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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File No. 000-23741
INNOTRAC CORPORATION
(Exact name of Registrant as specified in its charter)
GEORGIA 58-1592285
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(State or other jurisdiction of incorporation (I.R.S.Employer
incorporation or organization) Identification No.)
6655 Sugarloaf Parkway, Duluth, Georgia 30097
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
Securities registered pursuant to Section 12(b) of the Act: None.
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Name of each exchange on which registered: The Nasdaq National Market.
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Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par
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Value $.10 Per Share.
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Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
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Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10K. [ ]
The aggregate market value of the voting stock held by nonaffiliates
(which for purposes hereof are all holders other than executive officers and
directors) of the Registrant as of March 18, 1999 was $26,825,569, based on the
closing sale price of the Common Stock as reported by the Nasdaq National Market
on such date. See Item 12.
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At March 22, 1999, there were 8,999,995 shares of Common Stock, par
value $0.10 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's 1998 Annual Report to Shareholders, filed
as an exhibit hereto, are incorporated by reference into Part II of this Annual
Report on Form 10-K for the year ended December 31, 1998 (the "Report").
Portions of the Registrant's definitive Proxy Statement for the 1999 Annual
Meeting of Shareholders, to be filed with the Securities and Exchange Commission
(the "Commission" or the "SEC"), are incorporated by reference into Part III of
this Report.
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TABLE OF CONTENTS
FORM 10-K ANNUAL REPORT
PART I
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ITEM 1.
<S> <C>
BUSINESS................................................................ 1
ITEM 2.
PROPERTIES............................................................... 18
ITEM 3.
LEGAL PROCEEDINGS........................................................ 18
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...................... 18
PART II
ITEM 5.
MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS.............................................. 19
ITEM 6.
SELECTED FINANCIAL DATA.................................................. 19
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS...................................... 19
ITEM 7A
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............... 19
ITEM 8.
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.............................. 20
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE...................................... 20
PART III
ITEM 10.
DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT....................... 20
ITEM 11.
EXECUTIVE COMPENSATION................................................... 20
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT........................................................... 20
ITEM 13.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS........................... 20
PART IV
ITEM 14.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K............................................................ 21
FINANCIAL STATEMENT SCHEDULES............................................. S-1
SIGNATURES................................................................ II-1
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PART I
ITEM 1. BUSINESS
GENERAL
Innotrac Corporation ("Innotrac" or the "Company") is a full-service
provider of customized, technology-based marketing support services to
enterprises, primarily telecommunications companies. The Company's marketing
support services provide its clients with an efficient means of delivering
products or information to their customers, and include product and literature
distribution, computerized inventory and database management and customer-
initiated ("inbound") teleservices. Innotrac works with its clients on a
consultative basis to create customized turnkey solutions to meet client needs,
which range from small, specialty projects to larger integrated fulfillment,
teleservicing and database tracking programs. The majority of Innotrac's growth
over the past five years has come from telecommunications companies and,
specifically, from services related to Caller ID equipment. Although 97% of its
1998 revenues came from BellSouth Telecommunications, Inc. ("BellSouth"),
Pacific Bell ("Pacific Bell"), Southwestern Bell Telephone Co. ("Southwestern
Bell") and US West Communications Services, Inc. ("US West"), the Company has a
broad range of clients, including Home Depot U.S.A., Inc. ("Home Depot"),
National Automotive Parts Association ("NAPA") and Siemens Energy & Automation
Inc. ("Siemens E&A").
Since its formation in 1984, the Company has expanded its capabilities 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. Under
this program Innotrac (i) sells or rents to BellSouth customers Caller ID
hardware, phone sets and other equipment (branded with BellSouth's logo), (ii)
ships ("fulfill") customers' orders, (iii) tracks inventory levels and sales and
marketing data regarding such items and (iv) maintains teleservicing operations
to handle customer service and technical support for Caller ID units and other
products. 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 arrangements with Pacific Bell, Southwestern Bell and US West.
Recently, Innotrac began providing limited fulfillment services to Ameritech
Corp., Cincinnati Bell Inc. and Bell Atlantic Corporation.
The Company has positioned itself to capitalize on the trend towards
outsourcing of marketing support services by investing in the technology and
infrastructure necessary to offer additional and more advanced services to its
clients. The Company believes that large corporations 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.
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
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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.
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:
MAXIMIZE CALLER ID BUSINESS. The Company currently distributes Caller ID
units for four of the regional bell operating companies ("RBOCs"): BellSouth,
Pacific Bell, Southwestern Bell and US West. Recently, Innotrac began providing
limited fulfillment services to Ameritech Corp., Cincinnati Bell Inc. and Bell
Atlantic Corporation. Management believes that significant growth opportunities
exist with these clients as the market penetration of Caller ID services
increases and as consumer demand for additional and/or more advanced Caller ID
units grows. Additionally, the Company believes it is well positioned to obtain
similar contracts with other RBOCs and independent local exchange carriers.
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.
DEVELOP E-COMMERCE SERVICES. The Company intends on pursuing the sale of
product distribution and related services in the electronic commerce ("e-
commerce") industry by (i) becoming a one-stop source for e-commerce and (ii)
functioning as an e-commerce distributor for manufacturers and large market
driven corporations. The Company believes that it can leverage its current core
competencies into the growing e-commerce industry. Innotrac will offer a
turnkey solution to product distribution via the Internet which will encompass
web design, web hosting, product ownership, product distribution, returns
processing and complete backend customer service.
EXPAND OUTSIDE OF TELECOMMUNICATIONS. Innotrac's full service capabilities
provide it with the flexibility to manage small specialty projects or large
integrated projects whereby the Company becomes a new and distinct channel of
distribution for clients. The Company believes that its infrastructure will
allow it to develop clients in a variety of industries that have numerous and/or
geographically diverse subsidiary or affiliate operations, extensive marketing
needs or complex point-of-distribution requirements. Management believes that
these capabilities will make its services attractive to companies in the
manufacturing and retailing industries, in which it currently has clients, as
well as companies engaged in e-commerce.
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
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advances, particularly those utilizing the Internet, will provide new
opportunities for the Company to tailor its services to meet each client's
needs.
EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to develop 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.
For example, the Company has provided services to NAPA since 1994, Home Depot
since 1993 and Siemens E&A since 1987. Innotrac has serviced its largest
client, BellSouth, since 1991. 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 products,
technologies or services or provide substantial operating synergies. While the
Company has made no acquisitions to date, management believes that there are a
variety of such potential acquisition opportunities.
CALLER ID FULFILLMENT SERVICES
The Company has experienced significant growth in revenue in recent years
primarily due to the growth in its Caller ID fulfillment services. The
Company's Caller ID services began in 1991 with BellSouth, when the Company
initiated a fulfillment program to sell or rent to BellSouth customers Caller ID
hardware, phone sets and other equipment. In 1993, Innotrac began billing the
charges on customers' telephone bills. The Company now provides such services to
US West, Pacific Bell, Southwestern Bell and Nevada Bell. Recently, Innotrac
began providing limited fulfillment services to Ameritech Corp., Cincinnati Bell
Inc. and Bell Atlantic Corporation.
A transaction generally begins when a customer calls one of the Company's
RBOC clients and speaks with a service representative to obtain Caller ID
service. 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 electronic data interchange
("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 on a monthly basis electronically submits to
the RBOC client the appropriate charges to be included on the customer's
telephone bill. Innotrac also provides the customer with order status, billing
information and technical product support through its call center by interactive
voice response ("IVR") or representative. Since November 1998, the Company has
established with all its RBOC clients a billing system whereby the Company bills
the RBOC directly for Caller ID units sold. The RBOCs now assume the credit
risk of Caller ID purchasers and provide any financing. Prior to then, Innotrac
derived its fees for sales of Caller ID equipment for its most significant
telecommunications client, BellSouth, from the difference in the price of the
Caller ID display unit charged to the customer and the wholesale cost of the
product.
E-COMMERCE SERVICES
The Company intends to leverage its core competencies of product
distribution, marketing, technology, and after-sale support services to business
enterprises to become their one-stop source for
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product distribution via the Internet. As acceptance of e-commerce grows,
Innotrac will offer a turnkey solution to companies seeking to outsource e-
commerce distribution. The Company has an on-staff web design team capable of
developing web pages to facilitate e-commerce. Innotrac offers web hosting for
its smaller e-commerce clients. As smaller clients grow, and for larger clients,
the Company may outsource this function to one of several approved web hosting
partners. Innotrac uses state-of-the-art shopping cart software along with
universal payment processing software to manage the e-commerce distribution
process. The Company may purchase for sale the offered product, presenting a
unique value-added service to e-commerce clients.
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. Some of the
services described below are provided to the Company's RBOC clients, and may be
offered to potential e-commerce clients.
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 IVR system, and instructs the system to deliver a
selected publication. The desired literature or marketing materials are then
quickly faxed to the customer. Print-on-demand solutions enable a client or the
client's customer to 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 using an electronic
file previously supplied or converted from a hard copy by the Company. Virtual
warehousing enables the client to print technical, educational or marketing
materials directly from Innotrac's computer system to its printers or its
customer's printers. Clients can reduce their shipping, labor, and warehousing
costs utilizing these virtual distribution services.
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.
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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 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
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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 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.
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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 two
Hewlett-Packard HP9000 K460 multiprocessing systems. The Company is in the
process of deploying an Oracle-based supply chain software system, 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.
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 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 400
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 January 31, 1999, the Company had 821 employees, of which
approximately 88% were full-time and 12% 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.
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
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or a few of the 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.
The Telecommunications Act of 1996 introduced restrictions on
telecommunications carriers' usage of CPNI. CPNI includes information that is
personal to customers, such as to whom, to where and when a customer places a
call, as well as the types of telecommunications services to which the customer
subscribes and the extent such services are used. The FCC interprets the CPNI
restrictions to permit telecommunications carriers, such as BellSouth, Pacific
Bell and US West, to use CPNI without customer approval to market services that
are related to the customer's existing service relationship with his or her
carrier. Before carriers may use CPNI to market services outside such customer's
existing service relationships, the carrier must obtain express customer
permission. Because the Company is dependent upon the efforts of its clients to
promote and market their equipment and services, laws and regulations inhibiting
those clients' ability to market such equipment and services to their existing
customers could have a material adverse effect on the Company's business,
results of operations and financial condition.
8
<PAGE>
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 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.
9
<PAGE>
CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K contains certain forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995). These statements concern the Company's operations, performance and
financial condition, including, in particular, the likelihood that Innotrac will
succeed in developing and expanding its business, among other things. They are
based upon a number of assumptions and estimates that are inherently subject to
significant uncertainties. Many of these uncertainties are beyond Innotrac's
control. Consequently, 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.
INNOTRAC RELIES ON A SMALL NUMBER OF CLIENTS.
Innotrac focuses on developing long-term relationships with large
corporations. Therefore, a relatively small number of clients generate a
significant portion of its revenues. The Company's four largest clients,
BellSouth, Pacific Bell, Southwestern Bell and US West, accounted for an
aggregate of 90%, 95%, and 97% of net revenues for 1996, 1997 and 1998,
respectively. BellSouth alone accounted for 82%, 85% and 59% for those same
years. If the Company loses one or more of its largest clients, then Innotrac's
business, results of operations and financial condition could be materially
adversely affected. If such client is lost, the Company cannot assure that it
will be able to replace such clients with others that generate comparable
revenues or profits.
INNOTRAC'S TELECOMMUNICATIONS CLIENTS CAN TERMINATE THEIR AGREEMENTS WITH
INNOTRAC.
Certain of Innotrac's written agreements with telecommunications companies
have expired, including those with US West and Pacific Bell. Innotrac
currently provides services to certain clients pursuant to oral agreements.
These agreements can be terminated by either party at any time. If these
agreements are terminated, the Company's financial condition and results of
operations could be materially adversely affected. Innotrac is negotiating new
written agreements with these clients. It cannot assure, however, that it will
be able to obtain those agreements on favorable terms, or at all.
Innotrac has written agreements with other telecommunications clients,
including BellSouth and certain other clients. Those agreements are generally
terminable for cause. Some agreements provide for termination without cause on
short notice. The Company's agreement with BellSouth, which does not expire
until September 2003, may be terminated by BellSouth for any reason after
March 15, 2000 upon 120 days notice. Most of the Company's agreements do not
assure specific volume or revenue levels. In addition, Innotrac's contracts
generally do not provide that Innotrac will be the client's exclusive service
provider. See "Business--General" in this Item 1.
INNOTRAC FACES RISKS ASSOCIATED WITH BUYING AND WAREHOUSING PRODUCTS AND RENTING
PRODUCTS TO CUSTOMERS.
Innotrac purchases Caller ID and other telecommunications equipment from
third party vendors in connection with certain of its fulfillment services.
Consequently, the Company assumes the risks of inventory obsolescence, damage to
rented units and theft. Innotrac's business, results of operations and
financial condition could be materially adversely affected if it cannot manage
these risks. Innotrac took steps to reduce its credit risk in 1998 by
terminating direct-to-consumer billing arrangements with certain large
telecommunications clients. The Company now bills its clients for sales of
telecommunications equipment to their customers. Those clients are then
responsible for billing and collecting from the equipment end-user consumers.
The clients assume the risks associated with installment financing, among
others. Innotrac's allowance for bad debt was approximately $4.9 million at
December 31, 1998 compared with $5.7 million at December 31, 1997. See
"Business--General" in this Item 1.
10
<PAGE>
INNOTRAC'S E-COMMERCE BUSINESS AND NEW PRODUCT FULFILLMENT SERVICES MAY NOT BE
SUCCESSFUL.
Innotrac is currently entering two new lines of business: (1) the provision
of services and products via the internet (electronic, or "e-commerce") and (2)
the sale and fulfillment of additional telecommunications products. The success
of Innotrac's new businesses depends upon, among other things, the Company's
ability to:
. recruit, hire and retain qualified personnel to assist in the new
businesses,
. integrate the new businesses into its existing lines and
. finance growth of these new businesses during their developmental stages.
Even if Innotrac successfully addresses these risks, the Company cannot assure
that it will successfully operate the new businesses. Nor can Innotrac assure
that the new businesses will be profitable. If these new businesses, or other
future ones, fail, the Company's business, financial condition or results of
operations could be materially adversely affected, particularly if significant
financing costs are not recouped.
