations hereunder required to be fulfilled are not fulfilled,
including, but not limited to, any change in the business, properties, business
prospects, condition (financial or otherwise) or results of operations of the
Company and its Subsidiaries taken as a whole from that set forth in the
Registration Statement or Prospectus which, in your reasonable judgment, is
material and
25
<PAGE>
adverse; (ii) any condition specified in Section 5 of this Agreement shall not
have been satisfied; (iii) trading in any of the equity securities of the
Company shall have been suspended by the Commission, by an exchange that lists
the Shares or by the Nasdaq National Market; (iv) trading in securities
generally on the New York Stock Exchange or the Nasdaq National Market shall
have been suspended or limited or minimum or maximum prices shall have been
generally established on such exchange, or additional material governmental
restrictions, not in force on the date of this Agreement, shall have been
imposed upon trading in securities generally by such exchange or by order of the
Commission or any court of other governmental authority; (v) a general banking
moratorium shall have been declared by either federal or state authorities; or
(vi) any material adverse change in the financial or securities markets in the
United States or in political, financial or economic conditions in the United
States or any outbreak or material escalation of hostilities or declaration by
the United States of a national emergency or war or other calamity, crisis, act
of God or hostile act against the United States shall have occurred the effect
of any of which is such as to make it, in your reasonable judgment,
impracticable or inadvisable to market the Shares on the terms and in the manner
contemplated by the Prospectus.
8. Substitution of Underwriters.
If any Underwriter shall fail or refuse to purchase any of the Firm Shares
which it has agreed to purchase hereunder, and the aggregate number of Firm
Shares which such defaulting Underwriter agreed but failed or refused to
purchase is not more than one-tenth of the aggregate number of Firm Shares, the
other Underwriters shall be obligated, severally, to purchase the Firm Shares
that such defaulting Underwriter agreed but failed or refused to purchase, in
the proportions which the number of Firm Shares which they have respectively
agreed to purchase pursuant to Section 1 bears to the aggregate number of Firm
Shares which all such non-defaulting Underwriters have so agreed to purchase, or
in such other proportions as you may specify; provided, that in no event shall
the maximum number of Firm Shares which an Underwriter has been obligated to
purchase pursuant to Section 1 be increased pursuant to this Section 8 by more
than one-ninth of such number of Firm Shares without the prior written consent
of such Underwriter. If an Underwriter shall fail or refuse to purchase any
Firm Shares and the aggregate number of Firm Shares which such defaulting
Underwriter agreed but failed or refused to purchase exceeds one-tenth of the
aggregate number of the Firm Shares and arrangements satisfactory to the non-
defaulting Underwriters or the Company for the purchase of such Firm Shares are
not made within 48 hours after such default, this Agreement will terminate
without liability on the part of any non-defaulting Underwriter or the Company
for the purchase or sale of any Shares under this Agreement. In any such case
the Underwriters or the Company shall have the right to postpone the Closing
Date or Option Closing Date, but in no event for longer than seven days, in
order that the required changes, if any, in the Registration Statement and in
the Prospectus or in any other documents or arrangements may be effected. Any
action taken pursuant to this Section 8 shall not relieve any defaulting
Underwriter from liability in respect to any default of such Underwriter under
this Agreement.
26
<PAGE>
9. Miscellaneous.
All communications hereunder shall be in writing and, if sent to any of the
Underwriters, shall be mailed, first class postage prepaid, sent via reliable
overnight delivery service, sent by facsimile (and by one of the two preceding
methods), delivered by hand or telegraphed and confirmed in writing to the
Representatives in care of J.C. Bradford & Co., J.C. Bradford Financial Center,
330 Commerce Street, Nashville, Tennessee 37201, Attention: James H. Graves, or
if sent to the Company shall be sent by one of the foregoing methods to the
Company at 1828 Meca Way, Norcross, Georgia 30093, Attention: Scott D. Dorfman.
This Agreement has been and is made solely for the several Underwriters'
and the Company's benefits and of the controlling persons, directors and
officers referred to in Section 6, and their respective heirs, executors,
administrators, successors and assigns, and no other person shall acquire or
have any right under or by virtue of this Agreement. The term "successors and
assigns" as used in this Agreement shall not include a purchaser, as such
purchaser, of Shares from an Underwriter.
This Agreement shall be governed by and construed in accordance with the
laws of the State of Tennessee.
This Agreement may be signed in two or more counterparts with the same
effect as if the signatures thereto and hereto were upon the same instrument.
In case any provision in this Agreement shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
THE COMPANY AND YOU EACH HEREBY IRREVOCABLY WAIVE ANY RIGHT THEY MAY HAVE
TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED UPON OR ARISING OUT OF THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
You hereby represent and warrant to the Company that you have authority to
act hereunder on behalf of the several Underwriters, and any action hereunder
taken by you will be binding upon all the Underwriters.
27
<PAGE>
Please confirm that the foregoing correctly sets forth the agreement
between the Company and you.
Very truly yours,
INNOTRAC CORPORATION
By:
------------------------------------
Name:
Title:
Confirmed and accepted as of the
date first above written.
J.C. BRADFORD & CO.
WHEAT FIRST SECURITIES, INC.
For themselves and as Representatives
of the several Underwriters
By: J.C. Bradford & Co.
By:
-------------------------------
Name:
Title:
28
<PAGE>
SCHEDULE I
Underwriters
Number of
Name of Underwriter Firm Shares
- ------------------- -----------
J.C. Bradford & Co. ...........................
Wheat First Securities, Inc. .................
---------
Total.................................... 2,500,000
=========
<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>
ARTICLES OF AMENDMENT
TO
THE AMENDED AND RESTATED ARTICLES OF INCORPORATION
OF
INNOTRAC CORPORATION
1.
The name of the corporation is Innotrac Corporation (the "Corporation").
2.
The Amended and Restated Articles of Incorporation of the Corporation are
amended by adding the following Article X;
"ARTICLE X
SECTION 1. DESIGNATION AND NUMBER OF SHARES. The shares of such series
shall be designated as "Series A Participating Cumulative Preferred Stock" (the
"SERIES A PREFERRED STOCK"), and the number of shares constituting such series
shall be 500,000. Such number of shares of the Series A Preferred Stock may be
increased or decreased by resolution of the Board of Directors; provided,
however, that no decrease shall reduce the number of shares of Series A
Preferred Stock to a number less than the number of shares then outstanding plus
the number of shares issuable upon exercise or conversion of outstanding rights,
options or other securities issued by the Corporation.
SECTION 2. DIVIDENDS AND DISTRIBUTIONS.
(A) Subject to the prior and superior rights of the holders of any shares
of any series of Preferred Stock ranking prior and superior to the shares of
Series A Preferred Stock with respect to dividends, if any, the holders of
shares of Series A Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable on the last day of March, June, September
and December of each year (each such date being referred to herein as a
"QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of any share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1.00 and (b) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share
<PAGE>
amount (payable in kind) of all cash dividends or other distributions and 100
times the aggregate per share amount of all non-cash dividends or other
distributions (other than (i) a dividend payable in shares of Common Stock, par
value $0.10 per share, of the Corporation (the "COMMON STOCK") or (ii) a
subdivision of the outstanding shares of Common Stock (by reclassification or
otherwise)), declared on the Common Stock since the immediately preceding
Quarterly Dividend Payment Date, or, with respect to the first Quarterly
Dividend Payment Date, since the first issuance of any share or fraction of a
share of Series A Preferred Stock. If the Corporation shall at any time after
January 1, 1998 (the "RIGHTS DECLARATION DATE") declare or pay any dividend on
Common Stock payable in shares of Common Stock or effect a subdivision or
combination or consolidation of the outstanding shares of Common Stock (by
reclassification or otherwise) into a greater or lesser number of shares of
Common Stock, then in each such case the amount to which holders of shares of
Series A Preferred Stock were entitled immediately prior to such event under
clause (b) of the preceding sentence shall be adjusted by multiplying such
amount by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in SECTION 2(A) immediately after it
declares a dividend or distribution on the Common Stock (other than as described
in clauses (i) and (ii) of the first sentence of SECTION 2(A)); provided,
however, that if no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date (or, with respect to the
first Quarterly Dividend Payment Date, the period between the first issuance of
any share or fraction of a share of Series A Preferred Stock and such first
Quarterly Dividend Payment Date), a dividend of $1.00 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is on or before the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue and be cumulative from the date of issue of such shares, or
unless the date of issue is a date after the record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive a quarterly
dividend and on or before such Quarterly Dividend Payment Date, in which case
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued
2
<PAGE>
and payable on such shares shall be allocated pro rata on a share-by-share basis
among all such shares at the time outstanding. The Board of Directors may fix a
record date for the determination of holders of shares of Series A Preferred
Stock entitled to receive payment of a dividend or distribution declared
thereon, which record date shall not be more than 60 days prior to the date
fixed for the payment thereof.
SECTION 3. VOTING RIGHTS. In addition to any other voting rights required
by law, the holders of shares of Series A Preferred Stock shall have the
following voting rights:
(A) Subject to the provision for adjustment hereinafter set forth, each
share of Series A Preferred Stock shall entitle the holder thereof to 100 votes
on all matters submitted to a vote of shareholders of the Corporation. If the
Corporation shall at any time after the Rights Declaration Date declare or pay
any dividend on Common Stock payable in shares of Common Stock or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise) into a greater or lesser number of
shares of Common Stock, then in each such case the number of votes per share to
which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of shares of
Series A Preferred Stock and the holders of shares of Common Stock shall vote
together as a single class on all matters submitted to a vote of shareholders of
the Corporation.
(C) (i) If at any time dividends on any Series A Preferred Stock shall be
in arrears in an amount equal to six quarterly dividends thereon (whether or not
consecutive), the occurrence of such contingency shall mark the beginning of a
period (herein called a "DEFAULT PERIOD") which shall extend until such time
when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series A
Preferred Stock then outstanding shall have been declared and paid or set apart
for payment. During each default period, all holders of Series A Preferred Stock
and any other series of Preferred Stock then entitled as a class to elect
directors, voting together as a single class, irrespective of series, shall have
the right to elect one Director.
(ii) During any default period, such voting right of the holders of Series
A Preferred Stock may be exercised initially at a special meeting called
pursuant to SECTION 3(C)(III) or at any annual meeting of shareholders, and
thereafter
3
<PAGE>
at annual meetings of shareholders; provided, however, that neither such voting
right nor the right of the holders of any other series of Preferred Stock, if
any, to increase, in certain cases, the authorized number of Directors shall be
exercised unless the holders of 10% in number of shares of Preferred Stock
outstanding shall be present in person or by proxy. The absence of a quorum of
holders of Common Stock shall not affect the exercise by holders of Preferred
Stock of such voting right. At any meeting at which holders of Preferred Stock
shall exercise such voting right initially during an existing default period,
they shall have the right, voting as a class, to elect Directors to fill such
vacancy, if any, in the Board of Directors as may then exist up to one Director
or, if such right is exercised at an annual meeting, to elect one Director. If
the number which may be so elected at any special meeting does not amount to the
required number, the holders of the Preferred Stock shall have the right to make
such increase in the number of Directors as shall be necessary to permit the
election by them of the required number. After the holders of the Preferred
Stock shall have exercised their right to elect Directors in any default period
and during the continuance of such period, the number of Directors shall not be
increased or decreased except by vote of the holders of Preferred Stock as
herein provided or pursuant to the rights of any equity securities ranking
senior to or pari passu with the Series A Preferred Stock.
---- -----
(iii) Notwithstanding anything to the contrary contained in the
Corporation's Articles of Incorporation or Bylaws, unless the holders of
Preferred Stock shall, during an existing default period, have previously
exercised their right to elect Directors, the Board of Directors may order, or
any shareholder(s) owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding, irrespective of
series, may request, the calling of a special meeting of holders of Preferred
Stock, which meeting shall thereupon be called by the President, a Vice
President or the Secretary of the Corporation. Notice of such meeting and of any
annual meeting at which holders of Preferred Stock are entitled to vote pursuant
to this SECTION 3(C)(III) shall be given to each holder of record of Preferred
Stock by mailing a copy of such notice to him at his last address as the same
appears on the books of the Corporation. Such meeting shall be called for a time
not earlier than 20 days and not later than 60 days after such order or request
or in default of the calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any shareholder(s)
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series. Notwithstanding
the provisions of this SECTION 3(C)(III), no such special meeting shall be
called during the period within 60 days immediately preceding the date fixed for
the next annual meeting of shareholders.
(iv) In any default period, the holders of Common Stock, and other classes
of stock of the Corporation if applicable, shall continue to be entitled to
elect the whole number of Directors until the holders of Preferred Stock shall
have
4
<PAGE>
exercised their right to elect one Director voting as a class, after the
exercise of which right (x) the Directors so elected by the holders of Preferred
Stock shall continue in office until their successors shall have been elected by
such holders or until the expiration of the default period, and (y) any vacancy
in the Board of Directors may (except as provided in SECTION 3(C)(II) be filled
by vote of a majority of the remaining Directors theretofore elected by the
holders of the class of stock which elected the Director whose office shall have
become vacant. References in this SECTION 3(C) to Directors elected by the
holders of a particular class of stock shall include Directors elected by such
Directors to fill vacancies as provided in clause (y) of the foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the right
of the holders of Preferred Stock as a class to elect Directors shall cease, (y)
the term of any Directors elected by the holders of Preferred Stock as a class
shall terminate, and (z) the number of Directors shall be such number as may be
provided for in the Articles of Incorporation or Bylaws irrespective of any
increase made pursuant to the provisions of SECTION 3(C)(II) (such number being
subject, however, to change thereafter in any manner provided by law or in the
Articles of Incorporation or Bylaws). Any vacancies in the Board of Directors
effected by the provisions of clauses (y) and (z) in the preceding sentence may
be filled by a majority of the remaining Directors.
(D) Except as otherwise provided herein, holders of Series A Preferred
Stock shall have no special voting rights, and their consent shall not be
required (except to the extent they are entitled to vote with holders of Common
Stock as set forth herein) for taking any corporate action.
SECTION 4. CERTAIN RESTRICTIONS.
(A) Whenever quarterly dividends or other dividends or distributions
payable on the Series A Preferred Stock as provided in SECTION 2 are in arrears,
thereafter and until all accrued and unpaid dividends and distributions, whether
or not declared, on outstanding shares of Series A Preferred Stock shall have
been paid in full, the Corporation shall not:
(i) declare or pay dividends on, or make any other distributions on,
any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on, or make any other distributions on,
any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
5
<PAGE>
other parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem, purchase or otherwise acquire for value any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock; provided,
however, that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of stock of
the Corporation ranking junior (as to dividends and upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem, purchase or otherwise acquire for value any shares of
Series A Preferred Stock, or any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of Series A Preferred Stock and all such other
parity stock upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(B) The Corporation shall not permit any subsidiary of the Corporation
to purchase or otherwise acquire for value any shares of stock of the
Corporation unless the Corporation could, under SECTION 4(A), purchase or
otherwise acquire such shares at such time and in such manner.
SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock without designation as to series and may be reissued
as part of a new series of Preferred Stock to be created by resolution or
resolutions of the Board of Directors as permitted by the Articles of
Incorporation or as otherwise permitted under Georgia law.
SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation,
dissolution or winding up of the Corporation, no distribution shall be made (1)
to the holders of shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock unless,
prior thereto, the holders of shares of Series A Preferred Stock shall have
received $1.00 per share, plus an amount equal to accrued and unpaid dividends
and distributions thereon, whether or not declared, to the date of such payment;
provided, however, that the holders of shares of Series A Preferred Stock shall
be entitled to
6
<PAGE>
receive an aggregate amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount to be distributed
per share to holders of Common Stock, or (2) to the holders of stock ranking on
a parity (either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except distributions made ratably on the
Series A Preferred Stock and all such other parity stock in proportion to the
total amounts to which the holders of all such shares are entitled upon such
liquidation, dissolution or winding up. If the Corporation shall at any time
after the Rights Declaration Date pay any dividend on Common Stock payable in
shares of Common Stock or effect a subdivision or combination or consolidation
of the outstanding shares of Common Stock (by reclassification or otherwise)
into a greater or lesser number of shares of Common Stock, then in each such
case the aggregate amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under the proviso in clause (1) of
the preceding sentence shall be adjusted by multiplying such amount by a
fraction the numerator of which is the number of shares of Common Stock
outstanding immediately after such event and the denominator of which is the
number of shares of Common Stock that were outstanding immediately prior to such
event.
SECTION 7. CONSOLIDATION OR MERGER. If the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged for or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash or any other property, as the case may be, into which or for
which each share of Common Stock is exchanged or changed. If the Corporation
shall at any time after the Rights Declaration Date pay any dividend on Common
Stock payable in shares of Common Stock or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
SECTION 8. NO REDEMPTION. The Series A Preferred Stock shall not be
redeemable.
SECTION 9. RANK. The Series A Preferred Stock shall rank junior (as
to dividends and upon liquidation, dissolution and winding up) to all other
series of the
7
<PAGE>
Corporation's preferred stock, except any series that specifically provides that
such series shall rank junior to the Series A Preferred Stock.
SECTION 10. FRACTIONAL SHARES. Series A Preferred Stock may be issued in
fractions of a share which shall entitle the holder, in proportion to such
holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
SECTION 11. AMENDMENT. The Articles of Incorporation of the Corporation
shall not be further amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred Stock
so as to affect them adversely without the affirmative vote of the holders of a
majority or more of the outstanding shares of Series A Preferred Stock, voting
separately as a class."
3.
The designation of rights and preferences pertaining to Series A
Participating Cumulative Preferred Stock was duly adopted by the sole director
of the Corporation on December 11, 1997, pursuant to authority conferred upon
the Board of Directors by the Amended and Restated Articles of Incorporation of
the Corporation, and by Section 14-2-602 of the Georgia Business Corporation
Code without need for shareholder approval.
IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment
to be signed by its duly authorized officer, this 31st day of December, 1997.
INNOTRAC CORPORATION
By: /s/ S. Dorfman
------------------------------------
Title: President
---------------------------------
8
<PAGE>
EXHIBIT 4.1
NUMBER SHARES
--------- ----------
INCORPORATED UNDER THE LAWS OF THE CUSIP 45767M 10 9
STATE OF GEORGIA
[INNOTRAC LOGO]
INNOTRAC CORPORATION
This certifies that
----------------------------------------------------
is the owner of
--------------------------------------------------------------
FULLY PAID AND NON-ASSESABLE SHARES OF COMMON STOCK, PAR VALUE OF $.10 EACH OF
Innotrac Corporation transferable only on the books of the Corporation by the
holder hereof in person or by duly authorized attorney upon surrender of this
Certificate properly endorsed. This Certificate is not valid until countersigned
and registered by the Transfer Agent and registered by the Registrar.
Countersigned and registered:
By: RELIANCE TRUST COMPANY
Transfer Agent and Registrar
Witness the facsimile seal of the Corporation and the signatures of its
duly authorized officers.
Dated:
[FORM OF INNOTRAC CORPORATE SEAL]
Authorized Signature
/s/ David Ellin /s/ Scott D. Dorfman
- -------------------------- ------------------------------
SECRETARY PRESIDENT AND
CHIEF EXECUTIVE OFFICER
<PAGE>
INNOTRAC CORPORATION
The following abbreviations, when used in the inscription on the face of this
certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<CAPTION>
<S> <C> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian
TEN ENT - as tenants by the entireties --------- ----------
JT TEN - as joint tenants with right of (Cust) (Minor)
survivorship and not as tenants under Uniform Gifts to Minors
in common Act
--------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
For Value received, _____________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ----------------------------------------------------
- -----------------------------------------------------
________________________________________________________________________________
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
Shares of Capital Stock
- -------------------------------------
represented by the within Certificate, and do hereby irrevocably constitute and
appoint
Attorney to transfer the said
- --------------------------------------------------
stock on the books of the within-named Corporation with full power of
substitution in the premises.
Dated,
--------------------
------------------------------------------------------
NOTICE: THIS SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND
WITH THE NAME AS WRITTEN UPON THE FACE OF THE
CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE WHATEVER.
SIGNATURE(S) GUARANTEED:
------------------------------------------------------
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE
GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND
LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN
AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM),
PURSUANT TO S.E.C. RULE 17Ad-15.
This certificate also evidences certain Rights as set forth in a Rights
Agreement between Innotrac Corporation and Reliance Trust Company, dated as of
December 31, 1997 (the "Rights Agreement"), the terms of which are hereby
incorporated herein by reference and a copy of which is on file at the principal
office of the Company. The Company will mail to the holder of this certificate a
copy of the Rights Agreement without charge promptly after receipt of a written
request therefor. Under certain circumstances, as set forth in the Rights
Agreement, such Rights may be evidenced by separate certificates and no longer
be evidenced by this certificate, may be redeemed or exchanged or may expire. As
set forth in the Rights Agreement, Rights issued to, or held by, any Person who
is, was or becomes an Acquiring Person or an Affiliate or Associate thereof (as
such terms are defined in the Rights Agreement), whether currently held by or on
behalf of such Person or by any subsequent holder, may be null and void.
<PAGE>
EXHIBIT 4.2
RIGHTS AGREEMENT
dated as of
December 31, 1997
between
INNOTRAC CORPORATION
and
RELIANCE TRUST COMPANY
as Rights Agent
<PAGE>
TABLE OF CONTENTS/1/
<TABLE>
<CAPTION>
Page
----
<S> <C>
Section 1. Definitions.....................................................................1
Section 2. Appointment of Rights Agent.....................................................5
Section 3. Issue of Rights Certificates....................................................5
Section 4. Form of Rights Certificate......................................................6
Section 5. Countersignature and Registration...............................................7
Section 6. Transfer and Exchange of Rights Certificates; Mutilated, Destroyed,
Lost or Stolen Rights Certificates...........................................8
Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...................8
Section 8. Cancellation and Destruction of Right Certificates.............................10
Section 9. Reservation and Availability of Capital Stock..................................10
Section 10. Preferred Stock Record Date...................................................11
Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of
Rights.....................................................................12
Section 12. Certificate of Adjusted Purchase Price or Number of Shares....................20
Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power..........21
Section 14. Fractional Rights and Fractional Shares.......................................23
Section 15. Rights of Action..............................................................24
Section 16. Agreement of Right Holders....................................................25
Section 17. Right Certificate Holder Not Deemed a Shareholder.............................25
Section 18. Concerning the Rights Agent...................................................26
Section 19. Merger or Consolidation or Change of Name of Rights Agent.....................26
</TABLE>
- ----------------
/1/ The Table of Contents is not a part of this Agreement.
i
<PAGE>
<TABLE>
<S> <C>
Section 20. Duties of Rights Agent........................................................27
Section 21. Change of Rights Agent........................................................29
Section 22. Issuance of New Right Certificates............................................29
Section 23. Redemption and Termination....................................................30
Section 24. Exchange......................................................................31
Section 25. Notice of Proposed Actions....................................................32
Section 26. Notices.......................................................................32
Section 27. Supplements and Amendments....................................................33
Section 28. Successors....................................................................33
Section 29. Determinations and Actions by the Board of Directors, etc.....................34
Section 30. Benefits of this Agreement....................................................34
Section 31. Severability..................................................................34
Section 32. Governing Law.................................................................35
Section 33. Counterparts..................................................................35
Section 34. Descriptive Headings..........................................................35
Exhibit A - Form of Board Resolution Establishing and Designating Preferred Stock
Exhibit B - Form of Rights Certificate
Exhibit C - Shareholder Rights Plan Summary of Terms
</TABLE>
ii
<PAGE>
RIGHTS AGREEMENT
THIS AGREEMENT is made and entered into as of December 31, 1997, by
and between INNOTRAC CORPORATION, a Georgia corporation (the "Company"), and
RELIANCE TRUST COMPANY as Rights Agent (the "Rights Agent").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Board of Directors of the Company has approved the
execution of this Agreement and has authorized and declared a dividend
distribution of one Right (as defined below) for each outstanding share of
Common Stock, par value $0.10 per share, of the Company (the "Common Stock") at
the close of business on the Effective Date and has authorized the issuance of
one Right for each share of Common Stock, each Right representing the right to
purchase, one one-hundredth of a share of Series A Participating Cumulative
Preferred Stock of the Company having the rights, powers and preferences set
forth in the Board Resolution Establishing and Designating Series A Preferred
Stock attached hereto as Exhibit A, upon the terms and subject to the conditions
contained herein (individually, a "Right," and collectively, the "Rights");
NOW, THEREFORE, for and in consideration of the premises and the
mutual agreements contained herein, the parties hereto agree as follows:
Section 1. Definitions. The following terms, as used herein, have
-----------
the following meanings:
(a) "Acquiring Person" means any Person who or which, together with
----------------
all Affiliates and Associates of such Person, shall be the Beneficial Owner of
15% or more of the shares of Common Stock then outstanding; provided, however,
-------- -------
that, an "Acquiring Person" shall not include the following Persons: (i) any
Excluded Person, (ii) any Person who is the Beneficial Owner of 15% or more of
the shares of Common Stock outstanding as of the Effective Date, or (iii) any
Person, who alone or together with its Affiliates or Associates becomes the
Beneficial Owner of 15% or more of the shares of Common Stock then outstanding
as a result of an Approved Acquisition; provided, further, that in the event
-------- -------
that a Person does not become an Acquiring Person by reason of clause (iii)
above, such Person nonetheless shall become an Acquiring Person if such Person
thereafter becomes the Beneficial Owner of an additional 2% or more of the
Common Stock then outstanding, unless the acquisition of such Common Stock is an
Approved Acquisition. Notwithstanding the foregoing, if the Board of Directors
of the Company determines in good faith (but only if at the time of such
determination by the Board of Directors there are then in office not less than
two Continuing Directors and such action is approved by a majority of the
Continuing Directors then in office) that a Person who would otherwise be an
"Acquiring Person" as defined pursuant to the foregoing provisions of this
Section 1(a) has become such inadvertently, and such Person divests as promptly
as practicable a sufficient number of shares of Common Stock so that such Person
would no longer be an
<PAGE>
"Acquiring Person" as defined pursuant to the foregoing provisions of this
Section 1(a), then such Person shall not be deemed an Acquiring Person for any
purposes of this Agreement.
(b) "Affiliate" and "Associate" have the respective meanings ascribed
--------- ---------
to such terms in Rule 12b-2 under the Exchange Act as in effect on the date
hereof.
(c) "Approved Acquisition" means any acquisition of Common Stock by an
--------------------
Acquiring Person that is approved in advance by a majority of the Continuing
Directors.
(d) A Person shall be deemed the "Beneficial Owner" of, and shall be
----------------
deemed to "beneficially own," any securities:
----------------
(i) which such Person or any of its Affiliates or Associates
beneficially owns (as determined pursuant to Rule 13d-3 under the
Exchange Act as in effect on the date hereof), directly or indirectly;
(ii) which such Person or any of its Affiliates or Associates,
directly or indirectly, has
(A) the right to acquire (whether such right is
exercisable immediately or only upon the occurrence of certain events
or the passage of time or both) pursuant to any agreement, arrangement
or understanding (whether or not in writing) or upon the exercise of
conversion rights, exchange rights, rights (other than pursuant to the
Rights), warrants, options or otherwise; provided, however, that a
-------- -------
Person shall not be deemed the "Beneficial Owner" of, or to
"beneficially own," any securities tendered pursuant to a tender or
exchange offer made by or on behalf of such Person or any of its
Affiliates or Associates until such tendered securities are accepted
for purchase or exchange; or
(B) the right to vote or dispose of (whether such right is
exercisable immediately or only upon the occurrence of certain events
or the passage of time or both) pursuant to any agreement, arrangement
or understanding (whether or not in writing) or otherwise; provided,
--------
however, that a Person shall not be deemed the "Beneficial Owner" of,
-------
or to "beneficially own," any security under this clause (B) as a
result of an agreement, arrangement or understanding to vote such
security if such agreement, arrangement or understanding (1) arises
solely from a revocable proxy or consent given to such Person in
response to a public proxy or consent solicitation made pursuant to,
and in accordance with, the applicable rules and regulations
promulgated under the Exchange Act, and (2) is not also then
reportable by such Person on Schedule 13D under the Exchange Act (or
any comparable or successor report); or
(iii) which are beneficially owned, directly or indirectly, by
any other Person (or any Affiliate or Associate thereof) with which such
Person (or any of its Affiliates or Associates) has any agreement,
arrangement or understanding (whether or not in writing)
2
<PAGE>
for the purpose of acquiring, holding, voting (except pursuant to a
revocable proxy as described in Subsection (ii)(B) above) or disposing of
any such securities; provided, however, that nothing in this Section 1(e)
-------- -------
shall cause any Person engaged in business as an underwriter of securities
who acquires any securities of the Company through such Person's
participation in good faith in a firm commitment underwriting to be deemed
the "Beneficial Owner" of, or to "beneficially own," such securities until
the expiration of 40 days after the date of such acquisition.
(e) "Business Day" means any day other than a Saturday, Sunday or a
------------
day on which banking institutions in the State of Georgia are authorized or
obligated by law or executive order to close.
(f) "Close of Business" on any given date means 5:00 P.M., Atlanta,
-----------------
Georgia time, on such date; provided, however, that if such date is not a
-------- -------
Business Day, then it shall mean 5:00 P.M., Atlanta, Georgia time, on the next
succeeding Business Day.
(g) "Common Stock" means the Common Stock, par value $0.10 per share,
------------
of the Company, except that, when used with respect to any Person other than the
Company, "Common Stock" means the capital stock (or other equity interests) of
such Person with the greatest voting power, or the equity securities or other
equity interests having the power to control or direct the management of such
Person.
(h) "Continuing Director" means any member of the Board of Directors
-------------------
of the Company, while such Person is a member of the Board, who is not an
Acquiring Person or an Affiliate or Associate of an Acquiring Person or a
representative or nominee of an Acquiring Person or of any such Affiliate or
Associate, or otherwise affiliated with an Acquiring Person or of any such
Affiliate or Associate, and who either (i) was a member of the Board immediately
prior to the Effective Date, or (ii) subsequently becomes a member of the Board,
if such Person's nomination for election or election to the Board is recommended
or approved by a majority of the Continuing Directors serving at the time of
such nomination or election (which shall include without limitation the nominees
included in any proxy statement approved by the Continuing Directors).
(i) "Distribution Date" means the earlier of (i) the Close of Business
-----------------
on the tenth day (or such later day as may be designated by action of a majority
of the Continuing Directors) after the Share Acquisition Date, and (ii) the
Close of Business on the tenth Business Day (or such later day as may be
designated by action of a majority of the Continuing Directors) after the date
of the commencement by any Person (other than an Excluded Person) of, or of the
first public announcement of the intention by any Person (other than an Excluded
Person) to commence, a tender or exchange offer if, upon consummation thereof,
such Person, together with all Affiliates and Associates of such Person, would
be the Beneficial Owner of 15% or more of the shares of Common Stock then
outstanding.
(j) "Effective Date" means January 1, 1998.
--------------
3
<PAGE>
(k) "Employee Benefit Plan" means any employee benefit plan of the
---------------------
Company or any of its Subsidiaries or any Person organized, appointed or
established by the Company or any of its Subsidiaries for or pursuant to the
terms of any such plan.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
------------
amended.
(m) "Excluded Person" means the Company, any of its Subsidiaries or
--------
any Employee Benefit Plan.
(n) "Expiration Date" means the earlier of (i) the Final Expiration
---------------
Date, and (ii) the time at which all Rights are redeemed as provided in Section
23 or exchanged as provided in Section 24.
(o) "Final Expiration Date" means the Close of Business on
---------------------
January 1, 2008.
(p) "Flip-in Event" means any event described in Section 11(a)(ii)(A),
-------------
(B) or (C), but excluding any event described in Section 11(a)(ii)(D).
(q) "Flip-over Event" means any event described in Section 13(a)(x),
---------
(y), or (z).
(r) "Person" means an individual, corporation, partnership, limited
------
liability company, association, trust or any other entity or organization.
(s) "Preferred Stock" means the Series A Participating Cumulative
---------------
Preferred Stock, par value $0.10 per share, of the Company having the terms set
forth in the form of certificate of designation attached hereto as Exhibit A.
(t) "Purchase Price" means the price (subject to adjustment as
--------------
provided herein) at which a holder of a Right may purchase one one-hundredth of
a share of Preferred Stock (subject to adjustment as provided herein) upon
exercise of a Right, which price shall initially be $60.00.
(u) "Qualifying Tender Offer" means a tender or exchange offer for all
-----------------------
outstanding shares of Common Stock of the Company approved by a majority of
Continuing Directors then in office, after taking into account the potential
long-term value of the Company and all other factors that they consider
relevant.
(v) "Securities Act" means the Securities Act of 1933, as amended.
--------------
(w) "Share Acquisition Date" means the date of the first public
----------------------
announcement (including the filing of a report on Schedule 13D under the
Exchange Act (or any comparable or successor report)) by the Company or an
Acquiring Person indicating that an Acquiring Person has become such.
4
<PAGE>
(x) "Subsidiary" means, with respect to any Person, any other Person
----------
of which securities or other ownership interests having ordinary voting power,
in the absence of contingencies, to elect a majority of the board of directors
or other Persons performing similar functions are at the time directly or
indirectly owned or controlled by such first Person.
(y) "Trading Day" means a day on which the principal national
-----------
securities exchange or inter-dealer quotation system on which the shares of
Common Stock are listed, admitted to trading or quoted is open for the
transaction of business or, if the shares of Common Stock are not listed,
admitted to trading or quoted on any national securities exchange or inter-
dealer quotation system, a Business Day.
(z) "Triggering Event" means any Flip-in Event or any Flip-over Event.
----------------
Section 2. Appointment of Rights Agent. The Company hereby
---------------------------
appoints the Rights Agent to act as agent for the Company and the holders of the
Rights (who, in accordance with Section 3, shall prior to the Distribution Date
also be the holders of the Common Stock) in accordance with the terms and
conditions hereof, and the Rights Agent hereby accepts such appointment. The
Company may from time to time appoint such co-Rights Agents as it may deem
necessary or desirable. If the Company appoints one or more co-Rights Agents,
then the respective duties of the Rights Agent and any co-Rights Agents shall be
as the Company shall determine.
Section 3. Issue of Rights Certificates. (a) Prior to the
----------------------------
Distribution Date, (i) the Rights will be evidenced (subject to Section 3(b)) by
the certificates for the Common Stock and not by separate Rights Certificates
(as defined below), and the registered holders of the Common Stock shall be
deemed to be the registered holders of the associated Rights, and (ii) the
Rights will be transferable only in connection with the transfer of the
underlying shares of Common Stock (including a transfer to the Company). As
soon as practicable after the Company has notified the Rights Agent of the
occurrence of a Distribution Date, the Rights Agent will, subject to Section
7(d), send, by first-class, insured, postage prepaid mail, to each record holder
of the Common Stock as of the Close of Business on the Distribution Date, at the
address of such holder shown on the records of the Company, one or more Rights
Certificates, in substantially the form of Exhibit B attached hereto (the
"Rights Certificates"), evidencing one Right (subject to adjustment as provided
herein) for each share of Common Stock so held. If an adjustment in the number
of Rights per share of Common Stock has been made pursuant to Section 11(p),
then the Company shall, at the time of distribution of the Rights Certificates
to record holders of Common Stock as of the Close of Business on the
Distribution Date, make the necessary and appropriate rounding adjustments (in
accordance with Section 14(a)) so that Rights Certificates representing only
whole numbers of Rights are distributed to such holders and cash is paid to such
holders in lieu of any fractional Rights. From and after the Distribution Date,
the Rights will be evidenced solely by such Right Certificates.
(b) As soon as practicable after the Effective Date, the Company will
send a summary of the Rights substantially in the form of Exhibit C attached
hereto, by first-class, postage prepaid mail, to each record holder of the
Common Stock as of the Close of Business on the
5
<PAGE>
Effective Date at the address of such holder shown on the records of the
Company. Until the Distribution Date, the Rights shall be evidenced by such
certificates evidencing the Common Stock, and the registered holders of such
Common Stock shall also be the registered holders of the associated Rights.
(c) Rights shall be issued in respect of all shares of Common Stock
that become outstanding (on original issuance or out of treasury) after the
Effective Date but prior to the earlier of the Distribution Date or the
Expiration Date. Certificates for the Common Stock that become outstanding or
shall be transferred or exchanged after the Effective Date but prior to the
earlier of the Distribution Date or the Expiration Date shall also be deemed to
be certificates for Rights and shall have impressed on, printed on, written on
or otherwise affixed to them the following legend:
This certificate also evidences certain Rights as set forth
in a Rights Agreement between Innotrac Corporation and Reliance
Trust Company, dated as of December 31, 1997 (the "Rights
Agreement"), the terms of which are hereby incorporated herein by
reference and a copy of which is on file at the principal office
of the Company. The Company will mail to the holder of this
certificate a copy of the Rights Agreement without charge promptly
after receipt of a written request therefor. Under certain
circumstances, as set forth in the Rights Agreement, such Rights
may be evidenced by separate certificates and no longer be
evidenced by this certificate, may be redeemed or exchanged or may
expire. As set forth in the Rights Agreement, Rights issued to, or
held by, any Person who is, was or becomes an Acquiring Person or
an Affiliate or Associate thereof (as such terms are defined in
the Rights Agreement), whether currently held by or on behalf of
such Person or by any subsequent holder, may be null and void.
(d) With respect to the certificates containing the foregoing legend,
until the earlier of the Distribution Date or the Expiration Date, the Rights
associated with the Common Stock represented by such certificates shall be
evidenced by such certificates alone and registered holders of Common Stock
shall also be the registered holders of the associated Rights, and the transfer
of any of such certificates shall also constitute the transfer of the Rights
associated with the Common Stock represented thereby. If the Company purchases
or acquires any shares of Common Stock after the Effective Date but prior to the
Distribution Date, any Rights associated with such Common Stock shall be deemed
canceled and retired so that the Company shall not be entitled to exercise any
Rights associated with the Common Stock that are no longer outstanding.