E-COMMERCE
Innotrac's new e-commerce initiative is in a developmental stage. The
Company therefore cannot assure that its e-commerce services, when fully
developed, will be attractive to existing or new clients. It also cannot assure
that if demand for them does arise, they will be quickly profitable, if at all.
The Company expects to combine its existing product distribution, marketing
and after-sale-support services with front-end services such as order and
payment processing via the Internet. At this time however the Company cannot
predict the products or clients that may be involved in the e-commerce line, or
the other services Innotrac may offer. Innotrac has not previously offered any
services closely related to e-commerce. E-commerce is a relatively new and
highly competitive industry. The Company's potential competitors could be
located anywhere in the world. They range in size and sophistication from the
smallest niche companies and even individuals, to large corporations.
NEW TELECOMMUNICATIONS PRODUCTS
Innotrac has begun or is seeking to fulfill orders for other
telecommunications products such as cable modems and asymmetric digital
subscriber line modems. Both products are relatively new technologies that
facilitate high-speed data tranmission. The Company cannot assure that these
products or other new ones will achieve high acceptance or market penetration.
Nor can Innotrac assure that competing technologies will not replace these
products. Although the sale and fulfillment of these new products is closely
related to its established Caller ID equipment sale and fulfillment services,
the Company cannot assure that it will successfully integrate these new
fulfillment programs with its existing business.
These products compete with each other and with other existing technologies
and services. Many of these technologies and services are offered by the
Company's large telecommunications clients. Potential competing services and
technologies include telephone company-related wireline technologies such as
traditional analog modems and integrated services digital network modems.
11
<PAGE>
THE MARKET FOR TELECOMMUNICATIONS PRODUCTS MAY CHANGE.
Caller ID is a relatively recent offering by telecommunications companies.
Innotrac cannot assure that it will gain or sustain wide acceptance in the
marketplace. The Company also depends on the level of resources (financial and
otherwise) its clients expend to promote Caller ID service. Innotrac cannot
assure that its telecommunications clients will sufficiently promote, or
continue to promote, Caller ID service in their areas. The Company's business,
results of operations and financial condition could be materially adversely
affected if Caller ID does not gain or sustain marketplace acceptance or if the
Company's RBOC clients fail to adequately promote Caller ID service.
Furthermore, the Company cannot assure that its 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. Innotrac partly plans its operations based on these
estimates. In addition, at some time in the future, the Company's clients may
achieve peak market penetration for Caller ID service. Caller ID service or
equipment may eventually be replaced by a different service or hardware.
Innotrac's business, results of operations and financial condition could be
materially adversely affected if penetration estimates prove optimistic, if peak
penetration is achieved or if new technologies supplant Caller ID.
In addition, both federal and state governments regulate the provision of
Caller ID services by telecommunications companies. Regulatory changes could
increase Innotrac's compliance and other costs, detrimentally impacting its
business, results of operations and financial condition. See the factor
captioned "Innotrac's business is subject to government regulation" below and
"Business--Government Regulation" in this Item 1.
INNOTRAC MAY NOT BE ABLE TO CONTINUE OR MANAGE GROWTH.
Innotrac's operations have grown significantly in recent years. The
Company's business, results of operations and financial condition could be
materially adversely affected if it cannot effectively manage its growth. The
Company's continued success depends 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, Innotrac recently entered into a long-term lease for a new
facility, which will increase lease expenses by approximately $400,000 per year.
The Company expects that its continued rapid growth will significantly strain
its management, operations, employees and resources. Innotrac cannot assure
that it will be able to:
. maintain or accelerate its current growth,
. effectively manage our expanding operations or
. achieve planned growth on a timely or profitable basis.
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<PAGE>
THE TREND TOWARD OUTSOURCING MAY STOP OR REVERSE ITSELF.
The Company believes that in the past several years there has been a
significant increase in the number of businesses outsourcing services not
directly related to their core competencies. The Company's business, results of
operations and financial condition could be materially adversely affected if the
outsourcing trend declines, reverses or suffers other adverse developments.
Innotrac cannot assure that this trend will continue, that it will not reverse
or that corporations will not bring previously outsourced functions back in-
house. Particularly during general economic downturns, continued outsourcing of
services could result in layoffs. Businesses may bring in-house previously
outsourced functions to avoid or delay layoffs. See "Business--Strategy" in
this Item 1.
INNOTRAC MAY NOT BE ABLE TO RECRUIT, HIRE, TRAIN OR RETAIN ENOUGH QUALIFIED
EMPLOYEES, AND ITS EMPLOYMENT-RELATED COSTS MAY RISE.
Innotrac's success depends largely on its ability to recruit, hire, train
and retain qualified employees. If the Company cannot recruit, hire, train and
retain qualified employees, its business, results of operations or financial
condition could be materially adversely affected. Innotrac's industry is very
labor- intensive and has experienced high personnel turnover. If the Company's
employee turnover rate increases significantly, its recruiting and training
costs could rise and its operating effectiveness and productivity could
correlatively decline. Also, adding significant new clients or implementing new
large-scale marketing support programs may require accelerated recruiting,
hiring and training of qualified personnel. Some of Innotrac's operations,
particularly its technical support and customer service, require specially
trained personnel. The Company cannot assure that it will be able to continue
to hire, train and retain sufficient qualified personnel to adequately staff new
marketing support programs. In addition, the unemployment rate in the area
Innotrac's facilities are located is relatively low, potentially making it more
difficult and costly to hire and train qualified personnel.
Currently, the Company is not a party to any collective bargaining
agreements. None of the Company's employees are unionized. Although the
Company considers its relationship with its employees to be good, there have
been periodic unionization initiatives at the Company, particularly among its
call center personnel. If some or a majority of Innotrac's employees were to
join unions, the Company could incur increased wages, employee benefits and
employment-related administrative costs. The Company could also experience an
increased risk of work stoppages. A significant portion of Innotrac's operating
expenses relate to labor costs. Therefore, an increase in wages, costs of
employee benefits or employment taxes could materially adversely affect the
Company's business, results of operations or financial condition.
INNOTRAC'S SOFTWARE CONVERSION MAY NOT BE SUCCESSFUL OR IT MAY BE DELAYED.
Innotrac's business depends highly on its computer and telecommunications
equipment and software systems. The Company is upgrading certain computer
hardware and software. As a result, Innotrac is converting certain existing
programs to the new system. If Innotrac cannot successfully convert these
programs, its business, results of operations and financial condition could be
materially adversely affected. Innotrac has experienced delays and difficulties
in converting its software. The Company cannot assure that it can effectively
or efficiently convert its programs to the new system.
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<PAGE>
INNOTRAC MAY NOT BE ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY.
The Company's success depends highly 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.
If the Company fails to maintain its technological capabilities or respond
effectively to technological changes, its business, results of operations and
financial condition could be materially adversely affected. Innotrac cannot
assure that it will select, invest in and develop new and enhanced technology on
a timely basis in the future in order to meet its clients' needs and maintain
competitiveness. See "Business--Technology" in this Item 1.
INNOTRAC FACES COMPETITION.
Innotrac competes in highly competitive markets, and expects competition to
persist and intensify in the future. Innotrac's competitors include:
. in-house operations of its current and potential clients,
. small firms offering specific services and
. large marketing support services firms.
A number of Innotrac's competitors have or may develop financial and other
resources greater than the Company's. The Company cannot assure that additional
competitors with greater name recognition and resources will not enter its
markets. Innotrac's existing or potential clients' in-house operations are also
significant competitors. If (1) existing clients decide to provide, in-house,
services that currently are outsourced or (2) potential clients retain or
increase their in-house capabilities, then the Company's performance and growth
could be negatively impacted.
Some products Innotrac sells and fulfills for some clients, such as cable
modems, may compete with products and services offered by other clients. If a
large client discontinues its relationship with Innotrac because it provides
services to one of the client's competitors, the Company's business, financial
condition or results of operations could suffer material adverse effects.
Further, Innotrac's business will be materially adversely affected if a
large client decides to consolidate its outsourced services with a company other
than Innotrac. In addition, competitive pressures from current or future
competitors could result in significant price erosion, which could in turn
materially adversely affect the Company's business, financial condition and
results of operations. See "Business--Competition" in this Item 1.
INNOTRAC'S OPERATING RESULTS AND QUARTERLY RESULTS MAY FLUCTUATE.
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:
14
<PAGE>
. fluctuations in the general economy . increased competition
. changes in operating expenses . expenses related to acquisitions
. changes in the timing and level of . the potential adverse effect of
client-specific marketing programs acquisitions
Due to these and any unforeseen factors, it is likely that in some future
quarter Innotrac's operating results will be below the expectations of public
market analysts and investors. If that occurs, the Company's common stock price
would likely decline materially. In view of the its recent significant growth,
the Company believes that period-to-period comparisons of its financial results
are not necessarily meaningful, and you should not rely on them as an indication
of future performance.
INNOTRAC DEPENDS ON A FEW KEY PERSONNEL.
Innotrac depends in large part on the abilities and continuing efforts of
its executive officers and senior management. The Company's business and
prospects could be materially adversely affected if (1) current officers and
managers do not continue in their key roles and Innotrac cannot attract and
retain qualified replacements or (2) Innotrac cannot attract and retain
additional qualified personnel to sustain growth. The Company does not have
employment agreements with its executive officers and cannot assure that it will
be able to retain them. The Company maintains key man life insurance on only
one of its executive officers--Scott D. Dorfman, in the amount of $3.5 million.
In order to support growth, Innotrac must effectively recruit, develop and
retain additional qualified management personnel. The Company cannot assure
that in the future it will be able to recruit and retain additional qualified
managers.
INNOTRAC MAY LOSE REVENUE OR INCUR ADDITIONAL COSTS BECAUSE OF THE YEAR 2000
ISSUE.
INNOTRAC MAY NOT ADEQUATELY ADDRESS THE YEAR 2000 ISSUE.
The efficient operation of Innotrac's business depends in part on its
computer software programs and operating systems. If these programs and systems
suffer failures from their inability to recognize dates after December 31, 1999
(that is, if they are not "Year 2000 compliant"), the Company's business,
financial condition or results of operations could be materially adversely
affected. These programs and systems are used in:
. inventory management . pricing
. sales . shipping
. financial reporting . administrative functions
Innotrac believes that the Company's information technology ("IT") systems,
including the existing systems and programs that will be replaced as a part of
an upgrade of the Company's system architecture, and other non-IT systems are
either Year 2000 compliant or will be compliant by June 30, 1999 after applying
vendor-supplied patches or upgrades to these systems. Innotrac could experience
business interruptions and systems failures that could materially adversely
affect its business if (1) any of these remedial efforts fail to eliminate Year
2000 problems in Innotrac's IT and non-IT systems or if (2) Innotrac fails to
identify all systems that require attention. If unforeseen failures do occur,
emergency remediation expenses could also have a materially adverse effect on
the Company's business, results of
15
<PAGE>
operations or financial condition. The Company anticipates completing an
evaluation of its Year 2000 efforts in September 1999. Innotrac cannot assure,
however, that its Year 2000 efforts will be completed before December 31, 1999.
It also cannot assure that these efforts, if completed, will successfully
remediate all Year 2000 problems.
INNOTRAC'S SUPPLIERS, CLIENTS, FINANCIAL INSTITUTIONS AND OTHERS MAY NOT
ADEQUATELY ADDRESS THE YEAR 2000 ISSUE.
Innotrac also depends on the efficient operation of the computer systems of
suppliers, clients, financial institutions and others which interface with its
own systems. Because such third-party systems or software may not be Year 2000
compliant, Innotrac may incur unanticipated expenses to remedy any problems
caused by such failures. These problems could in turn materially adversely
affect Innotrac's business, results of operations and financial condition. The
Company is obtaining documentation from third parties concerning their Year 2000
compliance programs and the possibility of any Year 2000-related interface
difficulties that may affect Innotrac. To date, no significant concerns have
been identified. Innotrac is developing contingency plans to address Year 2000
failures of these entities. However, Year 2000-related operating problems or
expenses may arise in connection with Innotrac's systems' interface with the
computer systems and software of its suppliers, clients, financial institutions
and others.
INNOTRAC'S BUSINESS IS SUBJECT TO GOVERNMENT REGULATION.
Because its current teleservicing business consists primarily of responding
to inbound telephone calls, as opposed to outbound calls, the Company is not
highly regulated. However, in connection with the limited amount of outbound
telemarketing services that it provides, the Company must 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 its business. Furthermore, there may be additional federal and
state legislation or changes in regulatory implementation, including
interpretations under the Telecommunications Act of 1996 restricting the ability
of telecommunications companies to use consumer proprietary network information
("CPNI"), that may limit the Company's activity or its clients' in the future or
significantly increase compliance costs. Additionally, Innotrac could be
responsible for failing to comply with regulations applicable to its clients.
If unfavorable federal or state legislation or regulations affecting Caller ID
service are adopted, the Company's business, financial condition and results of
operations could be materially adversely affected. See "--Risks Associated with
Product-Based Marketing Support Services" and "Business--Government Regulation"
in this Item 1.
COMPLETING AND INTEGRATING ACQUISITIONS MAY BE DIFFICULT.
As part of its strategy, the Company plans to pursue strategic
acquisitions. For acquisition candidates, Innotrac seeks companies offering
services, products, technologies, industry specializations or geographic
coverage that extend or complement its existing business. The Company cannot
assure however that it will be able to successfully identify, acquire on
favorable terms or integrate such companies. If Innotrac completes an
acquisition, it cannot assure that such acquisition will enhance its business,
results of operations or financial condition. In the future, the Company may
face increased competition for acquisition candidates, which may inhibit the
consummation of suitable acquisitions on favorable terms. Innotrac could use a
portion of its capital resources and proceeds from its initial public
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offering for acquisitions. Innotrac may require additional debt or equity
financing for future acquisitions. Additional financing however may not be
available on favorable terms, or at all.
EXECUTIVE OFFICERS OF REGISTRANT
The executive officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Scott D. Dorfman........... 41 President, Chief Executive Officer and
Chairman of the Board
David L. Ellin............. 40 Senior Vice President and Chief Operating
Officer
Donald L. Colter, Jr....... 38 Vice President--Operations
Larry C. Hanger............ 44 Vice President--Business Development
John H. Nichols, III....... 44 Vice President, Chief Financial Officer and
Secretary
Stephen J. Walden.......... 55 Vice President--Electronic Commerce
</TABLE>
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. At
Paymaster, Mr. Dorfman gained experience in distribution, tracking and inventory
control by developing and managing Paymaster's mail order catalog.
Mr. Ellin joined Innotrac in 1986 and has served as Senior Vice President
and Chief Operating Officer of the Company since November 1997. He served as
the Company's Vice President from 1988 to November 1997. From 1984 to 1986, Mr.
Ellin was employed by the Atlanta branch of WHERE Magazine, where he managed the
sales and production departments. From 1980 to 1984, Mr. Ellin was employed by
Paymaster, where he was responsible for Paymaster's sales and collections.
Mr. Colter joined Innotrac in 1995 and has served as Vice President-
Operations since November 1997. He served as the Company's Chief Financial
Officer from 1995 to November 1997. Prior to joining Innotrac, Mr. Colter was
from 1993 to 1995 the corporate controller of Gay & Taylor/Thomas Howell Group,
an international insurance adjusting company. From 1991 to 1993, Mr. Colter was
corporate controller of Outdoor West, Inc., an outdoor advertising company. Mr.
Colter is a certified public accountant and has over 15 years of experience in
the financial and accounting industry.
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.
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<PAGE>
Mr. Nichols joined Innotrac in November 1997 as Vice President and Chief
Financial Officer and was appointed Secretary of the Company in July 1998. 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. Walden joined Innotrac in January 1999 as Vice President-Electronic
Commerce. He had previously served as Senior Vice President for Internet
Strategy at Premiere Technologies, responsible for managing a new, Internet-
based product line integrating telephony services with Internet technology.
Prior to that, he was Vice President of Content and Commerce for BellSouth.net,
a BellSouth subsidiary. Mr. Walden has been President of Walden Associates, a
media and technology consulting group. Earlier in his career, he held positions
in Prodigy Services Company, Grey Advertising, Warner Amex Cable Communications,
Time Inc.'s Manhattan Cable TV, and Home Box Office.
ITEM 2. PROPERTIES
Innotrac's headquarters and distribution facilities are located in 250,000
square feet of leased space in Duluth, Georgia. The Company's corporate offices
occupy 50,000 square feet of this facility and the remaining 200,000 square feet
is distribution space. This site also includes approximately 3.5 acres that will
be available for the Company's expansion requirements. The Company's lease for
its Duluth facility has a term of 10 years and two five year renewal options.
The lease provides for an option to purchase the facility 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
446 workstations and has room to expand to approximately 700 workstations. It
also contains approximately 18,000 square feet of expansion 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 are adequate for its needs for the
foreseeable future.
ITEM 3. 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. The Company is, from time to time, a party to litigation arising in
the normal course of its business. Management believes that none of these
actions, individually or in the aggregate, will have a material adverse effect
on the financial position or results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the fiscal year covered by this Report.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
The Company's Common Stock began trading on the Nasdaq National Market
("NASDAQ") under the symbol "INOC" on May 7, 1998. Prior to that time, there
was no trading market for the Common Stock. The following table sets forth for
the periods indicated the high and low sales prices of the Common Stock on the
NASDAQ.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1998
Second Quarter (beginning May 7, 1998)..................... $13.250 $ 8.875
Third Quarter.............................................. $13.500 $ 6.750
Fourth Quarter............................................. $24.375 $ 5.750
Fiscal Year Ended December 1999............................ $24.375 $ 5.750
1999
First Quarter (through March 18)........................... $19.000 $10.000
</TABLE>
The approximate number of holders of record of Common Stock as of March 4,
1999 was 22.
The Company has never declared cash dividends on the Common Stock. The
Company intends to retain its earnings to finance the expansion of its business
and does not anticipate paying cash dividends in the foreseeable future. Any
future determination as to the payment of cash dividends will depend upon such
factors as earnings, capital requirements, the Company's financial condition,
restrictions in financing agreements and other factors deemed relevant by the
Board of Directors. The payment of dividends by the Company is restricted by its
revolving credit facility.
ITEM 6. SELECTED FINANCIAL DATA
The information contained under the heading "Selected Financial Data" in
the Company's 1998 Annual Report to Shareholders, filed as an exhibit hereto, is
incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in the Company's 1998
Annual Report to Shareholders, filed as an exhibit hereto, is incorporated
herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information contained under the heading "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Quantitative and
Qualitative Disclosures About Market Risk" in the Company's 1998 Annual Report
to Shareholders, filed as an exhibit hereto, is incorporated herein by
reference.
19
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information contained under the headings "Report of Independent Public
Accountants" and "Consolidated Financial Statements and Notes to the
Consolidated Financial Statements" in the Company's 1998 Annual Report to
Shareholders, filed as an exhibit hereto, is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information contained under the heading "Election of Directors" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 1999 Annual Meeting of Shareholders, filed with the
Commission, is hereby incorporated herein by reference. Pursuant to Instruction
3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the
executive officers of the Company is included in Item 1 of this Report.
ITEM 11. EXECUTIVE COMPENSATION
The information contained under the heading "Executive Compensation" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 1999 Annual Meeting of Shareholders, filed with the
Commission, is hereby incorporated herein by reference. The information
contained in the Proxy Statement under the headings "Compensation Committee
Report on Executive Compensation" and "Stock Performance Graph" shall not be
deemed incorporated herein by such reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information contained under the heading "Voting Securities and
Principal Shareholders" in the definitive Proxy Statement used in connection
with the solicitation of proxies for the Company's 1999 Annual Meeting of
Shareholders, filed with the Commission, is hereby incorporated herein by
reference.
For purposes of determining the aggregate market value of the Company's
voting stock held by nonaffiliates, shares held by all current directors and
executive officers of the Company have been excluded. The exclusion of such
shares is not intended to, and shall not, constitute a determination as to which
persons or entities may be "affiliates" of the Company as defined by the
Commission.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information contained under the heading "Certain Transactions" in the
definitive Proxy Statement used in connection with the solicitation of proxies
for the Company's 1999 Annual Meeting of Shareholders, filed with the
Commission, is hereby incorporated herein by reference.
20
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
AND REPORTS ON FORM 8-K
(A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS
1. FINANCIAL STATEMENTS
The following financial statements and notes thereto are incorporated
herein by reference in Item 8 of this Report.
Report of Independent Public Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Operations for the years ended December 31,
1998, 1997, and 1996
Consolidated Statements of Partners', Members' and Shareholders' Equity for
the years ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows for the years ended December 31,
1998, 1997, and 1996
2. FINANCIAL STATEMENT SCHEDULES
Report of Independent Public Accountants as to Schedules
Schedule II - Valuation and Qualifying Accounts
21
<PAGE>
3. EXHIBITS
The following exhibits are required to be filed with this Report by Item
601 of Regulation S-K:
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
<C> <S>
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 11,
1998)
3.2 Amended and Restated By-laws of the Company (incorporated by
reference to Exhibit 3.2 to the Company's Registration Statement
on Form S-1 (Commission File No. 333-42373), filed with the
Commission on December 16, 1997)
4.1 Form of Common Stock Certificate of the Company (incorporated by
reference to Exhibit 4.1 to the Company's Amendment No. 1 to
Registration Statement on Form S-1 (Commission File No. 333-
42373), filed with the Commission on February 11, 1998)
4.2 Rights Agreement between Company and Reliance Trust Company as
Rights Agent, dated as of December 31, 1997 (incorporated by
reference to Exhibit 4.2 to the Company's Amendment No. 1 to
Registration Statement on Form S-1 (Commission File No. 333-
42373), filed with the Commission on February 11, 1998)
10.1 Acquisition Agreement by and among the Company, 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 (incorporated by reference to Exhibit 10.1 to
the Company's Registration Statement on Form S-1 (Commission File
No. 333-42373), filed with the Commission on December 16, 1997)
10.2(a) Stock Option and Incentive Award Plan (incorporated by reference
to Exhibit 10.2 to the Company's Registration Statement on Form S-
1 (Commission File No. 333-42373), filed with the Commission on
December 16, 1997)+
(b) Amendment No. 1 to Stock Option and Incentive Award Plan
(incorporated by reference to Exhibit 10.2(b) to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 11,
1998)+
10.3 Amended and Restated Loan and Security Agreement by and among the
Company, 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 (incorporated by reference to Exhibit 10.3 to the
Company's Registration Statement on Form S-1 (Commission File No.
333-42373), filed with the Commission on December 16, 1997)
10.4 Purchase Agreement for Services between BellSouth
Telecommunications, Inc. and the Company, effective November 1,
1998*
</TABLE>
22
<PAGE>
<TABLE>
<S> <C>
10.5 Form of Indemnification Agreements entered into as of December 11,
1997, by and between the Company and each of Messrs. Scott D.
Dorfman, David L. Ellin, Donald L. Colter, Jr., John H. Nichols
III, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III
and William H. Scott, III (incorporated by reference to Exhibit
10.5 to the Company's Registration Statement on Form S-1
(Commission File No. 333-42373), filed with the Commission on
December 16, 1997)+
10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and
the Company (incorporated by reference to Exhibit 10.7 to the
Company's Registration Statement on Form S-1 (Commission File No.
333-42373), filed with the Commission on December 16, 1997)
10.8(a) Lease, dated December 8, 1997, by and between Weeks Development
Partnership and the Company (incorporated by reference to Exhibit
10.8 to the Company's Amendment No. 1 to Registration Statement on
Form S-1 (Commission File No. 333-42373), filed with the
Commission on February 11, 1998)
10.9 Split Dollar Life Insurance Agreement, dated July 10, 1997, by and
between the Company, Bruce V. Benator, as Trustee of The Scott
David Dorfman Family Trust #2, and Scott David Dorfman
(incorporated by reference to Exhibit 10.9 to the Company's
Amendment No. 1 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 11,
1998)+
10.10 Innotrac Corporation Deferred Compensation Plan, effective as of
October 16, 1997 (incorporated by reference to Exhibit 10.10 to
the Company's Amendment No. 1 to Registration Statement on Form S-
1 (Commission File No. 333-42373), filed with the Commission on
February 11, 1998)+
10.11 Grantor Trust Agreement dated October 16, 1997, by and between the
Company and Wachovia Bank, N.A. (incorporated by reference to
Exhibit 10.11 to the Company's Amendment No. 1 to Registration
Statement on Form S-1 (Commission File No. 333-42373), filed with
the Commission on February 11, 1998)+
10.12 Shareholders' Agreement by and among SellTel #1, Inc., Arnold
Dorfman, Scott Dorfman and the Company, dated February 13, 1998
(incorporated by reference to Exhibit 10.12 to the Company's
Amendment No. 2 to Registration Statement on Form S-1 (Commission
File No. 333-42373), filed with the Commission on February 23,
1998)
10.13 Stock Redemption Agreement by and among RenTel #1, Inc., Scott
Dorfman and Arnold Dorfman, dated December 15, 1997 (incorporated
by reference to Exhibit 10.13 to the Company's Amendment No. 2 to
Registration Statement on Form S-1 (Commission File No. 333-
42373), filed with the Commission on February 23, 1998)
10.14 Amended and Restated Loan and Security Agreement between the
Company and SouthTrust Bank, N.A., dated January 25, 1999
</TABLE>
23
<PAGE>
<TABLE>
<S> <C>
10.15 1999 Senior Executive Incentive Compensation Plan+
10.16 Aircraft Lease by and between SD Holdings, Inc. and the Company,
dated February 19, 1998
13.1 Portions of the 1998 Annual Report to Shareholders that are
incorporated by reference in this Report
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney (included on signature page)
27.1 Financial Data Schedule (for Commission use only)
99.1 Proxy Statement for the 1999 Annual Meeting of Shareholders
</TABLE>
+ - Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
* - Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934. In accordance with Rule 24b-2, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Registrant during the fourth
quarter of the Registrant's 1998 fiscal year.
24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES
We have audited in accordance with generally accepted auditing standards, the
financial statements of INNOTRAC, CORPORATION included in this Form 10-K and
have issued our report thereon dated January 31, 1999. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in the index 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
ARTHUR ANDERSEN LLP
Atlanta, Georgia
January 31, 1999
S-1
<PAGE>
INNOTRAC CORPORATION
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Balance at Charged to Balance at
Beginning of Charged to Other End of
Description Period Expenses Accounts Deductions Period
- ----------- ------------ ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Provision for uncollectible accounts
Year ended December 31,
1998................................ $5,058 $ 8,245 -- $ (8,797) $4,506
1997................................ 4,141 7,750 -- (6,833) 5,058
1996................................ 2,552 5,841 -- (4,252) 4,141
1995................................ 575 3,043 -- (1,066) 2,552
Provisions for returns and allowances
Year ended December 31,
1998................................ 649 11,104 -- (10,722) 1,031
1997................................ 101 6,327 -- (5,779) 649
1996................................ -- 3,536 -- (3,435) 101
1995................................ -- -- -- -- --
</TABLE>
S-2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, on the 23rd day of
March, 1999.
INNOTRAC CORPORATION
By: /s/ Scott D. Dorfman
----------------------
Scott D. Dorfman
Chairman and
Chief Executive Officer
POWER OF ATTORNEY
Know all men by these presents, that each person whose signature appears
below constitutes and appoints Scott D. Dorfman and John H. Nichols, III and
either of them, as attorneys-in-fact, with power of substitution, for him in any
and all capacities, to sign any amendments to this Report on Form 10-K, and to
file the same, with exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, hereby ratifying and
confirming all that said attorneys-in-fact may do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant in the capacities indicated on the 23rd day of March, 1999.