Section 4. Form of Rights Certificate. (a) The Rights Certificates
--------------------------
(and the forms of assignment, election to purchase and certificates to be
printed on the reverse thereof) shall be substantially in the form of Exhibit B
attached hereto and may have such marks of identification or designation and
such legends, summaries or endorsements printed thereon as the Company
6
<PAGE>
may deem appropriate and as are not inconsistent with the provisions of this
Agreement, or as may be required to comply with any applicable law, rule or
regulation or with any rule or regulation of any stock exchange or inter-dealer
quotation system of a registered national securities association on which the
Rights may from time to time be listed, traded or quoted or to conform to usage.
Subject to Sections 11 and 22, the Rights Certificates, whenever distributed,
shall be dated as of the Distribution Date, shall entitle the holders thereof to
purchase such number of one one-hundredths of a share of Preferred Stock as
shall be set forth therein at the price set forth therein, but the number of
such one one-hundredths and the Purchase Price thereof shall be subject to
adjustment as provided herein.
(b) Any Rights Certificate representing Rights beneficially owned by
any Person referred to in Section 7(d)(i), (ii) or (iii) shall (to the extent
feasible) contain the following legend:
The Rights represented by this Rights Certificate are or were
beneficially owned by a Person who was or became an Acquiring Person
or an Affiliate or Associate of an Acquiring Person (as such terms are
defined in the Rights Agreement). This Rights Certificate and the
Rights represented hereby may be or may become null and void in the
circumstances specified in Section 7(d) of the Rights Agreement.
Section 5. Countersignature and Registration. (a) The Rights
---------------------------------
Certificates shall be executed on behalf of the Company by its Chairman of the
Board, its President or any Vice President, either manually or by facsimile
signature, and shall have affixed thereto the Company's seal or a facsimile
thereof which shall be attested by the Secretary or an Assistant Secretary of
the Company, either manually or by facsimile signature. The Rights Certificates
shall be manually countersigned by the Rights Agent and shall not be valid for
any purpose unless so countersigned. In case any officer of the Company whose
manual or facsimile signature is affixed to the Rights Certificates shall cease
to be such officer of the Company before countersignature by the Rights Agent
and issuance and delivery by the Company, such Rights Certificates may,
nevertheless, be countersigned by the Rights Agent and issued and delivered with
the same force and effect as though the individual who signed such Rights
Certificates had not ceased to be such officer of the Company. Any Rights
Certificate may be signed on behalf of the Company by any Person who, at the
actual date of the execution of such Rights Certificate, shall be a proper
officer of the Company to sign such Rights Certificate, although at the date of
the execution of this Agreement any such Person was not such an officer.
(b) Following the Distribution Date, the Rights Agent will keep or
cause to be kept, at its principal office or offices designated as the
appropriate place for surrender of Rights Certificates upon exercise, transfer
or exchange, books for registration and transfer of the Rights Certificates.
Such books shall show with respect to each Rights Certificate the name and
address of the registered holder thereof, the number of Rights indicated on the
certificate, and the certificate number.
7
<PAGE>
Section 6. Transfer and Exchange of Rights Certificates; Mutilated,
--------------------------------------------------------
Destroyed, Lost or Stolen Rights Certificates. (a) Subject to Section 4(b),
- ---------------------------------------------
7(d), and 14, at any time after the Close of Business on the Distribution Date
and prior to the Close of Business on the Expiration Date, any Rights
Certificate(s) may, upon the terms and subject to the conditions set forth in
this Section 6(a), be transferred or exchanged for another Rights Certificate(s)
evidencing a like number of Rights as the Rights Certificate(s) surrendered.
Any registered holder desiring to transfer or exchange any Rights Certificate(s)
shall make such request in writing delivered to the Rights Agent, and shall
surrender such Rights Certificate(s) (with, in the case of a transfer, the form
of assignment and certificate on the reverse side thereof duly executed) to the
Rights Agent at the principal office or offices of the Rights Agent designated
for such purpose. Neither the Rights Agent nor the Company shall be obligated
to take any action whatsoever with respect to the transfer of any such
surrendered Rights Certificate(s) until the registered holder of the Rights has
complied with the requirements of Section 7(e). Upon satisfaction of the
foregoing requirements, the Rights Agent shall, subject to Sections 4(b), 7(d),
14 and 24, countersign and deliver to the Person entitled thereto a Rights
Certificate(s) as so requested. The Company may require payment of a sum
sufficient to cover any transfer tax or other governmental charge that may be
imposed in connection with any transfer or exchange of any Rights
Certificate(s).
(b) Upon receipt by the Company and the Rights Agent of evidence
reasonably satisfactory to them of the loss, theft, destruction or mutilation of
a Rights Certificate, and, in case of loss, theft or destruction, of indemnity
or security reasonably satisfactory to them, and, at the Company's request,
reimbursement to the Company and the Rights Agent of all reasonable expenses
incidental thereto, and upon surrender to the Rights Agent and cancellation of
the Rights Certificate if mutilated, the Company will issue and deliver a new
Rights Certificate of like tenor to the Rights Agent for countersignature and
delivery to the registered holder in lieu of the Rights Certificate so lost,
stolen, destroyed or mutilated.
Section 7. Exercise of Rights; Expiration Date of Rights;
----------------------------------------------
Restrictions on Transfer. (a) Subject to Section 7(d), the registered holder
- ------------------------
of any Rights Certificate may exercise the Rights evidenced thereby (except as
otherwise provided herein, including, without limitation, Sections 7(e), 9(c),
11(a), 13, 23, and 24), in whole or in part, at any time after the Distribution
Date and prior to the Expiration Date upon surrender of the Rights Certificate,
with the form of election to purchase and the certificate on the reverse side
thereof duly executed (with signatures guaranteed), to the Rights Agent at the
principal office or offices of the Rights Agent designated for such purpose,
together with payment of the aggregate Purchase Price (in lawful money of the
United States of America by certified check or bank draft payable to the order
of the Company) with respect to the Rights then to be exercised and an amount
equal to any applicable transfer tax or other governmental charge.
(b) Upon satisfaction of the requirements of Section 7(a) and subject
to Section 20(k), the Rights Agent shall thereupon promptly (i)(A) requisition
from any transfer agent of the Preferred Stock (or make available, if the Rights
Agent is the transfer agent therefor) certificates for the total number of one
one-hundredths of a share of Preferred Stock to be purchased (and the Company
hereby irrevocably authorizes its transfer agent to comply with all
8
<PAGE>
such requests), or (B) if the Company shall have elected to deposit the shares
of Preferred Stock issuable upon exercise of the Rights with a depository agent,
requisition from the depository agent depository receipts representing such
number of one one-hundredths of a share of Preferred Stock as are to be
purchased (in which case certificates for the shares of Preferred Stock
represented by such receipts shall be deposited by the transfer agent with the
depository agent), and the Company will direct the depository agent to comply
with such request, (ii) requisition from the Company the amount of cash, if any,
to be paid in lieu of issuance of fractional shares in accordance with Section
14, and (iii) after receipt of such certificates or depository receipts and
cash, if any, cause the same to be delivered to or upon the order of the
registered holder of such Rights Certificate (with such certificates or receipts
registered in such name or names as may be designated by such holder). If the
Company is obligated to deliver Common Stock, other securities or assets
pursuant to this Agreement, the Company will make all arrangements necessary so
that such other securities and assets are available for distribution by the
Rights Agent, if and when appropriate.
(c) In case the registered holder of any Rights Certificate shall
exercise less than all the Rights evidenced thereby, a new Rights Certificate
evidencing the number of Rights remaining unexercised shall be issued by the
Rights Agent and delivered to, or upon the order of, the registered holder of
such Rights Certificate, registered in such name or names as may be designated
by such holder, subject to the provisions of Section 14.
(d) Notwithstanding anything in this Agreement to the contrary, from
and after the first occurrence of a Flip-in Event, any Rights beneficially owed
by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person,
(ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate)
who becomes a transferee after the Acquiring Person becomes such, or (iii) a
transferee of an Acquiring Person (or of any such Associate or Affiliate) who
becomes a transferee prior to or concurrently with the Acquiring Person becoming
such and receives such Rights pursuant to either (A) a transfer (whether or not
for consideration) from the Acquiring Person (or any such Associate or
Affiliate) to holders of equity interests in such Acquiring Person (or in any
such Associate or Affiliate) or to any Person with whom the Acquiring Person (or
any such Associate or Affiliate) has any continuing agreement, arrangement or
understanding regarding the transferred Rights, or (B) a transfer which the
Continuing Directors have determined is part of a plan, arrangement or
understanding which has as a primary purpose or effect the avoidance of this
Section 7(d) shall become null and void without any further action, and no
holder of such Rights shall have any rights whatsoever with respect to such
Rights, whether under any provision of this Agreement or otherwise; provided,
--------
however, that the foregoing provisions of this Section 7(d) shall not apply to
- -------
Rights beneficially owned by an Acquiring Person (or an Associate or Affiliate)
of such Acquiring Person or a transferee thereof if such Person became an
Acquiring Person pursuant to a Qualifying Tender Offer. The Company shall use
all reasonable efforts to insure that the provisions of Section 4(b) and this
Section 7(d) and are complied with, but shall have no liability to any holder of
Rights Certificates or other Person as a result of its failure to make any
determinations with respect to an Acquiring Person or its Affiliates and
Associates or any transferee of any of them hereunder.
9
<PAGE>
(e) Notwithstanding anything in this Agreement to the contrary,
neither the Rights Agent nor the Company shall be obligated to undertake any
action with respect to a registered holder of Rights upon the occurrence of any
purported transfer pursuant to Section 6 or exercise pursuant to this Section 7
unless such registered holder (i) shall have completed and signed the
certificate contained in the form of assignment or election to purchase, as the
case may be, set forth on the reverse side of the Rights Certificate surrendered
for such transfer or exercise, as the case may be, (ii) shall not have indicated
an affirmative response to clause 1 or 2 thereof, and (iii) shall have provided
such additional evidence of the identity of the Beneficial Owner (or former
Beneficial Owner) or Affiliates or Associates thereof as the Company shall
reasonably request.
Section 8. Cancellation and Destruction of Right Certificates.
--------------------------------------------------
All Rights Certificates surrendered for exercise, transfer or exchange shall,
if surrendered to the Company or to any of its agents, be delivered to the
Rights Agent for cancellation or in canceled form, or, if surrendered to the
Rights Agent, shall be canceled by it, and no Rights Certificates shall be
issued in lieu thereof except as expressly permitted by this Agreement. The
Company shall deliver to the Rights Agent for cancellation and retirement, and
the Rights Agent shall cancel and retire, any other Rights Certificate purchased
or acquired by the Company otherwise than upon the exercise thereof. The Rights
Agent shall deliver all canceled Rights Certificates to the Company, or shall,
at the written request of the Company, destroy such canceled Rights
Certificates, and in either such case shall deliver a certificate of
cancellation or destruction thereof, as appropriate, to the Company.
Section 9. Reservation and Availability of Capital Stock. (a) The
---------------------------------------------
Company covenants and agrees that it will use reasonable efforts to cause to be
reserved and kept available out of its authorized and unissued shares of
Preferred Stock (and, following the occurrence of Triggering Event, out of its
authorized and unissued shares of Common Stock) a number of shares of Preferred
Stock (and, following the occurrence of a Triggering Event, out of its
authorized but unissued shares of Common Stock) that will be, except as provided
in Section 11(a)(iii), sufficient to permit the exercise in full of all
outstanding Rights as provided in this Agreement.
(b) So long as the Preferred Stock (and, following the occurrence of
Triggering Event, Common Stock and other securities) issuable and deliverable
upon the exercise of the Rights may be listed on any national securities
exchange or inter-dealer quotation system of a registered national securities
association, the Company shall use its best efforts to cause, from and after
such time as the Rights become exercisable, all securities reserved for such
issuance to be listed on any such exchange or quotation system upon official
notice of issuance upon such exercise.
(c) The Company shall use its best efforts (i) to file, as soon as
practicable following the earliest date after the occurrence of a Flip-in Event,
or as soon as is required by law following the Distribution Date, as the case
may be, a registration statement under the Securities Act with respect to the
securities issuable upon exercise of the Rights, (ii) to cause such registration
statement to become effective as soon as practicable after such filing, and
(iii) to cause such
10
<PAGE>
registration statement to remain effective (with a prospectus at all times
meeting the requirements of the Securities Act) until the earlier of (A) the
date as of which the Rights are no longer exercisable for such securities, and
(B) the Expiration Date. The Company will also take such action as may be
appropriate under, or to ensure compliance with, the securities or blue sky laws
of the various states in connection with the exercisability of the Rights. The
Company may temporarily suspend, for a period of time not to exceed 90 days
after the date set forth in this Section 9(c)(i), the exercisability of the
Rights in order to prepare and file such registration statement and permit it to
become effective. Upon any such suspension, the Company shall notify the Rights
Agent and issue a public announcement stating that the exercisability of the
Rights has been temporarily suspended, as well as a public announcement at such
time as the suspension is no longer in effect that the rights are currently
exercisable. Notwithstanding any such provision of this Agreement to the
contrary, the Rights shall not be exercisable for securities in any jurisdiction
if the requisite qualification in such jurisdiction shall not have been
obtained, such exercise therefor shall not be permitted under applicable law or
a registration statement in respect of such securities shall not have been
declared effective.
(d) The Company covenants and agrees that it will take all such action
as may be necessary to ensure that all one one-hundredths of a share of
Preferred Stock (and, following the occurrence of a Triggering Event, Common
Stock or other securities) issuable upon exercise of the Rights shall, at the
time of delivery of the certificates for such securities (subject to payment of
the Purchase Price), be duly authorized, validly issued, fully paid, and
nonassessable.
(e) The Company further covenants and agrees that it will pay when due
and payable any and all federal and state transfer taxes and other governmental
charges which may be payable in respect of the issuance or delivery of the
Rights Certificates and of any certificates for Preferred Stock (or Common Stock
or other securities, as the case may be) upon the exercise of Rights. The
Company shall not, however, be required to pay any transfer tax or other
governmental charge which may be payable in respect of any transfer involved in
the issuance or delivery of any Rights Certificates or of any certificates for
Preferred Stock (or Common Stock or other securities, as the case may be) to a
Person other than the registered holder of the applicable Rights Certificate,
and prior to any such transfer, issuance or delivery any such tax or other
governmental charge shall have been paid by the holder of such Rights
Certificate or it shall have been established to the Company's satisfaction that
no such tax or other governmental charge is due.
Section 10. Preferred Stock Record Date. Each Person (other than
---------------------------
the Company) in whose name any certificate for Preferred Stock (or Common Stock
or other securities, as the case may be) is issued upon the exercise of Rights
shall for all purposes be deemed to have become the holder of record of such
Preferred Stock (or Common Stock or other securities, as the case may be)
represented thereby on, and such certificate shall be dated, the date upon which
the Rights Certificate evidencing such Rights was duly surrendered and payment
of the Purchase Price (and any applicable transfer taxes or other governmental
charges) was made; provided, however, that if the date of such surrender and
-------- -------
payment is a date upon which the transfer books of the Company relating to the
Preferred Stock (or Common Stock or other securities, as the case may be) are
closed, such Person shall be deemed to have become the record holder of such
shares
11
<PAGE>
on, and such certificate shall be dated, the next succeeding Business Day
on which the applicable transfer books of the Company are open.
Section 11. Adjustment of Purchase Price, Number and Kind of Shares
-------------------------------------------------------
or Number of Rights. The Purchase Price, the number and kind of shares
- -------------------
covered by each Right, and the number of Rights outstanding are subject to
adjustment from time to time, as provided in this Section 11.
(a)(i) If the Company shall at any time after the date of this
Agreement (A) declare or pay a dividend on the Preferred Stock payable in shares
of Preferred Stock (or other capital stock), (B) subdivide the outstanding
Preferred Stock into a greater number of shares, (C) combine the outstanding
Preferred Stock into a smaller number of shares, or (D) issue any shares of its
capital stock in a reclassification of the Preferred Stock (including any such
reclassification in connection with a consolidation or merger involving the
Company in which the Company is the surviving or continuing corporation), except
as otherwise provided in Section 7(d) and this Section 11(a), then the Purchase
Price in effect immediately prior to the record date for such dividend or of the
effective date of such subdivision, combination or reclassification, and the
number and kind of shares of Preferred Stock or other capital stock issuable on
such date shall be proportionately adjusted so that each holder of a Right shall
thereafter be entitled to receive, upon exercise thereof at the Purchase Price
in effect immediately prior to such date, the aggregate number and kind of
shares of Preferred Stock or other capital stock, as the case may be, which, if
such Right had been exercised immediately prior to such date and at a time when
the applicable transfer books of the Company were open, such holder would have
been entitled to receive upon such exercise and by virtue of such dividend,
subdivision, combination or reclassification. If an event occurs which requires
an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the
adjustment provided for in this Section 11(a)(i) shall be in addition to, and
shall be made prior to, any adjustment required pursuant to Section 11(a)(ii).
(ii) Subject to Sections 23 and 24, if:
(A) any Person, alone or together with its Affiliates
and Associates, shall, at any time after the date of this
Agreement become an Acquiring Person (other than pursuant to a
Qualifying Tender Offer), or
(B) during such time as there is an Acquiring Person,
there shall be a reclassification of securities (including any
reverse stock split), recapitalization of the Company, or any
merger or consolidation of the Company with any of its
Subsidiaries or any other transaction or series of transactions
involving the Company or any of its Subsidiaries (whether or not
with or into or otherwise involving an Acquired Person), other
than a Flip-over Event(s), which has the effect, directly or
indirectly, of increasing by more than [2%] the proportionate
share of the outstanding shares of any class of equity or
convertible securities of the Company or any of its Subsidiaries
which is directly or indirectly beneficially owned by any
Acquiring Person or any Associate or Affiliate of any Acquiring
Person, or
12
<PAGE>
(C) any Acquiring Person or any Associate or Affiliate
of any Acquiring Person, at any time after the date of this
Agreement, directly or indirectly, (1) shall merge into the
Company or otherwise combine or consolidate with the Company and
the Company shall be the continuing or surviving corporation of
such merger, combination or consolidation and, in connection with
such merger, combination or consolidation, none of the
outstanding shares of the Common Stock of the Company shall be
changed into or exchanged for stock or other securities of the
Company or of any other Person or cash or any other property, (2)
shall, in one transaction or a series of transactions, other than
in connection with the exercise of a Right or Rights and other
than in connection with the exercise or conversion of securities
exercisable for or convertible into securities of the Company
which securities were outstanding prior to the time such
Acquiring Person became such, transfer any assets to the Company
or to any of its Subsidiaries in exchange (in whole or in part)
for shares of Common Stock, for other equity securities of the
Company, or for securities exercisable for or convertible into
shares of equity securities of the Company (Common Stock or
otherwise) or otherwise obtain from the Company, with or without
consideration, any additional shares of such equity securities or
securities exercisable for or convertible into shares of such
equity securities (other than pursuant to a pro rata offer or
distribution to all holders of Common Stock), (3) shall sell,
purchase, lease, exchange, mortgage, pledge, transfer or
otherwise dispose of assets (in one or more transactions), to,
from, with or of, as the case may be, the Company or any of its
Subsidiaries (including, in the case of Subsidiaries, by way of a
merger, combination or consolidation of any Subsidiary), on terms
and conditions less favorable to the Company than the Company
would be able to obtain in arm's-length negotiations with an
unaffiliated third party, other than pursuant to a Flip-over
Event, (4) shall sell, purchase, lease, exchange, mortgage,
pledge, transfer or otherwise acquire or dispose of in one
transaction or a series of transactions, to, from or with (as the
case may be) the Company or any of its Subsidiaries (other than
incidental to the lines of business, if any, engaged in as of
such date between the Company and such Acquiring Person or
Associates or Affiliate) assets having an aggregate fair market
value of more than $4,000,000, other than pursuant to a
transaction set forth in Section 13(a), (5) shall receive any
compensation from the Company or any of its Subsidiaries other
than compensation for full-time employment as a regular employee,
or fees for serving as a director, at rates in accordance with
the Company's (or its Subsidiaries') past practices, or (6) shall
receive the benefit, directly or indirectly (except
proportionately as a shareholder and except if resulting from a
requirement of law or governmental regulation), of any loans,
assumptions of loans, advances, guarantees, pledges or other
financial assistance, or any tax credits or other tax advantage,
provided by the Company or any of its Subsidiaries,
(D) provided that the events described in Sections
11(a)(ii)(A), (B) and (C) shall not include a repurchase by the
Company of Common Stock that is
13
<PAGE>
approved by a majority of Continuing Directors, promptly
following five days after the date of the occurrence of the event
described in Section 11(a)(ii)(A) hereof and promptly following
the occurrence of any event described in Section 11(a)(B) or (C)
hereof,
then proper provision shall promptly be made so that each holder of a Right
shall (except as otherwise provided herein, including, without limitation,
Section 7(d)) thereafter be entitled to receive, upon exercise of the Right,
without payment of the Purchase Price and in lieu of Preferred Stock, such
number of duly authorized, validly issued, fully paid and nonassessable shares
of Common Stock of the Company (such shares being referred to herein as the
"Adjustment Shares") as shall be equal to the result obtained by (x) multiplying
the then current Purchase Price by the number of one -hundredths of a share
of Preferred Stock for which a Right is then exercisable (such product being
thereafter referred to as the "Purchase Price" for each Right and for all
purposes of this Agreement), and dividing that product by (y) the current market
price (determined pursuant to Section 11(d)(i)) per share of Common Stock on the
date of such first occurrence; provided, however, that if the transaction that
-------- -------
would otherwise give rise to the foregoing adjustment is also subject to the
provisions of Section 13, then only the provisions of Section 13 shall apply and
no adjustment shall be made pursuant to this Section 11(a)(ii).
(iii) If the number of shares of Common Stock which are
authorized by the Company's articles of incorporation but not outstanding or
reserved for issuance other than upon exercise of the Rights is insufficient to
permit the exercise in full of the Rights in accordance with Section 11(a)(ii),
the Company shall (A) determine the excess of (1) the value of the Adjustment
Shares issuable upon the exercise of a Right (computed using the "current market
price" used to determine the number of Adjustment Shares), over (2) the Purchase
Price (such excess being referred to herein as the "Spread"), and (B) with
respect to each Right, make adequate provision to substitute for the Adjustment
Shares, (1) (to the extent available) Common Stock and then, (2) (to the extent
available) other equity securities of the Company which a majority of the
Continuing Directors has determined to be essentially equivalent to shares of
Common Stock in respect to dividend, liquidation and voting rights (such
securities being referred to herein as "common stock equivalents"), and then, if
necessary, (3) other equity or debt securities of the Company, cash or other
assets, a reduction in the Purchase Price or any combination of the foregoing,
having an aggregate value (as determined by the Continuing Directors based upon
the advice of a nationally recognized investment banking firm selected by the
Continuing Directors) equal to the value of the Adjustment Shares; provided,
--------
however, if the Company shall not have made adequate provision to deliver value
- -------
pursuant to clause (B) above within thirty (30) days following the latter of (x)
the first occurrence of a Flip-in Event and (y) the date on which the Company's
right of redemption pursuant to Section 23 expires, then the Company shall be
obligated to deliver, upon the surrender for exercise of a Right and without
requiring payment of the Purchase Price, shares of Common Stock (to the extent
available), shares of Preferred Stock of the Company, and then, if necessary,
cash, which shares and cash have an
14
<PAGE>
aggregate value equal to the Spread. If the Continuing Directors of the
Company shall determine in good faith that it is likely that sufficient
additional shares of Common Stock could be authorized for issuance upon
exercise in full of the Rights, the 30 day period set forth above (such
period, as it may be extended, being referred to herein as the
"Substitution Period") may be extended to the extent necessary, but not
more than 90 days following the first occurrence of a Flip-In Event, in
order that the Company may seek shareholder approval for the authorization
of such additional shares. If the Company determines that some action is to
be taken pursuant to the first or second sentence of this Section
11(a)(iii), then the Company (x) shall provide, subject to Section 7(d),
that such action shall apply uniformly to all outstanding Rights, and (y)
may suspend the exercisability of the Rights until the expiration of the
Substitution Period in order to seek any authorization of additional shares
or to decide the appropriate form and value of any consideration to be
delivered as referred to in such first or second sentence. If any such
suspension occurs, the Company shall issue a public announcement stating
that the exercisability of the Rights has been temporarily suspended, as
well as a public announcement at such time as the suspension is no longer
in effect. For purposes of this Section 11(a)(iii), the value of the Common
Stock shall be the current market price per share of Common Stock (as
determined pursuant to Section 11(d)) on the later of the date of the first
occurrence of a Flip-in Event and the first date that the right to redeem
the Rights pursuant to Section 23 shall expire; any common stock equivalent
shall be deemed to have the same value as the Common Stock on such date;
and the value of other securities or assets shall be determined pursuant to
Section 11(d)(iii).
(b) If the Company shall fix a record date for the issuance of rights,
options or warrants to all holders of Preferred Stock entitling them to
subscribe for or purchase (for a period expiring within 45 calendar days after
such record date) Preferred Stock (or securities having the same rights,
privileges and preferences as the shares of Preferred Stock ("equivalent
preferred stock")) or securities convertible into or exercisable for Preferred
Stock (or equivalent preferred stock) at a price per share of Preferred Stock
(or equivalent preferred stock) (in each case, taking account of any conversion
or exercise price) less than the current market price (as determined pursuant to
Section 11(d)) per share of Preferred Stock on such record date, the Purchase
Price to be in effect after such record date shall be determined by multiplying
the Purchase Price in effect immediately prior to such date by a fraction, the
numerator of which shall be the number of shares of Preferred Stock outstanding
on such record date, plus the number of shares of Preferred Stock which the
aggregate price (taking account of any conversion or exercise price) of the
total number of shares of Preferred Stock (and/or equivalent preferred stock) so
to be offered would purchase at such current market price, and the denominator
of which shall be the number of shares of Preferred Stock outstanding on such
record date, plus the number of additional shares of Preferred Stock (and/or
equivalent preferred stock) so to be offered. In case such subscription price
may be paid by delivery of consideration part or all of which shall be in a form
other than cash, the value of such consideration shall be as determined in good
faith by the Board of Directors of the Company, whose determination shall be
described in a statement filed with the Rights Agent and shall be conclusive for
all purposes. Shares of Preferred Stock owned by or held for the account of the
Company shall not be deemed outstanding for the purpose of any such computation.
Such adjustment shall be made successively whenever such a record date is fixed,
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<PAGE>
and if such rights, options or warrants are not so issued, the Purchase Price
shall be adjusted to be the Purchase Price which would then be in effect if such
record date had not been fixed.
(c) In case the Company shall fix a record date for the making of a
distribution to all holders of Preferred Stock (including any such distribution
made in connection with a consolidation or merger involving the Company in which
the Company is the surviving entity) of evidences of indebtedness, equity
securities other than Preferred Stock, cash or assets (other than a regular
periodic cash dividend out of the earnings or retained earnings of the Company)
or rights, options or warrants (excluding those referred to in Section 11(b)),
the Purchase Price to be in effect after such record date shall be determined by
multiplying the Purchase Price in effect immediately prior to such record date
by a fraction, the numerator of which shall be the current market price (as
determined pursuant to Section 11(d)) per share of Preferred Stock on such
record date, less the value (as determined pursuant to Section 11(d)(iii)) of
such evidences of indebtedness, equity securities, assets, rights, options or
warrants so to be distributed with respect to one share of Preferred Stock, and
the denominator of which shall be such current market price per share of
Preferred Stock (as determined by Section 11(d)). Such adjustment shall be made
successively whenever such a record date is fixed, and if such distribution is
not so made, the Purchase Price shall be adjusted to be the Purchase Price which
would then be in effect if such record date had not been fixed.
(d)(i) For the purpose of any computation hereunder other than
computations made pursuant to Section 11(a)(iii) or 14, the "current market
price" per share of Common Stock on any date shall be deemed to be the average
of the daily closing prices per share of such Common Stock for the 30
consecutive Trading Days immediately prior to such date; for purposes of
computations made pursuant to Section 11(a)(iii), the "current market price" per
share of Common Stock on any date shall be deemed to be the average of the daily
closing prices per share of such Common Stock for the 10 consecutive Trading
Days immediately following such date; and for purposes of computations made
pursuant to Section 14, the "current market price" per share of Common Stock for
any Trading Day shall be deemed to be the closing price per share of Common
Stock for such Trading Day; provided, however, that if the current market price
-------- -------
per share of the Common Stock is determined during a period following the
announcement by the issuer of such Common Stock of (A) a dividend or
distribution on such Common Stock payable in shares of such Common Stock or
securities exercisable for or convertible into shares of such Common Stock
(other than the Rights), or (B) any subdivision, combination or reclassification
of such Common Stock, and prior to the expiration of the requisite 30 Trading
Day or 10 Trading Day period after the ex-dividend date for such dividend or
distribution, or the record date for such subdivision, combination or
reclassification, then, and in each such case, the "current market price" shall
be properly adjusted to take into account ex-dividend trading. The closing
price for each day shall be the last sale price, regular way, or, in case no
such sale takes place on such day, the average of the closing bid and asked
prices, regular way, in either case as reported in the principal consolidated
transaction reporting system with respect to securities listed or admitted to
trading on the New York Stock Exchange or, if the shares of Common Stock are not
listed or admitted to trading on the New York Stock Exchange, on the principal
national securities exchange on which the shares of Common Stock are listed or
admitted to trading or, if the shares of Common Stock are not listed or admitted
to trading on any
16
<PAGE>
national securities exchange, the last quoted price or, if not so quoted, the
average of the high bid and low asked prices in the over-the-counter market, as
reported by The Nasdaq Stock Market or such other system then in use or, if on
any such date the shares of Common Stock are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional market maker making a market in the Common Stock selected by a
majority of the Continuing Directors. If on any such date no market maker is
making a market in the Common Stock, then the fair value of such shares on such
date as determined in good faith by a majority of the Continuing Directors shall
be used. If the Common Stock is not publicly held or not so listed or traded,
the "current market price" per share means the fair value per share as
determined in good faith by a majority of the Continuing Directors, or if there
are no Continuing Directors, by a nationally recognized investment banking firm
selected by the Board of Directors, which determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all purposes.
(ii) For the purpose of any computation hereunder, the "current
market price" per share of Preferred Stock shall be determined in the same
manner set forth above for the Common Stock in Section 11(d)(i) (other than
the last sentence thereof). If the current market price per share of
Preferred Stock cannot be determined in such manner, or if the Preferred
Stock is not publicly held or listed or traded in a manner described in
Section 11(d)(i), then the "current market price" per share of Preferred
Stock shall be conclusively deemed to be an amount equal to 100 (as such
number may be appropriately adjusted for such events as stock splits, stock
dividends and recapitalizations with respect to the Common Stock occurring
after the date of this Agreement) multiplied by the current market price
per share of Common Stock (as determined pursuant to Section 11(d)(i)
(other than the last sentence thereof)). If neither the Common Stock nor
the Preferred Stock is publicly held or so listed or traded, the "current
market price" per share of the Preferred Stock shall be determined in the
same manner as set forth in the last sentence of Section 11(d)(i). For all
purposes of this Agreement, the "current market price" of one one-hundredth
of a share of Preferred Stock shall be equal to the "current market price"
of one share of Preferred Stock divided by 100.
(iii) For the purpose of any computation hereunder, the value of
any securities or assets other than Common Stock or Preferred Stock shall
be the fair value as determined in good faith by a majority of the
Continuing Directors then in office, or, if there are no Continuing
Directors, by a nationally recognized investment banking firm selected by
the Board of Directors, which determination shall be described in a
statement filed with the Rights Agent and shall be conclusive for all
purposes.
(e) Anything herein to the contrary notwithstanding, no adjustment in
the Purchase Price shall be required unless such adjustment would require an
increase or decrease of at least 2% in the Purchase Price; provided, however,
-------- -------
that any adjustments which by reason of this Section 11(e) are not required to
be made shall be carried forward and taken into account in any subsequent
adjustment. All calculations under this Section 11 shall be made to the nearest
cent
17
<PAGE>
or to the nearest ten-thousandth of a share of Common Stock or other share or
one-millionth of a share of Preferred Stock, as the case may be.
(f) If at any time, as a result of an adjustment made pursuant to
Section 11(a)(ii) or Section 13(a), the holder of any Right shall be entitled to
receive upon exercise of such Right any shares of capital stock other than
Preferred Stock, thereafter the number of such other shares so receivable upon
exercise of any Right and the Purchase Price thereof shall be subject to
adjustment from time to time in a manner and on terms as nearly equivalent as
practicable to the provisions with respect to the Preferred Stock contained in
Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the
provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock
shall apply on like terms to any such other shares.
(g) All Rights originally issued by the Company subsequent to any
adjustment made hereunder shall evidence the right to purchase, at the Purchase
Price then in effect, the then applicable number of one one-hundredths of a
share of Preferred Stock and other capital stock of the Company issuable from
time to time hereunder upon exercise of the Rights, all subject to further
adjustment as provided herein.
(h) Unless the Company shall have exercised its election as provided
in Section 11(i), upon each adjustment of the Purchase Price as a result of the
calculations made in Sections 11(b) and (c), each Right outstanding immediately
prior to the making of such adjustment shall thereafter evidence the right to
purchase, at the adjusted Purchase Price, that number of one one-hundredths of a
share of Preferred Stock (calculated to the nearest one-millionth) obtained by
(i) multiplying (x) the number of one one-hundredths of a share for which a
Right was exercisable immediately prior to this adjustment by (y) the Purchase
Price in effect immediately prior to such adjustment of the Purchase Price, and
(ii) dividing the product so obtained by the Purchase Price in effect
immediately after such adjustment of the Purchase Price.
(i) The Company may elect on or after the date of any adjustment of
the Purchase Price to adjust the number of Rights, in lieu of any adjustment in
the number of one one-hundredths of a share of Preferred Stock issuable upon the
exercise of a Right. Each of the Rights outstanding after such adjustment of the
number of Rights shall be exercisable for the number of one one-hundredths of a
share of Preferred Stock for which such Right was exercisable immediately prior
to such adjustment. Each Right held of record prior to such adjustment of the
number of Rights shall become that number of Rights (calculated to the nearest
ten-thousandth) obtained by dividing the Purchase Price in effect immediately
prior to adjustment of the Purchase Price by the Purchase Price in effect
immediately after adjustment of the Purchase Price. The Company shall make a
public announcement of its election to adjust the number of Rights, indicating
the record date for the adjustment, and, if known at the time, the amount of the
adjustment to be made. This record date may be the date on which the Purchase
Price is adjusted or any day thereafter, but, if the Rights Certificates have
been issued, shall be at least 10 days later than the date of the public
announcement. If Rights Certificates have been issued, upon each adjustment of
the number of Rights pursuant to this Section 11(i), the Company shall, as
promptly as practicable, cause to be distributed to holders of record of Rights
Certificates on such record date Right Certificates evidencing, subject to
Section 14, the
18
<PAGE>
additional Rights to which such holders shall be entitled as a result of such
adjustment, or, at the option of the Company, shall cause to be distributed to
such holders of record in substitution and replacement for the Rights
Certificates held by such holders prior to the date of adjustment, and upon
surrender thereof, if required by the Company, new Rights Certificates
evidencing all the Rights to which such holders shall be entitled after such
adjustment. Rights Certificates so to be distributed shall be issued, executed
and countersigned in the manner provided for herein (and may bear, at the option
of the Company, the adjusted Purchase Price) and shall be registered in the
names of the holders of record of Rights Certificates on the record date
specified in the public announcement.
(j) Irrespective of any adjustment or change in the Purchase Price or
the number of one one-hundredths of a share of Preferred Stock issuable upon the
exercise of the Rights, the Rights Certificates theretofore and thereafter
issued may continue to express the Purchase Price per one one-hundredth of a
share and the number of shares which were expressed in the initial Rights
Certificates issued hereunder.
(k) Before taking any action that would cause an adjustment reducing
the Purchase Price below the par value, if any, of the number of one one-
hundredths of a share of Preferred Stock issuable upon exercise of the Rights,
the Company shall take any corporate action which may, in the opinion of its
counsel, be necessary in order that the Company may validly and legally issue
fully paid and nonassessable such number of one one-hundredths of a share of
Preferred Stock at such adjusted Purchase Price.
(l) In any case in which this Section 11 shall require that an
adjustment in the Purchase Price be made effective as of a record date for a
specified event, the Company may elect to defer until the occurrence of such
event the issuance to the holder of any Right exercised after such record date
the number of one one-hundredths of a share of Preferred Stock or other capital
stock of the Company, if any, issuable upon such exercise over and above the
number of one one-hundredths of a share of Preferred Stock or other capital
stock of the Company, if any, issuable upon such exercise on the basis of the
Purchase Price in effect prior to such adjustment; provided, however, that the
-------- -------
Company shall deliver to such holder a due bill or other appropriate instrument
evidencing such holder's right to receive such additional shares upon the
occurrence of the event requiring such adjustment.
(m) Anything in this Section 11 to the contrary notwithstanding, the
Company shall be entitled to make such reductions in the Purchase Price, in
addition to those adjustments expressly required by this Section 11, as and to
the extent that it, in its sole discretion, shall determine to be advisable in
order that any (i) consolidation or subdivision of the Preferred Stock, (ii)
issuance wholly for cash of any Preferred Stock at less than the current market
price, (iii) issuance wholly for cash of Preferred Stock or securities which by
their terms are convertible into or exercisable for Preferred Stock, (iv) stock
dividends, or (v) issuance of rights, options or warrants referred to in this
Section 11, hereafter made by the Company to the holders of its Preferred Stock,
shall not be taxable to such shareholders.