<TABLE>
<CAPTION>
Signature Title
- --------- -------
<S> <C>
/s/Scott D. Dorfman President, Chief Executive Officer and
- ---------------------------
Scott Dorfman Chairman of the Board (principal executive
officer)
/s/David L. Ellin Senior Vice President, Chief Operating
- ---------------------------
David L. Ellin Officer and Director
/s/Larry C. Hanger Vice President--Business Development and
- ---------------------------
Larry C. Hanger Director
/s/John H. Nichols, III Vice President, Chief Financial Officer and
- ---------------------------
John H. Nichols, III Secretary (principal financial and
accounting officer)
/s/Bruce V. Benator Director
- ---------------------------
Bruce V. Benator
/s/Martin J. Blank Director
- ---------------------------
Martin J. Blank
/s/Campbell B. Lanier, III Director
- ---------------------------
Campbell B. Lanier, III
/s/William H. Scott, III Director
- ---------------------------
William H. Scott, III
</TABLE>
<PAGE>
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION OF EXHIBITS
- ----------- -----------------------
10.4 Purchase Agreement for Services between BellSouth
Telecommunications, Inc. and the Company, effective November 1,
1998*
10.14 Amended and Restated Loan and Security Agreement between the
Company and SouthTrust Bank, N.A., dated January 25, 1999
10.15 1999 Senior Executive Incentive Compensation Plan+
10.16 Aircraft Lease by and between SD Holdings, Inc. and the Company,
dated February 19, 1998
13.1 Portions of the 1998 Annual Report to Shareholders that are
incorporated by reference in this Report
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule (for Commission use only)
99.1 Proxy Statement for the 1999 Annual Meeting of Shareholders
+ - Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
* - Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of
1934. In accordance with Rule 24b-2, these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
<PAGE>
EXHIBIT 10.4
CONFIDENTIAL TREATMENT
Portions of this Exhibit (Exhibit 10.4) have been omitted pursuant to a request
for confidential treatment filed with the Securities and Exchange Commission
(the "Commission"). The omitted portions, which are designated by asterisks
(* * *), were filed separately with the Commission.
Agreement No. R-11268M
Effective Date: November 01, 1998
Agreement No. R11268M
between
BELLSOUTH TELECOMMUNICATIONS, INC.
and
INNOTRAC CORPORATION
BELLSOUTH TELECOMMUNICATIONS, INC., a(n) Georgia corporation ("Company"), and
INNOTRAC CORPORATION, a(n) GA corporation ("Supplier"), enter into this
Agreement No. R-11268M ("Agreement") effective November 01, 1998.
The parties hereby agree that all the terms and conditions attached hereto are
fully incorporated herein by this reference.
IN WITNESS WHEREOF, the parties have, manually or by electronic signature,
executed this Agreement by their duly authorized representatives in one or more
counterparts, each of which shall constitute an original, on the effective date
specified above.
INNOTRAC CORPORATION BELLSOUTH
TELECOMMUNICATIONS, INC.
By: /s/S Dorfman By: * * *
------------------------------- ------------------------------
(Authorized Signature) (Authorized Signature)
Name: Scott Dorfman Name: * * *
----------------------------- ----------------------------
(Print or Type) (Print or Type)
Title: President Title: * * *
---------------------------- ---------------------------
<PAGE>
Purchase Agreement For Services
BellSouth Telecommunications, Inc.
This Purchase Agreement for Services (hereafter "Agreement") is made by and
between BellSouth Telecommunications, Inc., a Georgia corporation, (hereafter
"Company") located at 675 W. Peachtree Street NE, Atlanta, GA 30375, and
Innotrac Corporation, a Georgia corporation, (hereafter "Supplier") located at
6655 Sugarloaf Parkway, Duluth, GA 30097, and shall supersede and replace the
"Equipment Negotiation and Referral" agreement dated May 1, 1995.
1. TERM OF AGREEMENT
The initial term of this Agreement shall commence and be effective on
October 1, 1998. It shall continue in effect thereafter through September
30, 2003 , inclusive, except as otherwise provided herein. This Agreement
shall continue in effect as specified herein unless: Company terminates,
with or without cause, at any time upon at least One hundred and twenty
(120) days prior written notice to Supplier, as provided herein; or either
party cancels pursuant to the terms hereof, upon the other's breach.
2. SCOPE OF AGREEMENT
This Agreement contemplates Supplier's procurement, sale or rental, and the
fulfillment of sales or rentals of telecommunications related customer
premises equipment (CPE) and other Services, as defined herein or in
subsequent Letter Purchase Orders (LPO's), as ordered by Company and
Company's customers. All transactions between Company and Supplier during
the term of this Agreement shall be covered by this Agreement and any
applicable Letter Purchase Order, as defined herein, unless the parties
agree otherwise in writing.
3. TERMS AND CONDITIONS
The terms and conditions applicable to this Agreement shall be those stated
within this Agreement and shall include those terms and conditions
contained in Appendices A, B, C, D, and E.
4. SERVICES AND PRICE
"Services" as used herein shall mean the Sales and Fulfillment Services
listed in Appendix B, which may be ordered hereunder. Prices for Services
and/or equipment ordered, including any applicable discount schedules,
shall be as shown in Appendix C and/or in subsequent LPO's.
<PAGE>
5. MATERIAL
"Material" as used herein shall mean telecommunications related customer
premise equipment (CPE).
6. TERMS OF PAYMENT
Terms of Payment shall be as described in Appendix C.
Company may withhold payment for non-conforming and/or non-complying
Services or Material.
7. NOTICES
Except as otherwise provided herein, any notices or demands that are
required by law or under the terms of this Agreement shall be given or made
by Supplier or Company in writing and shall be given by hand delivery,
facsimile, telegram or similar communication, or by certified or registered
mail, and addressed to the respective parties set forth in Appendix A,
Paragraph 27 NOTICES. In the case of facsimile, telegram or similar
communication, the receiving party shall consider such notices given when
sent, and in the case of certified or registered mail, when deposited in
the United States mail with postage prepaid.
8. INCORPORATION BY REFERENCE
The terms and conditions contained in Appendices A through E, referred to
in this Agreement and attached hereto, are integral parts of this Agreement
and are fully incorporated herein by this reference.
<PAGE>
TERMS AND CONDITIONS
APPENDIX A
1. AFFILIATED COMPANIES
BellSouth Corporation or any company which BellSouth Corporation owns,
directly or indirectly, in whole or in part, shall constitute an affiliated
company ("Affiliated Company(ies)"). Any Affiliated Company may place
Orders under this Agreement. All references to "Company" in this Agreement
apply to the Affiliated Company placing an Order. The terms and conditions
of this Agreement apply to such Orders. The Affiliated Company placing the
Order becomes "Company" for any Order it places. Each Order constitutes a
separate, distinct and independent contract between Supplier and the
Company placing the Order. Each Company bears sole responsibility and
liability for meeting the obligations of any Order such Company may place.
2. ASSIGNMENT BY COMPANY
Company may assign this Agreement and its rights and may delegate its
duties under this Agreement either in whole or in part, at any time and
without Supplier's consent, to any present or future Affiliated Company or
successor company of Company; provided, however, Company must assure that
its assignee has the ability to perform Company's responsibilities under
this Agreement. Company shall give Supplier written notice of such
assignment or delegation. The assignment shall not affect nor diminish any
rights or duties that Supplier or Company may then or thereafter have as to
Services, material, or software ordered by Company before the effective
date of the assignment. Written notice to the Supplier releases and
discharges Company, to the extent of the assignment, from all further
duties under this Agreement, except with respect to Services, material, or
software that Company ordered before the effective date of the assignment.
3. ASSIGNMENT BY SUPPLIER
Supplier must have Company's written consent before Supplier assigns or
otherwise delegates any work it is to perform under this Agreement, in
whole or in part, or assigns any of its rights, interests or obligations
hereunder. Supplier shall deliver to Company written notice of Supplier's
intent to assign, at least thirty (30) days before assignment. Company
shall consider void any assignment to which it has not consented, except
where Supplier assigns its rights to receive monies pursuant to this
Agreement. In such case, Supplier only needs to notify Company in writing.
However, Supplier cannot assign monies due if Supplier tries to transfer to
the assignee any of Supplier's other rights or obligations hereunder.
Supplier shall not make an assignment that prevents Company from dealing
solely and directly with
<PAGE>
Supplier on all matters pertaining to this Agreement. Such matters include
amending this Agreement and/or settling amounts due either party by the
other hereunder.
4. BANKRUPTCY
In addition to all other rights or remedies provided for in this Agreement
or by law, Company may immediately cancel this Agreement if:
a) Supplier becomes insolvent or makes a general assignment for the
benefit of creditors;
b) Supplier admits in writing the inability to pay debts as they mature;
c) Any court appoints a trustee or receiver with respect to Supplier or
any substantial part of Supplier's assets; or
d) An action is taken by or against Supplier under any bankruptcy or
insolvency laws or laws relating to the relief of debtors, including
the Federal Bankruptcy Act.
5. COMPANY'S INFORMATION
Scope of Company's Information
Supplier acknowledges that Supplier may acquire information and material
that is the Company's confidential, proprietary or trade secret
information. As used herein, "Company's Information" includes, but is not
limited to, all information and documents disclosed by the Company, whether
written or oral, in the course of this Agreement or in contemplation hereof
including, without limitation, all Specifications, drawings, sketches,
schematics, models, samples, tools, algorithms, technical or business
information, research and development, production and engineering
processes, costs, profit and margin information, Company lists, marketing,
production and future business plans.
Use of Company's Information
Supplier agrees to take all steps reasonably necessary to hold in trust and
confidence the Company's Information. Supplier hereby agrees to hold
Company's Information in strict confidence, not to disclose it to third
parties or to use it, in any way, commercially or otherwise, other than as
permitted under this Agreement. Supplier will limit the disclosure of the
Company's Information to employees with a need to know who: (i) have been
advised of the proprietary nature thereof; and (ii) have acknowledged the
express obligation to maintain such confidentiality. Supplier's
obligations set forth herein shall remain in effect for two (2) years from
the receipt of Company's Information considered or deemed to be
confidential information, but such obligation of confidentiality will not
expire for Company's Information considered or deemed to be a trade secret
under applicable law.
Exceptions
Notwithstanding the other provisions of this Agreement, nothing received by
Supplier from Company will be considered to be Company's Information if:
(i) it has been
<PAGE>
published or is otherwise available to the public other than by a breach of
this Agreement; (ii) it has been rightfully and lawfully received by
Supplier from a third party without confidential limitations; (iii) it has
been independently developed by Supplier by personnel having no access to
Company's Information; (iv) it was known by Supplier prior to its first
receipt from Company; (v) it is hereafter disclosed by Company without
restriction on further disclosure; or (vi) it is disclosed pursuant to a
court order, subpoena or by operation of law, provided Supplier has given
Company prior advance written notice in order that Company may attempt to
obtain a protective order limiting disclosure and use of the information
disclosed.
Supplier hereby agrees that every individual person including but not
limited to employees, sub-contractors, agents, representatives and other
third parties who perform under this Agreement shall execute the
appropriate documents to undertake obligations of confidentiality
consistent with the terms set forth herein. Supplier hereby agrees to
provide evidence of such duly executed documents to Company upon request.
6. CHOICE OF LAW/VENUE
The laws of the State of Georgia shall govern the validity, construction,
interpretation, and performance of this Agreement. The jurisdictional
venue for any legal proceedings involving this Agreement shall be held in
any applicable local, state or federal court located within the State of
Georgia.
7. COMPLIANCE WITH LAWS
Supplier shall comply with all applicable federal, state, county and local
laws, orders, rules, ordinances, regulations and codes, applicable to
Suppliers provision of Services hereunder, including, but not limited to,
Supplier's obligations as an employer regarding the health, safety and
payment of its employees. Supplier's compliance shall also include
identifying and procuring the required permits, certificates, approvals,
and inspections in Supplier's performance under this Agreement.
Notwithstanding whether a specification is furnished under this Agreement,
Supplier shall comply with all FCC rules pertaining to Customer Proprietary
Network Information ("CPNI") as well as all applicable laws regarding the
construction, packaging, labeling, and registration of Services, material,
software or containers. Supplier shall indemnify, defend and hold Company
harmless against any claim, loss, liability, cost or damage sustained
because of Supplier's noncompliance. Notwithstanding any of the foregoing,
Supplier shall not be required to obtain registrations, permits, approvals,
inspections or otherwise comply with laws, orders, rules, ordinances,
regulations and/or codes applicable to processes handled by persons or
entities other than Supplier.
<PAGE>
8. CONFLICT OF INTEREST
Supplier acknowledges it has received Company's "Position Statement," as
contained in the attached applicable appendix. Supplier further stipulates
that it has not employed, retained, induced, or directed any of Company's
officers or employees to solicit or secure this Agreement by means of an
agreement, offer, understanding, or implication involving any form of
remuneration. Supplier agrees that if Company alleges that a violation
exists hereof, Supplier will cooperate in every reasonable manner with
Company in establishing whether the allegation is true. If such a
violation has occurred and Company considers it material, Company may
cancel this Agreement.
9. DEFAULT
If Supplier breaches or defaults on any of the terms, conditions, or
covenants of this Agreement or any Order(s), Company shall give Supplier
written notice of such breach or default ("Breach Notice"). If , by the
10th working day following receipt of a Breach Notice, Supplier does not
demonstrate, to Company's reasonable satisfaction, that Supplier has
implemented efforts to cure such breach or default, then in addition to all
other rights and remedies of law or equity or otherwise, Company may cancel
this Agreement or any such Order(s) without any charge, obligation, or
liability whatsoever, except for payment of Services, material and/or
software already ordered and being processed; provided, however, if
Supplier has implemented efforts to cure such breach or default within the
said 10 working days and such breach or default cannot be completely cured
within said period, then the cure period may be extended, at the Company's
discretion, day-to-day for a period of up to thirty (30) additional
calendar days.
10. ENVIRONMENTAL COMPLIANCE
Supplier hereby warrants and certifies that Supplier's performance under
this Agreement, the Services rendered and/or material supplied by Supplier,
its agents, or Sub-contractors hereunder shall conform and comply with all
applicable laws regarding the packaging, handling, use, storage,
processing, transportation, treatment and/or disposal of material or other
items which are, or contain, hazardous or toxic wastes, substances or
materials (collectively called "Hazardous Material"). Supplier shall
advise Company how to use and dispose of Hazardous Material bought under
this Agreement.
Supplier shall obtain all required licenses, permits, and authorizations
from all applicable government agencies that have, or may assert,
jurisdiction over any aspects of Supplier's performance hereunder,
including the performance of its employees, agents, or sub-contractors.
Supplier shall notify Company at least thirty (30) days before shipping
Hazardous Material. Supplier shall mark each self-contained unit and
<PAGE>
carrier identifying the existence of a Hazardous Material or substance and
its name. Notwithstanding the section entitled "TERMINATION FOR
---------------
CONVENIENCE", if applicable, Company may terminate an Order for Hazardous
-----------
Material within thirty (30) days after such notification from Supplier
without any liability to Company whatsoever.