19
<PAGE>
(n) The Company covenants and agrees that it will not at any time
after the Distribution Date, (i) consolidate with any other Person, (ii) merge
with or into any other Person, (iii) effect a statutory share exchange with any
Person, or (iv) sell, lease or otherwise transfer (and/or permit any of its
Subsidiaries to sell, lease or otherwise transfer), in one transaction or a
series of related transactions, assets aggregating more than 50% of the assets
(measured by either book value or fair market value) or generating more than 50%
of operating income or cash flow of the Company and its Subsidiaries, taken as a
whole, to any other Person or Persons if (x) at the time of or immediately after
such consolidation, merger, statutory share exchange, sale, lease or transfer
there are any rights, warrants or other instruments or securities outstanding or
any agreements or arrangements in effect which would substantially diminish or
otherwise eliminate the benefits intended to be afforded by the Rights, or (y)
prior to, simultaneously with or immediately after such consolidation, merger,
statutory share exchange, sale, lease or transfer, the shareholders of a Person
who constitutes, or would constitute, the "Principal Party" for the purposes of
Section 13 shall have received a distribution of Rights previously owned by such
Person or any of its Affiliates and Associates.
(o) The Company covenants and agrees that after the Distribution
Date, it will not, except as permitted by Sections 23, 24 or 27, take (or permit
any Subsidiary to take) any action if at the time such action is taken it is
reasonably foreseeable that such action will substantially diminish or otherwise
eliminate the benefits intended to be afforded by the Rights, unless such action
is approved by a majority of the Continuing Directors.
(p) Notwithstanding anything in this Agreement to the contrary, if at
any time after the Effective Date and prior to the Distribution Date the Company
shall (i) pay a dividend on the outstanding shares of Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock into a
larger number of shares, or (iii) combine the outstanding Common Stock into a
smaller number of shares, the number of Rights associated with each share of
Common Stock then outstanding, or issued or delivered thereafter shall be
proportionately adjusted so that the number of Rights thereafter associated with
each share of Common Stock following any such event shall equal the result
obtained by multiplying the number of Rights associated with each share of
Common Stock immediately prior to such event by a fraction the numerator of
which shall be the total number of shares of Common Stock outstanding
immediately prior to the occurrence of the event and the denominator of which
shall be the total number of shares of Common Stock outstanding immediately
following the occurrence of such event.
Section 12. Certificate of Adjusted Purchase Price or Number of
---------------------------------------------------
Shares. Whenever an adjustment is made as provided in Sections 11 and 13, the
- ------
Company shall (a) promptly prepare a certificate setting forth such adjustment
and a brief statement of the facts accounting for such adjustment, (b) promptly
file with the Rights Agent and with each transfer agent for the Preferred Stock
and the Common Stock a copy of such certificate, and (c) mail a brief summary
thereof to each holder of a Rights Certificate (or, if prior to the Distribution
Date, to each holder of a certificate representing shares of Common Stock) in
the manner set forth in Section 26. The Rights Agent shall be fully protected
in relying on any such certificate and on any adjustment contained therein.
20
<PAGE>
Section 13. Consolidation, Merger or Sale or Transfer of Assets or
------------------------------------------------------
Earning Power. (a) Except for any transaction with a Person who has
- -------------
consummated a Qualifying Tender Offer which transaction is approved by a
majority of the Continuing Directors, if following the Share Acquisition Date,
directly or indirectly,
(w) the Company shall consolidate with, merge with or
into, or otherwise combine with, any other Person, and the
Company shall not be the continuing or surviving corporation of
such consolidation, merger or combination, or
(x) any Person shall consolidate with, merge with or
into, or otherwise combine with, the Company, and the Company
shall be the continuing or surviving corporation of such
consolidation, merger or combination and, in connection with such
consolidation, merger or combination, all or part of the
outstanding shares of Common Stock shall be changed into or
exchanged for other stock or securities of the Company or any
other Person or cash or any other property, or
(y) the Company shall be a party to any statutory share
exchange with any other Person after which the Company is a
subsidiary of any other Person, or
(z) the Company and/or one or more of its Subsidiaries
shall sell, lease or otherwise transfer, in one transaction or a
series of related transactions, assets aggregating more than 50%
of the assets (measured by either book value or fair market
value) or generating more than 50% of the operating income or
cash flow of the Company and its Subsidiaries, taken as a whole,
to any other Person or Persons,
then, and in each such case, proper provision shall promptly be made so that (i)
each holder of a Right, except as provided in Section 7(d), shall thereafter be
entitled to receive, upon exercise thereof at the then current Purchase Price,
such number of duly authorized, validly issued, fully paid and nonassessable
shares of freely tradable Common Stock of the Principal Party (as defined
below), not subject to any rights of call or first refusal, liens, encumbrances
or other claims, as shall be equal to the result obtained by (A) multiplying the
then current Purchase Price by the number of one one-hundredths of a share of
Preferred Stock for which a Right was exercisable immediately prior to the first
occurrence of a Flip-over Event (or, if a Flip-in Event has previously occurred,
multiplying the number of such one one-hundredths of a share of Preferred Stock
for which a Right was exercisable immediately prior to the first occurrence of a
Flip-in Event by the Purchase Price in effect immediately prior to such first
occurrence) (such product being thereafter referred to as the "Purchase Price"
for each Right and for all purposes of this Agreement), and dividing that
product by (B) 50% of the current market price (determined pursuant to Section
11(d)(i)) per share of the Common Stock or other securities of such Principal
Party) on the date of consummation of such consolidation, merger, combination,
statutory share exchange, sale, lease or transfer;
21
<PAGE>
(ii) the Principal Party shall thereafter be liable for, and shall
assume, by virtue of such consolidation, merger, combination, statutory
share exchange, sale, lease or transfer, all the obligations and duties of
the Company pursuant to this Agreement;
(iii) the term "Company" shall thereafter be deemed to refer to such
Principal Party, it being specifically intended that the provisions of
Section 11 shall apply only to such Principal Party following the first
occurrence of a Flip-over Event;
(iv) such Principal Party shall take such steps (including, without
limitation, the authorization and reservation of a sufficient number of
shares of its Common Stock to permit exercise of all outstanding Rights in
accordance with this Section 13(a)) in connection with the consummation of
any such transaction as may be necessary to assure that the provisions
hereof shall thereafter be applicable, as nearly as reasonably may be, in
relation to the shares of its Common Stock thereafter deliverable upon the
exercise of the Rights; and
(v) the provisions of Section 11(a)(ii) shall be of no effect
following the first occurrence of a Flip-over Event.
(b) "Principal Party" means:
(i) in the case of any transaction described in Sections 13(a) (w),
(x) or (y), (A) the Person that is the issuer of any securities into which
shares of Common Stock of the Company are converted in such merger,
consolidation, or combination or for which shares of Common Stock of the
Company are exchanged in such statutory share exchange, or, if there is
more than one such issuer, the issuer of the Common Stock of which has the
greatest aggregate market value, or (B) if no securities are issued, (x)
the person that survives such consolidation or is the other party to the
merger, combination or statutory share exchange, or, if there is more than
one such Person, the Person the Common Stock of which has the greatest
aggregate market value, or (y) if the Person that is the other party to the
merger does not survive the merger, the Person that does survive the merger
(including the Company if it survives); and
(ii) in the case of any transactions described in Sections 13(a)(z),
the Person that is the party receiving the greatest portion of the assets,
operating income or cash flow transferred pursuant to such transaction or
transactions, or, if each person that is a party to such transaction or
transactions receives the same portion of the assets, operating income or
cash flow so transferred, or, if the Person receiving the greatest portion
of the assets, operating income or cash flow cannot be determined, the
person the Common Stock of which has the greatest aggregate market value;
provided, however, that in any such case, (A) if the Common Stock of such Person
- -------- -------
is not at such time and has not been continuously over the preceding 12-month
period registered under Section 12 of the Exchange Act, and such Person is a
direct or indirect Subsidiary of another Person the
22
<PAGE>
Common Stock of which is and has been so registered, "Principal Party" shall
refer to such other Person; and (B) in case such Person is a Subsidiary,
directly or indirectly, of more than one Person, the Common Stock of two or more
of which are and have been so registered, "Principal Party" shall refer to
whichever of such Persons is the issuer of the Common Stock having the greatest
aggregate market value.
(c) The Company shall not consummate any such consolidation, merger,
combination, statutory share exchange, sale, lease or transfer unless the
Principal Party shall have a sufficient number of authorized shares of its
Common Stock which are not outstanding or otherwise reserved for issuance to
permit the exercise in full of the Rights in accordance with this Section 13 and
unless prior thereto the Company and such Principal Party shall have executed
and delivered to the Rights Agent a supplemental agreement providing for the
terms set forth in Sections 13(a) and (b) and further providing that, as soon as
practicable after the date of any consolidation, merger, combination, statutory
share exchange, sale, lease or transfer mentioned in Section 13(a), the
Principal Party will (i) prepare and file a registration statement under the
Securities Act with respect to the Rights and the securities issuable upon
exercise of the Rights on an appropriate form, and will use its best efforts to
cause such registration statement (A) to become effective as soon as practicable
after such filing, and (B) to remain effective (with a prospectus at all times
meeting the requirements of the Securities Act) until the Expiration Date; and
(ii) deliver to holders of the Rights historical financial statements for the
Principal Party and each of its Affiliates which comply in all respects with the
requirements for registration on Form 10 under the Exchange Act.
(d) The provisions of this Section 13 shall similarly apply to
successive mergers, consolidations, combinations, statutory share exchanges,
sales, leases or other transfers. If any Flip-over Event shall occur at any time
after the occurrence of a Flip-in Event, the Rights which have not theretofore
been exercised shall thereafter become exercisable in the manner described in
Section 13(a).
Section 14. Fractional Rights and Fractional Shares. (a) The
---------------------------------------
Company shall not be required to issue fractions of Rights, except prior to the
Distribution Date as provided in Section 11(p), or to distribute Rights
Certificates which evidence fractional Rights. In lieu of any such fractional
Rights, the Company shall pay to the registered holders of the Rights
Certificates with regard to which such fractional Rights would otherwise be
issuable an amount in cash equal to the same fraction of the current market
price of a whole Right. For purposes of this Section 14(a), the current market
price of a whole Right shall be the closing price of a Right for the Trading Day
immediately prior to the date on which such fractional Rights would otherwise
have been issuable. The closing price of a Right for any day shall be the last
sale price, regular way, or, in case no such sale takes place on such day, the
average of the closing bid and asked prices, regular way, in either case as
reported on the principal national securities exchange on which the Rights are
listed or admitted to trading or, if the Rights are not listed or admitted to
trading on any national securities exchange, the last quoted price, or, if not
so quoted, the average of the high bid and low asked prices in the over-the-
counter market, as reported by The Nasdaq Stock Market or such other system then
in use or, if on any such date the Rights are not quoted by any such
organization, the average of the closing bid and asked prices as furnished by a
professional
23
<PAGE>
market maker making a market in the Rights selected by a majority of the
Continuing Directors. If on any such date no such market maker is making a
market in the Rights, the current market price of the Rights on such date shall
be as determined in good faith by a majority of the Continuing Directors.
(b) The Company shall not be required to issue fractions of shares of
Preferred Stock (other than fractions which are multiples of one one-hundredth
of a share of Preferred Stock) upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Preferred Stock (other than
fractions which are multiples of one one-hundredth of a share of Preferred
Stock). In lieu of any such fractional shares of Preferred Stock, the Company
shall pay to the registered holders of Rights Certificates at the time such
Rights are exercised as herein provided an amount in cash equal to the same
fraction of the current market price of one one-hundredth of a share of
Preferred Stock. For purposes this Section 14(b), the current market price of
one one-hundredth of a share of Preferred Stock shall be one one-hundredth of
the closing price of a share of Preferred Stock (as determined pursuant to
Section 11(d)) for the Trading Day immediately prior to the date of such
exercise.
(c) Following the occurrence of any Triggering Event or upon any
exchange pursuant to Section 24, the Company shall not be required to issue
fractions of shares of Common Stock upon exercise of the Rights or to distribute
certificates which evidence fractional shares of Common Stock. In lieu of
fractional shares of Common Stock, the Company shall pay to the registered
holders of Rights Certificates at the time such Rights are exercised or
exchanged as provided herein an amount in cash equal to the same fraction of the
current market price of a share of Common Stock. For purposes of this Section
14(c), the current market price of a share of Common Stock shall be the closing
price of a share of Common Stock (as determined pursuant to Section 11(d)(i))
for the Trading Day immediately prior to the date of such exercise or exchange.
(d) The holder of a Right by the acceptance of the Right expressly
waives his right to receive any fractional Rights or any fractional shares upon
exercise of a Right except as permitted by this Section 14.
Section 15. Rights of Action. All rights of action in respect of
----------------
this Agreement are vested in the respective registered holders of the Rights
Certificates (and, prior to the Distribution Date, the registered holders of
Common Stock), and any registered holder of any Rights Certificate (or, prior to
the Distribution Date, of any Common Stock), without the consent of the Rights
Agent or of the holder of any other Rights Certificate (or, prior to the
Distribution Date, of any Common Stock), may, in his own behalf and for his own
benefit, enforce, and may institute and maintain any suit, action or proceeding
against the Company to enforce, or otherwise act in respect of, his right to
exercise the Rights evidenced by such Rights Certificate in the manner provided
in such Rights Certificate and in this Agreement. Without limiting the foregoing
or any remedies available to the holders of Rights, it is specifically
acknowledged that the holders of Rights would not have an adequate remedy at law
for any breach of this Agreement and will be entitled to specific performance of
the obligations under, and injunctive
24
<PAGE>
relief against actual or threatened violations of the obligations of, any Person
subject to this Agreement.
Section 16. Agreement of Right Holders. Every holder of a Right by
--------------------------
accepting the same consents and agrees with the Company and the Rights Agent and
with every other holder of a Right that:
(a) prior to the Distribution Date, the Rights will be transferable
only in connection with the transfer of Common Stock;
(b) after the Distribution Date, the Rights Certificates are
transferable only on the registry books of the Rights Agent if surrendered at
the principal office or offices of the Rights Agent designated for such
purposes, duly endorsed or accompanied by a proper instrument of transfer and
with the appropriate forms and certificates fully executed;
(c) subject to Sections 6(a) and 7(e), the Company and the Rights
Agent may deem and treat the Person in whose name a Rights Certificate (or,
prior to the Distribution Date, a certificate representing Common Stock) is
registered as the absolute owner thereof and of the Rights evidenced thereby
(notwithstanding any notations of ownership or writing on the Rights Certificate
or the certificate representing shares of Common Stock made by anyone other than
the Company or the Rights Agent) for all purposes whatsoever, and neither the
Company nor the Rights Agent, subject to the last sentence of Section 7(d),
shall be affected by any notice to the contrary; and
(d) notwithstanding anything in this Agreement to the contrary,
neither the Company nor the Rights Agent shall have any liability to any holder
of a Right or other Person as a result of its inability to perform any of its
obligations under this Agreement by reason of any preliminary or permanent
injunction or other order, decree or ruling issued by a court of competent
jurisdiction or by a governmental, regulatory or administrative agency or
commission, or any statute, rule, regulation or executive order promulgated or
enacted by any governmental authority prohibiting or otherwise restraining
performance of such obligation; provided, however, that the Company must use its
-------- -------
best efforts to have any such order, decree or ruling lifted or otherwise
overturned as soon as possible.
Section 17. Rights Certificate Holder Not Deemed a Shareholder. No
--------------------------------------------------
holder, as such, of any Rights Certificate shall be entitled to vote, receive
dividends or be deemed for any purpose the holder of the shares of capital stock
which may at any time be issuable on the exercise of the Rights represented
thereby, nor shall anything contained herein or in any Rights Certificate be
construed to confer upon the holder of any Rights Certificate, as such, any of
the rights of a shareholder of the Company or any right to vote for the election
of directors or upon any matter submitted to shareholders at any meeting
thereof, or to give or withhold consent to any corporate action, or to receive
notice of meetings or other actions affecting shareholders (except as provided
in Section 25), or to receive dividends or subscription rights, or otherwise,
until the Right or Rights evidenced by such Rights Certificate shall have been
exercised in accordance with the provisions hereof.
25
<PAGE>
Section 18. Concerning the Rights Agent. (a) The Company agrees to
---------------------------
pay to the Rights Agent reasonable compensation for all services rendered by it
hereunder and, from time to time, on demand of the Rights Agent, its reasonable
expenses and counsel fees and other disbursements incurred in the execution or
administration of this Agreement and the exercise and performance of its duties
hereunder. The Company also agrees to indemnify the Rights Agent for, and to
hold it harmless against, any loss, liability, or expense, incurred without
negligence, bad faith or willful misconduct on the part of the Rights Agent, for
anything done or omitted by the Rights Agent in connection with the acceptance
and administration of this Agreement or the exercise or performance of its
duties hereunder, including the costs and expenses of defending against any
claim of liability.
(b) The Rights Agent shall be protected and shall incur no liability
for or in respect of any action taken, suffered or omitted by it in connection
with the administration of this Agreement or the exercise or performance of its
duties hereunder in reliance upon any Rights Certificate or certificate for
Common Stock or for other securities of the Company, instrument of assignment or
transfer, power of attorney, endorsement, affidavit, letter, notice,
instruction, direction, consent, certificate, statement, or other paper or
document believed by it to be genuine and to be signed, executed and, where
necessary, verified or acknowledged, by the proper Person or Persons.
Section 19. Merger or Consolidation or Change of Name of Rights
---------------------------------------------------
Agent. (a) Any corporation into which the Rights Agent or any successor Rights
- -----
Agent may be merged or with which it may be consolidated, or any corporation
resulting from any merger or consolidation to which the Rights Agent or any
successor Rights Agent shall be a party, or any corporation succeeding to the
corporate trust or stock transfer business of the Rights Agent or any successor
Rights Agent, shall be the successor to the Rights Agent under this Agreement
without the execution or filing of any paper or any further act on the part of
any of the parties hereto; provided, however, that such corporation would be
-------- -------
eligible for appointment as a successor Rights Agent under the provisions of
Section 21. In case at the time such successor Rights Agent shall succeed to the
agency created by this Agreement, any of the Rights Certificates shall have been
countersigned but not delivered, any such successor Rights Agent may adopt the
countersignature of a predecessor Rights Agent and deliver such Rights
Certificates so countersigned; and in case at that time any of the Rights
Certificates shall not have been countersigned, any successor Rights Agent may
countersign such Rights Certificates either in the name of the predecessor
Rights Agent or in the name of the successor Rights Agent; and in all such cases
such Rights Certificates shall have the full force provided in the Rights
Certificates and in this Agreement.
(b) In case at any time the name of the Rights Agent shall be changed
and at such time any of the Rights Certificates shall have been countersigned
but not delivered, the Rights Agent may adopt the countersignature under its
prior name and deliver Rights Certificates so countersigned; and in case at that
time any of the Rights Certificates shall not have been countersigned, the
Rights Agent may countersign such Rights Certificates either in its prior name
26
<PAGE>
or in its changed name; and in all such cases, such Rights Certificates shall
have the full force provided in the Rights Certificates and in this Agreement.
Section 20. Duties of Rights Agent. The Rights Agent undertakes the
----------------------
duties and obligations imposed by this Agreement upon the following terms and
conditions, by all of which the Company and the holders of Rights Certificates,
by their acceptance thereof, shall be bound:
(a) The Rights Agent may consult with legal counsel (who may be legal
counsel for the Company), and the opinion of such counsel shall be full and
complete authorization and protection to the Rights Agent as to any action taken
or omitted by it in good faith and in accordance with such opinion.
(b) Whenever in the performance of its duties under this Agreement the
Rights Agent shall deem it necessary or desirable that any fact or matter
(including, without limitation, the identity of any "Acquiring Person" and the
determination of "current market price") be proved or established by the Company
prior to taking, suffering or omitting to take any action hereunder, such fact
or matter (unless other evidence in respect thereof is specifically prescribed
herein) may be deemed to be conclusively proved and established by a certificate
signed by the Chairman of the Board, the President, any Vice President, the
Secretary or any Assistant Secretary of the Company and delivered to the Rights
Agent. Any such certificate shall be full authorization to the Rights Agent for
any action taken, suffered or omitted in good faith by it under the provisions
of this Agreement in reliance upon such certificate.
(c) The Rights Agent shall be liable hereunder only for its own
negligence, bad faith or willful misconduct.
(d) The Rights Agent shall not be liable for or by reason of any of
the statements of fact or recitals contained in this Agreement or in the Rights
Certificates (except its countersignature thereof) or be required to verify the
same, but all such statements and recitals are and shall be deemed to have been
made by the Company only.
(e) The Rights Agent shall not be under any responsibility in respect
of the validity of this Agreement or the execution and delivery hereof (except
the due execution hereof by the Rights Agent) or in respect of the validity or
execution of any Rights Certificate (except its countersignature thereof); nor
shall it be responsible for any breach by the Company of any covenant or
condition contained in this Agreement or in any Rights Certificate; nor shall it
be responsible for any change in the exercisability of the Rights (including the
Rights becoming void pursuant to Section 7(d)) or any adjustment in the terms of
the Rights (including the manner, method or amount thereof) provided for in
Sections 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that
would require any such adjustment (except with respect to the exercise of Rights
evidenced by Rights Certificates after actual notice of any such adjustment);
nor shall it by any act hereunder be deemed to make any representation or
warranty as to the authorization or reservation of any shares of Common Stock or
Preferred Stock to be issued pursuant to this Agreement or any Rights
Certificate or as to whether any shares of
27
<PAGE>
Common Stock or Preferred Stock will, when issued, be duly authorized, validly
issued, fully paid and nonassessable.
(f) The Company agrees that it will perform, execute, acknowledge and
deliver or cause to be performed, executed, acknowledged and delivered all such
further and other acts, instruments and assurances as may reasonably be required
by the Rights Agent for the carrying out or performing by the Rights Agent of
the provisions of this Agreement.
(g) The Rights Agent is hereby authorized and directed to accept
instructions with respect to the performance of its duties hereunder from the
Chairman of the Board, the President any Vice President, the Secretary or any
Assistant Secretary of the Company, and to apply to such officers for advice or
instructions in connection with its duties, and it shall not be liable for any
action taken, suffered or omitted to be taken by it in good faith in accordance
with instructions of any such officer.
(h) The Rights Agent and any shareholder, director, officer or
employee of the Rights Agent may buy, sell or deal in any of the Rights or other
securities of the Company or become pecuniarily interested in any transaction in
which the Company may be interested, or contract with or lend money to the
Company or otherwise act as fully and freely as though it were not the Rights
Agent under this Agreement. Nothing herein shall preclude the Rights Agent from
acting in any other capacity for the Company or for any other Person.
(i) The Rights Agent may execute and exercise any of the rights or
powers hereby vested in it or perform any duty hereunder either itself or by or
through its attorneys or agents, and the Rights Agent shall not be answerable or
accountable for any act, default, neglect or misconduct of any such attorneys or
agents or for any loss to the Company or to any holders of Rights resulting from
any such act, default, neglect or misconduct; provided, however, that reasonable
-------- -------
care was exercised in the selection and continued employment thereof.
(j) No provision of this Agreement shall require the Rights Agent to
expend or risk its own funds or otherwise incur any financial liability in the
performance of any of its duties hereunder or in the exercise of its rights if
there shall be reasonable grounds for believing that repayment of such funds or
adequate indemnification against such risk or liability is not reasonably
assured to it.
(k) If, with respect to any Rights Certificate surrendered to the
Rights Agent for exercise or transfer, the certificate attached to the form of
assignment or form of election to purchase, as the case may be, has either not
been completed or indicates an affirmative response to clause 1 or 2 thereof,
the Rights Agent shall not take any further action with respect to such
requested exercise or transfer without first consulting with the Company.
Section 21. Change of Rights Agent. The Rights Agent or any
----------------------
successor Rights Agent may resign and be discharged from its duties under this
Agreement upon 30 days' written notice mailed to the Company and to each
transfer agent of the Common Stock and Preferred Stock by registered or
certified mail, and, subsequent to the Distribution Date, to the holders of the
Rights Certificates by first-class mail. The Company may remove the Rights
Agent or any successor Rights Agent upon 30 days' written notice, mailed to the
Rights Agent or successor Rights Agent, as the case may be, and to each transfer
agent of the Common Stock and Preferred Stock by registered or certified mail,
and subsequent to the Distribution Date, to the holders of
28
<PAGE>
the Rights Certificates by first-class mail. If the Rights Agent shall resign or
be removed or shall otherwise become incapable of acting, the Company shall
appoint a successor to the Rights Agent. If the Company shall fail to make such
appointment within a period of 30 days of giving notice of such removal or after
it has been notified in writing of such resignation or incapacity by the
resigning or incapacitated Rights Agent or by the holder of a Rights Certificate
(who shall, with such notice, submit his Rights Certificate for inspection by
the Company), then the registered holder of any Rights Certificate may apply to
any court of competent jurisdiction for the appointment of a new Rights Agent.
Any successor Rights Agent, whether appointed by the Company or by such a court,
shall be (a) a corporation organized and doing business under the laws of the
United States or of the States of Georgia (or any other state of the United
States so long as such corporation is authorized to do business as a banking
institution in the States of Georgia), in good standing, having a principal
office in the State of Georgia, and which is authorized under such laws to
exercise stock transfer or corporate trust powers and is subject to supervision
or examination by federal or state authority or (b) an Affiliate of a
corporation described in Section 21(a). After appointment, the successor Rights
Agent shall be vested with the same powers, rights, duties and responsibilities
as if it had been originally named as Rights Agent without further act or deed;
but the predecessor Rights Agent shall deliver and transfer to the successor
Rights Agent any property at the time held by it hereunder, and execute and
deliver any further assurance, conveyance, act or deed necessary for the
purpose. Not later than the effective date of any such appointment, the Company
shall file notice thereof in writing with the predecessor Rights Agent and each
transfer agent of the Common Stock and the Preferred Stock, and, subsequent to
the Distribution Date, mail a notice thereof in writing to the registered
holders of the Rights Certificates. Failure to give any notice provided for in
this Section 21, or any defect therein, shall not affect the legality or
validity of the resignation or removal of the Rights Agent or the appointment of
the successor Rights Agent, as the case may be.
Section 22. Issuance of New Right Certificates. Notwithstanding
----------------------------------
any of the provisions of this Agreement or of the Rights to the contrary, the
Company may, at its option, issue new Rights Certificates evidencing Rights in
such form as may be approved by its Board of Directors to reflect any adjustment
or change in the Purchase Price and the number or kind or class of shares or
other securities issuable or property purchasable upon exercise of the Rights
made in accordance with the provisions of this Agreement.
Section 23. Redemption and Termination. (a) The Company may, at its
--------------------------
option, but only upon the vote of a majority of the Continuing Directors then in
office, at any time prior to the earlier of (i) the Close of Business on the
Share Acquisition Date, or (ii) the Final Expiration Date, redeem all but not
less than all of the then outstanding Rights at a redemption price of $0.001 per
Right, as such amount may be appropriately adjusted to reflect any stock split,
stock dividend or similar transaction occurring after the date hereof (such
redemption price being
29
<PAGE>
referred to herein as the "Redemption Price"), and the Company may, at its
option, pay the Redemption Price in shares of Common Stock (based on the
"current market value," as defined in Section 11(d), of the shares of Common
Stock at the time of redemption), cash or any other form of consideration deemed
appropriate by the Board of Directors; provided, however, that any redemption
-------- -------
of Rights shall also be subject to any additional approval procedures required
by the articles of incorporation or bylaws of the Company. Notwithstanding
anything in this Agreement to the contrary, the Rights shall not be exercisable
after the first occurrence of a Flip-in Event until such time as the Company's
right of redemption hereunder has expired.
(b) If, following the occurrence of a Share Acquisition Date (i) a
Person who is an Acquiring Person shall have transferred or otherwise disposed
of a number of shares of Common Stock in one transaction or series of
transactions, not directly or indirectly involving the Company or any of its
Subsidiaries, which did not result in the occurrence of a Triggering Event such
that such Person is thereafter the Beneficial Owner of 10% or less of the
outstanding Common Stock, and (ii) there are no other Persons immediately
following the occurrence of the event described in clause (i) who are Acquiring
Persons, then the right of redemption shall be reinstated and thereafter be
subject to the provisions of this Section 23.
(c) Immediately upon the action of the Continuing Directors electing
to redeem the Rights, and without any further action and without any notice, the
right to exercise the Rights will terminate and thereafter the only right of the
holders of Rights shall be to receive the Redemption Price for each Right so
held. The Company shall promptly thereafter give notice of such redemption to
the Rights Agent and the holders of the Rights in the manner set forth in
Section 26; provided, however, that the failure to give, or any defect in, such
-------- -------
notice shall not affect the validity of such redemption. Any notice which is
mailed in the manner provided herein shall be deemed given, whether or not the
holder receives the notice. Each such notice of redemption will state the
method by which the payment of the Redemption Price will be made.
Section 24. Exchange. (a) At any time after any Person becomes an
--------
Acquiring Person, a majority of the Continuing Directors may, at their option,
exchange all or part of the then outstanding and exercisable Rights (which shall
not include Rights that have become void pursuant to Section 7(d)) for shares of
Common Stock at an exchange ratio of one share of Common Stock per Right,
appropriately adjusted to reflect any stock split, stock dividend or similar
transaction occurring after the date hereof (such exchange ratio being
hereinafter referred to as the "Exchange Ratio").
(b) Immediately upon the action of the Continuing Directors electing
to exchange any Rights pursuant to Section 24(a) and without any further action
and without any notice, the right to exercise such Rights will terminate and
thereafter the only right of a holder of such Rights shall be to receive that
number of shares of Common Stock equal to the number of such Rights held by such
holder multiplied by the Exchange Ratio. The Company shall promptly thereafter
give notice of such exchange to the Rights Agent and the holders of the Rights
to be exchanged in the manner set forth in Section 26; provided, however, that
-------- -------
the failure to give, or any defect in, such notice shall not affect the validity
of such exchange. Any notice which is mailed in the manner provided herein
shall be deemed given, whether or not the holder receives the notice.
30
<PAGE>
Each such notice of exchange will state the method by which the exchange of the
shares of Common Stock for Rights will be effected and, in the event of any
partial exchange, the number of Rights which will be exchanged. Any partial
exchange shall be effected pro rata based on the number of Rights (other than
Rights which have become void pursuant to Section 7(d)) held by each holder of
Rights.
(c) If there shall not be sufficient Common Stock issued but not
outstanding or authorized but unissued to permit any exchange of Rights as
contemplated by this Section 24, the Company shall take all such action as may
be necessary to authorize additional Common Stock for issuance upon exchange of
the Rights. In the event the Company shall, after a good faith effort, be
unable to take all such action as may be necessary to authorize such additional
Common Stock, the Company may substitute common stock equivalents (as defined in
Section 11(a)(iii)) for shares of Common Stock exchangeable for Rights, at the
initial rate of one common stock equivalent for each share of Common Stock, as
appropriately adjusted to reflect adjustments in dividend, liquidation and
voting rights of common stock equivalents pursuant to the terms thereof, so that
each common stock equivalent delivered in lieu of each share of Common Stock
shall have essentially the same dividend, liquidation and voting rights as one
share of Common Stock.
(d) The Company shall not be required to issue fractional shares of
Common Stock or to distribute certificates which evidence fractional shares of
Common Stock. In lieu of such fractional shares of Common Stock, the Company
shall pay to the registered holders of Rights Certificates with regard to which
such fractional shares of Common Stock would otherwise be issuable, an amount in
cash equal to the same fraction of the current market value of a whole share of
Common Stock. For purposes of this Section 24(d), the current market value of a
whole share of Common Stock shall be the closing price of a share of Common
Stock (as determined pursuant to Section 11(d)) for the Trading Day immediately
prior to the date of the exchange.
Section 25. Notice of Proposed Actions. (a) If the Company shall
--------------------------
propose, at any time after the Distribution Date, (i) to pay any dividend
payable in stock of any class to the holders of Preferred Stock or to make any
other distribution to the holders of Preferred Stock (other than a regular
quarterly cash dividend out of earnings or retained earnings of the Company),
(ii) to offer to the holders of its Preferred Stock rights or warrants to
subscribe for or to purchase any additional shares of Preferred Stock or shares
of stock of any class or any other securities, rights or options, (iii) to
effect any reclassification of its Preferred Stock (other than a
reclassification involving only the subdivision or combination of outstanding
shares of Preferred Stock), (iv) to effect any consolidation or merger with or
into any other Person, or to effect a statutory share exchange with any Person,
or to effect and/or to permit one or more of its Subsidiaries to effect any
sale, lease or other transfer, in one transaction or a series of related
transactions, of assets aggregating more than 50% of the assets (measured by
either book value or fair market value) or generating more than 50% of the
operating income or cash flow of the Company and its Subsidiaries, taken as a
whole, to any other Person or Persons, or (v) to effect the liquidation,
dissolution or winding up of the Company, then, in each such case, the Company
shall give to each holder of a Right, to the extent feasible and in accordance
with Section 26, a notice of such proposed action, which shall specify the
record date for the purposes of any such
31
<PAGE>
dividend, distribution or offering of rights or warrants, or the date on which
any such reclassification, consolidation, merger, statutory share exchange,
sale, lease, transfer, liquidation, dissolution or winding up is to take place
and the date of participation therein by the holders of Preferred Stock, if any
such date is to be fixed, and such notice shall be so given in the case of any
action covered by clause (i) or (ii) above at least 20 days prior to the record
date for determining holders of the Preferred Stock entitled to participate in
such dividend, distribution or offering, and in the case of any such other
action, at least 20 days prior to the date of the taking of such proposed action
or the date of participation therein by the holders of Preferred Stock,
whichever shall be the earlier. The failure to give notice required by this
Section or any defect therein shall not affect the legality or validity of the
action taken by the Company or the vote upon any such action.
(b) Notwithstanding anything in this Agreement to the contrary, prior
to the Distribution Date a public filling by the Company with the Securities and
Exchange Commission shall constitute sufficient notice to the holders of
securities of the Company, including the Rights, for purposes of this Agreement
and no other notice need be given to such holders.
(c) If a Triggering Event shall occur, then, in any such case, (i) the
Company shall as soon as practicable thereafter give to each holder of a Right,
in accordance with Section 26, a notice of the occurrence of such event, which
shall specify the event and the consequences of the event to holders of Rights
under Section 11(a)(ii) or 13, as the case may be, and (ii) all references in
Section 25(a) to Preferred Stock shall be deemed thereafter to refer to Common
Stock or other capital stock, as the case may be.
Section 26. Notices. Notices or demands authorized by this
-------
Agreement to be given or made by the Rights Agent or by the holder of any Right
to or on the Company shall be sufficiently given or made if sent by first-class,
postage prepaid mail to the address of the Company indicated on the signature
page hereof or such other address as the Company shall specify in writing to the
Rights Agent. Subject to the provisions of Section 21, any notice or demand
authorized by this Agreement to be given or made by the Company or by the holder
of any Right to or on the Rights Agent shall be sufficiently given or made if
sent by first-class, postage prepaid mail to the address of the Rights Agent
indicated on the signature page hereof or such other address as the Rights Agent
shall specify in writing to the Company. Notices or demands authorized by this
Agreement to be given or made by the Company or the Rights Agent to the holder
of any Rights Certificate (or, prior to the Distribution Date, to the holder of
any certificate representing shares of Common Stock) shall be sufficiently given
or made if sent by first-class, postage prepaid mail to the address of such
holder shown on the registry books of the Company.
Section 27. Supplements and Amendments. Prior to the Distribution
--------------------------
Date and subject to the penultimate sentence of this Section 27, the Company may
and the Rights Agent shall, if the Company so directs, supplement or amend any
provision of this Agreement without the approval of any holders of certificates
representing shares of Common Stock. From and after the Distribution Date, and
subject to the penultimate sentence of this Section 27, the Company and the
Rights Agent shall, if the Company so directs, supplement or amend this
Agreement without
32
<PAGE>
the approval of any holders of Right Certificates in order (a) to cure any
ambiguity, (b) to correct or supplement any provision contained herein which may
be defective or inconsistent with any other provisions herein, (c) to shorten or
lengthen any time period hereunder (which shortening or lengthening shall be
effective only if there are Continuing Directors in office and shall require the
concurrence of a majority of such Continuing Directors), or (d) to change or
supplement the provisions hereof in any manner which the Company may deem
necessary or desirable and which shall not adversely affect the interests of the
holders of Rights (other than an Acquiring Person or an Affiliate or Associate
of an Acquiring Person); provided, however, that this Agreement may not be
-------- -------
supplemented or amended pursuant to Section 27(c) to lengthen (i) a time period
relating to when the Rights may be redeemed at such time as the Rights are not
then redeemable, or (ii) any other time period, unless lengthening such other
time period is for the purpose of protecting, enhancing, or clarifying the
rights of, or benefits to the holders of, the Rights. Notwithstanding the
foregoing, after any Person has become an Acquiring Person, any supplement or
amendment shall be effective only if there are Continuing Directors then in
office, and such supplement or amendment shall have been approved by a majority
of such Continuing Directors. Prior to the Distribution Date, the interests of
the holders of Rights shall be deemed coincident with the interests of the
holders of Common Stock. Notwithstanding anything contained in this Agreement
to the contrary, no supplement or amendment shall be made at any time which
changes the Redemption Price, the Final Expiration Date, the Purchase Price, the
requisite ownership of Common Stock necessary for a Person to be deemed an
Acquiring Person, the number of one one-hundredths of a share of Preferred Stock
for which a Right is exercisable, or the definition of an Excluded Person,
unless in any such case there are Continuing Directors then in office and such
supplement or amendment shall have been approved by a majority of such
Continuing Directors. Upon the delivery of a certificate from an appropriate
officer of the Company which states that the proposed supplement or amendment is
in compliance with the terms of this Section, the Rights Agent shall execute
such supplement or amendment.
Section 28. Successors. All the covenants and provisions of this
----------
Agreement by or for the benefit of the Company or the Rights Agent shall bind
and inure to the benefit of their respective successors and assigns hereunder.
Section 29. Determinations and Actions by the Board of Directors.
----------------------------------------------------
For all purposes of this Agreement, any calculation of the number of shares of
Common Stock outstanding at any particular time, including for purposes of
determining the particular percentage of such outstanding shares of Common Stock
of which any Person is the Beneficial Owner, shall be made in accordance with
the last sentence of Rule 13d-3(d)(1)(i) under the Exchange Act as in effect on
the date of this Agreement. A majority of the Continuing Directors shall have
the exclusive power and authority to administer this Agreement and to exercise
all rights and powers specifically granted to the Board or to the Company, or as
may be necessary or advisable in the administration of this Agreement,
including, without limitation, the right and power to (a) interpret the
provisions of this Agreement, and (b) make all determinations deemed necessary
or advisable for the administration of this Agreement (including a determination
to redeem or exchange or not to redeem or exchange the Rights or to amend this
Agreement); provided, however, that any redemption of Rights shall also be
-------- -------
subject to any additional approval procedures required by the articles of
incorporation or bylaws of the Company. All such actions, calculations,
interpretations and determinations (including, for purposes of clause (y) below,
all omissions with respect to the foregoing) which are done or made by the
Continuing Directors in good faith, shall (x) be final, conclusive and binding
on the Company (subject to any additional
33
<PAGE>
redemption approval procedures referred to in the proviso to the immediately
preceding sentence), the Rights Agent, the holders of the Rights and all other
parties, and (y) not subject the Board of Directors of the Company or the
Continuing Directors to any liability to the holders of the Rights.
Section 30. Benefits of this Agreement. Nothing in this Agreement
--------------------------
shall be construed to give to any Person other than the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, the certificates representing the shares of Common Stock) any
legal or equitable right, remedy or claim under this Agreement; but this
Agreement shall be for the sole and exclusive benefit of the Company, the Rights
Agent and the registered holders of the Rights Certificates (and, prior to the
Distribution Date, the certificates representing the shares of Common Stock).
Section 31. Severability. If any term, provision, covenant or
------------
restriction of this Agreement is held by a court of competent jurisdiction or
other authority to be invalid, void or unenforceable, the remainder of the
terms, provisions, covenants and restrictions of this Agreement shall remain in
full force and effect and shall in no way be affected, impaired or invalidated;
provided, however, that, notwithstanding anything in this Agreement to the
- -------- -------
contrary, if any such term, provision, covenant or restriction is held by such
court or authority to be invalid, void or unenforceable and a majority of the
Continuing Directors determines in its good faith judgment that severing the
invalid language from this Agreement would adversely affect the purpose or
effect of this Agreement, the right of redemption set forth in Section 23 hereof
shall be reinstated and shall not expire until the close of business on the
tenth day following the date of such determination by the Continuing Directors.
Section 32. Governing Law. This Agreement, each Right and each
-------------
Rights Certificate issued hereunder shall be deemed to be a contract made under
the laws of the State of Georgia and for all purposes shall be governed by and
construed in accordance with the laws of such State (other than its conflicts of
laws rules) applicable to contracts to be made and performed entirely within
such State.
Section 33. Counterparts. This Agreement may be executed in any
------------
number of counterparts and each of such counterparts shall for all purposes be
deemed to be an original, and all such counterparts shall together constitute
one and the same instrument.
Section 34. Descriptive Headings. The captions herein are included
--------------------
for convenience of reference only, do not constitute a part of this Agreement
and shall be ignored in the construction and interpretation hereof.
34
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
INNOTRAC CORPORATION
By: /s/ Scott Dorfman
-------------------------------------
Name: Scott Dorfman
--------------------------------
Title: President
-------------------------------
1828 Meca Way
Norcross, Georgia 30093
Attention: President
RELIANCE TRUST COMPANY
By: /s/ Jerry W. Dawson
-------------------------------------
Name: Jerry W. Dawson
--------------------------------
Title: Senior Vice President
-------------------------------
Reliance Trust Company
-------------------------------------
3384 Peachtree Rd., N.E., Suite 900
-------------------------------------
Atlanta, GA 30326-1106
-------------------------------------
Attention: Jerry W. Dawson
---------------------------
35
<PAGE>
Exhibit A
FORM OF
BOARD RESOLUTION ESTABLISHING AND DESIGNATING
SERIES A PARTICIPATING CUMULATIVE
PREFERRED STOCK
OF
INNOTRAC CORPORATION
Pursuant to Section 14-2-602 of the Georgia
Business Corporation Code
Section 1. Designation and Number of Shares. The shares of such
series shall be designated as "Series A Participating Cumulative Preferred
Stock" (the "Series A Preferred Stock"), and the number of shares constituting
such series shall be 500,000. Such number of shares of the Series A Preferred
Stock may be increased or decreased by resolution of the Board of Directors;
provided, however, that no decrease shall reduce the number of shares of Series
A Preferred Stock to a number less than the number of shares then outstanding
plus the number of shares issuable upon exercise or conversion of outstanding
rights, options or other securities issued by the Corporation.
Section 2. Dividends and Distributions.
(A) Subject to the prior and superior rights of the holders of any
shares of any series of Preferred Stock ranking prior and superior to the shares
of Series A Preferred Stock with respect to dividends, if any, the holders of
shares of Series A Preferred Stock shall be entitled to receive, when, as and if
declared by the Board of Directors out of funds legally available for the
purpose, quarterly dividends payable on the last day of March, June, September
and December of each year (each such date being referred to herein as a
"Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend
Payment Date after the first issuance of any share or fraction of a share of
Series A Preferred Stock, in an amount per share (rounded to the nearest cent)
equal to the greater of (a) $1.00 and (b) subject to the provision for
adjustment hereinafter set forth, 100 times the aggregate per share amount
(payable in kind) of all cash dividends or other distributions and 100 times the
aggregate per share amount of all non-cash dividends or other distributions
(other than (i) a dividend payable in shares of Common Stock, par value $0.10
per share, of the Corporation (the "Common Stock") or (ii) a subdivision
A-1
<PAGE>
of the outstanding shares of Common Stock (by reclassification or otherwise)),
declared on the Common Stock since the immediately preceding Quarterly Dividend
Payment Date, or, with respect to the first Quarterly Dividend Payment Date,
since the first issuance of any share or fraction of a share of Series A
Preferred Stock. If the Corporation shall at any time after _________, ____
(the "Rights Declaration Date") declare or pay any dividend on Common Stock
payable in shares of Common Stock or effect a subdivision or combination or
consolidation of the outstanding shares of Common Stock (by reclassification or
otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the amount to which holders of shares of Series A Preferred Stock
were entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such
event.
(B) The Corporation shall declare a dividend or distribution on the
Series A Preferred Stock as provided in Section 2(A) immediately after it
declares a dividend or distribution on the Common Stock (other than as described
in clauses (i) and (ii) of the first sentence of Section 2(A)); provided,
however, that if no dividend or distribution shall have been declared on the
Common Stock during the period between any Quarterly Dividend Payment Date and
the next subsequent Quarterly Dividend Payment Date (or, with respect to the
first Quarterly Dividend Payment Date, the period between the first issuance of
any share or fraction of a share of Series A Preferred Stock and such first
Quarterly Dividend Payment Date), a dividend of $1.00 per share on the Series A
Preferred Stock shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(C) Dividends shall begin to accrue and be cumulative on outstanding
shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next
preceding the date of issue of such shares of Series A Preferred Stock, unless
the date of issue of such shares is on or before the record date for the first
Quarterly Dividend Payment Date, in which case dividends on such shares shall
begin to accrue and be cumulative from the date of issue of such shares, or
unless the date of issue is a date after the record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive a quarterly
dividend and on or before such Quarterly Dividend Payment Date, in which case
dividends shall begin to accrue and be cumulative from such Quarterly Dividend
Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends
paid on shares of Series A Preferred Stock in an amount less than the total
amount of such dividends at the time accrued and payable on such shares shall be
allocated pro rata on a share-by-share basis among all such shares at the time
outstanding. The Board of Directors may fix a record date for the determination
of holders of shares of Series A Preferred Stock entitled to receive payment of
a dividend or distribution declared thereon, which record date shall not be more
than 60 days prior to the date fixed for the payment thereof.
Section 3. Voting Rights. In addition to any other voting rights
required by law, the holders of shares of Series A Preferred Stock shall have
the following voting rights:
A-2
<PAGE>
(A) Subject to the provision for adjustment hereinafter set forth,
each share of Series A Preferred Stock shall entitle the holder thereof to 100
votes on all matters submitted to a vote of shareholders of the Corporation. If
the Corporation shall at any time after the Rights Declaration Date declare or
pay any dividend on Common Stock payable in shares of Common Stock or effect a
subdivision or combination or consolidation of the outstanding shares of Common
Stock (by reclassification or otherwise) into a greater or lesser number of
shares of Common Stock, then in each such case the number of votes per share to
which holders of shares of Series A Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by a fraction,
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(B) Except as otherwise provided herein or by law, the holders of
shares of Series A Preferred Stock and the holders of shares of Common Stock
shall vote together as a single class on all matters submitted to a vote of
shareholders of the Corporation.
(C) (i) If at any time dividends on any Series A Preferred Stock shall
be in arrears in an amount equal to six quarterly dividends thereon (whether or
not consecutive), the occurrence of such contingency shall mark the beginning of
a period (herein called a "default period") which shall extend until such time
when all accrued and unpaid dividends for all previous quarterly dividend
periods and for the current quarterly dividend period on all shares of Series A
Preferred Stock then outstanding shall have been declared and paid or set apart
for payment. During each default period, all holders of Series A Preferred
Stock and any other series of Preferred Stock then entitled as a class to elect
directors, voting together as a single class, irrespective of series, shall have
the right to elect one Director.
(ii) During any default period, such voting right of the holders of
Series A Preferred Stock may be exercised initially at a special meeting called
pursuant to Section 3(C)(iii) or at any annual meeting of shareholders, and
thereafter at annual meetings of shareholders; provided, however, that neither
such voting right nor the right of the holders of any other series of Preferred
Stock, if any, to increase, in certain cases, the authorized number of Directors
shall be exercised unless the holders of 10% in number of shares of Preferred
Stock outstanding shall be present in person or by proxy. The absence of a
quorum of holders of Common Stock shall not affect the exercise by holders of
Preferred Stock of such voting right. At any meeting at which holders of
Preferred Stock shall exercise such voting right initially during an existing
default period, they shall have the right, voting as a class, to elect Directors
to fill such vacancy, if any, in the Board of Directors as may then exist up to
one Director or, if such right is exercised at an annual meeting, to elect one
Director. If the number which may be so elected at any special meeting does not
amount to the required number, the holders of the Preferred Stock shall have the
right to make such increase in the number of Directors as shall be necessary to
permit the election by them of the required number. After the holders of the
Preferred Stock shall have exercised their right to elect Directors in any
default period and during the continuance of such period, the number of
Directors shall not be increased or decreased except by vote of the holders of
Preferred Stock as herein provided or pursuant to the rights of any equity
securities ranking senior to or pari passu with the Series A Preferred Stock.
---- -----
A-3
<PAGE>
(iii) Notwithstanding anything to the contrary contained in the
Corporation's Articles of Incorporation or Bylaws, unless the holders of
Preferred Stock shall, during an existing default period, have previously
exercised their right to elect Directors, the Board of Directors may order, or
any shareholder(s) owning in the aggregate not less than ten percent (10%) of
the total number of shares of Preferred Stock outstanding, irrespective of
series, may request, the calling of a special meeting of holders of Preferred
Stock, which meeting shall thereupon be called by the President, a Vice
President or the Secretary of the Corporation. Notice of such meeting and of any
annual meeting at which holders of Preferred Stock are entitled to vote pursuant
to this Section 3(C)(iii) shall be given to each holder of record of Preferred
Stock by mailing a copy of such notice to him at his last address as the same
appears on the books of the Corporation. Such meeting shall be called for a time
not earlier than 20 days and not later than 60 days after such order or request
or in default of the calling of such meeting within 60 days after such order or
request, such meeting may be called on similar notice by any shareholder(s)
owning in the aggregate not less than ten percent (10%) of the total number of
shares of Preferred Stock outstanding, irrespective of series. Notwithstanding
the provisions of this Section 3(C)(iii), no such special meeting shall be
called during the period within 60 days immediately preceding the date fixed for
the next annual meeting of shareholders.
(iv) In any default period, the holders of Common Stock, and other
classes of stock of the Corporation if applicable, shall continue to be entitled
to elect the whole number of Directors until the holders of Preferred Stock
shall have exercised their right to elect one Director voting as a class, after
the exercise of which right (x) the Directors so elected by the holders of
Preferred Stock shall continue in office until their successors shall have been
elected by such holders or until the expiration of the default period, and (y)
any vacancy in the Board of Directors may (except as provided in Section
3(C)(ii) be filled by vote of a majority of the remaining Directors theretofore
elected by the holders of the class of stock which elected the Director whose
office shall have become vacant. References in this Section 3(C) to Directors
elected by the holders of a particular class of stock shall include Directors
elected by such Directors to fill vacancies as provided in clause (y) of the
foregoing sentence.
(v) Immediately upon the expiration of a default period, (x) the
right of the holders of Preferred Stock as a class to elect Directors shall
cease, (y) the term of any Directors elected by the holders of Preferred Stock
as a class shall terminate, and (z) the number of Directors shall be such number
as may be provided for in the Articles of Incorporation or Bylaws irrespective
of any increase made pursuant to the provisions of Section 3(C)(ii) (such number
being subject, however, to change thereafter in any manner provided by law or in
the Articles of Incorporation or Bylaws). Any vacancies in the Board of
Directors effected by the provisions of clauses (y) and (z) in the preceding
sentence may be filled by a majority of the remaining Directors.
(D) Except as otherwise provided herein, holders of Series A
Preferred Stock shall have no special voting rights, and their consent shall not
be required (except to the extent they are entitled to vote with holders of
Common Stock as set forth herein) for taking any corporate action.
A-4
<PAGE>
Section 4. Certain Restrictions.
(A) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on outstanding shares of Series A
Preferred Stock shall have been paid in full, the Corporation shall not:
(i) declare or pay dividends on, or make any other distributions
on, any shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred Stock;
(ii) declare or pay dividends on, or make any other distributions
on, any shares of stock ranking on a parity (either as to dividends or upon
liquidation, dissolution or winding up) with the Series A Preferred Stock,
except dividends paid ratably on the Series A Preferred Stock and all such
other parity stock on which dividends are payable or in arrears in
proportion to the total amounts to which the holders of all such shares are
then entitled;
(iii) redeem, purchase or otherwise acquire for value any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Stock; provided,
however, that the Corporation may at any time redeem, purchase or otherwise
acquire shares of any such junior stock in exchange for shares of stock of
the Corporation ranking junior (as to dividends and upon dissolution,
liquidation or winding up) to the Series A Preferred Stock; or
(iv) redeem, purchase or otherwise acquire for value any shares of
Series A Preferred Stock, or any shares of stock ranking on a parity
(either as to dividends or upon liquidation, dissolution or winding up)
with the Series A Preferred Stock, except in accordance with a purchase
offer made in writing or by publication (as determined by the Board of
Directors) to all holders of Series A Preferred Stock and all such other
parity stock upon such terms as the Board of Directors, after consideration
of the respective annual dividend rates and other relative rights and
preferences of the respective series and classes, shall determine in good
faith will result in fair and equitable treatment among the respective
series or classes.
(B) The Corporation shall not permit any subsidiary of the
Corporation to purchase or otherwise acquire for value any shares of stock of
the Corporation unless the Corporation could, under Section 4(A), purchase or
otherwise acquire such shares at such time and in such manner.
Section 5. Reacquired Shares. Any shares of Series A Preferred Stock
redeemed, purchased or otherwise acquired by the Corporation in any manner
whatsoever shall be retired and canceled promptly after the acquisition thereof.
All such shares shall upon their cancellation become authorized but unissued
shares of Preferred Stock without designation as to series and may be reissued
as part of a new series of Preferred Stock to be created by resolution
A-5
<PAGE>
or resolutions of the Board of Directors as permitted by the Articles of
Incorporation or as otherwise permitted under Georgia law.
Section 6. Liquidation, Dissolution or Winding Up. Upon any
liquidation, dissolution or winding up of the Corporation, no distribution shall
be made (1) to the holders of shares of stock ranking junior (either as to
dividends or upon liquidation, dissolution or winding up) to the Series A
Preferred Stock unless, prior thereto, the holders of shares of Series A
Preferred Stock shall have received $1.00 per share, plus an amount equal to
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment; provided, however, that the holders of shares of
Series A Preferred Stock shall be entitled to receive an aggregate amount per
share, subject to the provision for adjustment hereinafter set forth, equal to
100 times the aggregate amount to be distributed per share to holders of Common
Stock, or (2) to the holders of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the Series A
Preferred Stock, except distributions made ratably on the Series A Preferred
Stock and all such other parity stock in proportion to the total amounts to
which the holders of all such shares are entitled upon such liquidation,
dissolution or winding up. If the Corporation shall at any time after the
Rights Declaration Date pay any dividend on Common Stock payable in shares of
Common Stock or effect a subdivision or combination or consolidation of the
outstanding shares of Common Stock (by reclassification or otherwise) into a
greater or lesser number of shares of Common Stock, then in each such case the
aggregate amount to which holders of shares of Series A Preferred Stock were
entitled immediately prior to such event under the proviso in clause (1) of the
preceding sentence shall be adjusted by multiplying such amount by a fraction
the numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
Section 7. Consolidation or Merger. If the Corporation shall enter
into any consolidation, merger, combination or other transaction in which the
shares of Common Stock are exchanged for or changed into other stock or
securities, cash or any other property, then in any such case the shares of
Series A Preferred Stock shall at the same time be similarly exchanged for or
changed into an amount per share, subject to the provision for adjustment
hereinafter set forth, equal to 100 times the aggregate amount of stock,
securities, cash or any other property, as the case may be, into which or for
which each share of Common Stock is exchanged or changed. If the Corporation
shall at any time after the Rights Declaration Date pay any dividend on Common
Stock payable in shares of Common Stock or effect a subdivision or combination
or consolidation of the outstanding shares of Common Stock (by reclassification
or otherwise) into a greater or lesser number of shares of Common Stock, then in
each such case the amount set forth in the preceding sentence with respect to
the exchange or change of shares of Series A Preferred Stock shall be adjusted
by multiplying such amount by a fraction the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
A-6
<PAGE>
Section 8. No Redemption. The Series A Preferred Stock shall not be
redeemable.
Section 9. Rank. The Series A Preferred Stock shall rank junior (as
to dividends and upon liquidation, dissolution and winding up) to all other
series of the Corporation's preferred stock, except any series that specifically
provides that such series shall rank junior to the Series A Preferred Stock.
Section 10. Fractional Shares. Series A Preferred Stock may be
issued in fractions of a share which shall entitle the holder, in proportion to
such holder's fractional shares, to exercise voting rights, receive dividends,
participate in distributions and to have the benefit of all other rights of
holders of Series A Preferred Stock.
Section 11. Amendment. The Articles of Incorporation of the
Corporation shall not be further amended in any manner which would materially
alter or change the powers, preferences or special rights of the Series A
Preferred Stock so as to affect them adversely without the affirmative vote of
the holders of a majority or more of the outstanding shares of Series A
Preferred Stock, voting separately as a class.
A-7
<PAGE>
Exhibit B
Form of Rights Certificate
Certificate No. R- _______________Rights
NOT EXERCISABLE AFTER THE EARLIER OF JANUARY 1, 2008, AND THE DATE ON WHICH
THE RIGHTS EVIDENCED HEREBY ARE REDEEMED OR EXCHANGED BY THE COMPANY AS SET
FORTH IN THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.001
PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. AS
SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO
IS, WAS OR BECOMES AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS
SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON
BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BE NULL AND VOID. [THE
RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY
A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR AN ASSOCIATE
OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT).
THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BE OR MAY BECOME
NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(d) OF THE RIGHTS
AGREEMENT.)]/1/
RIGHTS CERTIFICATE
INNOTRAC CORPORATION
This Rights Certificate certifies that ________, or registered
assigns, is the registered holder of the number of Rights set forth above, each
of which entitles the holder (upon the terms and subject to the conditions set
forth in the Rights Agreement, dated as of December 31, 1997 (the "Rights
Agreement"), between Innotrac Corporation, a Georgia corporation (the
"Company"), and Reliance Trust Company (the "Rights Agent")), to purchase
from the Company, at any time after the Distribution Date (as such term is
defined in the Rights Agreement) and prior to the Expiration Date (as such term
is defined in the Rights Agreement), one one-hundredth{s} of a fully paid, non-
assessable share of Series A Participating Cumulative Preferred Stock (the
"Preferred Stock") of the Company, at a purchase price of $60.00 per one one-
hundredth of a share (the "Purchase Price"), payable in lawful money of the
United States of America, upon surrender of this Rights Certificate, with the
form of election to purchase and related certificate duly executed, and payment
of the Purchase Price at an office of the Rights Agent designated for such
purpose.
- ---------------------
/1/ If applicable, insert this portion of the legend and delete the preceding
sentence.
B-1
<PAGE>
Terms used herein and not otherwise defined herein have the meanings
assigned to them in the Rights Agreement.
The number of Rights evidenced by this Rights Certificate (and the
number and kind of shares issuable upon exercise of each Right) and the Purchase
Price set forth above are as of ____________, _____, and may have been or in the
future may be adjusted as a result of the occurrence of certain events, as more
fully provided in the Rights Agreement.
Upon the occurrence of a Flip-in Event, if the Rights evidenced by
this Rights Certificate are beneficially owned by (a) an Acquiring Person or an
Associate or Affiliate of an Acquiring Person, (b) a transferee of an Acquiring
Person (or any such Associate or Affiliate) who becomes a transferee after the
Acquiring Person becomes such, or (c) under certain circumstances specified in
the Rights Agreement, a transferee of an Acquiring Person (or any such Associate
or Affiliate) who becomes a transferee prior to or concurrently with the
Acquiring Person becoming such, such Rights shall become null and void, and no
holder hereof shall have any right with respect to such Rights from and after
the occurrence of such Flip-in Event.
This Right Certificate is subject to all of the terms, provisions and
conditions of the Rights Agreement, which terms, provisions and conditions are
hereby incorporated herein by reference and made a part hereof and to which
Rights Agreement reference is hereby made for a full description of the rights,
limitations of rights, obligations, duties and immunities hereunder of the
Rights Agent, the Company and the holders of the Rights Certificates, which
limitations of rights include the temporary suspension of the exercisability of
such Rights under the specific circumstances set forth in the Rights Agreement.
Copies of the Rights Agreement are on file at the office of the Company and are
also available upon written request to the Company.
Upon surrender at the principal office or offices of the Rights Agent
designated for such purpose and subject to the terms and conditions set forth in
the Rights Agreement, any Rights Certificate(s) may be transferred or exchanged
for another Rights Certificate(s) evidencing a like number of Rights as the
Rights Certificate(s) surrendered. If this Rights Certificate shall be
exercised in part, the holder shall be entitled to receive upon surrender hereof
another Rights Certificate(s) for the number of whole Rights not exercised.
Subject to the provisions of the Rights Agreement, the Board of
Directors of the Company may, at its option,
(a) at any time prior to the earlier of (i) the Close of Business
on the Share Acquisition Date and (ii) the Final Expiration Date,
redeem all but not less than all the then outstanding Rights at a
redemption price of $0.001 per Right; or
(b) at any time after any Person becomes an Acquiring Person,
exchange all or part of the then outstanding Rights (other than Rights
held by the Acquiring Person and certain related Persons) for shares
of Common Stock at an exchange ratio of one share of Common Stock per
Right. If the Rights shall be exchanged in part, the holder of this
Rights Certificate shall be entitled to receive
B-2
<PAGE>
upon surrender hereof another Rights Certificate(s) for the number of
whole Rights not exchanged.
After the expiration of the redemption period, the Company's right of
redemption may be reinstated if an Acquiring Person reduces his beneficial
ownership to ten percent (10%) or less of the outstanding shares of Common Stock
in a transaction or series of transactions not involving the Company and there
is no other Acquiring Person.
No fractional shares of Preferred Stock are required to be issued upon
the exercise of any Right(s) evidenced hereby (other than fractions which are
multiples of one one-hundredth of a share of Preferred Stock, which may, at the
election of the Company, be evidenced by depository receipts), but in lieu
thereof a cash payment will be made, as provided in the Rights Agreement.
No holder of this Rights Certificate shall be entitled to vote,
receive dividends or be deemed for any purpose the holder of the shares of
capital stock which may at any time be issuable on the exercise hereof, nor
shall anything contained in the Rights Agreement or herein be construed to
confer upon the holder hereof, as such, any of the rights of a shareholder of
the Company or any right to vote for the election of directors or upon any
matter submitted to shareholders at any meeting thereof, or to give or withhold
consent to any corporate action, or to receive notice of meetings or other
actions affecting shareholders (except as provided in the Rights Agreement), or
to receive dividends or subscription rights, or otherwise, until the Right(s)
evidenced by this Rights Certificate shall have been exercised as provided in
the Rights Agreement.
This Rights Certificate shall not be valid or obligatory for any
purpose until it shall have been countersigned by the Rights Agent.
B-3
<PAGE>
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal by its authorized officers.
Dated as of _____________________, ______
INNOTRAC CORPORATION
By:
----------------------------
Title:
(SEAL)
Attest:
- ------------------------------------
Secretary
Countersigned:
Reliance Trust Company
as Rights Agent
By:
---------------------------------
Authorized Signature
B-4
<PAGE>
Form of Reverse Side of Rights Certificate
FORM OF ASSIGNMENT
(To be executed if the registered holder
desires to transfer the Rights Certificate.)
FOR VALUE RECEIVED
------------------------------------------------------------
hereby sells, assigns and transfers unto
--------------------------------------
- ------------------------------------------------------------------------------
(Please print name and address of transferee)
- ------------------------------------------------------------------------------
this Rights Certificate, together with all right, title and interest therein,
and does hereby irrevocably constitute and appoint _______________________
Attorney, to transfer the within Rights Certificate on the books of the within-
named Company, with full power of substitution.
Dated:
------------------------- -----------------------------
Signature
Signature Guaranteed:
B-5
<PAGE>
Certificate
The undersigned hereby certifies by checking the appropriate boxes
that:
(1) the Rights evidenced by this Rights Certificate ___ are ___ are
not being assigned by or on behalf of a Person who is or was an Acquiring Person
or an Affiliate or Associate of any such Acquiring Person (as such terms are
defined in the Rights Agreement);
(2) after due inquiry and to the best knowledge of the undersigned, it
___ did ___ did not acquire the Rights evidenced by this Rights Certificate from
any Person who is, was or became an Acquiring Person or an Affiliate or
Associate of an Acquiring person.
Dated:
--------------------------- --------------------------------
Signature
NOTICE
The signatures to the foregoing Assignment and Certificate must
correspond to the name as written upon the face of this Rights Certificate in
every particular, without alteration or enlargement or any change whatsoever.
B-6
<PAGE>
-------------------
FORM OF ELECTION TO PURCHASE
(To be executed if the registered holder desires to exercise Rights represented
by the Rights Certificate.)
To: Innotrac Corporation
The undersigned hereby irrevocably elects to exercise ______________
Rights represented by this Rights Certificate to purchase shares of Preferred
Stock issuable upon the exercise of the Rights (or such other securities of the
Company or of any other Person which may be issuable upon the exercise of the
Rights) and requests that certificates for such securities be issued in the name
of and delivered to:
Please insert social security
or other identifying number
- --------------------------------------------------------------------------------
(Please print name and address)
- --------------------------------------------------------------------------------
If such number of Rights shall not be all the Rights evidenced by this
Rights Certificate, a new Rights Certificate for the balance of such Rights
shall be registered in the name of and delivered to:
Please insert social security
or other identifying number
- ---------------------------------------------
(Please print name and address)
- ---------------------------------------------
Dated: ____________________, _______
-------------------------
Signature
Signature Guaranteed:
B-7
<PAGE>
EXHIBIT C
------------
INNOTRAC CORPORATION
SHAREHOLDER RIGHTS PLAN
Summary of Terms
Form of Security: The Board of Directors has declared a dividend
of one preferred stock purchase right for each
outstanding share of the Company's Common Stock,
payable to holders of record as of the close of
business on January 1, 1998 (the "Effective
Date") (each a "Right," and collectively, the
"Rights").
Distribution Date: The earlier of:
(1) the 10th day after public announcement
that (a) any person or group has become,
after the Effective Date, the beneficial
owner of 15% or more of the Company's
Common Stock, or (b) an acquisition (other
than an Approved Acquisition) of an
additional 2% or more of the Common Stock
has been made by (i) a person or group which
previously acquired a 15% or greater
interest in an Approved Acquisition or (ii)
a person or group which owned 15% or more
of the Company's Common Stock prior to the
Effective Date; and
(2) the 10th business day after the date of
the commencement of a tender or exchange
offer (other than a Qualifying Tender Offer)
by any person which would, if consummated,
result in such person becoming the
beneficial owner of 15% or more of the
Company's Common Stock, in each case,
subject to extension by a majority of the
Continuing Directors.
Approved Acquisition: An acquisition, approved in advance by a
majority of the Continuing Directors, of (i)
15% or more of the Common Stock by any person,
or (ii) an additional 2% or more of the Common
Stock by a previously approved 15% or more
holder.
Qualifying Tender Offer: A tender or exchange offer for all the Common
Stock which
C-1
<PAGE>
is approved in advance by a majority of the
Continuing Directors.
Transfer: Prior to the Distribution Date, the Rights will
be evidenced by the certificates for and will be
transferred with the Common Stock, and the
registered holders of the Common Stock will be
deemed to be the registered holders of the
Rights.
After the Distribution Date, the Rights Agent
will mail separate certificates evidencing the
Rights to each record holder of the Common Stock
as of the close of business of the Distribution
Date, and thereafter the Rights will be
transferable separately from the Common Stock.
Exercise: Prior to the Distribution Date, the Rights will
not be exercisable.
After the Distribution Date, each Right will be
exercisable to purchase, for $60.00 (the
"Purchase Price"), one one-hundredth of a share
of Series A Participating Cumulative Preferred
Stock, par value $0.10 per share, of the
Company.
Flip-In: If (1) any person or group (an "Acquiring
Person") becomes, after the Effective Date, the
beneficial owner of 15% or more of the
Company's Common Stock (other than an Approved
Acquisition or a Qualifying Tender Offer), (2)
during such time as there is an Acquiring
Person, an event occurs which results in such
Acquiring Person acquiring an additional 2% or
more of the Common Stock (other than an Approved
Acquisition or a Qualifying Tender Offer), (3)
the Company is the surviving corporation in a
merger with an Acquiring Person and its Common
Stock is not changed or exchanged, or (4) an
Acquiring Person engages in one or more "self-
dealing" transactions as set forth in the Rights
Agreement, then each Right (other than Rights
beneficially owned by the Acquiring Person and
certain affiliated persons) will entitle the
holder to elect to receive a number of shares of
the Company's Common Stock (or in certain
circumstances, cash, property or other
securities of the Company) having a market value
equal to the Purchase Price, without payment of
the Purchase Price and in lieu of the Preferred
Stock. Notwithstanding the foregoing, in most
instances following the occurrence of the events
set forth in this paragraph, all Rights that
are, or (under certain circumstances specified
in the Rights Agreement) were, beneficially
owned by any Acquiring Person will be null and
void. However, Rights are not exercisable
following the occurrence of the events set
C-2
<PAGE>
forth above until such time as the Rights are no
longer redeemable by the Company as set forth
below.
Flip-Over: If, after any person has become an Acquiring
Person (other than pursuant to an Approved
Acquisition or a Qualifying Tender Offer), (1)
the Company is involved in a merger or other
business combination in which the Company is not
the surviving corporation or its Common Stock is
exchanged for other securities or assets, or (2)
the Company and/or one or more of its
subsidiaries sell or otherwise transfer assets
aggregating more than 50% of the assets or
generating more than 50% of the operating income
or cash flow of the Company and its
subsidiaries, taken as a whole (other than a
Qualifying Tender Offer), then each Right will
entitle the holder to purchase, for the Purchase
Price, a number of shares of common stock of the
other party to such business combination or sale
(or in certain circumstances, an affiliate)
having a market value of twice the Purchase
Price.
Exchange: At any time after any person has become an
Acquiring Person a majority of the Continuing
Directors may exchange all or part of the Rights
(other than the Rights beneficially owned by the
Acquiring Person and certain affiliated persons)
for shares of Common Stock at an exchange ratio
of one share of Common Stock per Right.
Redemption: Subject to the applicable provisions in the
Company's articles of incorporation and bylaws,
a majority of Continuing Directors may redeem
all of the Rights at a price of $0.001 per Right
at any time prior to the close of business on
the date of the public announcement that any
person has become an Acquiring Person (subject
to extension by a majority of the Continuing
Directors). The Company's right of redemption
may be reinstated if an Acquiring Person reduces
his beneficial ownership to 10% or less of the
outstanding shares of Common Stock in a
transaction or series of transactions not
involving the Company. Immediately upon the
action of a majority of Continuing Directors
ordering redemption of the Rights, the Rights
will terminate and the only right of the holders
of the Rights will be to receive the redemption
price thereof.
Continuing Director: Means any member of the Board of Directors who
was a member of the Board prior to the Effective
Date or any person who is subsequently elected
to the Board if such person is recommended or
approved by a majority of the
C-3
<PAGE>
Continuing Directors. Continuing Directors do
not include an Acquiring Person, an affiliate or
associate of an Acquiring Person or any
representative or nominee of the foregoing.
Expiration: The Rights will expire 10 years from the
Effective Date unless earlier exchanged or
redeemed.
Amendments: Prior to the Distribution Date, the Rights
Agreement may be amended in any respect;
provided that, at any time, any change in the
Redemption Price, the Expiration Date, the
Purchase Price or the number of shares of
Preferred Stock for which a Right is
exercisable must be approved by a majority of
the Continuing Directors.
After the Distribution Date, the Rights
Agreement may be amended in any respect that
does not adversely affect the Rights holders
(other than any Acquiring Person and certain
affiliated persons); provided that, at any time,
any change in the Redemption Price, the
Expiration Date, the Purchase Price or the
number of shares of Preferred Stock for which a
Right is exercisable must be approved by a
majority of the Continuing Directors.
After any person has become an Acquiring Person,
the Rights Agreement may be amended only with
the approval of a majority of the Continuing
Directors.
Voting Rights: Rights holders have no rights as a shareholder
of the Company, including the right to vote and
to receive dividends.
Antidilution Provisions: The Purchase Price payable, and the number of
shares of Preferred Stock or other securities or
property issuable upon exercise of the Rights
are subject to adjustment from time to time to
prevent dilution (1) in the event of a stock
dividend on, or a subdivision, combination or
reclassification of, the Preferred Stock, (2)
upon the grant to holders of the Preferred Stock
of certain rights or warrants to subscribe for
or purchase Preferred Stock at a price, or
securities convertible into Preferred Stock with
a conversion price, less than the then-current
market price of the Preferred Stock, or (3) upon
the distribution to holders of the Preferred
Stock of evidences of indebtedness or assets
(excluding regular periodic cash dividends paid
out of earnings or retained earnings) or of
subscription rights or warrants.
The number of outstanding Rights and the number
of 1/100ths of a share of Preferred Stock
issuable upon exercise of each Right are also
subject to adjustment in the event of a stock
split of the Common Stock or a stock dividend on
the Common Stock payable in Common Stock or
subdivisions, consolidations or combinations of
the Common Stock occurring prior to the
Distribution Date.
C-4
<PAGE>
With certain exceptions, no adjustment in the
Purchase Price will be required until cumulative
adjustments amount to at least of the Purchase
Price. No fractional shares of Preferred Stock
will be issued (other than fractions which are
integral multiples of 1/100th of a share of a
Preferred Stock), and in lieu thereof, an
adjustment in cash will be made based on the
market price of the Preferred Stock on the last
trading date prior to the date of exercise.
Preferred Stock: The dividend and liquidation rights of the
Preferred Stock are designed so that the value
of one one-hundredth of a share of Preferred
Stock issuable upon exercise of each Right will
approximate the same economic value of one share
of Common Stock, including voting rights. Shares
of Preferred Stock issuable upon exercise of the
Rights will not be redeemable. Each share of
Preferred Stock will entitle the holder to a
minimum preferential dividend of $1.00 per
share, but will entitle the holder to an
aggregate dividend payment of 100 times the
dividend declared on each share of Common Stock.
In the event of liquidation, each share of
Preferred Stock will be entitled to a minimum
preferential liquidation payment of $1.00, plus
accrued and unpaid dividends and distributions
thereon, but will be entitled to an aggregate
payment of 100 times the payment made per share
of Common Stock. In the event of any merger,
consolidation or other transaction in which
Common Stock is exchanged for or changed into
other stock or securities, cash or other
property, each share of Preferred Stock will be
entitled to receive 100 times the amount
received per share of Common Stock.
Each share of Preferred Stock will be entitled
to 100 votes on all matters submitted to a vote
of the shareholders of the Company, and shares
of Preferred Stock will generally vote together
as one class with the Common Stock and any other
voting capital stock of the Company on all
matters submitted to a vote of the Company's
shareholders. Further, whenever dividends on the
Preferred Stock are in arrears in an amount
equal to six quarterly payments, the Preferred
Stock, together with any other shares of
preferred stock then entitled to elect
directors, shall have the right, as a single
class, to elect one director until the default
has been cured.
C-5
<PAGE>
Taxes: While the dividend of the Rights will not be
taxable to shareholders or to the Company,
shareholders or the Company may, depending upon
the circumstances, recognize taxable income in
the event that the Rights become exercisable as
set forth above.
C-6
<PAGE>
[KILPATRICK STOCKTON LLP LETTERHEAD APPEARS HERE]
EXHIBIT 5
ATTORNEYS AT LAW
Suite 2800
1100 Peachtree Street
Atlanta, Georgia 30309-4530
Telephone: 404.815.6500
Facsimile: 404.815.6555
February 10, 1998 E-MAIL: [email protected]
Direct Dial: 404.815.6483
Innotrac Corporation
1828 Meca Way
Norcross, GA 30093
RE: INNOTRAC CORPORATION
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-42373)
Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
File No. 333-42373, as amended (the "Registration Statement") filed by Innotrac
Corporation (the "Company"), a Georgia corporation, with the Securities and
Exchange Commission with respect to the registration under the Securities Act of
1933, as amended, of 2,500,000 shares of Common Stock, par value $0.10 per
share, of the Company (the "Common Stock"), to be sold by the Company to the
underwriters named in the Registration Statement (the "Underwriters") for resale
by them to the public, together with an additional 375,000 shares of Common
Stock subject to an over-allotment option granted to the Underwriters by the
Company.