Supplier must include a Material Safety Data Sheet ("MSDS"), Occupational
Safety and Health Act ("OSHA") Form 174 as revised, with all shipments that
contain Hazardous Material as specified in Department of Transportation
Title 49 and OSHA Standards.
Supplier shall indemnify, defend and hold Company harmless from any
violation or breach of the terms of this section. Such indemnity
obligation shall survive the termination of this Agreement.
The provisions of this section shall apply only to the extent that
manufacturing, packaging, handling, use, storage, processing,
transportation, treatment, disposal and/or other such activities are
processes generated or handled by Supplier. Nothing in this section shall
require Supplier to conform or comply with laws, or to obtain licenses,
permits or other approvals, with respect to manufacturing, packaging,
handling, use, storage processing, transportation, treatment, disposal
and/or other such processes and activities not generated or handled by
Supplier.
11. FACILITY RULES AND GOVERNMENT CLEARANCE
Both parties' employees and representatives shall comply with all internal
rules and regulations while on each other's premises. If required by
Government regulations, such compliance shall include submission of a
satisfactory clearance from the U. S. Department of Defense and other
concerned federal authorities.
12. FORCE MAJEURE
Neither party shall be responsible for any delay or failure in performing
any part of this Agreement when it is caused by fire, flood, explosion,
war, strike, embargo, government requirement, civil or military authority,
act of God, act or omission of carriers or other similar causes beyond its
control (collectively called "Condition"). If any such Condition occurs,
the party delayed or unable to perform shall give immediate notice to the
other party. The party affected by the other's delay or inability to
perform may elect to:
a) Terminate this Agreement or part thereof as to Services, material
and/or software not already received; or
b) Suspend this Agreement for the duration of the Condition, buy or sell
elsewhere Services, material and/or software comparable to those to be
obtained under this
<PAGE>
Agreement, and deduct from any Supplier commitment the quantity bought
or committed to with other suppliers; or
c) Resume performance of this Agreement once the Condition ceases, with an
option in the affected party to extend the period of this Agreement up
to the length of time the Condition endured; or
d) If the affected party does not notify the other in writing within
thirty (30) days after the affected party receives notice of the
Condition from the party unable to perform, then Option 2. shall apply.
13. INDEMNITY
Supplier agrees to indemnify and hold Company harmless from any and all
liabilities, causes of action, lawsuits, penalties, claims or demands
(including the costs, expenses and reasonable attorneys' fees on account
thereof) that may be made by:
a) Anyone for injuries of any kind, including but not limited to personal
injury, death, property damage and theft, resulting from Supplier's
negligent or willful acts or omissions or those of persons furnished by
Supplier, its agents or sub-contractors or resulting from the use of
Supplier's Services, material, or software furnished hereunder or
resulting from Supplier's failure to perform its obligations hereunder;
b) Any of either Supplier's, its agent's or sub-contractor's employees or
former employees for which the Supplier's, its agents' or sub-
contractors' liability to such employee or former employee would
otherwise be subject to payments under the state Worker's Compensation
laws or an Employer's Liability policy, premises liability principles
or any other law or form of legal duty or obligation; and
c) Either Supplier's, its agent's or sub-contractor's employees or former
employees, including applicants at Company's job site, for any and all
claims arising out of the employment relationship with respect to
performing under this Agreement. This includes, but is not limited to,
employment discrimination charges and actions arising under Title VII
of The Civil Rights Act of 1964, as amended; The Equal Pay Act; The Age
Discrimination in Employment Act, as amended; The Rehabilitation Act;
The Americans with Disabilities Act; The Fair Labor Standards Act; The
National Labor Relations Act; and any other applicable law.
Supplier, at its own expense, shall defend Company, at Company's request,
against any such liability, cause of action, penalty, claim, demand,
administrative proceeding or lawsuit, including any in which Company is
named as an "employer" or "joint employer" with Supplier. Company shall
notify Supplier promptly of any written claims or demands against Company
for which Supplier is responsible hereunder.
The foregoing indemnity shall be in addition to any other indemnity
obligations of Supplier set forth in this Agreement.
<PAGE>
14. INDEPENDENT CONTRACTOR
Supplier shall perform all work in connection with the Services, material
or software described in the Agreement as an independent contractor and not
as the agent or employee of Company. All persons furnished by Supplier
shall be for all purposes solely the Supplier's employees or agents and
shall not be deemed to be employees of Company for any purpose whatsoever.
Supplier shall furnish, employ, and have exclusive control of all persons
to be engaged in performing Services under this Agreement and shall
prescribe and control the means and methods of performing such Services by
providing adequate and proper supervision. Supplier shall be solely
responsible for compliance with all rules, laws, and regulations relating
to employment of labor, hours of labor, working conditions, payment of
wages, and payment of taxes, such as employment, social security, and other
payroll taxes, including applicable contributions from such person when
required by law. Supplier shall not subcontract work to be performed
without Company's prior written permission.
15. INSPECTION
At its option, Company may inspect Services. If Company so chooses, then
Company, Company's authorized agents and/or representatives shall inspect
the Services (including material and software) according to Company's
quality assurance specifications. This reference hereby incorporates those
specifications into this Agreement. Company's inspection or failure to
inspect on any occasion shall not affect Company's rights or Supplier's
obligations under warranty or other provisions of this Agreement.
Company's inspection shall not constitute acceptance of Services.
Company or Company's authorized agents or representatives may perform on-
site audits of Supplier's or Supplier's authorized agents' or
representatives' quality systems. These audits will follow the appropriate
Bellcore Technical Reference TR-NWT-001252, "Quality System Generic
Requirements For Hardware" or TR-TSY-000179, "Software Quality Program
Generic Requirements." Company, at its option, may determine, arrange and
conduct other ways to ensure quality compliance.
16. INSURANCE
During the term of this Agreement, Supplier shall maintain all insurance
and/or bonds required by law or this Agreement, including but not limited
to the following:
a) Adequate Worker's Compensation and related insurance required by
Company and prescribed by the law of any state in which the work is to
be performed;
b) Employer's liability insurance with limits of at least $1,000,000 for
each occurrence; and
c) Commercial general liability insurance, including contractual
liability, products liability and completed operations coverage, and if
applicable, comprehensive
<PAGE>
motor vehicle liability insurance. Each shall have limits of at least
$1,000,000 for bodily injury, including death, to any one person,
$1,000,000 as a result of any one occurrence, and $1,000,000 for each
occurrence of property damage.
Supplier shall also require its agents or sub-contractors, if any, who may
enter upon Company's premises to maintain the same insurance coverage
required herein. All required insurance policies shall contain a provision
stating Company's name and address and shall require insurer to notify
Company in writing at least thirty (30) days prior to cancellation of, or
any material change in, the policy. All commercial general liability
policies required herein shall name the Company as an additional insured
with respect to work performed under this Agreement. Before starting work
and upon renewing each coverage required herein, Supplier shall furnish
Company with all certificates and/or adequate proof of the foregoing
insurance.
In addition, Supplier shall maintain all policies required herein with
insurers acceptable to the Company. Company may disallow coverage from any
insurer that does not maintain a rating from A.M. Best Company of B+ X or
higher.
17. LETTER PURCHASE ORDERS
This Agreement contemplates the future execution by Company and Supplier of
one or more written Letter Purchase Order(s) ("LPO[s]"). Both parties
shall execute each LPO. This Agreement and any applicable LPO(s) shall
cover all transactions between Company and Supplier during the term of this
Agreement unless the parties agree otherwise in writing.
Upon its execution, the parties shall deem each properly executed LPO to be
incorporated into this Agreement. If the LPO conflicts with the terms and
conditions of this Agreement, the terms and conditions of this Agreement
shall control unless the parties otherwise agree via a "Special
Considerations" section of the LPO.
Supplier will furnish consultant, professional or other Services to Company
as specified in LPOs. Each LPO, at a minimum, shall specify the
information outlined below:
a) A reference to this Agreement and a unique identifying number assigned
by Company's Contact;
b) A detailed description of the Services Supplier shall perform;
c) A statement defining all deliverables and their associated due dates;
d) Company and Supplier's contact names, addresses and telephone numbers;
e) A list of expenses authorized for reimbursement by Company, and an
explanation for each item;
f) The maximum total expenditure authorized, meaning either (a) the total
dollar amount authorized under the LPO, or (b) the total time limit
for completing the project under the LPO;
<PAGE>
g) A statement defining the beginning and ending dates for the work to be
performed;
h) Invoicing instructions;
i) Signatures of representatives authorized by Company and Supplier to
execute the LPO; and
j) Special Considerations, if appropriate.
Company, without prejudice to any right or remedy on account of any failure
of Supplier to perform its obligations under this Agreement, may at any
time terminate the performance of the work under any LPO, in whole or in
part, by written notice to Supplier specifying the extent to which the
performance of the work is terminated and the date upon which such
termination becomes effective. If Company terminates an LPO for other than
the Supplier's failure to perform its obligations under the LPO, Company
shall then pay Supplier for Services rendered prior to the effective date
of termination and for expenses properly reimbursable under the LPO,
provided, however, that the payment of any such amounts shall be subject to
any provision for the limit of expenditures set forth in the LPO.
Company's payment of such amounts shall be in full settlement of any and
all claims of Supplier of every description, including profit.
If Company terminates an LPO issued hereunder, affected Company property
and work in Supplier's possession shall be forwarded promptly to Company.
18. LICENSES
Except as otherwise provided in this Agreement, Company grants no licenses
to Supplier under any patents, copyrights, trademarks, trade secrets or any
other intellectual property, expressed or implied.
19. NONDISCRIMINATION COMPLIANCE
Supplier agrees to comply with the applicable provisions of the
"NONDISCRIMINATION COMPLIANCE AGREEMENT" set forth in the attached
Appendix D.
20. NON-EXCLUSIVE RIGHTS
This Agreement does not grant Supplier an exclusive privilege to sell to
Company any or all Services or Material that Company may require,
specifically including fulfillment services. Company, at its option, may
purchase comparable products and services from other manufacturers or
suppliers. In addition, Company, at its sole discretion, shall determine
the extent of Company's efforts to market, advertise, promote, or support
the Services or Material.
<PAGE>
21. NON-WAIVER
No waiver or failure to exercise any option, right or privilege under the
terms of this Agreement on any occasion or occasions shall be construed to
be a waiver of the same or any other option, right, or privilege on any
other occasion.
22. PATENT AND OTHER PROPRIETARY RIGHTS INFRINGEMENT
Supplier shall indemnify, defend and hold Company harmless, at Supplier's
expense, against any claim, suit or proceeding brought against Company
resulting from, relating to or arising out of a claim that any use of the
Services, material and/or software constitutes an infringement of a patent,
copyright, trademark, trade secret or other proprietary right of a third
party. Supplier will also pay any costs including, without limitation,
reasonable attorneys' fees, expenses or damages awarded to third parties or
incurred by Company. Supplier may settle, at Supplier's sole expense, any
claim, suit or other action against Company for which Supplier is
responsible under this section provided that such settlement shall not
limit, unduly interfere or otherwise adversely affect the rights granted to
Company or Supplier's obligations under this Agreement. Company shall
notify Supplier of any claim of infringement for which Supplier is
responsible and shall provide Supplier with reasonable assistance in the
defense of any such claim. Company reserves the right to employ counsel at
its own expense and participate in the defense of any claim.
Upon notice of an alleged infringement or if in Supplier's opinion such a
claim is likely, or if Company's rights hereunder are restricted by a valid
court order, then Supplier shall at its option and sole expense: (i)
procure the right to continue using the alleged infringing material; (ii)
replace the material with non-infringing material which is equivalent in
features, functionality and quality; or (iii) modify the material to make
it non-infringing while retaining all features, functionality and quality.
23. PUBLICITY
Supplier agrees to submit to Company all advertisements, sales promotions,
press releases, and other publicity matters relating to this Agreement or
mentioning or implying the trade names, logos, trademarks or service marks
(collectively called "Marks") of BellSouth Corporation and/or any of its
Affiliated Companies or language from which the connection of said Marks
therewith may be inferred or implied, or mentioning or implying the names
of any personnel of BellSouth Corporation and/or any of its Affiliated
Companies. Supplier further agrees not to publish or use such
advertisements, sales promotions, press releases, or publicity matters
without Company's prior written consent. Notwithstanding the foregoing,
Company hereby consents to Supplier's appropriate use of the Marks in
connection with legally required reporting disclosures.
<PAGE>
24. RECORDS AND AUDITS
Supplier shall maintain complete and accurate records of all amounts
billable to and payments Company makes under this Agreement following
generally accepted commercial accounting practices. Whenever applicable,
Supplier shall also maintain records, including but not limited to, the
following:
a) Costs Company pays for Services, material and/or software provided
hereunder;
b) Direct labor employee hours for which Supplier computes payment under
this Agreement on the basis of actual hours worked at a fixed rate per
hour;
c) Costs incurred which may affect re-determination or revision of prices
or ultimate termination costs;
d) Costs incurred which may affect the termination charges Company is
expected to pay;
e) Costs Supplier incurs for any required tooling which may affect re-
determination of price; and
f) Records concerning any physical inventories.
Supplier shall keep such records for at least three (3) years after
Company's final payment for Services, material and/or software covered by
this Agreement. Supplier shall provide to Company reasonable supporting
documentation concerning any disputed invoice amount within thirty (30)
days after Company notifies Supplier of the dispute in writing.
Company and its authorized agents and representatives may audit such
records during the respective periods in which Supplier is required to
maintain such records. Company may access such records on Supplier's
premises, inspect and photocopy same, and retain copies of such records
away from Supplier's premises with appropriate safeguards as Company in its
sole discretion may deem necessary. Company shall also have such above-
described auditing rights with respect to Supplier's agents, Suppliers, or
sub-contractors.
Supplier shall keep and make such records readily available for such audit
to determine the correctness of Supplier's billing. All payments, if any,
Company makes shall be subject to final adjustments as determined by such
audit(s). Audit(s) to determine costs and the payment of such costs shall
occur no later than three (3) years after Company presents such claim.
Supplier shall adjust its billing according to the audit results.
25. RELEASES VOID
Neither party shall require waivers or releases of any personal rights from
representatives of the other when visiting Supplier's and Company's
respective premises. Neither party shall require any representative of the
other party to sign a
<PAGE>
personal nondisclosure agreement. Supplier, Company, or any third party
shall not plead any such releases or waivers in any action or proceeding.
26. REPRESENTATIVES
All Services that Supplier performs and material and/or software that
Supplier furnishes under this Agreement are subject to contract
administration activities by Company's Representative(s). Such activities
include, but are not limited to, monitoring supplier performance, Agreement
interpretation and amendment, maintenance of Agreement information in
Company's database, inspecting and accepting work performed, verifying work
completion, and validating charges rendered on Supplier's invoices. In
addition to or instead of Company's Representative, contract administration
activities may be performed by the individual(s) designated as Company's
Delegate, or others as may be delegated by Company in writing.
Company's Representative shall be the Director - Consumer Services.
Company's Delegate shall be the Manager - Consumer Services.
27. NOTICES
All notices from either party to the other shall be delivered either
personally or by first-class, pre-paid U.S. mail or overnight mail. Notice
to either party shall be sent to the respective address as set forth in the
Agreement, unless written notice of a change of address shall have been
previously given by either party. In addition, a copy of any changes in
address for notices and any notices of termination or any claimed default
by BellSouth shall be contemporaneously given to counsel for BellSouth at
the following address:
BellSouth Telecommunications, Inc.
4300 BellSouth Center
675 W. Peachtree St., N. E.
Atlanta, GA 30375
Attn: * * *
BellSouth Telecommunications, Inc.
32A - BellSouth Center
675 W. Peachtree Street NE
Atlanta, GA 30375
Attn. * * *
Innotrac Corporation
6655 Sugarloaf Parkway
Duluth, GA 30097
Attn. Mr. Scott Dorfman - President
<PAGE>
28. SECTION HEADINGS
The section headings used in this Agreement are for convenience only and do
not affect the meaning or interpretation of this Agreement.
29. SUPPLIER'S INFORMATION
Scope of Supplier's Information
Company acknowledges that Supplier may need to provide Company with certain
information and material that is the Supplier's confidential, proprietary
or trade secret information. As used herein, "Supplier's Information" may
include information and documents disclosed by the Supplier in the course
of this Agreement such as by way of example, drawings, sketches,
schematics, models, samples, tools, algorithms, technical or business
information. Supplier shall provide a detailed description of Supplier's
Information in the applicable LPO. All Supplier's Information shall be in
writing or other tangible form and clearly marked with a confidential,
private or proprietary legend. Supplier's Information conveyed orally
shall be designated as proprietary at the time of disclosure and shall be
reduced to writing within ten (10) business days.
Use of Supplier's Information
Company agrees to take all steps reasonably necessary to hold in trust and
confidence Supplier's Information. Company hereby agrees to hold such
Supplier's Information in strict confidence, not to disclose it to third
parties or to use it, in any way, commercially or otherwise, other than as
permitted under this Agreement. Company will limit the disclosure of
Supplier's Information to employees, consultants, agents, contractors,
Affiliated Companies and representatives with a need to know who will not
be considered as "third parties" and who: (i) have been advised of the
proprietary nature thereof; and (ii) have acknowledged the express
obligation to maintain such confidentiality. Company's obligations set
forth herein shall remain in effect for two (2) years from the receipt of
Supplier's Information considered or deemed to be confidential information,
but such obligation of confidentiality will not expire for Supplier's
Information considered or deemed to be a trade secret under applicable law.
Exceptions
Notwithstanding the other provisions of this Agreement, nothing received by
Company from Supplier will be considered to be Supplier's Information if:
(i) it has been published or is otherwise available to the public other
than by a breach of this Agreement; (ii) it has been rightfully and
lawfully received by Company from a third party without confidential
limitations; (iii) it has been independently developed by Company by
personnel having no access to such Supplier's Information; (iv) it was
known by Company prior to its first receipt from Supplier; (v) it is
hereafter disclosed by Supplier without restriction on further disclosure;
or (vi) it is disclosed to any
<PAGE>
governmental agency or court of competent jurisdiction by written order,
subpoena or decree, or by operation of law, provided Company has given
prior notice to Supplier in order that Supplier may attempt to obtain a
protective order limiting disclosure and use of the information disclosed.
30. SUPPLIER OVERDEPENDENCE
Company has no way to know Supplier's dependence on revenues from sales to
Company in proportion to Supplier's revenues from other customers. To
protect Company from a situation in which Supplier is too dependent upon
Company for said sales, Supplier hereby agrees to release and hold Company
harmless from any and all claims and liabilities relating to Supplier's
financial stability, which may result from Company's termination of this
Agreement for any reason whatsoever.
31. SEVERABILITY
If any provision(s) of this Agreement are invalid or unenforceable under
the laws applicable to the entire Agreement, such invalidity or
unenforceability shall not invalidate or render unenforceable the entire
Agreement. Instead, the entire Agreement shall be construed as if not
containing the particular invalid or unenforceable provision(s), and the
rights and obligations of Supplier and Company shall be construed and
enforced accordingly.
32. SPECIFICATIONS
"Specifications" shall mean Supplier's technical data as well as technical
data Company furnishes to Supplier concerning the Services, material and/or
software including without limitation, drawings, sketches, models,
manufacturing level schematics, computer or other apparatus programs, and
descriptions of Services, material and/or software. If applicable, an
attached appendix identifies the Specifications contained in this
Agreement. Upon request, Supplier will provide Company a copy of all such
Specifications at no charge.
33. SURVIVAL OF OBLIGATIONS
Company's and Supplier's respective obligations hereunder which by their
nature would continue beyond the termination, cancellation or expiration of
this Agreement or any Order, shall survive. This includes, by way of
example but not limited to, the obligations provided in the sections
"COMPANY'S INFORMATION"; "DAMAGES"; "INDEMNITY"; "PATENT AND OTHER
PROPRIETARY RIGHTS INFRINGEMENT"; "PUBLICITY"; and "WARRANTY FOR SERVICES",
if applicable, shall survive such termination, cancellation or expiration.
<PAGE>
34. TAX
Supplier shall add to the invoice an amount equal to any applicable taxes,
local, state or federal, however designated, that may be validly levied or
based upon this Agreement or upon the Material and/or Services furnished
hereunder. Taxes excluded and not applicable include:
1. Ad valorem personal property taxes;
2. State and local privilege and excise taxes based on gross revenue;
3. Taxes based on or measured by Supplier's net income; and
4. Any taxes or amounts in lieu thereof paid or payable by Supplier in
respect of the foregoing excluded items.
Supplier shall bill applicable taxes as separate items on Supplier's
invoices and shall not include them in the purchase price. Company may
have Supplier contest with the imposing jurisdiction, at Company's expense,
any such taxes that Company deems are improperly levied.
Supplier must collect all appropriate state and local sales and use taxes
from Company on all sales of taxable tangible personal property and taxable
services. The taxing situs for tangible personal property is the shipped-
to address. Therefore, suppliers that do not have "nexus", the legal
requirement to collect tax in a given state or local taxing jurisdiction,
must, as a result of this Agreement, voluntarily register with all
appropriate state and local taxing jurisdictions and collect and remit all
applicable taxes.
Company shall not pay or otherwise be liable or responsible for any
penalty, additional tax, costs or interest assessed or levied by any taxing
authority resulting from Supplier's failure to file any return, form, or
information statement such taxing authority requires. Supplier hereby
indemnifies, defends and holds Company harmless against any such
requirements.
35. TERMINATION FOR CONVENIENCE
After March 15, 2000, Company may, at any time for its own convenience and
without cause, terminate this Agreement or any Order hereunder in whole or
in part by giving Supplier at least One hundred and twenty (120) days prior
written notice. Unless otherwise specified herein, Company's sole and
exclusive liability to Supplier with respect to such termination shall be
limited to:
1. Supplier's actual cost for all components ordered and accepted by
Company that Supplier cannot use in Supplier's other operations or sell
to Supplier's other customers;
2. Supplier's actual costs in procuring material ordered and accepted by
Company that Supplier cannot use in Supplier's other operations or
cannot sell to Supplier's other customers;
<PAGE>
3. Supplier's actual costs and expenses incurred prior to the termination
date, to the extent that Company would be liable for such costs and
expenses had Company not terminated the Agreement or Order.
In no event, shall the sum of the above costs exceed the full price of the
Services and Material on hand should Company terminate hereunder. At
Company's request, Supplier shall substantiate such costs with proof
satisfactory to Company.
36. WARRANTY FOR SERVICES
Supplier warrants to Company that Supplier shall perform Services under
this Agreement in a good and fully workmanlike manner to Company's
satisfaction and according to the Specifications set forth herein. This
warranty shall survive inspection, test, acceptance, use and payment.
<PAGE>
APPENDIX B
DESCRIPTION OF SERVICES
COMPANY AGREES:
1. To negotiate the installment sale or rental of the appropriate complementary
equipment, when communicating with existing or prospective Network Services
subscribers and refer sales to Supplier for fulfillment of the subscriber's
order. Where such direct negotiation is not feasible, Company's
representatives may offer the subscriber referral to Supplier for the sale
or rental of the appropriate equipment. If the subscribers indicate an
interest in such referral, the Company's representative may on-line transfer
the subscriber or refer the subscriber or prospective subscriber to a
telephone number designated by Supplier.
2. To sell or rent of an average of * * * units of CPE per month and refer
those sales and rentals to Supplier, for fulfillment in a timely manner. The
commitment of * * * units per month shall be computed on a six month rolling
average. There shall be no penalty to Company for not meeting the * * *
amount, provided all such sales and/or rentals for the non-complying month
were referred to Supplier. In any event the penalty assessed to Company for
non-compliance shall not exceed the lesser of; 1) the difference between the
actual number of units sold and the number of units referred to Supplier or;
2) the difference between the number of units referred to Supplier and * * *
units.
3. To provide Supplier with minimum training standards, in writing, detailing
function and capability of each piece of equipment to be handled by
Supplier, materials and other assistance as is necessary to assist Supplier
to adequately train its telemarketing specialists.
4. To designate and approve manufacturers and distributors of equipment,
without any liability for the performance of said manufacturer or
distributor, to be sold by Supplier. Company will assist Supplier in
obtaining the equipment at a price per unit comparing favorably to the price
being offered to other purchasers of like equipment, taking into
consideration volume discounts. Company shall use its best efforts to assist
Supplier in its efforts to obtain, in a timely manner, adequate quantities
of equipment to fulfill its obligations to Company under this Agreement.
5. To have the selected equipment tested by an independent laboratory to ensure
that it works properly and is reasonably suited for its intended purpose.
6. To authorize Supplier to use the BellSouth Telecommunications name, the
BellSouth brand, trademark and/or logo (Marks) associated with the
equipment, solely in conjunction with the marketing, sale and/or rental of
said equipment. Supplier shall comply with all graphic standards for the
Marks which may furnished from time to time, and shall place appropriate
trademark notices on the Marks as instructed. Any
<PAGE>
use of the Marks which is not authorized herein or by an authorized
representative of Company is strictly prohibited. During the term of this
Agreement, Supplier's employees will be permitted to answer calls from
referred subscribers with the phrase "BellSouth Phones". Supplier may not
use, publish or advertise in any manner an alphabetic or alpha-numeric
equivalent of an in-bound toll free phone number, including but not limited
to 1-800-XXX-XXXX.
7. To purchase from Supplier and assume ownership/title of the equipment upon
receipt of said equipment by customer and to bill customers within the
Company's service area via USOC billing procedures as outlined in Appendix
C. Company also assumes risk of "bad debt" upon receipt of equipment by
customers within its service area.
8. To compensate Supplier for equipment ordered and received by customers who
are billed via the USOC procedures, as provided for in Appendix C.
9. To assist Supplier in developing forecasts of sales, rentals and incoming
calls to Supplier's call centers.
SUPPLIER AGREES:
1. To accept toll-free telephone calls between the hours of 8:00 a.m. and 12:00
a.m. Eastern time, Monday through Friday and from 9:00 a.m. and 6:00 p.m. on
Saturdays, except on Company recognized holidays, from subscribers and
prospective subscribers who are on-line transferred, or referred by the
Company's service representative, as provided herein. The forgoing hours may
be modified by mutual agreement of the parties.
2. To train, to the reasonable satisfaction of Company, all of its Call Center
and Customer Service telemarketing specialists who will be handling all
forms of inquiries from Company's subscribers and prospective subscribers.
These inquiries include, but are not limited to, referrals and sales,
product function, installation, billing delivery and return. Training shall
be of sufficient duration and detail to enable the telemarketing specialist
to accurately and fully understand the function of all equipment; to assist
Company's subscriber in troubleshooting; to assist with billing; to assist
with product delivery inquiries; and to assist with product returns. All
costs of such training will be borne by Supplier. A maximum of two of
Company's employees shall be allowed to observe any and all training to
ensure accuracy and completeness of training.
3. To make all reasonable efforts to ensure that all subscriber calls
transferred or referred to Supplier, as well as all subsequent customer
service calls associated with Company's subscribers are handled in a prompt,
helpful and courteous manner. Company may, at its own discretion and without
advance notice, place test calls, visit Supplier's premises, observe the
handling of calls from subscribers, assess the courtesy, knowledge and
promptness of Supplier's telemarketing specialists and discuss the results
of such
<PAGE>
activities with Supplier's management. Supplier agrees to remove from the
work group that handles Company's subscriber calls any telemarketing
specialist who does not perform to a level of courtesy, promptness and
knowledge reasonably satisfactory to Company. Supplier shall place signs in
conspicuous places in the workplace notifying its employees that calls taken
by telemarketing specialists are subject to periodic monitoring for quality
control purposes.
4. To use its best efforts to maintain a monthly average of answering * * *% of
customer calls in * * * seconds or less and to maintain an abandon rate of
* * *% or less. Failure to maintain the preceding answer and abandon rate
for a period of three consecutive months shall constitute a breach of this
Agreement; provided, however, Supplier's inability to meet the monthly
average due to unexpected causes beyond Supplier's control, shall not give
rise to a claim of breach by Company.
5. To keep in service, solely at its own expense, sufficient telecommunication
facilities dedicated to answering customer calls, including but not limited
to toll-free lines and telephone sets, to ensure adequate access to
Suppliers Sales and Call Centers as described herein. If, at any time, the
incoming subscriber calls become too numerous to be handled, (on a recurring
basis) by the available facilities and/or telemarketing specialists
allocated by Supplier, Supplier agrees to increase the number of facilities
or telemarketing specialists to handle the increased volume of calls. When
all telecommunications facilities and/or telemarketing specialists become
busy and incoming calls encounter a busy or hold condition, Supplier shall
be permitted to make commitments to call subscribers back within four (4)
working hours of the time the subscriber's call was originally received by
Supplier.