As your counsel, and in connection with the preparation of the Registration
Statement, we have examined the originals or copies of such documents, corporate
records, certificates of public officials and officers of the Company, and other
instruments related to the authorization and issuance of the Common Stock as we
deemed relevant or necessary for the opinion expressed herein. Based upon the
foregoing, it is our opinion that the shares of Common Stock to be issued and
sold by the Company to the Underwriters will be, upon issuance, sale, and
delivery in the manner and under the terms and conditions described in the
Registration Statement, validly issued, fully paid, and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name in the "Legal
Matters" section of the
<PAGE>
EXHIBIT 10.2(b)
FIRST AMENDMENT TO INNOTRAC CORPORATION
STOCK OPTION AND INCENTIVE AWARD PLAN
THIS FIRST AMENDMENT TO INNOTRAC CORPORATION STOCK OPTION AND INCENTIVE
AWARD PLAN (the "FIRST AMENDMENT") is made as of the 24th day of November, 1997.
WHEREAS, the sole shareholder and sole member of the Board of Directors
(the "BOARD") of the Innotrac Corporation (the "CORPORATION") adopted that
certain Innotrac Corporation Stock Option and Incentive Award Plan on November
24, 1997 (the "PLAN"); and
WHEREAS, the sole member of the Board amended Article 13.3 of the Plan
pursuant to Article 14.1 thereof, by Written Consent of the Board dated November
24, 1997;
NOW THEREFORE, the Plan is hereby amended by deleting the first sentence or
Article 13.3 in its entirety.
IN WITNESS WHEREOF, the undersigned has executed this First Amendment as of
the date first above written.
INNOTRAC CORPORATION
By: /s/ Scott Dorfman
-------------------------
SCOTT DORFMAN
PRESIDENT
ATTEST:
By: /s/ David Ellin
-------------------------
DAVID ELLIN
SENIOR VICE PRESIDENT
<PAGE>
EXHIBIT 10.8
STATE OF GEORGIA
GWINNETT COUNTY
LEASE AGREEMENT
---------------
THIS LEASE AGREEMENT ("Lease"), made this 8th day of December, 1997, by and
between WEEKS DEVELOPMENT PARTNERSHIP, hereinafter referred to as "Landlord",
and INNOTRAC CORPORATION, hereinafter referred to as "Tenant";
ARTICLE I
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: (i) an office warehouse building (the "Building") containing approximately
250,000 square feet of leasable space (50,000 square feet of office space and
200,000 square feet of warehouse space) in the Sugarloaf Office Park, Duluth,
Georgia, with a street address of 6655 Sugarloaf Parkway, which Building is to
be constructed by Landlord for Tenant, at Landlord's sole cost and expense, in
accordance with the Approved Plans and Specifications (as defined in Section
3.03 hereof), and (ii) the land on which the Building is to be located with all
its rights and appurtenances (the "Land") and as more particularly described on
Exhibit "A" attached hereto and by this reference incorporated herein. (The
Building and Land are sometimes collectively referred to as the "Leased
Premises").
1.02 Landlord represents, warrants and covenants to and with Tenant,
knowing that Tenant is relying on each such representation, warranty and
covenant, that:
(a) Landlord is a general partnership, duly organized, validly
existing and in good standing under the laws of the State of Georgia. All
partnership action has been taken by Landlord authorizing and approving the
execution of and entry into this Lease and the performance by Landlord of
Landlord's duties and obligations under this Lease.
(b) To the best of Landlord's knowledge, there are no actions,
suits or proceedings pending or threatened against, by or affecting
Landlord which affect title to the Leased Premises or which question the
validity or enforceability of this Lease or of any action taken by Landlord
under this Lease, in any court or before any governmental authority,
domestic or foreign.
<PAGE>
(c) The execution of and entry into this Lease, and the performance
by Landlord of Landlord's duties and obligations under this Lease are
consistent with and not in violation of, and will not create any adverse
condition under, any contract, agreement or other instrument to which
Landlord is a party, any judicial order or judgment of any nature by which
Landlord is bound, or the organizational documents of Landlord.
(d) By the Commencement Date, Landlord shall have good and
marketable fee simple title to the Leased Premises subject only to the
exceptions, liens and encumbrances listed on Exhibit "A-1" ("Permitted
Exceptions").
(e) There are no encroachments on the Land, with the exception of a
monument sign located on the corner of Sugarloaf Parkway and Premier
Parkway, and the Building will be situated entirely within the boundaries
of the Land and within applicable building lines.
(f) The Building or any improvements to be constructed by Landlord
on the Leased Premises will not contain hazardous substances or hazardous
materials; and, to the best of Landlord's knowledge, no Hazardous
Substances have been released, introduced, spilled, discharged or disposed
of on, in or under any adjacent land.
(g) By the Commencement Date, the Land will constitute either a
previously subdivided lot in compliance with applicable subdivision
regulations and similar governmental requirements, or will constitute a lot
that was created in a manner not subject thereto; and no subdivision filing
or approval or similar governmental filing or approval will be required for
the conveyance of the Land.
(h) To the best of Landlord's knowledge, there are no pending,
threatened or contemplated condemnation actions involving all or any
portion of the Land; and, to the best of Landlord's knowledge and belief,
there are no existing, proposed or contemplated plans to widen, modify or
realign any public rights-of-way located adjacent to any portion of the
Land.
(i) By the Commencement Date, all utilities (including, without
limitation, water, storm and sanitary sewer, electricity, gas, telephone
and cable television) will be available on the Land through private
easements or properly dedicated public easements in capacities sufficient
to serve and operate the Building.
(j) By the Commencement Date, access to the Land from streets and
roads adjoining the Land shall be provided by a curb cut to Sugarloaf
Parkway and a curb cut to Premier Parkway as shown on the Site Plan
referred to on Exhibit "B", and such access shall not otherwise be limited
or restricted.
2
<PAGE>
ARTICLE II
TERM
----
2.01 TO HAVE AND TO HOLD said Leased Premises for a term commencing on the
date of Substantial Completion of the Leased Premises (hereinafter referred to
as the "Commencement Date") and continuing for a period of ten (10) years,
(provided that if the Commencement Date is not the first day of a calendar
month, the term of this lease shall continue until the last day of the calendar
month in which the tenth (10th) anniversary of the Commencement Date occurs)
upon the terms, conditions, and covenants contained herein. "Substantial
Completion" shall mean the date three (3) weeks after the: (i) completion of
construction of the Leased Premises in accordance with the Approved Plans and
Specifications, subject only to normal punchlist items which shall be set forth
in the Punch List described in section 7.03; and (ii) issuance of a Certificate
of Occupancy for the Building, and all other certificates, licenses, permits,
authorizations and approvals for the full and complete uses and occupancy of the
Leased Premises by Tenant ("Other Licenses"), by all governmental authorities
having jurisdiction with respect thereto; provided, however, that Other Licenses
shall not include any certificate, license, permit or other authorization or
approval that (i) Tenant is required to obtain under this Lease; or (ii) relate
to Tenant's own operations at the Leased Premises. It is understood and agreed
by Landlord and Tenant that in order to achieve Substantial Completion the Punch
List must be those items which shall, if taken either individually or in the
aggregate, do not materially or substantially interfere with Tenant's taking
possession of, moving its personal property and effects into, or using and
enjoying the Leased Premises for the purposes for which it was intended.
Landlord agrees to provide to Tenant at least fifteen (15) days prior written
notice of the date on which it expects to achieve Substantial Completion.
ARTICLE III
RENTAL
------
3.01 As rental for the Leased Premises, Tenant agrees to pay to Landlord,
without offset or abatement, except as otherwise provided in the Lease, Base
Rental as set forth below:
Years 1 - 5 $71,458.33/month $857,500.00/year
Years 6 - 10 $80,000.00/month $960,000.00/year
due on or before the first day of each calendar month beginning on or following
the Commencement Date and thereafter for the remainder of the term, together
3
<PAGE>
with any other additional rental as hereinafter set forth. Tenant shall pay
interest at a rate of eight percent (8%) per annum on any payment of Base Rental
remaining due five (5) days after the due date thereof. Tenant has deposited
with Landlord, upon delivery of this Lease Agreement, an amount equal to
Seventy-One Thousand Four Hundred Fifty-Eight and 33/100 Dollars ($71,458.33)
which is to be applied as first month's rental, and part of the second month's
rental if the first month is a partial month. Landlord shall hold an amount
equal to Ten Thousand Seven Hundred Sixty-two and 50/100 ($10,762.50) Dollars
from Tenant's previous lease agreement, and upon execution of this Lease, shall
apply said amount to be held as a refundable security deposit for this Lease.
If Tenant shall perform each provision of this Lease, any portion of the
security deposit which has not been appropriated by Landlord in accordance with
the provisions hereof shall be returned to Tenant, without interest, within
thirty (30) days after the expiration of the term of this Lease.
Notwithstanding anything to the contrary, Landlord shall not appropriate any
portion of the security deposit without first giving Tenant notice which
expressly sets forth which provision of the Lease was breached by Tenant and the
damages suffered by Landlord as a result of such breach. If the Commencement
Date of this Lease shall be a date other than the first day of a calendar month,
applicable rent for such month shall be prorated on a daily basis, based on the
number of days in such month, and such sum shall be due on the Commencement
Date.
3.02 In addition to the rentals called for herein, Landlord agrees to
provide or contract for the common area maintenance ("CAM") and Tenant agrees to
pay Landlord additional rental for said CAM. CAM shall consist of: maintaining
parking areas, planted areas, signs, and routine lawn maintenance, including the
trimming of plantings and pruning of trees in the summer, all done in a manner
consistent with like-kind space in the northern corridor of the Atlanta, Georgia
Metropolitan area. Specifically excluded from the definition of the term "CAM"
are expenses for repairs, replacements and general maintenance to the extent
paid by proceeds of insurance or by Tenant or other third parties; expenses for
repairs, replacements or maintenance to the extent same are to be paid for by
Landlord pursuant to the provisions this Lease; interest, amortization or other
payments on loans to Landlord whether secured or unsecured; depreciation of the
Building; leasing commissions; legal expenses; salaries of officers, executives,
employees and agents not directly involved in the on-site operation of the
Building; state, federal or local income taxes, excess profits or franchise
taxes or other such taxes imposed on or measured by or determined from the gross
income of Landlord; and any capital improvements to the Leased Premises with the
exception of those mandated by governmental requirements occurring after the
Commencement Date. Each year during the term hereof, Landlord shall give Tenant
written notice of its estimate of the amount of CAM charges (collectively
"Charges") for the Leased 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
4
<PAGE>
the actual Charges, any adjustment necessary shall be made to additional rental
payments next coming due under this section. Charges for the Leased Premises
shall be set at $.25 per square foot of space contained within the Leased
Premises for the first full year of the Lease and can only be increased five
percent (5%) per annum thereafter. CAM for the calendar years during which the
Commencement Date and the last day of the term of Lease occur shall be prorated
so that Tenant pays only that portion of the CAM for such calendar years
allocable to periods of time during the term of this Lease.
3.03 The base rental provided in section 3.01 above, was based, in part,
on a tenant finish allowance for the office space in the amount of $25.00 per
square foot ($1,250,000.00) (the "Allowance") for the costs and expenses of
construction of the tenant finish to the Leased Premises as set forth in the
plans and specifications attached hereto in Exhibit "B" and by reference
incorporated herein (herein referred to as the "Approved Plans and
Specifications"). Any increases in costs and expenses due to Change Orders
shall be taken into account in the manner described in Section 7.01.
3.04 Tenant agrees to pay as additional rent to Landlord, upon demand, its
pro rata share of any utility surcharges, or any other costs levied, assessed or
imposed by, or at the direction of, or resulting from statutes or regulations,
or interpretations thereof, promulgated by any Federal, State, Municipal or
local governmental authorities in connection with its use or occupancy of the
Leased Premises.
3.05 Tenant recognizes that the Leased Premises are subject to the
Protective Covenants (as defined below) and that the Protective Covenants
provide, among other things, for the imposition of assessments and other charges
against the Leased Premises and the Land. Tenant agrees to pay as additional
rent to Landlord, upon demand, any costs, expenses or assessments levied,
assessed or imposed on the Leased Premises ("Covenant Assessments") by, or at
the direction of, any entity or group authorized by the Protective Covenants to
make such assessments or levy such costs in connection with the Leased Premises.
Tenant may, within the time and in the manner prescribed by the Protective
Covenants for such purpose, in its own name and behalf or, if necessary or
appropriate in order to perfect such challenge, in the name and on behalf of
Landlord, challenge the amount, validity or applicability of any such costs,
expenses or assessments (an "Assessment Protest"); provided that (a) Tenant
shall pay any such cost, expense or assessment under protest, prior to
delinquency, if any such Assessment Protest does not suspend the collection
thereof from any party, and (b) no portion of the Leased Premises or any rentals
payable hereunder or Landlord's title or interest therein would be in any danger
of being sold, forfeited, interrupted or lost as a result of such Assessment
Protest. Tenant shall prosecute any Assessment Protest with due diligence and
continuity. Tenant shall provide Landlord with copies of any application,
petition or other pleading filed in connection with any Assessment Protest
before filing. Landlord may, at its own expense, join with Tenant in making any
such application, petition or other pleading, retain co-counsel, attend
hearings, present evidence and arguments, and generally participate in the
5
<PAGE>
conduct of the Assessment Protest. If and to the extent that Landlord is
requested in writing to do so by Tenant, Landlord agrees to cooperate with
Tenant in good faith in connection with any Assessment Protest undertaken by
Tenant ("Landlord's Cooperation With Assessment Protest"), provided Tenant
promptly reimburses Landlord for reasonable expenses in connection therewith.
Subject to Landlord's right to reimbursement as set forth below, Tenant shall be
entitled to receive and retain any refund of any costs, expense or assessments
obtained by Tenant, to the extent such cost, expense or assessment was paid by
Tenant under this section 3.05. Nothing contained in this section 3.05 shall
limit or restrict Landlord's right to undertake any Assessment Protest with
respect to the Leased Premises at its own expense. Any reduction in or refund
of any such costs, expenses or assessments previously paid by Tenant obtained by
Landlord shall be applied first to Landlord's reasonable costs and expenses
incurred in connection with Landlord's Cooperation With Assessment Protest, with
the balance refunded to Tenant in the manner described above, and in the event
of a reduction in any such costs, expenses and assessments not yet paid by
Tenant, Tenant shall reimburse Landlord, within thirty (30) days of receipt of
Landlord's invoice therefor, for Landlord's reasonable costs and expenses
incurred in connection with Landlord's Cooperation With Assessment Protest, up
to the amount of the reduction obtained. In the event Tenant undertakes or files
any Assessment Protest in the name of Landlord, Tenant shall promptly provide
Landlord written notice thereof, and Tenant acknowledges that Tenant's use of
Landlord's name shall be subject to the indemnification of Landlord contained in
Article 12 hereof. Tenant shall give Landlord five (5) days advance written
notice of any such use of Landlord's name. Covenant Assessments for the calendar
years during which the Commencement Date and the last day of the term of the
Lease occur shall be prorated so that Tenant pays only that portion of the
Covenant Assessments for such calendar years allocable to periods of time during
the term of this Lease.
"Protective Covenants" means the Initial Declaration of Covenants,
Conditions and Restrictions, dated November 1,1996 by King & Spalding, recorded
in Deed Book 13418, Page 0001, Gwinnett County, Georgia Records, as further
amended.
3.06 It is the purpose and intent of Landlord and Tenant that (except as
otherwise expressly provided in this Lease) the base rental payable under this
Lease be net. Tenant covenants and agrees with Landlord to pay and discharge on
a timely basis, as additional rent hereunder, those items set forth above and in
Articles 6 and 8 hereof, excepting only any costs, expenses and/or obligations
which arise as a result of the negligence, intentional misconduct or
unauthorized acts of Landlord which are not covered by the insurance under
Article 17 hereof. Notwithstanding the foregoing, nothing contained herein
shall be construed to require Tenant to make any debt service payments under any
secured or unsecured indebtedness of Landlord or to pay any costs and expenses
which this Lease expressly provided for Landlord to pay (including the costs and
expenses Landlord agrees to pay under Article 7 hereof), or to pay any income
taxes, franchise taxes, estate or gift taxes, inheritance taxes, transfer taxes,
recording taxes or intangibles taxes of Landlord.
6
<PAGE>
ARTICLE IV
DELAY IN DELIVERY OF POSSESSION
-------------------------------
4.01 Attached hereto as Exhibit "C" is a schedule of construction of the
Leased Premises, including the dates by which Tenant must make certain decisions
regarding the Leased Premises (hereinafter referred to as the "Construction
Schedule"). Landlord and Tenant shall use their diligent good faith efforts to
ensure construction of the Leased Premises remains on schedule in accordance
with the Construction Schedule, provided, however, that in no event shall the
failure of Landlord to cause Substantial Completion to occur on or before the
Substantial Completion Deadline (hereinafter defined), constitute a default by
Landlord under this Lease. In the event of any delay in Substantial Completion
of the Leased Premises caused by Tenant Delays (hereafter defined), the
Commencement Date (for purposes of Tenant's obligation to commence the payment
of rent and for purposes of fixing the lease term) shall be the date on which
Substantial Completion would have occurred but for such delay.
4.02. Landlord acknowledges and agrees that it is of critical importance
to Tenant that Landlord shall have achieved Substantial Completion by 7/1/98
(the "Substantial Completion Deadline"). Accordingly, Landlord agrees that
Landlord shall be liable to and shall pay Tenant for damages suffered by Tenant
("Tenant's Damages") as a result of Landlord's failure to meet such construction
deadlines, and such Tenant's Damages shall be calculated as follows:
(i) if Substantial Completion, as extended by Tenant Delays or Excusable
Delays other than adverse weather conditions, occurs after 7/1/98 but prior to
8/1/98 and was delayed by (a) reasons other than adverse weather conditions,
then Tenant's Damages shall be the amount which is the greater of the rent paid
or to be paid by Tenant for the month of August 1998 for the lease at 6866 Jimmy
Carter Boulevard or the last month's rent paid by Tenant under such lease (such
greater amount shall be known herein as "Tenant's Rent Payment"), or (b) reasons
of adverse weather conditions, then Tenant's Damages shall be one-half (1/2) of
Tenant's Rent Payment; or
(ii) if Substantial Completion, as extended by Tenant Delays or Excusable
Delays, occurs on or after 8/1/98 then Tenant's Damages shall be: (a) the
amount by which the sum of all of the rent paid by Tenant to its landlords under
its current leases (1828 Meca Way, Shackleford Road, 6866 Jimmy Carter
Boulevard, and parking lot lease at 1 Meca Way) and any other lease which Tenant
enters into because of Landlord's failure to meet such construction deadlines,
exceeds the Base Rental that would have been due under this Lease, and (b) all
moving, storage, setup and any other expenses related to moving to any temporary
space; provided, however, that the parties agree to cooperate in good faith in
an attempt to mitigate Tenant's Damages as calculated in this subparagraph (ii)
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by utilizing other space which Landlord may have available and shall provide to
Tenant at no cost.
Furthermore, in addition to Landlord's liability for such damages, Tenant shall
be entitled to a credit against future Base Rental equal to the Base Rental for
the number of days by which the work necessary to achieve Substantial Completion
remains incomplete following the Substantial Completion Deadline for any reason
other than Tenant Delays or Excusable Delays.
4.03 In the event the Substantial Completion has not occurred by 9/15/98,
as such date has been extended for Excusable Delays and Tenant Delays, or, in
the event Substantial Completion has not occurred by 11/1/98, as such date has
been extended for only Tenant Delays, then, in either said event, Tenant shall
have the right to terminate this Lease by giving Landlord five (5) days written
notice, whereupon neither party shall have further liability to the other
hereunder except as provided for in Section 4.02 above.
ARTICLE V
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 such other uses as are incidental thereto and customary in
connection therewith (collectively herein the "Permitted Uses'), 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 (collectively herein "Laws", or singularly "Law") which are
applicable as a result of Tenant's specific use of the Leased Premises, but
specifically not including any zoning Law, building Law or other Law applicable
to the construction or installation of the Building (except as a result of or in
connection with any alterations made by Tenant). Tenant shall not, without
prior written notice to Landlord, do or permit anything to be done in or about
the Leased Premises that will in any way increase the insurance premiums due for
fire insurance upon the Building. Tenant shall be solely responsible for all
increases in fire insurance premium amounts resulting from Tenant's specific use
of the Building. Tenant will not perform any act or carry on any practices that
will likely injure the building or constitute a nuisance to owners or occupants
of adjoining premises. Tenant shall not cause, maintain or permit any outside
storage on or about the Leased Premises, including pallets or other refuse. No
area outside of the Leased Premises shall be used by Tenant for storage without
Landlord's prior written consent. The rear loading areas of the Tenant's unit
must be clean and unobstructed. 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. 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
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operate thereon the normal business operations of Tenant, subject to sections
18.01, 18.02, and 20.01.
5.02 Tenant shall not cause or permit the escape, disposal or release 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 permitted by law for the storage and use of such
substances or materials, nor allow to be brought into the Lease Premises any
such materials or substances except to use in the ordinary course of Tenant's
business. Without limitation, hazardous substances or 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 governmental agency shall ever require testing of the Leased Premises to
ascertain whether or not there has been any release of hazardous substances or
materials, then the reasonable costs thereof shall be reimbursed by Tenant to
Landlord upon demand only if such governmental agency makes a written
determination that Tenant caused the release of such hazardous substances or
materials and Tenant is provided a copy of such determination. In addition,
Tenant agrees to provide Landlord with notice any time it brings hazardous
substances or materials on to the Leased Premises in such a manner that it would
result in a reporting obligation under any federal, state or local law. In
addition, Tenant shall execute affidavits, representations and the like from
time to time, but limited to one time per calendar year, at Landlord's request
concerning Tenant's best knowledge and belief regarding the presence of
hazardous substances or materials on the Leased Premises. Tenant shall
indemnify Landlord and hold Landlord harmless from and against any and all
claims, damages, fines, judgments, penalties, costs, liabilities and losses
(including, without limitation, any and all sums paid for settlement of claims,
attorneys' fees and consultant and expert fees) arising from or in connection
with the presence of hazardous substances in or on the Leased Premises resulting
from the actions of Tenant except as a result of the acts or omissions of
Landlord, its agents, employees and contractors for which Landlord shall
indemnify Tenant and hold Tenant harmless in the manner provided in section 5.03
below. Without limitation of the foregoing, these indemnifications shall
include any and all costs incurred due to any investigation of the site or any
cleanup, removal, or restoration mandated by a federal, state, or local agency
or political subdivision. The indemnification covenants in this section 5.02
shall survive the expiration or earlier termination of the lease term.
5.03 Landlord shall indemnify Tenant and hold Tenant harmless from and
against any and all claims, damages, fines, judgments, penalties, costs,
liabilities and losses (including, without limitation, any and all sums paid for
settlement of claims, attorneys' fees and consultant and expert fees) arising
from or in connection with the presence of hazardous substances in or on the
Leased Premises which presence resulted from the acts of Landlord except as a
result of the acts or omissions of Tenant, its agents, employees and contractors
9
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for which Tenant shall indemnify Landlord and hold Landlord harmless in the
manner provided in section 5.02 above. Without limitation of the foregoing,
these indemnifications shall include any and all costs incurred due to any
investigation of the site or any cleanup, removal, or restoration mandated by a
federal, state, or local agency or political subdivision. The indemnification
covenants in this section 5.03 shall survive the expiration or earlier
termination of the lease term.
5.04 In the event of the discovery of the presence of hazardous substances
or materials on the Leased Premises which presence arose prior to the
Commencement Date, Tenant shall have the right to terminate the Lease with one
hundred twenty (120) days prior notice to Landlord. Notwithstanding the
foregoing, Tenant shall not have the right to terminate the Lease if: (i) within
ninety (90) days following such notice Landlord brings the Leased Premises in
compliance with all laws related to hazardous substances and materials, or to
the extent such compliance shall be incapable of completion within such ninety
(90) days, if Landlord shall commence such compliance within such ninety (90)
day period and continuously and in good faith prosecute the performance of the
same until completion; and (ii) the presence of such hazardous substances or
materials does not materially affect Tenant's operations at the Leased Premises.
ARTICLE VI
UTILITIES
---------
6.01 Landlord shall not be liable in the event of any interruption in the
supply of any utilities unless and except to the extent caused by the actions or
inactions of Landlord, its employees, agents, contractors or invitees.
Notwithstanding the foregoing, Tenant will not seek recovery against Landlord
for damages for the interruption of utility service to the extent such damages
have been previously paid by any business interruption insurance that may be
carried by Tenant, but Tenant has no requirement to carry such insurance. Also,
notwithstanding the foregoing, Landlord agrees to use all reasonable efforts to
aid Tenant in having any such interrupted utility restored in an expeditious
manner. Tenant agrees that it will not knowingly 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 to the extent required by
Article 9. Tenant shall be solely responsible for and shall pay all charges for
its use or consumption of sanitary sewer, water, gas, electricity and any other
utility services for the Leased Premises.
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ARTICLE VII
LANDLORD'S OBLIGATIONS
----------------------
7.01 The Leased Premises shall be constructed by Landlord: (i) in
accordance with the Approved Plan and Specifications and anything reasonably
inferable therefrom; (ii) in compliance with all federal, state, county,
municipal or local government laws, ordinances, regulations, rules and orders
(including, without limitation, the Occupational Safety and Health Act of 1970,
as amended), and after obtaining all necessary approvals and permits; (iii)
diligently, continuously and in a workman-like manner; and (iv) with new and
first-class materials. The obligations of Landlord in the preceding sentence
shall be referred to as "Landlord's Work". All costs of Landlord's Work shall
be borne by Landlord. Changes in the Approved Plans and Specifications shall be
made only pursuant to written change order (hereafter a "Change Order") signed
by both Tenant and Landlord and shall be in compliance with the Protective
Covenants. Such Change Order shall specify the increase or decrease in
construction costs as a result of the change (which shall be based on the actual
costs and expenses attributable thereto with no mark-up or profit by Landlord or
general contractor whatsoever, except for a 10% mark-up for overhead and profit
to be charged by Landlord), and any reasonably expected increase or decrease in
the time, if any, required to substantially complete construction as a result of
such change. In the event of a net increase in the cost of construction
resulting from such Change Orders requested by Tenant, Landlord shall invoice
Tenant for the net increase upon Substantial Completion of the Leased Premises,
in which event Tenant shall pay Landlord the amount thereof within ten (10)
business days after delivery of such invoice. In the event of a net increase in
the amount of time required for substantial completion resulting from such
Change Orders requested by Tenant, such Change Orders shall constitute an
amendment to this Lease extending the dates specified in Article 4 hereof by
that number of days of net additional time so specified in such Change Orders;
provided, however, that in such event the Commencement Date, for purposes of
Tenant's obligation to commence the payment of rent and for purposes of fixing
the lease term, shall be the date on which Substantial Completion would have
occurred but for the extension of time caused by such Change Order. Landlord
shall indemnify and hold Tenant harmless from or in connection with any
occurrence during construction of the Leased Premises, unless such claims or
demands are caused by any act or negligence of Tenant or its agents,
contractors, employees or invitees.
7.02 During the course of construction of the Leased Premises, Tenant may
enter upon the Leased Premises for purposes of inspecting and reviewing
Landlord's Work, taking measurements, making plans, installing trade fixtures
and telephones, erecting temporary or permanent signs and doing such other work
as may be appropriate or desirable without being deemed thereby to have taken
possession or obligated itself to pay rent but Tenant agrees that: (a) Landlord
shall have no liability for injury to any person or damage to any property of
Tenant stored on the Leased Premises except for damages caused by the negligence
of Landlord or its employees, contractors, or agents, (b) Tenant shall not
materially interfere with Landlord's construction work on the Leased Premises,
(c) Tenant shall indemnify, protect and hold harmless Landlord from and against
any and all claims, demands, damages, losses, costs, expenses, liabilities and
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actions at law or in equity directly arising out of Tenant's exercise of such
right, and (d) Tenant shall be solely responsible for the permitting of any such
work it performs to the extent required.
7.03 No later than twenty (20) days after the Commencement Date, Tenant
and Landlord shall an agreed final punch list ("Punch List") setting forth the
work, if any, remaining to be done, or requiring correction, on the Leased
Premises, and Landlord shall promptly commence, and thereafter with due
diligence prosecute to completion the work required by the Punch List (which
shall in no event include, except on the condition Tenant shall pay to Landlord
the actual cost thereof plus ten percent (10%) of such amount, work required as
a consequence of injury or damages to the Leased Premises attributable to
Tenant, its agents, employees, contractors or movers). If the parties cannot
agree upon the Punch List, then the Punch List shall be determined by an
independent professional engineer employed by the mutual agreement of Landlord
and Tenant. Landlord agrees to commence to complete all the items on the Punch
List within thirty (30) days after Substantial Completion. Landlord
acknowledges and agrees that in the event it has not completed all of the items
on the Punch List within ninety (90) days after Substantial Completion, Tenant
shall have the right to complete such items and charge Landlord the cost
thereof.
7.04 Notwithstanding anything elsewhere in this Lease to the contrary,
Landlord shall, at its sole cost and expense, upon notice by Tenant, for a
period of one (1) year immediately subsequent to the Commencement Date, repair,
replace or otherwise correct any defects or problems related to any of
Landlord's Work, as well as defects in any of the additional items to be
constructed or installed by Landlord in accordance with this Lease, provided
that Landlord shall not have any obligation to correct or repair any defect or
condition directly caused by the acts of Tenant, its agents, contractors,
employees or invitees. In addition, Landlord acknowledges and agrees that it
shall, at its sole cost and expense, repair any defects or problems in any of
the structural components of the Leased Premises (including but not limited to
the roof, exterior walls, and foundation) discovered during the Lease Term.
Landlord acknowledges and agrees that Landlord's costs incurred in connection
with its obligations under this Section 7.04 shall not be passed through as CAM.
7.05 From the Commencement Date until the expiration or earlier
termination of the term hereof, Tenant shall have exclusive control of the
Leased Premises and Landlord shall be under no obligation to inspect the same.
Tenant shall 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 condition. Landlord agrees that in the event Landlord
fails to maintain the Leased Premises as required or fails to commence to make
repairs within thirty (30) days after its receipt of notice from Tenant, or
fails thereafter to diligently pursue such repair to completion, then Tenant
shall have the right to make such repairs or have a contractor make such repairs
and charge Landlord for the cost thereof. Failure to report such defects within
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a reasonable time after discovery shall make Tenant responsible to Landlord for
any and all additional costs or liability incurred by Landlord resulting from
such delay in notification.
ARTICLE VIII
TENANT REPAIRS
--------------
8.01 Except as otherwise expressly provided in Article 7, Tenant shall, at
its sole cost, keep and maintain the Leased Premises and appurtenances and every
part thereof, including by way of illustration and not by way of limitation the
all windows, and skylights, doors, any store front and the interior of the
Leased Premises, including all plumbing, heating, air conditioning, sewer,
electrical systems and all fixtures and all other similar equipment serving the
Leased Premises (but expressly excluding the roof, exterior walls, foundation
and all structural elements of the Building) in good and sanitary order,
condition, and repair. Tenant shall be responsible for its own pest control
within the Leased Premises. 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.
8.02 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 six (6) months. A
copy of said contract shall be provided to Landlord, as shall any modification,
extension, renewal or replacement thereof.
ARTICLE IX
ALTERATIONS, MECHANICS' LIENS
-----------------------------
9.01 Alterations may not be made to the Leased Premises without prior
written consent of Landlord, and any alterations of the Leased Premises
excepting moveable furniture and trade fixtures shall at Landlord's option
become part of the realty and belong to Landlord. Notwithstanding the foregoing
provisions, Tenant shall have the absolute right to make alterations, additions
or improvements to the Leased Premises ("Tenant's Alterations") having a cost of
Fifteen Thousand Dollars ($15,000.00) for each alteration, addition or
improvement, or Forty-Five Thousand Dollars ($45,000.00) in the aggregate per
lease year, provided Tenant's Alterations do not materially and adversely affect
the structure, electrical, mechanical or plumbing systems of the Building.
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9.02 Should Tenant desire to alter the Leased Premises and Landlord must
consent to such alterations, at Landlord's option, Tenant shall contract with a
contractor approved by Landlord for the construction of such alterations.
9.03 Notwithstanding anything in section 9.01 or 9.02 above, Tenant may,
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, 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. Upon termination of the Lease, Tenant
shall not be required to remove: (i) any alteration, addition or improvement
approved by Landlord during the term unless Landlord advises Tenant at time of
such approval that it will require such removal; and (ii) any of Tenant's
Alterations unless Landlord advises Tenant within ten (10) days of its knowledge
of such alteration that it will require such removal. 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, and Tenant shall discharge of
record by bond or otherwise, within ten (10) days following the filing thereof,
any mechanic's or similar lien or encumbrance filed against the Leased Premises
for work or materials claimed to have been furnished to or for the benefit of
Tenant and/or the Leased Premises, but expressly excluding any work performed
for, materials furnished to, or obligations incurred by Landlord. All such work
provided for above requiring Landlord's approval, shall be done at such times
and in such manner as Landlord may from time to time designate.
ARTICLE X
WASTE AND QUIET CONDUCT
-----------------------
10.01 Tenant shall not commit, or suffer any waste upon the Leased
Premises, or any nuisance, or other act or thing which may unreasonably
interfere with the quiet enjoyment of any owner or occupant of any other
property in the project in which the Leased Premises are located.
ARTICLE XI
FIRE INSURANCE, HAZARDS
-----------------------
11.01 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
14
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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 and appurtenances. In the event that Tenant takes any actions
in the future, or conducts its business in such a way that causes an increase in
the fire insurance rate on the Building, Landlord shall give Tenant notice of
such proposed increase, and Tenant shall have a period of ten (10) days within
which to discontinue such actions or use before Tenant shall be responsible for
the payment of such increase in cost.
ARTICLE XII
INDEMNIFICATION BY TENANT
-------------------------
12.01 Tenant shall indemnify Landlord and hold Landlord harmless against
and from any and all claims arising from Tenant's use of the Leased Premises
(other than those arising from any 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, reasonable 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. The obligations of Tenant under this Section
12.01 shall survive any termination or expiration of this Lease.
12.02 Landlord shall indemnify and hold harmless Tenant against and from
all claims arising from any breach or default in the performance of any
obligation on Landlord's part to be performed under this Lease, or arising from
any act, neglect, fault or omission of Landlord or of its agents, employees or
contractors and from and against all reasonable costs, reasonable attorneys'
fees actually incurred, expenses and liabilities actually incurred in or about
such claim or any action or proceeding brought relative thereto and in case any
action or proceeding be brought against Tenant by reason of any such claim.
Landlord upon notice from Tenant shall defend the same at Landlord's expense by
counsel, chosen by Landlord, and who is reasonably acceptable to Tenant. The
obligations of Landlord under this Section 12.02 shall survive any termination
or expiration of this Lease.
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ARTICLE XIII
WAIVER OF CLAIMS
----------------
13.01 Notwithstanding any indemnity granted herein, and notwithstanding
any other term or provision of the Lease to the contrary, Landlord and Tenant
hereby both release the other and their respective employees, agents and
invitees from and waive any claims either may have against the other and their
employees, agents, servants or invitees for any loss or damage to the Building,
Leased Premises, Land, improvements on or to the Building, Leased Premises, or
Land, or the contents of the foregoing, and any personal property stored or
placed thereon by either of them caused by any of the perils insurable against
under fire and extended coverage insurance policies with "all risks"
endorsement, whether such damage or loss was caused by the negligence of either
of them or their respective employees, agents, servants or invitees. The
foregoing mutual release and waiver of subrogation shall apply whether or not
such insurance on the Building, Leased Premises, Land, improvements, contents,
and/or personal property was in force at the time of the loss of damage.
Moreover, each party agrees to take all actions necessary to make the foregoing
release effective and binding upon their respective insurance carriers so that
such carriers specifically waive any right of subrogation that such carriers
might otherwise have against the other party and/or their respective employees,
agents, servants or invitees.
ARTICLE XIV
SIGNS, LANDSCAPING
------------------
14.01 Landlord shall have the right to control landscaping and approve the
placing of signs and the size and quality of the same. Tenant shall, however,
be entitled to make changes to the landscaping plan shown on the Approved Plans
and Specifications, with the prior written consent of the Landlord. Tenant
shall place no exterior signs on the Leased Premises without the prior written
consent of Landlord, but Landlord hereby approves the placement of an
appropriate monument sign at the Sugarloaf Parkway entrance and a smaller
monument sign and "truck entrance" and/or "delivery entrance" sign at the
Premiere Parkway entrance. Any signs not in conformity with the Lease may be
immediately removed by Landlord. Notwithstanding the above language, Landlord
acknowledges and agrees that Tenant shall be entitled to have corporate
identification signage on any and all Sugarloaf Office Park signs which list
tenants or any multi-user directional signs constructed by Landlord within the
Sugarloaf Office Park, and, furthermore, Landlord acknowledges and agrees that
it will not withhold its approval of any proposed Tenant signage based upon size
so long as such signage is in conformance with the Protective Covenants and all
applicable governmental requirements. Finally, Tenant shall have the absolute
right to place such identification signs within the interior of the Building as
Tenant so elects.