6. To purchase and own the inventory of equipment that it sells and/or rents to
subscribers and will maintain any inventory adequate to fill orders, placed
by subscribers, within the time frames described in item 10, herein. All
equipment supplied under this Agreement shall be BellSouth branded
equipment, approved by Company and purchased only from distributors
designated by Company and authorized by Company to use its trademarks,
brands and/or logo. No equipment, material or product acquired in any manner
from any other sources, supplier, distributor or manufacturer may be
advertised, marketed, promoted or sold in any way to Company's subscribers
without the prior written consent of Company.
7. To not sell any equipment, material or product to a third party for resale,
unless Supplier, at its own expense, removes or has removed the BellSouth
trademark, brand or logo prior to the sale of said equipment, material or
product.
8. To handle all necessary communications with subscribers, following the
negotiation of sale or referral by Company, including but not limited to
post sale calls in connection with the sale or rental of the equipment.
Supplier shall provide the equipment to subscribers on an "as-ordered" basis
only.
<PAGE>
9. To collect payment for all equipment sold to customers who reside outside
the Company's service area or may desire to make direct payment for
purchased equipment. Supplier may accept personal checks or credit cards
from customers. Supplier shall be responsible for collecting and remitting
the appropriate sales tax, as required by applicable laws on such sales.
10. To ship all credit card and USOC billing orders within two (2) working days
of the order being received by Supplier; and within five (5) working days
of receipt of the subscriber's personal check. Supplier shall provide
Company with monthly reports of all sales and shipping activity as required
by Company, in a mutually agreed format.
11. Acknowledge the value of, the popularity of, and the good will associated
with the Company's Marks and that said good will is a property right
belonging to Company. Supplier also acknowledges that the Company is the
owner of all trademark and other rights in said Marks worldwide. Supplier
recognizes that nothing contained in this Agreement is intended as an
assignment or grant to Supplier of any right, title or interest in or to
said Marks or to any other marks of Company or the good will attached
thereto. Any use of the Marks shall inure to the benefit of and be on
behalf of Company and its Affiliated Companies, except Supplier may use and
receive the benefit of the Marks as provided in this Agreement. Supplier
further recognizes that this Agreement does not confer any right on
Supplier to use the Marks in any manner outside of the United States, or to
grant sub-licenses, and is not assignable. Supplier will do nothing
inconsistent with Company's ownership of the Marks. Supplier acknowledges
that in the event, after a thirty (30) day notice has been issued to
Supplier and Supplier remains in breach of these terms and continues to act
in any manner which materially and negatively impacts on the reputation of
Company, its Marks or its Affiliated Companies, Company shall have the
right to, (i) bring an action against Supplier at law or in equity to
protect the Marks and to recover damages as the result of any misuse or
unauthorized use thereof and/or; (ii) terminate this Agreement for any such
misuse or unauthorized use by Supplier.
12. Upon termination, cancellation or expiration of this Agreement, to (i)
cease answering calls with the phrase "BellSouth Phones"; (ii) cease any
uses of the Marks, and; (iii) cease its use of all materials and other
tangible items bearing the Marks. Supplier shall certify compliance with
this paragraph in writing to Company within thirty (30) days of the
expiration, termination or cancellation date. Upon expiration, termination
or cancellation of this Agreement, Supplier will be allowed to sell and/or
rent the remaining equipment in its possession independently of this
Agreement so long as the Marks used on or in connection with the sale
and/or rental of the equipment are either (i) removed or (ii) comply with
the graphic standards set forth in this Agreement.
13. Expend consideration, in amounts and forms to be mutually agreed upon,
promoting the ongoing sales of said equipment. This promotion may take the
form of additional
<PAGE>
training or manufacturer's incentives for Company's customer service
representatives or printed media advertising upon approval by Company
representative.
14. To compensate Company under the "Part X" compensation plan as described in
Appendix C, for the direct negotiation and/or referral of equipment
rentals.
15. To compensate Company for all CPE units sold via credit card or direct
payment as described in Appendix C "Credit Card Sales".
16. To accept returned merchandise under the "Thirty Day - Try and Buy" program
and credit Company for said returns. The process for handling such returns
shall be mutually agreed upon by Company and Supplier representatives.
<PAGE>
APPENDIX C
PRICES AND TERMS OF PAYMENT
PART X COMPENSATION
- --------------------
Supplier shall compensate Company, for the rentals directly negotiated by
Company's service representatives, using the following formula:
* * *
AVERAGE NEGOTIATION TIME
The average time spent negotiating the sale of Caller ID and other display
equipment is hereby established at * * *. This average is subject to
adjustment at any time during the term of this Agreement, based on the
nature of the telecommunications equipment being sold.
COMPENSATION RATE
The per minute rate by which Company will be compensated by Supplier is
established at * * * per minute. This rate may be adjusted annually based
on Company's employee compensation rates.
BILLING
Company will bill Supplier monthly based on the previous month's sales
activity.
USOC BILLING PROCEDURES
- -----------------------
Supplier shall provide Company an invoice for all sales under the USOC
billing system by the fifth (5th) working day of the succeeding month. The
invoices shall be itemized by each type of CPE and include:
Equipment Type
Number of units sold
Retail selling price of the unit
Company cost for the unit
Shipping charges
Totals
Company and Supplier representatives shall mutually agree upon a format for
the above report.
<PAGE>
Company and Supplier representatives shall mutually agree, in writing, upon
the retail selling price, cost price to Company and shipping charges for
each item of CPE to be billed via the USOC system.
CREDIT CARD SALES
- -----------------
Supplier shall compensate Company for all sales made via credit card
according to the following formula:
* * *
Supplier shall provide Company with a report of all credit card sales in a
mutually agreed format by the tenth (10th) working day following the end
of the month.
<PAGE>
APPENDIX D
NonDiscrimination Compliance Agreement
The term "Supplier" as used herein, shall also mean, when applicable, Supplier,
Vendor, Supplier, Supplier or other defined term as used in the body of the
Agreement.
Suppliers shall comply with the applicable provisions of the following:
FAR 19.704, 52.219-8 and 52.219-9, Exec. Order No. 12138, P. L. 95-507, Exec.
Order No. 11246, Exec. Order No. 11625, Section 8 of the Small Business Act as
amended, Railroad Revitalization and Regulatory Reform Act of 1976, Exec. Order
No. 11701, Exec. Order No. 11758, Exec Order No. 12138, Section 503 of the
Rehabilitation Act of 1973 as amended by PL93-516, Vietnam Era Veteran's
Readjustment Assistance Act of 1974 and the rules, regulations and relevant
Orders of the Secretary of Labor pertaining to the Executive Orders and Statutes
listed above.
For contracts of or which aggregate to $2,500 or more annually, the following
table describes the clauses which are included in the contract:
1. Inclusion of the Equal Employment clause in all contracts and orders;
2. Certification of non-segregated facilities;
3. Certification that an affirmative action program has been developed and
is being filed;
4. Certification that an annual Employers Information Report (EEO-1 Standard
Form 100) is being filed;
5. Inclusion of the "Utilization of Minority and Women's Business
Enterprises" clause in all contracts and orders;
6. Inclusion of the "Minority and Women's Business Enterprise Subcontracting
Program" clause in all contracts and orders;
7. Inclusion of the "Listing of Employment Openings" clause in all contracts
and orders;
8. Inclusion of the "Employment of the Handicapped" clause in all contracts
and orders;
Contract Value Clause(s) Required
$ 2,500 to $10,000 8
$10,000 to $50,000 1,2,5,6,7,8
$50,000 or more 1,2,3*,4*,5,6,7,8
* Applies only for businesses with 50 or more employees
1. Equal Employment Opportunity Provisions
In accordance with Exec. Order No. 11246, dated September 24, 1965 and Part
60-1 of Title 41 of the codes of Federal Regulations (Public Contracts and
Property Management, Office of Federal Contract Compliance, Obligations of
Suppliers and Sub-contractors), as may be amended from time to time, the
parties incorporate herein by this reference the regulations and contract
clauses required by those provisions to be made a part of Government
contracts and subcontracts.
2. Certification of Non-segregated Facilities
The Supplier certifies that it does not and will not maintain any facilities
it provides for its employees in a segregated manner, or permit its
employees to perform their services at any location under its control where
segregated facilities are maintained and that it will obtain a similar
certification prior to the award of any nonexempt subcontract.
3. Certification of Affirmative Action Program
The Supplier affirms that it has developed and is maintaining an affirmative
action plan as required by Part 60-2 of Title 41 of the Code of Federal
Regulations.
4. Certification of Filing of Employers Information Reports
The Supplier agrees to file annually, on or before the 31st day of March,
complete and accurate reports on Standard Form 100 (EEO-1) or such forms as
may be promulgated in its place.
5. Utilization of Minority and Women's Business Enterprises
(a) It is the policy of the Government and BellSouth Corporation and its
affiliates as a Government Supplier, that minority and women's business
enterprises shall have the maximum practicable opportunity to
participate in the performance of contracts.
(b) The Supplier agrees to use his or her best efforts to carry out this
policy in the award of his or her subcontracts to the fullest extent
consistent with the efficient performance of this contract. As used in
this contract, the term "minority or women's business enterprise" means
a business with at least 51 percent of which is owned by minority or
women group members or in case of publicly owned businesses at least 51
percent of the stock of which is owned by minority or women group
members. For purposes of this definition, minority group members are
Blacks, Hispanics, Asians, Pacific Islanders, American Indians, and
Alaskan Natives. Suppliers may rely on written representation by Sub-
contractors regarding their status as minority or women's business
enterprises in lieu of an independent investigation. The Supplier shall
inform its Sub-contractors that any who misrepresent their status as
small, minority or women-owned business enterprises in order to obtain
for themselves a contract are subject to substantial penalties under
law.
6. Minority and Women's Business Enterprise Subcontracting Program
(a) The Supplier agrees to establish and conduct a program which will
enable minority and women's business enterprises (as defined in
paragraph 5 above) to be considered fairly as Sub-contractors and
suppliers under the contract. In this connection, the Supplier shall:
(b) Designate a liaison officer who will administer the Supplier's minority
and women's business enterprises program;
(c) Provide adequate and timely consideration of the potentialities of
known minority and women's business enterprises in all "make-or-buy"
decisions;
<PAGE>
(d) Assure that known minority and women's business enterprises will have
an equitable opportunity to compete for subcontracts, particularly by
arranging solicitations, time for the preparation of bids, quantities,
specifications, and delivery schedules so as to facilitate the
participation of minority and women's business enterprises;
(e) Maintain records showing (i) procedures which have been adopted to
comply with the policies set forth in this clause, including the
establishment of a source list of minority and women's business
enterprises, (ii) awards to minority and women's business enterprises
on the source list, and (iii) specific efforts to identify and award
contracts to minority and women's business enterprises;
(f) Include the Utilization of Minority and Women's Business Enterprises
clause in subcontracts which offer substantial minority and women's
business enterprises subcontracting opportunities;
(g) Cooperate with the Government's Contracting Officer for BellSouth
Corporation or its affiliates in any studies and surveys of the
Supplier's minority and women's business enterprises procedures and
practices that the Government's Contracting Officer may from time to
time conduct;
(h) Submit periodic reports of subcontracting to known minority and women's
business enterprises with respect to the records referred to in
subparagraph (4) above, in such form and manner and at such time (not
more often than quarterly) as the Government's Contracting Officer for
BellSouth Corporation or its affiliates may prescribe.
(i) The Supplier agrees to provide assurances that the Supplier will
include the clause in the contract entitled "Utilization of Small
Business Concerns, Small Disadvantaged Business Concerns and Women's
Business Enterprises" in all subcontracts that offer further
subcontracting opportunities, and that the Supplier will require all
subcontracts (except small business concerns) who receive subcontracts
in excess of $500,000 ($1,000,000 for construction of any public
facility), to adopt a plan similar to the plan agreed to by the
Supplier.
7. List of Employment Openings for Veterans
In accordance with Exec. Order 11701, dated January 24, 1973, and Part 60-
250 of Title 41 of the Code of Federal Regulations, as it may be amended
from time to time, the parties incorporate herein by this reference the
regulations and contract clauses required by those provisions to be made a
part of Government contracts and subcontracts.
8. Employment of the Disabled
In accordance with Exec. Order 11758, dated January 15, 1974, and Part 60-
741 of Title 41 of the Code of Federal Regulations as may be amended from
time to time, the parties incorporate herein by this reference the
regulations and contract clauses required by those provisions to be made a
part of Government contracts and subcontracts.
<PAGE>
APPENDIX E
BELLSOUTH TELECOMMUNICATIONS, INC.
STATEMENT OF POLICY ON DEALINGS
WITH SUPPLIERS AND SUPPLIERS
BellSouth Telecommunications, Inc., and its affiliated companies (hereinafter
"BellSouth") does business with many Suppliers and suppliers. It is a
fundamental policy of BellSouth that such dealings shall be conducted on a fair
and non-discriminatory basis, free from improper influences, so that all
participating Suppliers and suppliers may be considered on the basis of the
quality and cost of their product or service.
BellSouth's policy is to seek out and obtain technically suitable products and
services at the lowest overall cost. Accordingly, BellSouth will not recognize
any oral agreement; any conversations with BellSouth's employees or
representatives shall not be construed to imply a commitment or obligation on
behalf of BellSouth. Any information disclosed or made know to BellSouth shall
be deemed as public and nonproprietary. Information shall not be received in
confidence, unless a prior written agreement authorizing such exchange of
information has been executed by an authorized representative of BellSouth.
BellSouth is committed to doing business with Suppliers and suppliers in an
atmosphere in keeping with the highest standards of business ethics. Therefore,
it is BellSouth's Policy that our employees shall not accept form customers;
from suppliers of property, goods, or services; or from other persons, any
gifts, benefits or unusual hospitality that may in any way tend to influence or
have the appearance of influencing them in the performance of their jobs.
Those employees of BELLSOUTH authorized to make purchases or negotiate contracts
are aware of this policy, and your cooperation is solicited in order to
forestall any embarrassing situations.