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ARTICLE XV
ENTRY BY LANDLORD
-----------------
15.01 Tenant shall permit Landlord and Landlord's agents to enter the
Leased Premises at all reasonable times during normal business hours 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; and shall
permit Landlord upon the Leased Premises at any time within thirty (30) days
prior to the expiration of this Lease for the purpose of placing any usual or
ordinary "to let" or "to lease" signs, or placing upon the Building any usual or
ordinary "for sale" signs, or ninety (90) days prior to the expiration of this
Lease for showing the Leased Premises to prospective tenants, 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. 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. Notwithstanding the
foregoing, Landlord agrees to use all reasonable efforts to provide Tenant at
least twenty-four (24) hours prior written notice of its intent to enter the
Leased Premises and further agrees any such entry shall be conducted in such
manner so as to minimize any interference with Tenant's business operations.
ARTICLE XVI
TAXES
-----
16.01 (a) Tenant shall, without notice or demand, as additional rent, pay
and discharge, on or before the last day on which the same may be paid without
penalty, but in no event earlier than ten (10) days after receipt of any invoice
or similar notice, 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 by reason of the Leased Premises or any part thereof,
or the Landlord's interest in the Leased Premises. For the purposes hereof
"taxes" shall mean all ad valorem 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 personally thereon, any rent
or use tax imposed on rent paid by Tenant under this Lease, or any assessments
after the Commencement Date for the benefit of public works or improvements
which benefit the Leased Premises. 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 Lease including this
Article 16, or any payment to reimburse Landlord or any affiliate, or related or
controlled entity, for any site development or work done on the Leased Premises
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or in the Sugarloaf Office Park. Taxes for the calendar years during which the
Commencement Date and the last day of the term of the Lease occur shall be
prorated so that Tenant pays only that portion of the taxes for such calendar
years allocable to periods of time during the term of this Lease.
(b) All taxes imposed upon the Leased Premises during the term of this
Lease for public works or improvements which shall benefit the Leased
Premises after the expiration of this Lease shall be equitably prorated, so
that only the portion of such taxes 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.
(c) Notwithstanding anything to the contrary expressed or implied in
this Article 16 or elsewhere in this Lease, nothing herein is intended to
or shall be held or construed so as to require Tenant to pay for any income
taxes, franchise taxes, estate or gift taxes, inheritance taxes, or
intangible taxes of Landlord.
16.02 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 base
rental.
16.03 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.
16.04 Tax Protest. Tenant may, within the respective times and in the
manner prescribed by law for such purposes, in its own name and behalf or, if
necessary or appropriate in order to perfect such petition, in the name and on
behalf of Landlord (subject to the provisions of section 16.06 hereof), petition
for reduction of the assessed valuation of the Building and the Land, claim a
refund of real estate taxes or assessments or otherwise challenge the amount,
validity or applicability of any taxes or other tax that must be paid by Tenant
under this Lease (a "Tax Protest"); provided that (a) Tenant shall pay such tax
or assessment under protest, prior to delinquency, if such Tax Protest does not
suspend the collection thereof from any party, and (b) no portion of the Leased
Premises or any rentals payable hereunder or Landlord's title or interest herein
would be in any danger of being sold, forfeited, interrupted or lost as a result
of such Tax Protest. Tenant shall prosecute any Tax Protest with due diligence
and continuity. Tenant shall provide Landlord with copies of any application,
petition or other pleading filed in connection with any Tax Protest before
filing. Landlord may, at its own expense, join with Tenant in making any such
application, petition or other pleading, retain co-counsel, attend hearings,
present evidence and arguments, and generally participate in the conduct of the
tax Protest. If and to the extent that Landlord is requested to do so by
Tenant, Landlord agrees to cooperate with Tenant in good faith in connection
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with any Tax Protest undertaken by Tenant ("Landlord's Cooperation With Tax
Protest"), provided Tenant promptly reimburses Landlord for any reasonable
expenses in connection therewith. Subject to Landlord's right to reimbursement
as set forth below, Tenant shall be entitled to receive and retain any refund of
taxes or assessments obtained by Tenant, to the extent such taxes or assessment
was paid by Tenant under this Article 16. Nothing contained in this section
16.04 shall limit or restrict Landlord's right to undertake any Tax Protest with
respect to the Leased Premises at its own expense; to the extent Landlord
obtains any reduction in or refund of taxes or assessments, Landlord's
reasonable expenses of Landlord's Cooperation With Tax Protest shall be
additional rent payable by Tenant to Landlord within ten (10) days of Tenant's
receipt of Landlord's invoice therefore, but Landlord shall not be entitled to
reimbursement by Tenant for the costs of such Landlord's Cooperation With Tax
Protest in excess of any reduction and/or refund of such taxes or assessments so
obtained.
16.05 In the event Tenant undertakes or files any Tax Protest in the name
of Landlord, Tenant shall promptly provide Landlord written notice thereof, and
Tenant acknowledges that Tenant's use of Landlord's name shall be subject to the
indemnification of Landlord contained in Article 12 hereof. Tenant shall give
Landlord five (5) days advance written notice of any such use of Landlord's
name.
16.06 Landlord agrees to provide to Tenant a copy of any tax assessment,
tax bill, tax statement or other tax invoice within ten (10) days of its receipt
of the same.
ARTICLE XVII
INSURANCE
---------
17.01 (a) Liability Insurance. Tenant, at its own expense, shall obtain
and keep in full force and effect at all times during the term of this Lease
public liability insurance for the benefit of Landlord and Tenant (and, at
Landlord's request, any Mortgagee (hereinafter defined) of Landlord) jointly
against liability for personal 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 One Million Dollars
($1,000,000.00) per occurrence in respect to damage to property. Tenant shall
increase said insurance coverage as reasonably required by Landlord; provided,
however, that the insurance premiums paid for such increased coverage shall not
be 5% greater than the prior premiums paid by Tenant. All or part of the
liability insurance coverage, if any, that may from time to time be required or
maintained in excess of the minimum limits set forth above may be provided by an
umbrella policy complying in all respects with the requirements of this Article
17 and which provides that its coverage is not limited or affected by claims
made with respect to personal injury or property damage at other locations. As
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used herein, "Mortgage" means any deed to secure debt, mortgage, deed of trust,
or similar security instrument. "Mortgagee" means the holder of a Mortgage.
(b) Tenant shall obtain and keep in full force and effect at all times
during the term of this Lease on all of its personal property in the Leased
Premises (including without limitation fixtures, equipment, movable and non-
movable trade fixtures, inventory, merchandise and goods) a policy or policies
of fire and extended coverage insurance with standard coverage endorsement to
the full extent of their insurable value (provided, however, that so long as at
least eighty percent (80%) of such insurable value is covered under Tenant's
primary policy, the remaining coverage up to full insurable value may be
provided by an umbrella policy complying in all respects with the requirements
of this Article 17 and which provides that such coverage is not limited or
affected by claims for loss or damage to insured property at other locations).
During the term of this Lease the proceeds from any such policy or policies of
insurance shall be used for the repair or replacement of the personal property,
and Landlord will sign all reasonable documents necessary or proper in
connection with the settlement of any claim or loss by Tenant. Landlord will
have no obligation to carry insurance on Tenant's possessions and Landlord will
not be responsible for any damage thereto except as expressly set forth in this
Lease to the contrary.
(c) Landlord shall procure and maintain in full force and effect fire
and extended coverage insurance covering the Building in an amount at least
equal to the full replacement cost thereof ("Landlord's Insurance"). Tenant
shall reimburse Landlord for the cost of the premiums for Landlord's Insurance
thirty (30) days after receipt of evidence showing payment by Landlord of such
premiums; provided, that, Tenant shall only reimburse Landlord for such premiums
to the extent the premiums, the coverage and the deductibles related to
Landlord's Insurance are reasonable and customary. Landlord shall furnish
Tenant with certificates of such policies whenever reasonably required by Tenant
to satisfy Tenant that such policies are in full force and effect.
(d) Each insurance policy required to be maintained by Tenant
hereunder shall be written by a company having an A.M. Best Company rating of
"A" or better and a financial category of "VII" or better and legally qualified
to issue such insurance, and shall name as insured parties Landlord (and, at
Landlord's request, any Mortgagee of Landlord) and Tenant as their interests may
appear. Each such policy shall provide that it shall not be canceled or reduced
except after not less than thirty (30) days written notice to Landlord (and any
Mortgagee of Landlord), and shall also provide that the interest of Landlord and
any Mortgagee of Landlord shall not be invalidated by any act or negligence of
Tenant or Landlord or of any person or entity having an interest in the Leased
Premises nor by occupancy or use of the Leased Premises for any purpose that is
more hazardous than permitted by such policy. Tenant shall deliver to Landlord
(and, at Landlord's request, any Mortgagee of Landlord) a certificate of
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insurance evidencing the existence and renewal of each insurance policy which is
required to be maintained by Tenant hereunder (and specifically confirming that
such policy shall not be canceled or reduced except after not less than thirty
(30) days written notice to Landlord and any Mortgagee of Landlord), such
delivery to be made promptly after such insurance is obtained at least thirty
(30) days prior to the expiration date of such insurance policy. If any such
insurance policy has a deductible clause, Tenant shall be liable for the full
deductible amount Each policy of property insurance maintained by Tenant
hereunder shall provide that the insurer waives any right of subrogation against
Landlord and any Mortgagee of Landlord, and any policy or policies of property
insurance maintained by Landlord with respect to the Leased Premises shall
provide that the insurer waives any right of subrogation against Tenant. Each
such policy maintained by Tenant shall be primary and non-contributing with any
insurance carried by Landlord (and any Mortgagee of Landlord). The limits of any
insurance provided hereunder shall not limit the liability of Tenant hereunder.
If Tenant shall fail to procure and maintain any insurance required hereunder,
Landlord may, but shall not be required to, procure and maintain the same but at
the expense of Tenant.
(e) In addition to the foregoing, Tenant shall comply with any
reasonable requirements of any Mortgagee of Landlord with respect to insurance
on or with respect to the Leased Premises, provided such requirements do not
materially increase the obligations or diminish the rights of Tenant hereunder.
ARTICLE XVIII
ABANDONMENT
-----------
18.01 Subject to Tenant's right to assign or sublease set forth in section
20.1, Tenant shall not vacate nor abandon the Leased Premises at any time during
the term of this Lease; and if Tenant shall abandon, vacate or surrender the
Leased Premises, or be dispossessed by process of law, or 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.
18.02 Notwithstanding anything to the contrary, Tenant may vacate the
Leased Premises during the term of this Lease provided that: (i) Tenant has not
been notified in writing of an Event of Default hereunder prior to vacating the
Leased Premises; (ii) Tenant adequately secures the Leased Premises to prevent
damage, destruction or vandalism to the Leased Premises; (iii) Tenant continues
such utilities to the Leased Premises as will prevent any damage to the Leased
Premises; and (iv) Tenant continues to provide insurance for the Leased Premises
and Tenant pays any increased premium resulting from a lack of a tenant in the
Leased Premises.
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ARTICLE XIX
DESTRUCTION
-----------
19.01 In the event of damage to or destruction of the Leased Premises
during the lease term which requires repairs to the Leased Premises, Landlord
shall (subject to section 19.02 below) forthwith make repairs and put the Leased
Premises in a condition at least as good as the condition which existed
immediately prior to the damage or destruction ("Landlord's Reconstruction"),
provided in Landlord's and Tenant's reasonable judgment repairs can be completed
within one hundred twenty (120) days from the date of such damage or destruction
under the laws and regulations of authorized public authorities, but such damage
or destruction (including any destruction necessary in order to make repairs)
shall in no way annul or void this Lease, except that Tenant shall be entitled
to a proportionate reduction of rent while such repairs are being made. The
proportionate reduction is to be based upon the extent to which the damage or
destruction, or the making of repairs, shall interfere with the business carried
on by Tenant in the Leased Premises. Notwithstanding anything to the contrary,
if Landlord's Reconstruction cannot in Landlord's and Tenant's reasonable
judgment be completed within one hundred twenty (120) days, then this Lease may
be terminated at the option of either party, and all sums payable by Tenant
shall be apportioned and paid through the date of such damage or destruction.
Notwithstanding the foregoing, if Landlord's Reconstruction is not completed
within one hundred twenty (120) days from the date of such damage or
destruction, then this Lease may be terminated by Tenant, and all sums payable
by Tenant shall be so apportioned. Landlord agrees to notify Tenant in writing
of the estimated time period for the completion of required repairs within
thirty (30) days after Landlord receives notice of the occurrence of the
damaging event, and to promptly commence and diligently prosecute unto
completion any repairs required to be made by Landlord hereunder.
19.02 (a) Either Landlord or Tenant may require that any dispute under
this Article 19 be submitted to arbitration pursuant to this section 19.03. To
the extent the provisions of this section 19.03 vary from or are inconsistent
with the rules of the American Arbitration Association or any other arbitration
tribunal, the provisions of this section 19.03 shall govern. All arbitration
shall occur at a location in Atlanta, Georgia chosen by the arbitrators and
shall, except as expressly provided to the contrary in this section 19.03, be
conducted pursuant to the rules of the American Arbitration Association (or the
successor organization, or if no such organization exists, then an organization
composed of persons of similar professional qualifications).
(b) The party desiring such arbitration shall give notice to that
effect to the other party. As soon as possible, but in any event within
the next ten (10) days, Landlord and Tenant shall each select one
arbitrator. As soon as possible, but in any event within the next ten (10)
days, the two arbitrators so selected shall select a third arbitrator.
Each arbitrator shall be, if reasonably possible, a recognized expert in
the subject matter of the arbitration. In the event of the failure,
refusal or inability of any arbitrator to act, a new arbitrator shall be
appointed in his stead, which appointment shall be made in the same manner
as provided above. At the request of either party, the arbitrators shall
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authorize the service of subpoenas for the production of documents or
attendance of witnesses.
(c) Within twenty (20) days after their appointment, the arbitrators
so chosen shall hold a hearing at which each party may submit evidence, be
heard and cross-examine witnesses, with each party having at least ten (10)
days advance notice of the hearing. The hearing shall be conducted such
that each of Landlord and Tenant shall have reasonably adequate time to
present oral evidence or argument, but either party may present whatever
written evidence it deems appropriate prior to the hearing (with copies of
any such written evidence being sent to the other party).
(d) The decision of the arbitrators so chosen shall be given within a
period of twenty (20) days after the conclusion of such hearing, and shall
be accompanied by findings of fact. The decision within which any two
arbitrators so appointed and acting hereunder concur, shall in all cases be
binding and conclusive upon the parties and shall be the basis for a
judgment entered in any court of competent jurisdiction.
(e) The fees and expenses of the arbitration proceeding and the fees
of the third arbitrator appointed under this section 19.03 shall be equally
borne by both parties. Landlord and Tenant shall each pay the fees of the
arbitrator each selected, and the fees and expenses of preparing and
presenting its own case. Landlord and Tenant may at any time by mutual
written agreement discontinue arbitration proceedings and agree themselves
upon any such matter submitted to arbitration.
ARTICLE XX
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 Leased Premises; provided, however, in
the event of any such transfer and assignment, Landlord shall remain primarily
responsible for any liability to Tenant arising either: (i) prior to the date of
said assignment; or (ii) by virtue of Landlord's failure to timely deliver the
Leased Premises to Tenant in accordance with the standards and schedules set
forth in this Lease. Tenant shall not assign this Lease or sublet all or any
part of the Leased Premises without the prior written consent of the Landlord.
Landlord agrees to provide Tenant written notice of its decision to either
approve or disapprove of any proposed sublessee or assignee within ten (10) days
of Tenant's request for such approval and failure to deliver such notice by
Landlord within this ten (10) day period shall be deemed approval. Tenant shall
state in its request for such approval that Landlord has only ten (10) days to
respond or Landlord's approval will be deemed granted. In the event of any
assignment or subletting, Tenant shall nevertheless at all times, remain fully
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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. Notwithstanding the foregoing, Tenant shall have the right, without
Landlord's consent, to sublet the Leased premises or any part thereof, or assign
this Lease, to any of Tenant's parent, subsidiaries or affiliated companies;
provided, however, as a condition to any such subletting or assignment: (i) both
Tenant and the proposed subtenant or, if applicable, assignee, shall be solvent
at the time of each such subletting and/or assignment; (ii) Tenant shall provide
Landlord at least ten (10) business days prior written notice of each such
subletting and/or assignment; and (iii) no such subletting and/or assignment
shall release Tenant of Tenant's obligation or alter the primary liability of
Tenant to pay Base Rental or additional rent hereunder and to perform all
obligations to be performed by Tenant under this Lease. Upon the occurrence of
an "Event of Default" as defined below, 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. 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, or an acceptance of such assignee or subtenant. 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 Landlord acknowledges and agrees
that Tenant shall be entitled to recoup any and all normal customary costs
incurred in connection with its re-leasing or assigning the Leased Premises
prior to sharing with Landlord any gross excess and/or additional consideration
received by Tenant as a result of any sublease or 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.
20.02 Landlord understands that Tenant, as a part of its business, stores
materials and information for its clients and charges for such storage. Such
storage shall not be considered an assignment or sublease under paragraph 20.01
and shall be a considered a Permitted Use under paragraph 5.01.
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ARTICLE XXI
INSOLVENCY OF TENANT
--------------------
21.01 Either (a) the appointment of a receiver 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 sixty (60) 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 Leases Premises and damages as provided below.
ARTICLE XXII
BREACH BY TENANT
----------------
22.01 The occurrence of any of the following shall constitute an Event of
Default ("Event of Default") under this Lease on the part of Tenant:
(a) Failure to pay when due any payment of base rental, additional
rent, or any other sum of money payable by Tenant under this Lease, and
such failure to pay continues for a period of ten (10) days after notice
from Landlord of such failure to pay; provided, however, Landlord shall not
be required to provide such notice more than two (2) times in any one (1)
calendar year, the third (3rd) and any subsequent such failure in such
calendar year to pay within ten (10) days after the due date therefor
constituting an Event of Default without Landlord being required to provide
such notice or allow Tenant a grace period after such notice;
(b) Tenant's interest in this Lease or the Leased Premises shall be
subjected to any attachment, execution, levy or other judicial seizure
pursuant to any order or decree entered against Tenant in any legal
proceeding that is not stayed (so as to prevent seizure) pending appeal and
such order or decree is not vacated or bonded against so as to prevent
seizure upon the earlier to occur of (aa) fifteen (15) days prior to the
sale of such interest pursuant to such order or decree, or (bb) sixty (60)
days after entry of the order; or
(c) Tenant breaches or fails to comply with any term, provision,
condition, or covenant of this Lease, other than as described in clause
21.01(i) above, and such breach or failure continues for thirty (30) days
after written notice from Landlord of such breach or failure to comply; or
in the event such breach or failure is curable but cannot be cured within
thirty (30) days and Tenant does not commence to cure such breach or
failure promptly within such thirty (30) day period and continuously
thereafter pursue such cure and remedy such breach or failure within a
reasonable period of time, not to exceed an additional 90 days.
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22.02 Upon the occurrence of an Event of Default, Landlord shall have the
option to do and perform any one or more of the following in addition to, and
not in limitation of, any other remedy or right permitted it by law or in equity
or by this Lease:
(a) Landlord, with or without terminating this Lease, may immediately
or at any time thereafter re-enter the Leased Premises and correct or
repair any condition which shall constitute a failure on Tenant's part to
keep, observe, perform, satisfy, or abide by any term, condition, covenant,
agreement, or obligation of this Lease or of any notice given Tenant by
Landlord pursuant to the terms of this Lease, and Tenant shall fully
reimburse and compensate Landlord on demand for Landlord's actual costs so
incurred.
(b) Landlord, with or without terminating this Lease, may immediately
or at any time thereafter demand in writing that Tenant vacate the Leased
Premises and thereupon Tenant shall immediately vacate the Leased Premises
and remove therefrom all property thereon belonging to or placed in the
Leased Premises by, at the direction of, or with consent of Tenant,
whereupon Landlord shall have the right to re-enter and take possession of
the Leased Premises. Any such demand, reentry and taking possession of the
Leased Premises by Landlord, shall not of itself constitute an acceptance
by Landlord of a surrender of this Lease, or of the Leased Premises by
Tenant, and shall not of itself constitute a termination of this Lease by
Landlord.
(c) Landlord, with or without terminating this Lease, may immediately
or at any time thereafter, reenter the Leased Premises pursuant to a court
order and remove therefrom Tenant and all property belonging to or placed
on the Leased Premises by, at the direction of, or with consent of Tenant.
Any such re-entry and removal by Landlord shall not of itself constitute an
acceptance by Landlord of a surrender of this Lease or of the Leased
Premises by Tenant and shall not of itself constitute a termination of this
Lease by Landlord.
(d) Landlord, with or without terminating this Lease, may immediately
or at any time thereafter use reasonable efforts to relet the Leased
Premises or any part thereof, without cost to Landlord (it being agreed
that "reasonable efforts" does not require Landlord to make any effort to
relet the Leased Premises or any portion thereof in preference to any
unleased space or space leased or subleased by Landlord or its affiliates
in other buildings) for such time or times, at such rental or rentals and
upon such other terms and conditions as Landlord in its sole, but
reasonable judgment (taking into account the fair market rental value of
the Leased Premises) deems advisable, and Landlord may make any alterations
or repairs to the Leased Premises which it in its reasonable determination
may be necessary or proper to facilitate such reletting; and Tenant shall
pay all reasonable costs of such reletting including but not limited to the
cost of any such alterations and repairs to the Leased Premises, reasonable
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attorneys' fees actually incurred, leasing inducements, and brokerage
commissions; and if this Lease shall not have been terminated, Tenant shall
continue to pay all rent due under this Lease up to and including the date
of beginning of payment of rent by any subsequent tenant of part or all of
the Leased Premises, and thereafter Tenant shall pay monthly during the
remainder of the term of this Lease the difference, if any, between the
rent and other charges collected from any such subsequent tenant or tenants
and the rent and other charges reserved in this Lease, but Tenant shall not
be entitled to receive any excess of any such rents collected over the rent
reserved herein.
(e) 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,
reasonable costs, charges, additional rentals, and reimbursements, the cost
(including court costs and reasonable 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 an amount equal to 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, over the present value (discounted at the
same rate) of the fair market value of the Leased Premises for the
remainder of the lease term.
22.03 If Landlord re-enters the Leased Premises or terminates this Lease
pursuant to any of the provisions of this Lease, Tenant hereby waives all claims
for damages which may be caused by such re-entry or termination by Landlord's
reasonable acts complying with the provisions of this Lease. No such reentry or
termination shall be considered or construed to be forcible entry.
22.04 "Events of Default by Landlord" under this Lease shall be deemed to
be the situations where Landlord shall fail to comply with any term, provision
or covenant of this Lease and shall not commence to cure such failure within
thirty (30) days after written notice thereof and diligently and in good faith
continue to cure the default until completion. If the default cannot reasonably
be cured within such thirty (30) day period, Landlord shall not be in default if
Landlord commences to cure the default within the thirty (30) day period and
diligently and in good faith continues to cure the default until completion. In
no event shall Landlord's right to cure extend beyond ninety (90) days following
written notice from Tenant, unless such period is extended by Tenant Delays or
Excusable Delays.
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22.05 Upon the occurrence of any Event of Default by Landlord, Tenant
shall have the right to perform the obligations of Landlord and Tenant shall
have Landlord reimburse Tenant on demand for any reasonable and necessary costs
and expenses which Tenant may have incurred.
ARTICLE XXIII
ATTORNEY'S FEES
---------------
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
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.
ARTICLE XXIV
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 not feasible or commercially impractical 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 not feasible or commercially impractical, then this Lease shall continue
on all of its same terms and conditions subject only to an equitable reduction
in rent proportionate to the effect (if any) of such taking on Tenant's
continued occupancy and operation.
24.03 Subject to section 24.04 below, in the event of any such taking or
transfer, whether or not it covers 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 such 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
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the same be for the taking of the property or for damages, or otherwise;
provided, however, that Tenant may separately claim and receive from the
condemning authority (but not from Landlord), for compensation for Tenant's
removal and relocation costs and/or business interruption, the value of any of
Tenant's property taken, and any alterations, additions or improvements made by
Tenant.
24.04 If all or any part of the Leased Premises shall be the subject of a
temporary taking, this Lease shall nevertheless remain in full force and effect,
and Tenant shall continue to be responsible for all of its obligations hereunder
insofar as Tenant's ability and authority to comply with such obligations are
not affected by such taking including, without limitation, the payment of all
base rental and additional rent. The award for any such temporary taking
payable for any period prior to the expiration date of this Lease shall be paid
to Tenant and the award for any temporary taking for any period thereafter shall
be paid to Landlord. A taking or transfer in lieu of taking shall be deemed to
be a temporary taking if the term of such taking does not extend beyond the then
current lease term.
ARTICLE XXV
NOTICES
-------
25.01 Prior to the Commencement Date of this Lease, all notices,
statements, demands, requests, consents, approvals, authorization, offers,
agreements, appointments, 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, if sent by facsimile to the number for each party set forth
below or by certified mail, return receipt requested, postage prepaid, at the
address for each party set forth below:
(a) To Tenant at 1828 Meca Way, Norcross, Georgia 30093, Attention: David
Ellin, Facsimile No. 770-717-2111, with a copy to such other place as
Tenant may from time to time designate by notice to Landlord.
(b) To Landlord at 4497 Park Drive, Norcross, Georgia 30093, Facsimile
No._____________, with a copy to such other place as Landlord may from
time to time designate by notice to Tenant.
25.02 Following the Commencement Date, the numbers and addresses shall be:
(a) To Tenant at the Leased Premises, Attention: David Ellin, Facsimile
No. _________________, with a copy to such other place as Tenant may
from time to time designate by notice to Landlord.
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<PAGE>
(b) To Landlord at 4497 Park Drive, Norcross, Georgia 30093, Facsimile
_______________, with a copy to such other place as Landlord may from
time-to-time designate by notice to Tenant.
25.03 All notices shall be deemed received five (5) days after being
deposited in the mail in accordance with the foregoing provisions, or if sent by
facsimile on the date of the facsimile transmittal.
ARTICLE XXVI
WAIVER
------
26.01 The waiver by either party 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.
ARTICLE XXVII
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 subsection 3.01 hereof shall be 125% of the rent payable pursuant to
subsection 3.01 for any month or portion thereof during the first thirty (30)
days of any holdover period. In such event, Landlord shall have the right to
terminate such tenancy-at-sufferance by giving Tenant fifteen (15) business days
prior written notice of such termination.
ARTICLE XXVIII
SUBORDINATION
-------------
28.01 This Lease and all rights of Tenant hereunder are and shall be
subject and subordinate to each Mortgage which may now or hereafter affect
Landlord's fee simple title to the Leased Premises and to any modifications,
renewals, consolidations, extensions or replacements thereof; provided, however,
that such subordination is conditioned upon the holder of any such Mortgage
30
<PAGE>
first executing and delivering to Tenant a Subordination, Non-Disturbance and
Attornment Agreement as described in section 28.02 below. Subject to the
provisions of the immediately preceding sentence, Tenant agrees to recognize and
attorn to any party succeeding to the interest of Landlord as a result of the
enforcement of any Mortgage, and to be bound to such party under all of the
terms, covenants, and conditions of this Lease, for the balance of the term of
this Lease, including renewal terms, with the same force and effect as if such
party were the original Landlord under this Lease.
28.02 Upon the request of Landlord, the lessor under any such Prime Lease
or the holder of any Mortgage, Tenant agrees to execute a Subordination, Non-
Disturbance and Attornment Agreement with respect to each Mortgage or other
instrument from time to time encumbering fee simple title to the Leased
Premises. Tenant agrees to execute and deliver any Subordination, Non-
Disturbance and Attornment Agreement substantially in the form attached hereto
as Exhibit "E" ("SNDA"), or in such other form as Landlord or the holder of such
Mortgage shall reasonably request. Notwithstanding anything to the contrary in
this Lease: (i) Tenant's obligations under this Lease shall be contingent upon
(and only Tenant shall have the right to waive such contingency) Tenant,
Landlord and all of the holders of Mortgages on the Leased Premises each
executing an SNDA prior to the Commencement Date; and (ii) Landlord covenants to
deliver to Tenant an SNDA executed by each of the holders of Mortgages on the
Leased Premises and Landlord prior to the Commencement Date.
28.03 Notwithstanding the foregoing provisions of this Article 28, Tenant
shall, upon demand, at any time or times, execute, acknowledge and deliver to
Landlord or holder of any Mortgage, any and all instruments that may be
necessary to make this Lease superior to the lien of such Mortgage, and each
renewal, modification, consolidation, replacement and extension thereof.
ARTICLE XXIX
ESTOPPEL CERTIFICATE
--------------------
29.01 Upon ten (10) 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 reasonably require and stating 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 Landlord; (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 and (viii) such other statements as
Landlord may reasonably require.
31
<PAGE>
29.02 Upon ten (10) days notice from Tenant to Landlord, Landlord 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 Tenant may reasonably require and stating 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; (vii) that Landlord 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 Landlord hereunder and (viii) such other statements as
Tenant may reasonably require.
ARTICLE XXX
PARKING
-------
30.01 Tenant agrees to park all Tenant's trucks in the designated parking
spaces, if any such exist, at the rear of the Building. "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 or serviced in the parking area and any
vehicle deemed abandoned by Landlord in its reasonable discretion will be towed
from the Leased Premises and all costs therein shall be borne by the Tenant.
ARTICLE XXXI
MORTGAGE 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 holder of a Mortgage covering
the Leased Premises whose address shall have been furnished to Tenant, and shall
offer such Mortgagee 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. Tenant shall
accept cure by Landlord's Mortgagee; provided, however, such cure must occur
within the same time period provided for a Landlord cure under the Lease.
32
<PAGE>
ARTICLE XXXII
RULES AND REGULATIONS
---------------------
32.01 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.
ARTICLE XXXIII
BROKERAGE COMMISSIONS
---------------------
33.01 Landlord and Tenant acknowledge that Carter & Associates, L.L.C.
("Broker") has represented Tenant in connection with this Lease. Broker's
commission, however, shall be payable by Landlord. Landlord shall pay to Broker
a leasing commission in an amount as set forth in a separate agreement between
Broker and Landlord. The parties hereto do acknowledge and agree that that
certain Commission Agreement dated September 15, 1997, by and between Weeks
Development Partnership, a Georgia general partnership, as lessor/owner and
Carter & Associates, L.L.C. as broker is hereby incorporated into this lease as
if same were repeated in full. Broker acknowledges that Broker is not entitled
to any other compensation in connection with this Lease other than as expressly
provided hereinabove.
33.02 Landlord and Tenant each represents and warrants to the other that
it has not dealt with any broker, agent, commission salesman or other person
(other than Broker) in the negotiations for and procurement of this Lease and of
the Leased Premises and that no commissions, fees, or compensation of any kind
are due and payable in connection herewith to any broker, agent, commission
salesman or other person (other than Broker) as a result of any such dealings.
Landlord and Tenant each hereby agrees to indemnify the other and hold the other
harmless from and against any and all claims, suits or judgments or in the
enforcement of this indemnity for any fees, commissions or compensation of any
kind which arise out of or in any way connected with any claimed dealings or
relationship with the indemnifying party.
33.03 Broker represents and warrants to Landlord and Tenant that Broker
has not dealt with any broker, agent, commission salesman or other person in the
negotiations for and procurement of this Lease and of the Leased Premises, and
that no commissions, fees, or other compensation of any kind are due and payable
in connection herewith to any broker, agent, commission salesman or other person
as a result of any such dealings. Broker agrees to indemnify Landlord and
Tenant and hold Landlord and Tenant harmless from and against any and all
claims, suits or judgments (including without limitation, reasonable attorneys'
fees and court costs incurred in connection with any such claims, suits or
judgments or in the enforcement of this indemnity) for any fees, commissions or
33
<PAGE>
compensation of any kind which arise out of or in any way connected with any
claimed dealings or relationship with Broker.
33.04 Broker has executed this Lease solely for the purpose of agreeing to
the provisions of this Article 34 and for no other purpose.
ARTICLE XXXIV
DELAYS
------
34.01 Definition. The term "Excusable Delays" shall mean any delay due to
war, natural catastrophe, future order of any government, court or regulatory
body claiming jurisdiction, blockage, embargo, or similar regulation or order of
any government or other regulatory body, storm, flood, washout, adverse weather
conditions, inability to obtain or delay in obtaining permits for reasons beyond
the control of the party seeking such permits, (provided that applications for
permits have been made within a reasonable time), or inability to obtain any
approval or consent required under the Protective Covenants for reasons beyond
the control of the party seeking such approval or consent, or any other cause
whatsoever beyond the reasonable control of the party from whom performance is
required, whether or not similar to any of the causes stated above; provided,
however, that a party's lack of funds or a party's failure, refusal or neglect
to pay any amount due hereunder shall not be deemed to be a cause beyond the
control of such party.
34.02 Performance Excused. Landlord and Tenant shall each be excused for
the period of any Excusable Delay from, and shall not be deemed in default with
respect to, the performance of any of the terms, covenants and conditions of
this Lease to be performed by such party when prevented from doing so by
Excusable Delays; provided, however, that nothing contained in this section
shall excuse a party's performance or prohibit the other party from exercising
any remedy in any circumstance in which any other provision of this Lease
expressly provides that such party is not excused or that such remedy may be
exercised notwithstanding or without regard to the existence of all or certain
Excusable Delays.
34.03 The term "Tenant Delays" shall mean and refer to delays directly
attributable to or caused by Tenant or Tenant's employees or agents, including
any failure by Tenant to make any decision within the time frame specified in
the Construction Schedule, except those delays contributed to by Landlord or
Landlord's employees, agents, contractors or invitees.
34.04 The time period for any Excusable Delay or Tenant Delay hereunder
shall not be deemed to have commenced until a party claiming such delay sends
notice to the other party that such delay has occurred. Notwithstanding the
34
<PAGE>
foregoing, a party claiming a delay can set a date in such notice up to five (5)
days prior to the date the notice is sent and this date shall be deemed the
commencement of such delay; provided that, the delay did in fact commence on
such day. Any Excusable Delay or Tenant Delay shall continue only as long as
necessary in the reasonable determination of the party claiming such delay, and
only so long as the party claiming such delay exercises due diligence to remove
and overcome such delay.
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 sections of this Lease are not a part of this
Lease 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.
D. Time is of the essence of each term and provision of this Lease.
E. 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.
F. Subject to Article 19, 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.
G. Except as otherwise expressly provided herein, 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. Where the consent, approval or acceptance of a party is required, the
party agrees that such consent, approval or acceptance shall not be unreasonably
withheld, conditioned or delayed.
I. This Lease shall create the relationship of Landlord and Tenant between
Landlord and Tenant; no estate shall pass out of Landlord; Tenant has only a
35
<PAGE>
usufruct, not subject to levy and/or sale and not assignable by Tenant except as
provided in section 19.01 hereof.
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; provided,
--------
however, that if Landlord and Tenant reasonably determine that security
- -------
protection would assist to prevent vandalism or other mischief at the Leased
Premises, then Landlord shall hire reasonable security protection for the Leased
Premises and 50% of such costs can be charged to Tenant as CAM.
K. This Lease shall be governed by Georgia law.
L. Both parties shall execute a memorandum of this Lease for the purpose
of recordation attached as Exhibit "F" contemporaneous with the execution of the
Lease. Said memorandum or short form of this Lease shall describe the parties,
the Leased Premises and the lease term, the renewal and purchase options, and
shall incorporate this Lease by reference. Said memorandum or short form of
this Lease shall not include the economic terms of this Lease unless both
parties consent.
M. Except as otherwise expressly provided herein, Landlord's liability for
performance of its obligations under the terms of this Lease shall be limited to
its interest in the Leased Premises, and neither Landlord, nor any officer,
director, shareholder or partner of Landlord, or of any partner of Landlord,
shall have any personal liability whatsoever with respect to this Lease.
Landlord's exculpation of liability hereunder shall not apply to any liability
of Landlord resulting from its failure to timely deliver the Leased Premises to
Tenant.
36
<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.
<TABLE>
<CAPTION>
<S> <C>
LANDLORD:
Signed, sealed and delivered WEEKS DEVELOPMENT PARTNERSHIP, a Georgia general
as to the Landlord, in the partnership
presence of:
/s/ By: Weeks Realty Services, Inc., a Georgia
- ------------------------------- corporation, its managing general partner
Unofficial Witness
/s/ By: /s/ Forrest Robinson
- ------------------------------- --------------------------------------------
Notary Public Name: Forrest Robinson
------------------------------------------
Its: President/COO
-------------------------------------------
(CORPORATE SEAL)
TENANT:
Signed, sealed and delivered INNOTRAC CORPORATION
as to the Tenant, in the
presence of:
By: /s/ David Ellin
/s/ -------------------------------------------
- ------------------------------- Name: David Ellin
Unofficial Witness -----------------------------------------
/s/ Its: Sr. V.P. & COO
- ------------------------------- -----------------------------------------
Notary Public (CORPORATE SEAL)
BROKER:
Signed, sealed and delivered CARTER & ASSOCIATES, L.L.C.
as to the Broker, in the
presence of:
By: /s/ George P. Edwards
/s/ ------------------------------------------
- ------------------------------- Name: George P. Edwards
Unofficial Witness -----------------------------------------
Its: Authorized Agent
-----------------------------------------
/s/ (CORPORATE SEAL)
- -------------------------------
Notary Public
</TABLE>
37
<PAGE>
EXHIBIT 10.9
SPLIT DOLLAR LIFE INSURANCE AGREEMENT
(the "Agreement" or the "Plan")
THIS AGREEMENT is made as of the 10 day of July, 1997, by and between
(1) INNOTRAC CORPORATION, a Georgia corporation (the "Corporation"), (2) BRUCE
V. BENATOR, as Trustee of THE SCOTT DAVID DORFMAN FAMILY TRUST #2 U/A January
28, 1997 (the "Owner"), and (3) SCOTT DAVID DORFMAN ("SCOTT") (the Corporation,
the Owner and SCOTT sometimes are referred to herein collectively as the
"Parties" and individually as a "Party").
The Corporation highly values SCOTT's efforts, abilities and
accomplishments.
SCOTT is deemed to be a member of a select group of management
personnel and one of the Corporation's highly regarded employees.
The Corporation, as an inducement to SCOTT's continued employment,
wishes to assist SCOTT with SCOTT's personal life insurance program.
SCOTT agrees to participate in such program to the extent hereinafter
provided.
The Plan is intended to qualify as a life insurance employee benefit
plan as described in Revenue Ruling 64-328.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements hereinafter set forth, the Parties hereto agree as follows:
a) Life Insurance Policy/Policies:
------------------------------
(1) In furtherance of the purposes of this Agreement, one or more life
insurance policies having an aggregate face amount of up to One Million
Dollars ($1,000,000) (collectively the "Policies" and individually a
"Policy") have been or may be issued on SCOTT's life by one or more
insurance companies (collectively the "Insurers" and individually an
"lnsurer"). See Schedule A attached to this Agreement for particulars
regarding each Policy issued in connection with this Plan.
(2) This Agreement will be effective as to each Policy upon the later
to occur of (A) the execution of this Agreement, or (B) the issuance to and
acceptance of such Policy by the Owner.
b) Rights of Parties:
-----------------
(1) The Owner shall be the sole and absolute owner of each Policy and
shall have and may exercise all incidents and rights of ownership with
respect to each Policy, including, by way of illustration and not
limitation, the right to surrender the Policy, the
<PAGE>
right to make policy loans, the right to designate and change the
beneficiary and the right to elect and to receive dividends. All such
rights are reserved exclusively to the Owner and may be exercised solely by
the Owner. (2) In exchange for the Corporation's payment of premiums as
provided in paragraph (c) of this Agreement, the Owner agrees to make the
applicable payment(s) described in subparagraphs (b)(2)(A) through
(b)(2)(C) of this Agreement below upon the first to occur of the following
events: (A) SCOTT's death; (B) as to any particular Policy, the lapse of
such Policy or the cancellation or surrender of such Policy by the Owner;
or (C) the bankruptcy, receivership, dissolution or cessation of business
of or by the Corporation (the first to occur of such events is referred to
as the "Triggering Event").
(A) If the Triggering Event is SCOTT's death, the Owner agrees
to return to the Corporation with respect to each Policy that shall be
in existence at SCOTT's death an amount equal to the lesser of: (i)
the Corporation's Premium Advance with respect to such Policy; or (ii)
the amount of the net proceeds payable upon SCOTT's death with respect
to such Policy.
(B) If the Triggering Event is the lapse, cancellation or
surrender of a Policy, the Owner agrees to return to the Corporation
an amount equal to the lesser of: (i) the Corporation's Premium
Advance with respect to such Policy; or (ii) the sum of the Total Cash
Value of such Policy at the time of such lapse, cancellation or
surrender, plus all unpaid loan amounts outstanding against such
Policy at the time of such lapse, cancellation or surrender.
(C) If the Triggering Event is the bankruptcy, receivership,
dissolution or cessation of business of or by the Corporation, the
Owner agrees to return to the Corporation with respect to each Policy,
that shall be in existence at the time of such bankruptcy,
receivership, dissolution or cessation of business an amount equal to
the lesser of: (i) the Corporation's Premium Advance with respect to
such Policy; or (ii) the sum of the Total Cash Value of such Policy at
the time of such bankruptcy, receivership, dissolution or cessation of
business, plus all unpaid loan amounts outstanding against such Policy
at the time of such bankruptcy, receivership, dissolution or cessation
of business.
c) Payments of Premiums:
--------------------
(1) The Owner shall remit to the Insurer in a timely manner a portion
of each premium due on each Policy, which portion (herein referred to as
the "Owner's Portion") shall be equal to the lesser of: (A) the value of
the entire economic benefit that would be taxable to SCOTT but for such
payment; or (B) the entire premium in question. The
-2-
<PAGE>
economic value that would be taxable to SCOTT but for such payment shall be
calculated by using the lower of: (A) the "PS 58" rate, whichever shall be
applicable, as set forth in the laws, regulations or rulings which governs
the federal income tax consequences of split dollar life insurance
arrangements at the time in question; or (B) the Insurer's applicable
annual renewable term insurance rates for providing a comparable amount of
insurance at the time in question. The Owner shall be entitled to elect to
pay any additional part or all of any premium on any Policy by policy loan
or other borrowing, and shall deliver notice of such election to the
Corporation on or before the premium due date. The Owner shall have the
right to apply any dividends declared on any Policy toward the reduction of
a premium otherwise payable.
(2) The Corporation shall remit to each Insurer in a timely manner all
premium amounts not paid by the Owner with respect to each Policy.
d) Use of Dividends: All dividends attributable to each Policy shall
----------------
be applied, in the Owner's sole discretion, to the purchase of paid-up additions
from the Insurer or a reduction of premiums.
e) Payment of Proceeds: Upon the SCOTT's death, such party or
-------------------
parties as shall be designated in writing by the Owner as beneficiary (or
beneficiaries) of each Policy shall receive the proceeds of such Policy.
f) Definitions: For purposes of this Agreement, the following
-----------
definitions are applicable:
(1) The "Guaranteed Cash Value" of a Policy is its contractually
guaranteed cash value only.
(2) The "Total Cash Value" of a Policy consists of such Policy's
Guaranteed Cash Value, cash values of additions, values from accumulation
and accrued but unpaid dividends.
(3) The "Corporation's Premium Advance" with respect to each Policy is
an amount equal to the cumulative total of the premiums paid by the
Corporation with respect to such Policy.
g) Termination of Agreement: This Agreement shall terminate and be
------------------------
of no further effect upon the Owner's complete satisfaction of all of the
Owner's obligations to reimburse the Corporation as set forth in subparagraph
(b)(2) of this Agreement.
h) Named Fiduciary: The Treasurer of the Corporation (currently SCOTT
---------------
DAVID DORFMAN) is hereby designated as the Named Fiduciary of the Plan, in
accordance with the Employee Retirement Income Security Act of 1984, and shall
serve in such capacity until his/her resignation or removal by the Board of
Directors of the Corporation and the
-3-
<PAGE>
appointment of a successor by a duly adopted resolution of such Board. The
business address and telephone number of the Named Fiduciary are: INNOTRAC
CORPORATION; 1828 Meca Way, N.W., Norcross, GA 30093. The Named Fiduciary shall
have the authority to control and manage the operation and administration of
this Plan. However, the Named Fiduciary may allocate his/her responsibilities
for the operation and administration of this Plan, including the designation of
persons who are not Named Fiduciaries, to carry out fiduciary responsibilities.
The Named Fiduciary shall affect such allocation of his/her responsibilities by
delivering to the Corporation a written instrument signed by him/her that
specifies the nature and extent of the responsibilities allocated, including, if
appropriate, the person(s) who are designated to carry out fiduciary
responsibilities under this Plan. The Named Fiduciary of this Plan shall be
responsible for making timely delivery of any required premiums to the Insurer.
All Plan documents shall be retained by the Named Fiduciary and made available
for examination at the above business address. Upon written request, the Plan
documents and other information shall be provided to the Parties.
i) Claims Procedure: Benefits shall be payable in accordance with
----------------
the Plan provisions. Should the Owner or a properly designated beneficiary
(collectively referred to as the "Claimant") fail to receive benefits to which
the Claimant believes he, she or they is or are entitled, a claim may be filed.
Any claim for a Plan benefit hereunder shall be filed by the Claimant by a
written communication which is made by the Claimant or the Claimant's authorized
representative which is reasonably calculated to bring the claim to the
attention of the Named Fiduciary. If a claim for a Plan benefit is wholly or
partially denied, a written notice of the decision shall be furnished to the
Claimant by the Named Fiduciary or his/her designee within a reasonable period
of time after receipt of the claim by the Plan, which notice shall include the
following information:
(1) The specific reason or reasons for the denial;
(2) Specific reference to the pertinent Plan provisions upon which the
denial based;
(3) A description of any additional material or information necessary
for the Claimant to perfect the claim and an explanation of why such
material or information is necessary; and
(4) An explanation of the Plan's claim review procedures. In order
that a Claimant may appeal a denial of a claim, a Claimant or his/her duly
authorized representative:
-4-
<PAGE>
(A) May request review to the Named Fiduciary or his/her
designee not later than sixty (60) days after receipt by the Claimant
of written notification of the denial of a claim;
(B) May review pertinent documents; and
(C) May submit issues and comments in writing. A decision on
review of a denied claim shall be made not later than sixty (60) days
after the Plan's receipt of a request for review, unless special
circumstances require an extension of time for processing, in which
case a decision shall be rendered within a reasonable period of time,
but not later than one hundred twenty (120) days after receipt of a
request for review. The decision on review shall be in writing and
shall include the specific reason(s) for the decision and the specific
reference(s) to the pertinent Plan provisions on which the decision is
based. Notwithstanding anything in this paragraph to the contrary, any
claim for a death benefit under a Policy under this Plan shall be
filed with the Insurer by the Claimant or his or her authorized
representative on the form or forms prescribed for such purpose by the
Insurer. The Insurer shall have the authority for determining whether
a death claim shall or shall not be paid, either in whole or in part,
in accordance with the terms of such Policy.
j) Amendment of Agreement: This Agreement may be altered, amended or
----------------------
written agreement signed by the Corporation and the Owner.
k) Governing Law: The laws of the State of Georgia shall governs this
-------------
Agreement.
l) Interpretation of Agreement: Where appropriate in this Agreement,
---------------------------
words used in the singular shall include the plural and words used in the
masculine shall include the feminine and vice versa.
m) Liability of Insurer(s): No Insurer is a party to this Agreement.
-----------------------
No Insurer shall have any liability except as set forth in such Policy issued by
such Insurer. No Insurer shall be bound to inquire into or take notice of any of
the covenants herein contained as to such Policy, or as to the application of
the proceeds of such Policy. Each Insurer shall be discharged from all
liability in making payments of the proceeds of a Policy issued by such Insurer,
and in permitting rights and privileges under the Policy to be exercised,
pursuant to the provisions of the Policy.
n) Binding Agreement: This Agreement shall bind all Parties and their
-----------------
successors and assigns.
-5-
<PAGE>
IN WITNESS WHEREOF, the Parties have executed this Agreement as of the
day and year first above written.
INNOTRAC CORPORATION, the Corporation
Employer Identification By: /s/ Scott David Dorfman (SEAL)
------------------------
Number 58-1592285 SCOTT DAVID DORFMAN
Treasurer
/s/ Bruce V. Benator
--------------------
BRUCE V. BENATOR, as Trustee of
THE SCOTT DAVID DORFMAN
FAMILY TRUST #2 U/A 1/28/97
/s/ Scott David Dorfman (SEAL)
-----------------------
SCOTT DAVID DORFMAN
-6-
<PAGE>
SCHEDULE A
INSURANCE POLICY FACE
INSURED COMPANY NUMBER AMOUNT
------------------ ----------------- ------ ----------
SCOTT DAVID THE MIDLAND LIFE U75068 $1 MILLION
DORFMAN INSURANCE COMPANY
-7-
<PAGE>
Exhibit 10.10
INNOTRAC CORPORATION
DEFERRED COMPENSATION PLAN
(Effective As of October 16, 1997)
<PAGE>
INNOTRAC CORPORATION
DEFERRED COMPENSATION PLAN
--------------------------
TABLE OF CONTENTS
-----------------
ARTICLE I INTRODUCTION AND ESTABLISHMENT...................................1
ARTICLE II DEFINITIONS.....................................................2
2.1 Account...........................................................2
2.2 Anniversary Date..................................................2
2.3 Beneficiary.......................................................2
2.4 Change in Control.................................................2
2.5 Code..............................................................3
2.6 Company...........................................................3
2.7 Compensation......................................................3
2.8 Deferral Subaccount...............................................3
2.9 Effective Date....................................................3
2.10 Election Form.....................................................3
2.11 Employee..........................................................3
2.12 Employer..........................................................3
2.13 Employer Credit Subaccount........................................3
2.14 ERISA.............................................................3
2.15 40l(k) Plan.......................................................3
2.16 Participant.......................................................4
2.17 Plan..............................................................4
2.18 Plan Administrator................................................4
2.19 Plan Year.........................................................4
2.20 Section 40l(a)(17) Limitation.....................................4
2.21 Valuation Date....................................................4
2.22 Year of Service...................................................4
ARTICLE III PARTICIPATION..................................................5
3.1 Eligibility to Participate........................................5
3.2 Deferral Election.................................................5
3.3 Time and Manner of Election.......................................5
3.4 Change of Election................................................6
-i-
<PAGE>
ARTICLE IV INTEREST OF PARTICIPANTS........................................7
4.1 Accounting for Participants' Interests............................7
4.2 Vesting of a Participant's Account................................8
4.3 Distribution of a Participant's Account...........................9
4.4 Withdrawals During Employment.....................................9
ARTICLE V PLAN ADMINISTRATOR..............................................11
5.1 Members..........................................................11
5.2 Action...........................................................11
5.3 Right and Duties.................................................11
5.4 Compensation, Indemnity and Liability............................12
5.5 Taxes............................................................12
ARTICLE VI CLAIMS PROCEDURE...............................................13
6.1 Claims for Benefits..............................................13
6.2 Appeals..........................................................13
ARTICLE VII AMENDMENT AND TERMINATION.....................................14
7.1 Amendments.......................................................14
7.2 Termination of Plan..............................................14
ARTICLE VIII MISCELLANEOUS................................................15
8.1 Limitation on Participant's Rights...............................15
8.2 Benefits Unfunded................................................15
8.3 Other Plans......................................................15
8.4 Receipt or Release...............................................15
8.5 Governing Law....................................................16
8.6 Adoption of Plan by Related Employers............................16
8.7 Gender, Tense, and Headings......................................16
8.8 Successors and Assigns; Nonalienation of Benefits................16
-ii-
<PAGE>
ARTICLE I
---------
INTRODUCTION AND ESTABLISHMENT
------------------------------
Innotrac Corporation (the "Company") hereby establishes the Innotrac
Corporation Deferred Compensation Plan (the "Plan") for the benefit of certain
management and highly compensated employees of the Company and affiliated
adopting employers, as such employees are selected by the Chairman of the Board
of Directors (or his designee) of the Company. The Plan provides supplemental
benefits for eligible employees whose benefits under the Innotrac Corporation
Employee Retirement Plan are limited by the provisions of the Internal Revenue
Code of 1986, as amended, or the Employee Retirement Income Security Act of
1974, as amended. The Plan shall be effective as of October 16, 1997.
1
<PAGE>
ARTICLE II
----------
DEFINITIONS
-----------
When used in this Plan, the following terms shall have the meanings
set forth below unless a different meaning is plainly required by the context:
2.1 "Account" means the records maintained by the Plan Administrator
-------
to determine each Participant's interest under this Plan. Such Account may be
reflected as an entry in the Employer's records, or as a separate account under
any trust established to provide benefits under the Plan, or as a combination of
both. Each Participant's Account shall consist of at least two subaccounts: a
Deferral Subaccount and an Employer Credit Subaccount. The Plan Administrator
may establish such additional subaccounts as it deems necessary for the proper
administration of the Plan.
2.2 "Anniversary Date" means the last day of each Plan Year.
----------------
2.3 "Beneficiary" means the person or persons last designated in
-----------
writing by the Participant to receive the amount in his Account in the event of
such Participant's death; or if no designation shall be in effect at the time of
a Participant's death or if all designated Beneficiaries shall have predeceased
the Participant, then the Beneficiary shall be the following, in the order
listed:
(a) Such Participant's surviving spouse, if any;
(b) Otherwise, the Participant's estate.
2.4 "Change in Control" means the purchase or other acquisition after
-----------------
the date hereof by any person, entity or group of persons, within the meaning of
section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any
comparable successor provisions, of beneficial ownership (within the meaning of
Rule 13d-3 promulgated under the Act) of 30 percent or more of either the
outstanding shares of common stock or the combined voting power of Company's
then outstanding voting securities entitled to vote generally, or the approval
by the stockholders of Company of a reorganization, merger, or consolidation, in
each case, with respect to which persons who were stockholders of Company
immediately prior to such reorganization, merger or consolidation do not
immediately thereafter, own more than 50 percent of the combined voting power
entitled to vote generally in the election of the directors of the reorganized,
merged or consolidated Company's then outstanding securities, or a liquidation
or dissolution of Company or the sale of all or substantially all of Company's
assets. For purposes of this Section 2.4, acquisition
2
<PAGE>
of the common stock of the Company by an employee benefit plan sponsored or
maintained by the Company or its affiliate (or a trust maintained for such plan)
shall not be considered a Change in Control.
2.5 "Code" means the Internal Revenue Code of 1986, as amended.
----
2.6 "Company" means Innotrac Corporation, or its successor or
-------
successors.
2.7 "Compensation" means "Compensation" as that term is defined in
------------
the 401(k) Plan, as the same may be amended from time to time, but without
regard to the Section 401(a)(17) Limitation. Compensation shall also include
amounts deferred by the Employee under this Plan or other deferred compensation
plans of the Employer (except to the extent specified by the Employer).
2.8 "Deferral Subaccount" means the subaccount of a Participant's
-------------------
Account maintained to reflect his interest in the Plan attributable to his
deferrals of Compensation and earnings or losses credited to such account.
2.9 "Effective Date" means October 16, 1997.
--------------
2.10 "Election Form" means the form prescribed by the Plan
-------------
Administrator on which a Participant may specify the amount of his Compensation
that is to be deferred pursuant to the provisions of Article III.
2.11 "Employee" means any management or highly compensated employee
--------
of an Employer.
2.12 "Employer" means the Company and each affiliated employer which
--------
has adopted the Plan with the consent of the Company.
2.13 "Employer Credit Subaccount" means the subaccount of a
--------------------------
Participant's Account maintained to reflect his interest in the Plan
attributable to the Employer's contribution credits, and any earnings or losses
credited to such account.
2.14 "ERISA" means the Employee Retirement Income Security Act of
-----
1974, as amended.
2.15 "40l(k) Plan" means the Innotrac Corporation Employee Retirement
-----------
Plan, as it may be amended from time to time. Any reference herein to a
provision or term of the 401(k) Plan shall mean such provision or term as it may
be amended from time to time.
3
<PAGE>
2.16 "Participant" means any eligible Employee who has satisfied the
-----------
requirements for participation in this Plan and who has an Account.
2.17 "Plan" means the Innotrac Corporation Deferred Compensation
----
Plan, as it may be amended from time to time.
2.18 "Plan Administrator" means the committee or individual appointed
------------------
pursuant to the provisions of this Plan to administer the Plan. In the absence
of such appointment, the Company shall be the Plan Administrator.
2.19 "Plan Year" means the 12-month period January 1 to December 31.
---------
2.20 "Section 40l(a)(17) Limitation" means the limitation on an
-----------------------------
Employee's compensation that may be used for benefit calculation purposes in the
401(k) Plan that is set forth in Code Section 40l(a)(17), as it may be increased
from time to time in accordance with applicable IRS rules.
2.21 "Valuation Date" means the Annual Valuation Date, December 31,
--------------
and any other date(s) selected by the Plan Administrator in its sole discretion
as of which the Accounts of Participants are valued.
2.22 "Year of Service" means a 12 consecutive month period during
---------------
which a Participant has 1,000 hours of service, as determined under and
consistent with the terms of the 401(k) Plan.
4
<PAGE>
ARTICLE III
-----------
PARTICIPATION
-------------
3.1 Eligibility to Participate. The Chairman of the Board of
--------------------------
Directors of the Company (the "Board") or its designee shall specify the
Employees of the Employer who are eligible to participate in the Plan and the
effective date and period of each such Employee's eligibility to participate.
Such eligibility designation may be made by establishing a minimum compensation
level for participation or by the use of such other criteria as the Board deems
appropriate from time to time. An Employee designated as eligible to
participate shall become a Participant on the eligibility date specified by the
Board in its discretion, provided in all instances that the Employee completes
the Election Form provided for in Section 3.3 below. A Participant shall
continue to be eligible to participate in the Plan until earlier of (a) the date
as of which the Board determines he is no longer eligible, (b) his death, or (c)
his termination of service, retirement or distribution due to disability.
3.2 Deferral Election. Each Participant may elect to defer under the
-----------------
Plan any whole percentage of his Compensation in the manner described in Section
3.3. The amount deferred by the Participant shall be deducted each pay period
in which the Participant has Compensation during his period of participation in
the Plan.
3.3 Time and Manner of Election. An eligible Employee desiring to
---------------------------
exercise a deferral election must, prior to the beginning of each Plan Year (or
within thirty (30) days of his initial eligibility to participate or within
thirty (30) days of the Effective Date of the Plan) complete an Election Form
indicating the percentage of Compensation to be deferred under the Plan. Such
election must be made prior to the period of service for which the Compensation
subject to the deferral election would otherwise be payable. If a Participant
fails to file a properly completed and duly executed Election Form with the Plan
Administrator by the prescribed time, he will be deemed to have elected not to
defer any Compensation under this Plan for the Plan Year, except to the extent
the Plan Administrator in its sole discretion permits an extension of the
election period. Except as provided in Section 3.4, a Participant may not,
after the applicable election date, discontinue his election to participate or
change the percentage of Compensation he has elected to defer for a Plan Year.
The Participant shall designate on the Election Form (or on a separate
form provided by the Plan Administrator) a Beneficiary to receive payment of
amounts in his Account in the event of his death.
In the Plan Year for which an eligible Employee is first eligible to
participate in the Plan, if the Employee fails to properly file an Election
form, he will be deemed to have made an election of zero deferrals and the
minimum earnings rate.
5
<PAGE>
3.4 Change of Election. Upon written notice to the Plan
------------------
Administrator by December 31st of a Plan Year, a Participant may increase,
decrease, or discontinue his deferral election for the following Plan Year;
provided, however, that (a) the form and amount deferred, and (b) the amount to
be deferred after such election, satisfy the provisions of Sections 3.2 and 3.3.
If the Participant fails to deliver a change of Election Form in the manner
provided in this section, his prior deferral election shall remain in effect for
the following Plan Year.
In addition, a Participant may at any time during the Plan Year
terminate an election and discontinue future deferrals of Compensation under
this Plan by providing written notice to the Plan Administrator prior to the
start of the next payroll period for which Compensation will be payable. In
such event, Compensation earned for services subsequent to such termination
notice will be paid directly to the Participant and will not be subject to his
prior deferral election. A Participant who elects to discontinue participation
in the Plan for a Plan Year may not recommence participation in the Plan until
the next following Plan Year (or such later Plan Year in which he is again
eligible to participate), provided the Participant completes and executes the
required Election Form. Increases or decreases in the amount a Participant
elects to defer (other than a suspension of deferrals) shall not be permitted
during the Plan Year.
6
<PAGE>
ARTICLE IV
----------
INTEREST OF PARTICIPANTS
------------------------
4.1 Accounting for Participants' Interests.
--------------------------------------
(a) Deferral Subaccount. Each Participant's Deferral Subaccount
-------------------
shall be credited with the amounts of Compensation deferred by the Participant
under this Plan. The timing and manner in which amounts are credited to
Participants' Accounts under this Plan shall be determined by the Company and
the Plan Administrator in their discretion, but his deferral election shall be
applied to each pay period in which he has Compensation during his period of
participation in the Plan.
(b) Employer Credit Subaccount. The Employer Credit Subaccount is
--------------------------
determined under subsection (i), subject to the additional terms of subsections
(ii) and (iii).
(i) At the end of each Plan Year, an Employer contribution credit
for that Plan Year to a Participant's Employer Credit Subaccount is made by
applying the appropriate percentage to the amounts of Compensation (but not
more than 30% of Compensation, excluding any bonus compensation) deferred
by the Participant under Section 3.2 of this Plan for the Plan Year based
on the Participant's full Years of Service as of the end of the Plan Year:
Years of Service Percentage of Deferred Compensation
---------------- -----------------------------------
less than 5 25%
5 but less than 8 50%
8 but less than 10 75%
10 or more 100%
(ii) At the end of the Plan Year, an Employer contribution credit
for that Plan Year to a Participant's Employer Credit Subaccount is made by
calculating the amount that would have been the earnings rate on the amount
of the Employer contribution credit made for that Plan Year under (i) above
if such amount had been credited monthly at the end of each calendar month
and invested in the manner indicated under subsection (c) below.
(iii) In the Plan Year during which the Participant terminates
service, retires or dies, the Employer contributions determined under
subsections (i) and (ii) above shall be prorated for the period prior to
the Valuation Date established for the payment of benefits under Section
4.3 and shall be credited as of such Valuation Date.
7
<PAGE>
(c) Account Earnings or Losses. The Participant's Account shall be
--------------------------
credited with earnings (or losses) each Valuation Date. The earnings rate
credited to the Participant's Account will be determined assuming the amounts
credited to his Account were invested in the investment funds the Participant
has selected from the funds made available under the Plan for such purpose by
the Board or its designee. The Participant must make his initial selection
among such funds on the form provided for such purpose by the Plan Administrator
in one percent (1%) increments. Thereafter, the Participant may change his
election with respect to prior deferrals and future deferrals of Compensation
once each calendar quarter to be effective as of the first day of the
immediately following calendar quarter by submitting a new election form to the
Plan Administrator. The use of a Participant's funds election is solely for the
purpose of valuing his Account and does not in any way require the Employer or
any trustee of assets designated as available to pay Plan benefits to make such
investments.
4.2 Vesting of a Participant's Account. A Participant's Account
----------------------------------
shall be vested as provided in this Section 4.2.
(a) A Participant's interest in the value of his Deferral Subaccount
shall at all times be 100% vested and nonforfeitable.
(b) A Participant's interest in the value of his Employer Credit
Subaccount shall be vested and nonforfeitable at the end of the Plan Year in
which the Participant attains Years of Service in accordance with the following
schedule:
Years of Service Vested Percentage
---------------- -----------------
Less than 2 0%
2 20%
3 40%
4 60%
5 80%
6 or more 100%
In the year in which a Participant retires or terminates service with
the Employer (including termination for disability under Section 4.3), Years of
Service and vesting for the purpose of the foregoing vesting schedule is
determined upon the Participant's termination of service.
(c) A Participant's interest in the value of his Employer Credit
Subaccount shall be 100% vested upon a Change in Control or upon the
Participant's death notwithstanding any other provision herein.
8
<PAGE>
4.3 Distribution of a Participant's Account. A Participant's
---------------------------------------
Account shall be distributed as provided in this Section 4.3. A Participant's
Account shall continue to be credited with earnings or losses under Section 4.1
until the Account is fully distributed.
(a) Termination of Service or Retirement. In the event the
------------------------------------
Participant has a termination of service or retires, the amounts credited to his
Account shall be paid to such Participant in either a lump sum or in
substantially equal annual installments over a period of years (not to exceed
10), as designated by the Participant, which election must be made at least
twenty-four (24) months prior to his termination of service or retirement.
Payments commence as soon as practical after such termination of employment;
provided, however, the Participant may elect to delay the commencement of
payment until the date specified by the Participant on a form provided for such
purpose by the Plan Administrator, provided such election to defer payment is
made at least twenty-four (24) months prior to the date of his termination of
service or retirement. A Participant may not defer the commencement of payment
beyond the date he reaches age seventy (70).
If his election as to the form of payment or time of payment is not
made at least twenty-four (24) months prior to the date of his termination of
service or retirement, the balance credited to his Account shall be paid to him
as he most recently elected to commence such payments (but at least twenty-four
months prior to the date of his termination of service or retirement, as
applicable). In the absence of a valid election, the balance credited to his
Account shall be paid to him in a lump sum as soon as practical after his
effective date of termination of service or retirement.
If the payout is due to the Participant's suffering a disability (as
determined by the Plan Administrator based on eligibility for the Company's long
term disability benefits plan), the twenty-four (24) month restriction will not
apply and the Participant's most recent election as to the time and/or method of
payment will apply.
(b) Death of Participant. In the event of the death of a
--------------------
Participant, distribution of the balance credited to a Participant's Account as
of the date of his death shall be made in a lump sum to his Beneficiary as soon
as practical following his death. If the Participant dies after payment of his
interest in the Plan has commenced, but prior to payment of his entire Account,
the remaining balance will be paid in a lump sum to his Beneficiary (or
Beneficiaries) as soon as possible following his death.
4.4 Withdrawals During Employment. Except as expressly provided in
-----------------------------
this Section 4.4, no payment of benefits shall be made under this Plan prior to
a Participant's termination of employment. A Participant who is suffering an
unforeseen and severe financial hardship as a result of an illness or accident
of the Participant or his immediate family, or loss of Participant's property
due to casualty, or for such other reasons as the Plan Administrator may
establish, may file a written request with the Plan Administrator for
distribution of all or a
9
<PAGE>
portion of the amount credited to his Account and vested under Section 4.2. The
Plan Administrator shall have sole discretion to determine whether to grant a
Participant's hardship request and the amount to distribute to the Participant.
The Plan Administrator shall not authorize distribution of an amount in excess
of that reasonably necessary to alleviate the Participant's hardship. Any
Participant who receives a hardship withdrawal under this section shall not be
eligible to make additional deferrals of Compensation to the Plan for a period
of twelve (12) months immediately following the date of the withdrawal. If such
Participant becomes eligible to reparticipate in the Plan prior to the last day
of a Plan Year, he must elect to reparticipate within thirty (30) days of the
date he is eligible to reparticipate. If he does not elect within such thirty-
day period, he shall not be eligible to reparticipate until the first day of the
immediately following Plan Year.
10
<PAGE>
ARTICLE V
---------
PLAN ADMINISTRATOR
------------------
5.1 Members. The Plan Administrator shall be a committee or an
-------
individual appointed by the Company to serve at its pleasure, provided that in
the absence of such appointment the Company shall be the Plan Administrator and
shall have the duties of the Plan Administrator provided for herein. Members of
the committee shall not be required to be employees of the Company or
Participants. Any committee member may resign by giving notice, in writing,
filed with the Company.
5.2 Action. Action of the Plan Administrator may be taken with or
------
without a meeting of committee members; provided, however, that any action shall
be taken only upon the vote or other affirmative expression of a majority of the
committee members qualified to vote with respect to such action. If a member of
the committee or the appointed individual is a Participant in the Plan, he shall
not participate in any decision which solely affects his own Account. The Plan
Administrator shall for purposes of administering the Plan choose a secretary
who shall keep minutes of the Plan Administrator's proceedings and all records
and documents pertaining to the administration of this Plan. The secretary may
execute any certificate or any other written direction on behalf of the Plan
Administrator.
5.3 Right and Duties. The Plan Administrator shall administer and
----------------
manage the Plan and shall have all powers necessary to accomplish that purpose,
including (but not limited to) the following:
(a) To construe, interpret, and administer this Plan;
(b) To make allocations and determinations required by this Plan, and
to maintain records regarding Participants' Accounts;
(c) To compute and certify to the Employer the amount and kinds of
benefits payable to Participants or their Beneficiaries, and to determine the
time and manner in which such benefits are to be paid;
(d) To authorize all disbursements by the Employer pursuant to this
Plan;
(e) To maintain (or cause to be maintained) all the necessary records
of the administration of this Plan;
(f) To make and publish such rules for the regulation of this Plan as
are not inconsistent with the terms hereof;
11
<PAGE>
(g) To delegate to other individuals or entities from time to time
the performance of any of its duties or responsibilities hereunder;
(h) To establish or to change the investment funds or arrangements
under Section 4.1(d) of the Plan; and
(i) To hire agents, accountants, actuaries, consultants and legal
counsel to assist in operating and administering the Plan.
The Plan Administrator shall have the exclusive discretionary
authority to construe and to interpret the Plan, to decide all questions of
eligibility for benefits and to determine the amount and manner of payment of
such benefits, and its decisions on such matters shall be final and conclusive
on all parties.
5.4 Compensation, Indemnity and Liability. The Plan Administrator
-------------------------------------
shall serve as such without bond and without compensation for services
hereunder. All expenses of the Plan and the Plan Administrator shall be paid by
the Employer. If the Plan Administrator is a committee, no member of the
committee shall be liable for any act or omission of any other member of the
committee, nor for any act or omission on his own part, excepting his own
willful misconduct. The Employer shall indemnify and hold harmless the Plan
Administrator and each member of the committee, if any, against any and all
expenses and liabilities, including reasonable legal fees and expenses, arising
out of his membership on the committee, excepting only expenses and liabilities
arising out of his own willful misconduct.
5.5 Taxes. If the whole or any part of any Participant's Account
-----
shall become liable for the payment of any estate, inheritance, income, or other
tax which the Employer shall be required to pay or withhold, the Employer shall
have the full power and authority to withhold and pay such tax out of any monies
or other property in its hand for the account of the Participant whose interests
hereunder are so liable. The Employer shall provide the Participant notice of
such withholding. Prior to making any payment, the Employer may require such
releases or other documents from any lawful taxing authority as it shall deem
necessary.
12
<PAGE>
ARTICLE VI
----------
CLAIMS PROCEDURE
----------------
6.1 Claims for Benefits. If a Participant or Beneficiary (hereafter,
-------------------
"Claimant") does not receive timely payment of any benefits which he believes
are due and payable under the Plan, he may make a claim for benefits to the Plan
Administrator. The claim for benefits must be in writing and addressed to the
Plan Administrator or to the Company. If the claim for benefits is denied, the
Plan Administrator shall notify the Claimant in writing within 90 days after the
Plan Administrator initially received the benefit claim. However, if special
circumstances require an extension of time for processing the claim, the Plan
Administrator shall furnish notice of the extension to the Claimant prior to the
termination of the initial 90-day period and such extension shall not exceed one
additional, consecutive 90-day period. Any notice of a denial of benefits shall
advise the Claimant of the basis for the denial, any additional material or
information necessary for the Claimant to perfect his claim, and the steps which
the Claimant must take to have his claim for benefits reviewed.
6.2 Appeals. Each Claimant whose claim for benefits has been denied
-------
may file a written request for a review of his claim by the Plan Administrator.
The request for review must be filed by the Claimant within 60 days after he
received the written notice denying his claim. The decision of the Plan
Administrator will be made within 60 days after receipt of a request for review
and shall be communicated in writing to the Claimant. Such written notice shall
set forth the basis for the Plan Administrator's decision. If there are special
circumstances which require an extension of time for completing the review, the
Plan Administrator's decision shall be rendered not later than 120 days after
receipt of a request for review.
13
<PAGE>
ARTICLE VII
-----------
AMENDMENT AND TERMINATION
-------------------------
7.1 Amendments. The Board shall have the right in its sole
----------
discretion to amend this Plan in whole or in part at any time; provided,
however, that no such amendment shall reduce the amounts credited at that time
to any Participant's Account. Any amendment shall be in writing and executed by
a duly authorized officer of the Company. All Participants shall be bound by
such amendment.
7.2 Termination of Plan. The Company expects to continue this Plan,
-------------------
but does not obligate itself to do so. The Company reserves the right to
discontinue and terminate the Plan at any time, in whole or in part, for any
reason (including a change, or an impending change, in the tax laws of the
United States or any State). If the Plan is terminated, the Plan Administrator
shall be notified of such action in a writing executed by a duly authorized
officer of the Company, and the Plan shall be terminated at the time therein set
forth. Termination of the Plan shall be binding on all Participants, but in no
event may such termination reduce the amounts credited at that time to any
Participant's Account. If this Plan is terminated, amounts theretofore credited
to Participants' Accounts shall either be paid in a lump sum immediately, or
distributed in some other manner consistent with this Plan, as determined by the
Plan Administrator in its sole discretion.
14
<PAGE>
ARTICLE VIII
------------
MISCELLANEOUS
-------------
8.1 Limitation on Participant's Rights. Participation in this Plan
----------------------------------
shall not give any Participant the right to be retained in the Company's employ
or any right or interest in this Plan or any assets of the Company other than as
herein provided. The Company reserves the right to terminate the employment of
any Participant without any liability for any claim against the Company under
this Plan, except to the extent provided herein.
8.2 Benefits Unfunded. The benefits provided by this Plan shall be
-----------------
unfunded. All amounts payable under this Plan to Participants shall be paid
from the general assets of the Company or Employer, and nothing contained in
this Plan shall require the Company or Employer to set aside or hold in trust
any amounts or assets for the purpose of paying benefits to Participants. This
Plan shall create only a contractual obligation on the part of the Company or
Employer, and Participants shall have the status of general unsecured creditors
of the Company or Employer under the Plan with respect to amounts of
Compensation they defer hereunder or any other obligation of the Employer to pay
benefits pursuant hereto. Any funds of the Employer available to pay benefits
pursuant to the Plan shall be subject to the claims of general creditors of the
Company or Employer, and may be used for any purpose by the Company or Employer.
Notwithstanding the preceding paragraph, the Company or Employer may
at any time transfer assets to a trust for purposes of paying all or any part of
its obligations under this Plan. However, to the extent provided in the trust
only, such transferred amounts shall remain subject to the claims of general
creditors of the Company and Employer only in accordance with the terms of such
trust. To the extent that assets are held in the trust when a Participant's
benefits under the Plan become payable, the Plan Administrator shall direct the
trustee to make trust assets available to pay such benefits to the Participant.
Any payments made to a Participant or Beneficiary from such trust shall relieve
the Company and Employer from any further obligations under the Plan only to the
extent of such payment.
8.3 Other Plans. This Plan shall not affect the right of any
-----------
eligible Employee or Participant to participate in and receive benefits under
and in accordance with the provisions of any other employee benefit plans which
are now or hereafter maintained by the Employer, unless the terms of such other
employee benefit plan or plans specifically provide otherwise.
8.4 Receipt or Release. Any payment to a Participant in accordance
------------------
with the provisions of this Plan shall, to the extent thereof, be in full
satisfaction of all claims against the Plan Administrator and the Company, and
the Plan Administrator may require such Participant, as a condition precedent to
such payment, to execute a receipt and release to such effect.
15
<PAGE>
8.5 Governing Law. This Plan shall be construed, administered, and
-------------
governed in all respects in accordance with applicable federal law and, to the
extent not preempted by federal law, in accordance with the laws of the State of
Georgia. If any provisions of this instrument shall be held by a court of
competent jurisdiction to be invalid or unenforceable, the remaining provisions
hereof shall continue to be fully effective.
8.6 Adoption of Plan by Related Employers. With the consent of the
-------------------------------------
Company, any corporation related to the Company by stock ownership is authorized
to adopt the Plan by action of its board of directors. The action taken by the
board shall include the effective date of the adoption of the Plan by such
related employer.
8.7 Gender, Tense, and Headings. In this Plan, whenever the context
---------------------------
so indicates, the singular or plural number and the masculine, feminine, or
neuter gender shall be deemed to include the other. Headings and subheadings in
this Plan are inserted for convenience of reference only and are not considered
in the construction of the provisions hereof.
8.8 Successors and Assigns; Nonalienation of Benefits. This Plan
-------------------------------------------------
shall inure to the benefit of and be binding upon the parties hereto and their
successors, heirs and assigns; provided, however, that the amounts credited to
the Account of a Participant shall not (except as provided in Section 5.5) be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution or levy of any kind, either
voluntary or involuntary, and any attempt to anticipate, alienate, sell,
transfer, assign, pledge, encumber, charge or otherwise dispose of any right to
any benefits payable hereunder, including, without limitation, any assignment or
alienation in connection with a separation, divorce, child support or similar
arrangement, shall be null and void and not binding on the Plan or the Company.
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IN WITNESS WHEREOF, the Company has caused this Plan to be executed by
its duly authorized officer to be effective as of October 16, 1997.
COMPANY:
INNOTRAC CORPORATION
By: /s/ Scott Dorfman
------------------
Title: President
-----------------
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EXHIBIT 10.11
INNOTRAC CORPORATION
GRANTOR TRUST AGREEMENT
This Grantor Trust Agreement (the "Trust Agreement") is made this 16th day of
October, 1997 by and between Innotrac Corporation ("the Company") and Wachovia
Bank, N.A. ("the Trustee").
RECITALS
--------
(a) WHEREAS, the Company has adopted the nonqualified deferred compensation
Plans and Agreements (the "Arrangements") as listed in Attachment I;
(b) WHEREAS, the Company has incurred or expects to incur liability under the
terms of such Arrangements with respect to the individuals participating in
such Arrangements (the "Participants and Beneficiaries");
(c) WHEREAS, the Company hereby establishes a Trust (the "Trust") and shall
contribute to the Trust assets that shall be held therein, subject to the
claims of the Company's creditors in the event of the Company's Insolvency,
as herein defined, until paid to Participants and their Beneficiaries in
such manner and at such times as specified in the Arrangements and in this
Trust Agreement;
(d) WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Arrangements as an unfunded plan maintained for the purpose of providing
deferred compensation for a select group of management or highly
compensated employees for purposes of Title I of the Employee Retirement
Income Security Act of 1974; and
(e) WHEREAS, it is the intention of the Company to make contributions to the
Trust to provide itself with a source of funds (the "Fund") to assist it in
satisfying its liabilities under the Arrangements.
NOW, THEREFORE, the parties do hereby establish the Trust and agree that the
Trust shall be comprised, held and disposed of as follows:
SECTION 1. ESTABLISHMENT OF THE TRUST
--------------------------
(a) The Trust is intended to be a Grantor Trust, of which the Company is the
Grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(b) The Company shall be considered a Grantor for the purposes of the Trust.
(c) The Trust hereby established is revocable by the Company; it shall become
irrevocable upon a Change of Control, as defined herein.
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(d) The Company hereby deposits with the Trustee in the Trust one-thousand
dollars and zero cents ($1,000.00) which shall become the principal of the
Trust to be held, administered and disposed of by the Trustee as provided
in this Trust Agreement.
(e) The principal of the Trust, and any earnings thereon shall be held separate
and apart from other funds of the Company and shall be used exclusively for
the uses and purposes of Participants and general creditors as herein set
forth. Participants and their Beneficiaries shall have no preferred claim
on, or any beneficial ownership interest in, any assets of the Trust. Any
rights created under the Arrangements and this Trust Agreement shall be
unsecured contractual rights of Participants and their Beneficiaries
against the Company. Any assets held by the Trust will be subject to the
claims of the general creditors of the Company under federal and state law
in the event the Company is Insolvent, as defined in Section 3(a) herein.
(f) The Company, in its sole discretion, may at any time, or from time to time,
make additional deposits of cash or other property acceptable to the
Trustee in the Trust to augment the principal to be held, administered and
disposed of by the Trustee as provided in this Trust Agreement. Prior to a
Change of Control, neither the Trustee nor any Participant or Beneficiary
shall have any right to compel additional deposits.
(g) Upon a Potential Change of Control, the Company shall, as soon as possible,
but in no event longer than thirty (30) days following the occurrence of a
Potential Change of Control, as defined herein, make a contribution to
the Trust in an amount that is sufficient to fund the Trust in an amount
equal to no less than 100% but no more than 120% of the amount necessary to
pay each Participant or Beneficiary the benefits to which Participants or
their Beneficiaries would be entitled pursuant to the terms of the
Arrangements as of the date on which the Potential Change of Control
occurred.
(h) In the event a Change of Control does not occur within one year of a
Potential Change of Control, the Company shall have the right to recover
any amounts contributed to and remaining on hand in the Trust pursuant to
Section 1(g).
(i) Upon a Change of Control, the Company shall, as soon as possible, but in no
event longer than thirty (30) days following the occurrence of a Change of
Control, as defined herein, make an irrevocable contribution to the Trust
in an amount that is sufficient to fund the Trust in an amount equal to no
less than 100 % but no more than 120% of the amount necessary to pay each
Participant or Beneficiary the benefits to which Participants or their
Beneficiaries would be entitled pursuant to the terms of the Arrangements
as of the date on which the Change of Control occurred.
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<PAGE>
SECTION 2. PAYMENTS TO PARTICIPANTS AND THEIR BENEFICIARIES
------------------------------------------------
(a) Prior to a Change of Control, distributions from the Trust shall be made by
the Trustee to Participants and Beneficiaries at the direction of the
Company. The entitlement of a Participant or his or her Beneficiaries to
benefits under the Arrangements shall be determined by the Company or such
party or professional administrator as it shall designate under the
Arrangements as the Company's agent, and any claim for such benefits shall
be considered and reviewed under the procedures set out in the
Arrangements.
(b) The Company may make payment of benefits directly to Participants or their
Beneficiaries as they become due under the terms of the Arrangements. The
Company shall notify the Trustee of its decision to make payment of
benefits directly prior to the time amounts are payable to Participants or
their Beneficiaries. In addition, if the principal of the Trust, and any
earnings thereon, are not sufficient to make payments of benefits in
accordance with the terms of the Arrangements, the Company shall make the
balance of each such payment as it falls due in accordance with the
Arrangements. The Trustee shall notify the Company where principal and
earnings are not sufficient. Nothing in this Agreement shall relieve the
Company of its liabilities to pay benefits due under the Arrangements
except to the extent such liabilities are met by application of assets of
the Trust.
(c) After a Potential Change of Control and before a Change of Control, the
Company shall deliver to the Trustee a schedule of benefits due under the
Arrangements. Subsequent to a Change of Control, the Trustee shall pay
benefits due in accordance with such schedule. After a Change of Control,
the Company shall continue to make the determination of benefits due to
Participants or their Beneficiaries and shall provide the Trustee with an
updated schedule of benefits due; provided however, a Participant or their
Beneficiaries may make application to the Trustee for an independent
decision as to the amount or form of their benefits due under the
Arrangements. In making any determination required or permitted to be made
by the Trustee under this Section, the Trustee shall, in each such case,
reach its own independent determination, in its absolute and sole
discretion, as to the Participant's or Beneficiary's entitlement to a
payment hereunder. In making its determination, the Trustee may consult
with and make such inquiries of such persons, including the Participant or
Beneficiary, the Company, legal counsel, actuaries or other persons, as the
Trustee may reasonably deem necessary. Any reasonable costs incurred by
the Trustee in arriving at its determination shall be reimbursed by the
Company and, to the extent not paid by the Company within a reasonable
time, shall be charged to the Trust. The Company waives any right to
contest any amount paid over by the Trustee hereunder pursuant to a good
faith determination made by the Trustee notwithstanding any claim by or on
behalf of the Company (absent a manifest abuse of discretion by the
Trustee) that such payments should not be made.
(d) The Trustee agrees that it will not itself institute any action at law or
at equity, whether in the nature of an accounting, interpleading action,
request for a declaratory judgment or otherwise, requesting a court or
administrative or quasi-judicial body to make the determination required to
be made by the Trustee under this Section 2 in the place and stead of the
Trustee. The Trustee may institute an action to collect a contribution due
the
3
<PAGE>
Trust following a Change of Control or in the event that the Trust should
ever experience a short-fall in the amount of assets necessary to make
payments pursuant to the terms of the Arrangements.
(e) In the event any Participant or his or her Beneficiary is determined to be
subject to federal income tax on any amount to the credit of his or her
account under any Arrangement prior to the time of payment hereunder,
whether or not due to the establishment of or contributions to this Trust,
a portion of such taxable amount equal to the federal, state and local
taxes (excluding any interest or penalties) owed on such taxable amount,
shall be distributed by the Trustee as soon thereafter as practicable to
such Participant or Beneficiary. The Company shall promptly reimburse the
Trust for any such distribution in an amount certified by the Trustee to be
needed for the Participant's benefits. For these purposes, a Participant
or Beneficiary shall be deemed to pay state and local taxes at the highest
marginal rate of taxation in the state in which the Participant resides or
is employed (or both) where a tax is imposed and federal income taxes at
the highest marginal rate of taxation, net of the maximum reduction in
federal income taxes which could be obtained from deduction of such state
and local taxes. Such distributions shall be at the direction of the
Company or the Trustee, or upon proper application of the Participant or
Beneficiary; provided that the actual amount of the distribution shall be
determined by the Company prior to a Change of Control and the Trustee
following a Change of Control. An amount to the credit of a Participant's
Account shall be determined to be subject to federal income tax upon the
earliest of: (a) a final determination by the United States Internal
Revenue Service addressed to the Participant or his Beneficiary which is
not appealed to the courts; (b) a final determination by the United States
Tax Court or any other federal court affirming any such determination by
the Internal Revenue Service; or (c) an opinion by the Company's tax
counsel, addressed to the Company and the Trustee, to the effect that by
reason of Treasury Regulations, amendments to the Internal Revenue Code,
published Internal Revenue Service rulings, court decisions or other
substantial precedent, amounts to the credit of Participants hereunder are
subject to federal income tax prior to payment. The Company shall
undertake at its sole expense to defend any tax claims described herein
which are asserted by the Internal Revenue Service against any Participant
or Beneficiary, including attorney fees and cost of appeal, and shall have
the sole authority to determine whether or not to appeal any determination
made by the Service or by a lower court. The Company also agrees to
reimburse any Participant or Beneficiary for any interest or penalties in
respect of tax claims hereunder upon receipt of documentation of same. Any
distributions from the Fund to a Participant or Beneficiary under this
Section 2(e) shall be applied in accordance with the provisions of the
Arrangement to reduce the Company liabilities to such Participant and/or
Beneficiary under the Arrangement with such reductions to be made on a pro-
rata basis over the term of benefit payments under the Arrangement;
provided, however, that in no event shall any Participant, Beneficiary or
estate of any Participant or Beneficiary have any obligation to return all
or any part of such distribution to the Company if such distribution
exceeds benefits payable under an Arrangement. Any reduction in accordance
with the foregoing sentence and the Arrangements shall be determined by the
Company prior to a Change of Control. Following a Change of Control, the
Company shall continue to make such determination subject to the right of a
Participant to petition the Trustee under Section 2(c).
4
<PAGE>
SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO THE TRUST
------------------------------------------------------
BENEFICIARY WHEN THE COMPANY IS INSOLVENT
-----------------------------------------
(a) The Trustee shall cease payment of benefits to Participants and their
Beneficiaries if the Company is Insolvent. The Company shall be considered
"Insolvent" for purposes of this Trust Agreement if (i) the Company is
unable to pay its debts as they become due, or (ii) the Company is subject
to a pending proceeding as a debtor under the United States Bankruptcy
Code.
(b) At all times during the continuance of this Trust, the principal and income
of the Trust shall be subject to claims of general creditors of the Company
under federal and state law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of the Company
shall have the duty to inform the Trustee in writing that the Company
is Insolvent. If a person claiming to be a creditor of the Company
alleges in writing to the Trustee that the Company has become
Insolvent, the Trustee shall determine whether the Company is
Insolvent and, pending such determination, the Trustee shall
discontinue payment of benefits to Participants or their
Beneficiaries.
(2) Unless the Trustee has actual knowledge that the Company is Insolvent,
or has received notice from the Company or a person claiming to be a
creditor alleging that the Company is Insolvent, the Trustee shall
have no duty to inquire whether the Company is Insolvent. The Trustee
may in all events rely on such evidence concerning the Company's
solvency as may be furnished to the Trustee and that provides the
Trustee with a reasonable basis for making a determination concerning
the Company's solvency.
(3) If at any time the Trustee has determined that the Company is
Insolvent, the Trustee shall discontinue payments to Participants or
their Beneficiaries and shall hold the assets of the Trust for the
benefit of the Company's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of Participants or
their Beneficiaries to pursue their rights as general creditors of the
Company with respect to benefits due under the Arrangements or
otherwise.
(4) The Trustee shall resume the payment of benefits to Participants or
their Beneficiaries in accordance with Section 2 of this Trust
Agreement only after the Trustee has determined that the Company is
not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if the Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments,
5
<PAGE>
the first payment following such discontinuance shall include the aggregate
amount of all payments due to Participants or their Beneficiaries under the
terms of the Arrangements for the period of such discontinuance, less the
aggregate amount of any payments made to Participants or their
Beneficiaries by the Company in lieu of the payments provided for hereunder
during any such period of discontinuance.
SECTION 4. PAYMENTS WHEN A SHORT-FALL OF THE TRUST ASSETS OCCURS
-----------------------------------------------------
(a) If there are not sufficient assets for the payment of benefits pursuant to
Section 2 or Section 3(c) hereof and the Company does not otherwise make
such payments within a reasonable time after demand from the Trustee, the
Trustee shall make payment of benefits from the Trust to the Participants
or their Beneficiaries in the following order of priority:
(1) retired Participants and their Beneficiaries;
(2) vested Participants over the age of 55 who were terminated within two
years following a Change of Control and their Beneficiaries;
(3) vested active Participants over the age of 55 and their Beneficiaries;
(4) any other vested active Participants and their Beneficiaries;
(5) vested former Participants and their Beneficiaries; and
(6) non-vested Participants and their Beneficiaries.
(b) Within each category set forth under Section 4(a), payments shall be
prioritized in the following order:
(1) Participants and their Beneficiaries with 5 (five) or more years of
participation in the Arrangements;
(2) balance to be paid pro-rata to remaining Participants and their
Beneficiaries.
(c) Upon receipt of a contribution from the Company necessary to make up for a
short-fall in the payments due, the Trustee shall resume payments to all
the Participants and Beneficiaries under the Arrangements. Following a
Change of Control, the Trustee shall have the right to compel a
contribution to the Trust from the Company to make-up for any short-fall.
SECTION 5. PAYMENTS TO THE COMPANY
-----------------------
Except as provided in Section 3 hereof, after the Trust has become irrevocable,
the Company shall have no right or power to direct the Trustee to return to the
Company or to divert to others any of the Trust assets before all payment of
benefits have been made to Participants and their Beneficiaries pursuant to the
terms of the Arrangements. After all payments under the
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<PAGE>
Arrangements are made to the Participants and their Beneficiaries, any remaining
funds will be returned to the Company.
SECTION 6. INVESTMENT AUTHORITY
--------------------
(a) The Trustee shall not be liable in discharging its duties hereunder,
including without limitation its duty to invest and reinvest the Fund, if
it acts for the exclusive benefit of the Participants and their
Beneficiaries, in good faith and as a prudent person would act in
accomplishing a similar task and in accordance with the terms of this
Trust Agreement and any applicable federal or state laws, rules or
regulations.
(b) Subject to investment guidelines agreed to in writing from time to time by
the Company and the Trustee prior to a Change of Control, the Trustee shall
have the power in investing and reinvesting the Fund in its sole
discretion:
(1) To invest and reinvest in any readily marketable common and preferred
stocks, bonds, notes, debentures (including convertible stocks and
securities but not including any stock or security of Innotrac
Corporation other than a de minimus amount held in a collective or
mutual fund), certificates of deposit or demand or time deposits
(including any such deposits with the Trustee) and shares of
investment companies and mutual funds, without being limited to the
classes or property in which the Trustees are authorized to invest by
any law or any rule of court of any state and without regard to the
proportion any such property may bear to the entire amount of the
Fund;
(2) To commingle for investment purposes all or any portion of the Fund
with assets of any other similar trust or trusts established by the
Company with the Trustee for the purpose of safeguarding deferred
compensation or retirement income benefits of its employees and/or
directors;
(3) To retain any property at any time received by the Trustee;
(4) To sell or exchange any property held by it at public or private sale,
for cash or on credit, to grant and exercise options for the purchase
or exchange thereof, to exercise all conversion or subscription rights
pertaining to any such property and to enter into any covenant or
agreement to purchase any property in the future;
(5) To participate in any plan of reorganization, consolidation, merger,
combination, liquidation or other similar plan relating to property
held by it and to consent to or oppose any such plan or any action
thereunder or any contract, lease, mortgage, purchase, sale or other
action by any person;
(6) To deposit any property held by it with any protective, reorganization
or similar committee, to delegate discretionary power thereto, and to
pay part of the expenses and compensation thereof any assessments
levied with respect to any such property to deposited;
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<PAGE>
(7) To extend the time of payment of any obligation held by it;
(8) To hold uninvested any moneys received by it, without liability for
interest thereon, but only in anticipation of payments due for
investments, reinvestments, expenses or disbursements;
(9) To exercise all voting or other rights with respect to any property
held by it and to grant proxies, discretionary or otherwise;
(10) For the purposes of the Trust, to borrow money from others, to issue
its promissory note or notes therefor, and to secure the repayment
thereof by pledging any property held by it;
(11) To employ suitable contractors and counsel, who may be counsel to the
Company or to the Trustee, and to pay their reasonable expenses and
compensation from the Fund to the extent not paid by the Company;
(12) To register investments in its own name or in the name of a nominee;
to hold any investment in bearer form; and to combine certificates
representing securities with certificates of the same issue held by it
in other fiduciary capacities or to deposit or to arrange for the
deposit of such securities with any depository, even though, when so
deposited, such securities may be held in the name of the nominee of
such depository with other securities deposited therewith by other
persons, or to deposit or to arrange for the deposit of any securities
issued or guaranteed by the United States government, or any agency or
instrumentality thereof, including securities evidenced by book
entries rather than by certificates, with the United States Department
of the Treasury or a Federal Reserve Bank, even though, when so
deposited, such securities may not be held separate from securities
deposited therein by other persons; provided, however, that no
securities held in the Fund shall be deposited with the United States
Department of the Treasury or a Federal Reserve Bank or other
depository in the same account as any individual property of the
Trustee, and provided, further, that the books and records of the
Trustee shall at all times show that all such securities are part of
the Trust Fund;
(13) To settle, compromise or submit to arbitration any claims, debts or
damages due or owing to or from the Trust, respectively, to commence
or defend suits or legal proceedings to protect any interest of the
Trust, and to represent the Trust in all suits or legal proceedings in
any court or before any other body or tribunal; provided, however,
that the Trustee shall not be required to take any such action unless
it shall have been indemnified by the Company to its reasonable
satisfaction against liability or expenses it might incur therefrom;
(14) To hold and retain policies of life insurance or interests therein,
annuity contracts, and other property of any kind which policies are
contributed to the Trust by the Company or any subsidiary of the
Company or are purchased by the Trustee;
8
<PAGE>
(15) To hold any other class of assets which may be contributed by the
Company and that is deemed reasonable by the Trustee, unless expressly
prohibited herein;
(16) To loan any securities at any time held by it to brokers or dealers
upon such security as may be deemed advisable, and during the terms of
any such loan to permit the loaned securities to be transferred into
the name of and voted by the borrower or others; and
(17) Generally, to do all acts, whether or not expressly authorized, that
the Trustee may deem necessary or desirable for the protection of the
Fund.
(c) Prior to a Change of Control, the Company shall have the right, subject to
this Section to direct the Trustee with respect to investments.
(1) The Company may at any time direct the Trustee to segregate all or a
portion of the Fund in a separate investment account or accounts and
may appoint one or more investment managers and/or an investment
committee established by the Company to direct the investment and
reinvestment of each such investment account or accounts. In such
event, the Company shall notify the Trustee of the appointment of each
such investment manager and/or investment committee. No such
investment manager shall be related, directly or indirectly, to the
Company, but members of the investment committee may be employees of
the Company.
(2) Thereafter, the Trustee shall make every sale or investment with
respect to such investment account as directed in writing by the
investment manager or investment committee. It shall be the duty of
the Trustee to act strictly in accordance with each direction. The
Trustee shall be under no duty to question any such direction of the
investment manager or investment committee, to review any securities
or other property held in such investment account or accounts acquired
by it pursuant to such directions or to make any recommendations to
the investment managers or investment committee with respect to such
securities or other property.
(3) Notwithstanding the foregoing, the Trustee, without obtaining prior
approval or direction from an investment manager or investment
committee, shall invest cash balances held by it from time to time in
short term cash equivalents including, but not limited to, through the
medium of any short term mutual fund established and maintained by the
Trustee subject to the instrument establishing such trust fund, U.S.
Treasury Bills, commercial paper (including such forms of commercial
paper as may be available through the Trustee's Trust Department),
certificates of deposit (including certificates issued by the Trustee
in its separate corporate capacity), and similar type securities, with
a maturity not to exceed one year; and, furthermore, sell such short
term investments as may be necessary to carry out the instructions of
an investment manager or investment committee regarding more permanent
type investment and directed distributions.
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<PAGE>
(4) The Trustee shall neither be liable nor responsible for any loss
resulting to the Fund by reason of any sale or purchase of an
investment directed by an investment manager or investment committee
nor by reason of the failure to take any action with respect to any
investment which was acquired pursuant to any such direction in the
absence of further directions of such investment manager or investment
committee.
(5) Notwithstanding anything in this Agreement to the contrary, the
Trustee shall be indemnified and saved harmless by the Company from
and against any and all personal liability to which the Trustee may be
subjected by carrying out any directions of an investment manager or
investment committee issued pursuant hereto or for failure to act in
the absence of directions of the investment manager or investment
committee including all expenses reasonably incurred in its defense in
the event the Company fails to provide such defense; provided,
however, the Trustee shall not be so indemnified if it participates
knowingly in, or knowingly undertakes to conceal, an act or omission
of an investment manager or investment committee, having actual
knowledge that such act or omission is a breach of a fiduciary duty;
provided further, however, that the Trustee shall not be deemed to
have knowingly participated in or knowingly undertaken to conceal an
act or omission of an investment manager or investment committee with
knowledge that such act or omission was a breach of fiduciary duty by
merely complying with directions of an investment manager or
investment committee or for failure to act in the absence of
directions of an investment manager or investment committee. The
Trustee may rely upon any order, certificate, notice, direction or
other documentary confirmation purporting to have been issued by the
investment manager or investment committee which the Trustee believes
to be genuine and to have been issued by the investment manager or
investment committee. The Trustee shall not be charged with knowledge
of the termination of the appointment of any investment manager or
investment committee until it receives written notice thereof from the
Company.
(d) Following a Change of Control, the Trustee shall have the sole and absolute
discretion in the management of the Trust assets and shall have all the
powers set forth under Section 6(b). In investing the Trust assets, the
Trustee shall consider:
(1) the needs of the Arrangements;
(2) the need for matching of the Trust assets with the liabilities of the
Arrangements; and
(3) the duty of the Trustee to act solely in the best interests of the
Participants and their Beneficiaries.
(e) The Trustee shall have the right, in its sole discretion, to delegate its
investment responsibility to an investment manager who may be an affiliate
of the Trustee. In
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<PAGE>
the event the Trustee shall exercise this right, the Trustee shall remain,
at all times responsible for the acts of an investment manager. The Trustee
shall have the right to purchase an insurance policy or an annuity to fund
the benefits of the Arrangements.
(f) The Company shall have the right at any time, and from time to time in its
sole discretion, to substitute assets of equal fair market value for any
asset held by the Trust. This right is exercisable by the Company in a
nonfiduciary capacity without the approval or consent of any person in a
fiduciary capacity.
SECTION 7. INSURANCE CONTRACTS
-------------------
(a) To the extent that the Trustee is directed by the Company prior to a Change
of Control to invest part or all of the Trust Fund in insurance contracts,
the type and amount thereof shall be specified by the Company. The Trustee
shall be under no duty to make inquiry as to the propriety of the type or
amount so specified.
(b) Each insurance contract issued shall provide that the Trustee shall be the
owner thereof with the power to exercise all rights, privileges, options
and elections granted by or permitted under such contract or under the
rules of the insurer. The exercise by the Trustee of any incidents of
ownership under any contract shall, prior to a Change of Control, be
subject to the direction of the Company. After a Change of Control, the
Trustee shall have all such rights.
(c) The Trustee shall have no power to name a beneficiary of the policy other
than the Trust, to assign the policy (as distinct from conversion of the
policy to a different form) other than to a successor Trustee, or to loan
to any person the proceeds of any borrowing against an insurance policy
held in the Trust Fund.
(d) No insurer shall be deemed to be a party to the Trust and an insurer's
obligations shall be measured and determined solely by the terms of
contracts and other agreements executed by the insurer.
SECTION 8. DISPOSITION OF INCOME
---------------------
(a) Prior to a Change of Control, all income received by the Trust, net of
expenses and taxes, may be returned to the Company or accumulated and
reinvested within the Trust at the direction of the Company.
(b) Following a Change of Control, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested within the Trust.
SECTION 9. ACCOUNTING BY THE TRUSTEE
-------------------------
The Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements,
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<PAGE>
and all other transactions required to be made, including such specific records
as shall be agreed upon in writing between the Company and the Trustee within
forty-five (45) days following the close of each calendar year and within forty-
five (45) days after the removal or resignation of the Trustee. The Trustee
shall deliver to the Company a written account of its administration of the
Trust during such year or during the period from the close of the last preceding
year to the date of such removal or resignation setting forth all investments,
receipts, disbursements and other transactions effected by it, including a
description of all securities and investments purchased and sold with the cost
or net proceeds of such purchases or sales (accrued interest paid or receivable
being shown separately), and showing all cash, securities and other property
held in the Trust at the end of such year or as of the date of such removal or
resignation, as the case may be. The Company may approve such account by an
instrument in writing delivered to the Trustee. In the absence of the Company's
filing with the Trustee objections to any such account within ninety (90) days
after its receipt, the Company shall be deemed to have so approved such account.
In such case, or upon the written approval by the Company of any such account,
the Trustee shall, to the extent permitted by law, be discharged from all
liability to the Company for its acts or failures to act described by such
account. The foregoing, however, shall not preclude the Trustee from having its
accounting settled by a court of competent jurisdiction. The Trustee shall be
entitled to hold and to commingle the assets of the Trust in one Fund for
investment purposes but at the direction of the Company prior to a Change of
Control, the Trustee shall create one or more sub-accounts.
SECTION 10. RESPONSIBILITY OF THE TRUSTEE
-----------------------------
(a) The Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that
the Trustee shall incur no liability to any person for any action taken
pursuant to a direction, request or approval given by the Company which is
contemplated by, and in conformity with, the terms of the Arrangements or
this Trust and is given in writing by the Company. In the event of a
dispute between the Company and a party, the Trustee may apply to a court
of competent jurisdiction to resolve the dispute, subject, however to
Section 2(d) hereof.
(b) The Company hereby indemnifies the Trustee against losses, liabilities,
claims, costs and expenses in connection with the administration of the
Trust, unless resulting from the negligence or misconduct of Trustee. To
the extent the Company fails to make any payment on account of an
indemnity provided in this paragraph 10(b), in a reasonably timely manner,
the Trustee may obtain payment from the Trust. If the Trustee undertakes
or defends any litigation arising in connection with this Trust or to
protect a Participant's or Beneficiary's rights under the Arrangements, the
Company agrees to indemnify the Trustee against the Trustee's costs,
reasonable expenses and liabilities (including, without limitation,
attorneys' fees and expenses) relating thereto and to be primarily liable
for such payments. If the Company does not pay such costs, expenses and
liabilities in a reasonably timely manner, the Trustee may obtain payment
from the Trust.
(c) Prior to a Change of Control, the Trustee may consult with legal counsel
(who may also be counsel for the Company generally) with respect to any of
its duties or obligations
12
<PAGE>
hereunder. Following a Change of Control the Trustee shall select
independent legal counsel and may consult with counsel or other persons
with respect to its duties and with respect to the rights of Participants
or their Beneficiaries under the Arrangements.
(d) The Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals to assist it in performing any
of its duties or obligations hereunder and may rely on any determinations
made by such agents and information provided to it by the Company.
(e) The Trustee shall have, without exclusion, all powers conferred on the
Trustee by applicable law, unless expressly provided otherwise herein.
(f) Notwithstanding any powers granted to the Trustee pursuant to this Trust
Agreement or to applicable law, the Trustee shall not have any power that
could give this Trust the objective of carrying on a business and dividing
the gains therefrom, within the meaning of section 301.7701-2 of the
Procedure and Administrative Regulations promulgated pursuant to the
Internal Revenue Code.
SECTION 11. COMPENSATION AND EXPENSES OF THE TRUSTEE
----------------------------------------
The Trustee's compensation shall be as agreed in writing from time to time by
the Company and the Trustee. The Company shall pay all administrative expenses
and the Trustee's fees and shall promptly reimburse the Trustee for any fees and
expenses of its agents. If not so paid, the fees and expenses shall be paid
from the Trust.
SECTION 12. RESIGNATION AND REMOVAL OF THE TRUSTEE
--------------------------------------
(a) Prior to a Change of Control, the Trustee may resign at any time by written
notice to the Company, which shall be effective sixty (60) days after
receipt of such notice unless the Company and the Trustee agree otherwise.
Following a Change of Control, the Trustee may resign only after the
appointment of a successor Trustee.
(b) The Trustee may be removed by the Company on sixty days (60) days notice or
upon shorter notice accepted by the Trustee prior to a Change of Control.
Subsequent to a Change of Control, the Trustee may only be removed by the
Company with the consent of a majority of the Participants.
(c) If the Trustee resigns within two years after a Change of Control, as
defined herein, the Company, or if the Company fails to act within a
reasonable period of time following such resignation, the Trustee shall
apply to a court of competent jurisdiction for the appointment of a
successor Trustee or for instructions.
(d) Upon resignation or removal of the Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within sixty (60) days after
receipt of notice of resignation, removal or transfer, unless the Company
extends the time limit.
13
<PAGE>
(e) If the Trustee resigns or is removed, a successor shall be appointed by the
Company, in accordance with Section 13 hereof, by the effective date of
resignation or removal under paragraph(s) (a) or (b) of this section. If
no such appointment has been made, the Trustee may apply to a court of
competent jurisdiction for appointment of a successor or for instructions.
All expenses of the Trustee in connection with the proceeding shall be
allowed as administrative expenses of the Trust.
SECTION 13. APPOINTMENT OF SUCCESSOR
------------------------
(a) If the Trustee resigns or is removed in accordance with Section 12 hereof,
the Company may appoint, subject to Section 12, any third party national
banking association with a market capitalization exceeding $100,000,000 to
replace the Trustee upon resignation or removal. The successor Trustee
shall have all of the rights and powers of the former Trustee, including
ownership rights in the Trust. The former Trustee shall execute any
instrument necessary or reasonably requested by the Company or the
successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any prior
Trustee and may retain or dispose of existing Trust assets, subject to
Section 8 and 9 hereof. The successor Trustee shall not be responsible for
and the Company shall indemnify and defend the successor Trustee from any
claim or liability resulting from any action or inaction of any prior
Trustee or from any other past event, or any condition existing at the time
it becomes successor Trustee.
SECTION 14. AMENDMENT OR TERMINATION
------------------------
(a) This Trust Agreement may be amended by a written instrument executed by
the Trustee and the Company. Notwithstanding the foregoing, no such
amendment shall conflict with the terms of the Arrangements or shall make
the Trust revocable after it has become irrevocable in accordance with
Section 1 hereof.
(b) The Trust shall not terminate until the date on which Participants and
their Beneficiaries have received all of the benefits due to them under the
terms and conditions of the Arrangements.
(c) Upon written approval of all Participants or Beneficiaries entitled to
payment of benefits pursuant to the terms of the Arrangements, the Company
may terminate this Trust prior to the time all benefit payments under the
Arrangements have been made. All assets in the Trust at termination shall
be returned to the Company.
(d) This Trust Agreement may not be amended or terminated by the Company for
two (2) years following a Change of Control without the written consent of
a majority of the Participants.
14
<PAGE>
SECTION 15. CHANGE OF CONTROL
-----------------
(a) For purposes of this Trust, the following terms shall be defined as set
forth below:
(1) Potential Change of Control shall mean:
the purchase or other acquisition after the date hereof by any person,
entity or group of persons, within the meaning of section 13(d) or
14(d) of the Securities Exchange Act of 1934 ("Act"), or any
comparable successor provisions, of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Act) of 15 percent or more
of either the outstanding shares of common stock or the combined
voting power of the Company's then outstanding voting securities
entitled to vote generally, or the approval by the shareholders of the
Company of a reorganization, merger, or consolidation, in each case,
with respect to which persons who were stockholders of the Company
immediately prior to such reorganization, merger, or consolidation do
not, immediately thereafter, own more than 75 percent of the combined
voting power entitled to vote generally in the election of the
directors of the reorganized, merged or consolidated Company's then
outstanding securities, or a liquidation or dissolution of Company or
the sale of all or substantially all of the Company's assets. The
acquisition of common stock of the Company by an employee benefit plan
sponsored or maintained by the Company or its affiliate (or a trust
maintained for such plan) shall not be considered a Change in Control.
(2) Change of Control shall mean:
the purchase or other acquisition after the date hereof by any person,
entity or group of persons, within the meaning of section 13(d) or
14(d) of the Securities Exchange Act of 1934 ("Act"), or any
comparable successor provisions, of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more
of either the outstanding shares of common stock or the combined
voting power of the Company's then outstanding voting securities
entitled to vote generally, or the approval by the shareholders of the
Company of a reorganization, merger, or consolidation, in each case,
with respect to which persons who were stockholders of the Company
immediately prior to such reorganization, merger, or consolidation do
not, immediately thereafter, own more than 50 percent of the combined
voting power entitled to vote generally in the election of the
directors of the reorganized, merged or consolidated Company's then
outstanding securities, or a liquidation or dissolution of Company or
the sale of all or substantially all of the Company's assets. The
acquisition of common stock of the Company by an employee benefit plan
sponsored or maintained by the Company or its affiliate (or a trust
maintained for such plan) shall not be considered a Change in Control.
For purposes of this Section 15(a), the Incumbent Board, by a majority
vote, shall have the power to determine on the basis of information known
to them (a) the number of shares beneficially owned by any person, entity
or group; (b) whether there exists an agreement, arrangement or
understanding with another as to matters referred to in this Section 15(a);
and (c) such other matters with respect to which a determination is
necessary under this Section 15(a).
15
<PAGE>
(b) The General Counsel of the Company shall have the specific authority to
determine whether a Potential Change of Control or Change of Control has
transpired under the guidance of this Section 15(a) and shall be required
to give the Trustee notice of a Change of Control or a Potential Change of
Control. The Trustee shall be entitled to rely upon such notice, but if
the Trustee receives notice of a Change of Control from another source, the
Trustee shall make its own independent determination.
SECTION 16. MISCELLANEOUS
-------------
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) The Company hereby represents and warrants that all of the Arrangements
have been established, maintained and administered in accordance with all
applicable laws, including without limitation, ERISA. The Company hereby
indemnifies and agrees to hold the Trustee harmless from all liabilities,
including attorney's fees, relating to or arising out of the establishment,
maintenance and administration of the Arrangements. To the extent the
Company does not pay any of such liabilities in a reasonably timely manner,
the Trustee may obtain payment from the Trust.
(c) Benefits payable to Participants and their Beneficiaries under this Trust
Agreement may not be anticipated, assigned (either at law or in equity),
alienated, pledged, encumbered or subjected to attachment, garnishment,
levy, execution or other legal or equitable process.
(d) This Trust Agreement shall be governed by and construed in accordance with
the laws of Georgia.
IN WITNESS WHEREOF, this Grantor Trust Agreement has been executed on behalf of
the parties hereto on the day and year first above written.
INNOTRAC CORPORATION WACHOVIA BANK, N.A.
By: /s/ Scott Dorfman By: /s/ Peter Quinn
-------------------------------- ---------------------------------
Its: President Its:
-------------------------------- ---------------------------------
16
<PAGE>
ATTACHMENT I
Innotrac Corporation Deferred Compensation Plan
17
<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
February 10, 1998
<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 year ended December 31, 1997.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> $553,746
<SECURITIES> 0
<RECEIVABLES> 25,788,474
<ALLOWANCES> 5,707,245
<INVENTORY> 2,935,611
<CURRENT-ASSETS> 24,329,191
<PP&E> 12,710,507
<DEPRECIATION> 5,101,992
<TOTAL-ASSETS> 32,495,243
<CURRENT-LIABILITIES> 22,807,753
<BONDS> 0
916,949
0
<COMMON> 18,960
<OTHER-SE> 4,807,802
<TOTAL-LIABILITY-AND-EQUITY> 32,495,243
<SALES> 87,978,487
<TOTAL-REVENUES> 87,978,487
<CGS> 0
<TOTAL-COSTS> 67,986,434
<OTHER-EXPENSES> 13,202,717
<LOSS-PROVISION> 14,077,000
<INTEREST-EXPENSE> 1,788,003
<INCOME-PRETAX> 4,882,938
<INCOME-TAX> (76,700)
<INCOME-CONTINUING> 4,959,638
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,959,638
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