<PAGE>
EXHIBIT 10.14
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
BETWEEN
INNOTRAC CORPORATION,
AS BORROWER,
AND
SOUTHTRUST BANK, N.A.
AS LENDER
DATED AS OF JANUARY 25, 1999
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
1. DEFINITIONS, TERMS AND REFERENCES............................................................2
1.1 Certain Definitions....................................................................2
1.2 Use of Defined Terms...................................................................9
1.3 Accounting Terms.......................................................................9
1.4 UCC Terms.............................................................................10
1.5 Terminology...........................................................................10
1.6 Exhibits..............................................................................10
2. THE FINANCING...............................................................................10
2.1 Revolving Line of Credit..............................................................10
2.2 Interest and Fees.....................................................................11
2.3 Method of Making Payments.............................................................12
2.4 Prepayments; Early Termination........................................................12
2.5 Use of Proceeds.......................................................................12
2.6 Increased Costs or Reduced Return.....................................................13
2.7 Indemnification of Lender.............................................................13
3. COLLECTIONS.................................................................................13
3.1 Collateral Reserve Account; Lockbox Accounts..........................................13
4. SECURITY INTEREST -- COLLATERAL.............................................................14
5. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
ACCOUNTS RECEIVABLE COLLATERAL..............................................................14
5.1 Bona Fide Accounts....................................................................14
5.2 Good Title; No Existing Encumbrances..................................................15
5.3 Right to Assign; No Further Encumbrances..............................................15
5.4 Power of Attorney.....................................................................15
6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
INVENTORY COLLATERAL........................................................................15
6.1 Sale of Inventory Collateral..........................................................15
6.2 Insurance.............................................................................16
6.3 Good Title; No Existing Encumbrances..................................................16
6.4 Right to Grant Security Interest; No Further Encumbrances.............................16
6.5 Location of Inventory Collateral......................................................16
7. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
EQUIPMENT COLLATERAL........................................................................16
</TABLE>
i
<PAGE>
<TABLE>
<S> <C>
7.1 Sale of Equipment Collateral..........................................................17
7.2 Insurance.............................................................................17
7.3 Good Title; No Existing Encumbrances..................................................17
7.4 Right to Grant Security Interest; No Further Encumbrances.............................17
7.5 Location..............................................................................17
8. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
BALANCES COLLATERAL............................................................................17
8.1 Ownership.............................................................................18
8.2 Liens.................................................................................18
9. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO
INTANGIBLES COLLATERAL.........................................................................18
9.1 Ownership.............................................................................18
9.2 Liens.................................................................................18
9.3 Preservation..........................................................................18
10. GENERAL REPRESENTATIONS AND WARRANTIES.........................................................18
10.1 Existence and Qualification...........................................................19
10.2 Authority; Validity and Binding Effect................................................19
10.3 No Material Litigation................................................................19
10.4 Taxes.................................................................................19
10.5 Organization..........................................................................19
10.6 Insolvency............................................................................19
10.7 Title.................................................................................20
10.8 Margin Stock..........................................................................20
10.9 No Violations.........................................................................20
10.10 ERISA.................................................................................21
10.11 Financial Statements..................................................................21
10.12 Purchase of Collateral................................................................21
10.13 Pollution and Environmental Control...................................................22
10.14 Possession of Franchises, Licenses, Etc...............................................22
10.15 Disclosure............................................................................22
10.16 Subsidiaries..........................................................................22
10.17 Year 2000 Readiness...................................................................22
11. GENERAL AFFIRMATIVE COVENANTS..................................................................23
11.1 Records Respecting Collateral.........................................................23
11.2 Further Assurances....................................................................23
11.3 Right to Inspect......................................................................23
11.4 Reports...............................................................................23
11.5 Settlement Sheets.....................................................................24
</TABLE>
ii
<PAGE>
<TABLE>
<S> <C>
11.6 Periodic Financial Statements of Borrower.............................................24
11.7 Annual Financial Statements of Borrower...............................................24
11.8 Payment of Taxes......................................................................24
11.9 Maintenance of Insurance..............................................................25
11.10 Maintenance of Property...............................................................25
11.11 Certificate of No Event of Default; Compliance Certificate;
Notice of Default.....................................................................25
11.12 Change of Principal Place of Business, Etc............................................25
11.13 Waivers...............................................................................26
11.14 Preservation of Corporate Existence...................................................26
11.15 Compliance with Laws..................................................................26
11.16 ERISA.................................................................................26
11.17 Litigation............................................................................27
11.18 Environmental Compliance..............................................................27
12. FINANCIAL COVENANTS............................................................................29
12.1 Debt/Tangible Net Worth Ratio.........................................................29
12.2 Tangible Net Worth....................................................................29
12.3 Fixed Charge Coverage Ratio...........................................................29
13. NEGATIVE COVENANTS.............................................................................29
13.1 No Liens..............................................................................29
13.2 Debt..................................................................................29
13.3 Contingent Liabilities................................................................30
13.4 Distributions.........................................................................30
13.5 Stock Redemptions, Etc................................................................30
13.6 Restricted Investment.................................................................30
13.7 Merger, Transfer, Etc.................................................................30
13.8 ERISA.................................................................................30
13.9 Transactions with Affiliates..........................................................30
13.10 Fiscal Year...........................................................................31
14. EVENTS OF DEFAULT..............................................................................31
14.1 Notes.................................................................................31
14.2 Obligations...........................................................................31
14.3 Misrepresentations....................................................................31
14.4 Covenants.............................................................................31
14.5 Damage, Loss, Theft or Destruction of Collateral......................................32
14.6 Other Debts...........................................................................32
14.7 Voluntary Bankruptcy..................................................................32
14.8 Involuntary Bankruptcy................................................................32
14.9 Judgments.............................................................................32
14.10 ERISA.................................................................................33
14.11 Change of Control.....................................................................33
</TABLE>
iii
<PAGE>
<TABLE>
<S> <C>
14.12 Material Adverse Change...............................................................33
14.13 Change of Management..................................................................33
15. REMEDIES.......................................................................................33
15.1 Acceleration of the Obligations.......................................................34
15.2 Remedies of a Secured Party...........................................................34
15.3 Set Off...............................................................................35
15.4 Other Remedies........................................................................35
16. MISCELLANEOUS..................................................................................35
16.1 Waiver................................................................................35
16.2 Governing Law.........................................................................35
16.3 Survival..............................................................................35
16.4 No Assignment by Borrower.............................................................35
16.5 Counterparts..........................................................................36
16.6 Reimbursement.........................................................................36
16.7 Successors and Assigns................................................................36
16.8 Severability..........................................................................37
16.9 Notices...............................................................................37
16.10 Entire Agreement; Amendments..........................................................38
16.11 Time of the Essence...................................................................38
16.12 Interpretation........................................................................38
16.13 Lender Not Joint Venturer.............................................................38
16.14 Jurisdiction..........................................................................39
16.15 Acceptance............................................................................39
16.16 Payment on Non-Business Days..........................................................39
16.17 UCC Terminations......................................................................39
16.18 Cure of Default by Lender.............................................................39
16.19 Recitals..............................................................................40
16.20 Attorney-in-Fact......................................................................40
16.21 Sole Benefit..........................................................................40
16.22 Termination of this Agreement.........................................................40
16.23 Acknowledgment by Borrower............................................................40
17. CONDITIONS PRECEDENT...........................................................................41
17.1 Conditions to Initial Revolving Advance...............................................41
</TABLE>
iv
<PAGE>
EXHIBIT DOCUMENT
- ------- --------
A........................................ Collateral Locations
B........................................ Additional Permitted Encumbrances
C........................................ Form of Revolving Note
D........................................ Trade Names and Trade Styles
E........................................ Form of Secretary's Certificate
v
<PAGE>
AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT
------------------------------------------------
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (hereinafter, as it
may be modified, amended or supplemented from time to time, and together with
all Exhibits attached hereto, called this "AGREEMENT"), made, entered into and
---------
effective as of the 25th day of January, 1999, by and between INNOTRAC
CORPORATION, a Georgia corporation ("BORROWER"); as borrower; and SOUTHTRUST
--------
BANK, N.A., a national banking association ("LENDER"), as lender;
------
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, Borrower and Lender are parties to that certain Amended and
Restated Loan and Security Agreement, dated as of December 5, 1997, as
heretofore amended (the "PRIOR LOAN AGREEMENT"), pursuant to which Lender has
--------------------
established for the benefit of the Borrower a revolving line of credit in the
maximum aggregate principal amount of Twenty-Five Million Dollars ($25,000,000);
and
WHEREAS, Borrower has requested that Lender increase the maximum aggregate
principal amount of such revolving line of credit to Thirty-Five Million Dollars
($35,000,000);
WHEREAS, Borrower has also requested Lender to extend the maturity date of
the revolving line of credit and to make certain other modification to the Prior
Loan Agreement, and subject to the terms and conditions set forth herein, Lender
is willing to do so; and
WHEREAS, Borrower and Lender wish to enter into this Agreement in order to
memorialize their mutual understandings in respect to such revolving line of
credit increase and the other financial accommodations made by Lender to the
Borrower;
WHEREAS, Lender is willing to extend such financial accommodations to
Borrower in accordance with the terms hereof upon the execution of this
Agreement by Borrower, compliance by Borrower with all of the terms and
provisions of this Agreement, and fulfillment by Borrower of all conditions
precedent to Lender's obligations herein contained; and
NOW, THEREFORE, in consideration of the sum of TEN DOLLARS ($10.00), the
foregoing premises, to induce Lender to extend the financial accommodations
provided for herein, and for other good and valuable consideration, the
sufficiency and receipt of all of which are acknowledged, Borrower and Lender
agree as follows:
1
<PAGE>
1. DEFINITIONS, TERMS AND REFERENCES.
----------------------------------
1.1 Certain Definitions.
-------------------
In addition to such other terms as elsewhere defined herein, as used in
this Agreement and in any Exhibits, the following capitalized terms shall have
the following meanings, unless the context requires otherwise:
"Accounts Receivable Collateral" shall mean all rights of Borrower to
------------------------------
payment for goods sold or leased, or to be sold or to be leased, or for services
rendered or to be rendered, howsoever evidenced or incurred, including, without
limitation, all accounts, all contract rights, all instruments, all leases,
rental contracts and other chattel paper and all general intangibles arising
therefrom or relating thereto, all sales orders, all returned or repossessed
goods and all books, records, computer tapes, programs and ledger books arising
therefrom or relating thereto, all whether now owned or hereafter acquired or
arising.
"Account Debtor" shall mean any Person who is or may become obligated
--------------
on any of the Accounts Receivable Collateral of Borrower.
"Affiliate" shall mean, with respect to any Person, any other Person
---------
Controlling, Controlled by or under common Control with, such Person.
"Agreement" shall have the meaning given to such term in the foregoing
---------
recitals to this Agreement.
"Balances Collateral" shall mean all property of Borrower left with
-------------------
Lender or in its possession now or hereafter, all deposit accounts of Borrower
now or hereafter opened with Lender, including, particularly, but without
limitation, any Collateral Reserve Account required to be established with
Lender pursuant to Section 3.1 hereof, all certificates of deposit issued by
Lender to Borrower, and all drafts, checks and other items deposited in or with
Lender by Borrower for collection now or hereafter.
"Bankruptcy Code" shall mean Title 11 of the United States Code, as
---------------
amended from time to time.
"Base Rate" shall mean that interest rate so denominated and set by
---------
Lender from time to time as an interest rate basis for borrowings from Lender.
The Base Rate is one of several interest rate bases which may be used by Lender.
Lender lends at interest rates above and below the Base Rate. Any change in any
rate of interest charged hereunder as a result of any change in the Base Rate
shall become effective as of the opening of business on each date on which such
change in the Base Rate occurs.
2
<PAGE>
"Business Day" shall mean any day on which Lender is open for the
------------
conduct of banking business at its main office in Atlanta, Georgia.
"Capital Expenditures" shall have the meaning given to such term in
--------------------
accordance with GAAP, and shall specifically include, in any event, any current
expenditure made by Borrower for the acquisition, construction, repair,
maintenance or replacement of fixed or capital assets which, under GAAP, would
be expected to be capitalized on the books of Borrower; provided, however, that
-------- -------
the purchase or other acquisition of caller identification equipment or other
telecommunications equipment used for sale, rental or lease purposes shall not
be considered a Capital Expenditure for any purpose whatsoever under this
Agreement or any of the other Loan Documents.
"Closing Date" shall mean that date on which the initial disbursement
------------
of funds being made available to Borrower under the Revolving Line of Credit.
"Collateral" shall mean the property of Borrower described in Article
----------
4, or any part thereof, as the context shall require, in which Lender has, or is
to have, a security interest pursuant hereto, as security for payment of the
obligations.
"Collateral Locations" shall mean (i) the Executive Office, (ii) those
--------------------
locations specified in Exhibit "A" attached hereto and (iii) such other
-----------
locations of Collateral as to which Lender shall be notified hereafter by
Borrower pursuant to Section 11.12.
"Collateral Reserve Account" shall mean, individually and
--------------------------
collectively, any non-interest bearing, demand deposit account (or series of
such accounts, as the case may be) which is or may be required to open and
maintain with Lender pursuant to the requirements of Section 3.1.
"Control," "Controlled," or "Controlling" shall mean, with respect to
------- ---------- -----------
any Person, the power to direct the management and policies of such Person,
directly or indirectly, whether through the ownership of voting securities or
otherwise; provided, however, that, in any event, any Person who owns directly
-------- -------
or indirectly twenty percent (20%) or more of the securities having ordinary
voting power for the election of directors or other governing body of a
corporation shall be deemed to "control" such corporation for purposes of this
Agreement.
"Debt" means all liabilities, obligations and indebtedness of Borrower
----
and its consolidated Subsidiaries to any Person, of any kind or nature, now or
hereafter owing, arising, due or payable, howsoever evidenced, created,
incurred, acquired or owing, whether primary, secondary, direct, contingent,
fixed or otherwise, and including, without in any way limiting the generality of
the foregoing: (i) Borrower's or any such Subsidiary's liabilities and
obligations to trade creditors; (ii) all Debt for borrowed funds; (iii) all
obligations and liabilities of any Person secured by any Lien on Borrower's or
any such Subsidiary's Property, even though Borrower or such Subsidiary shall
not have assumed or become liable for the payment thereof; (iv) all accrued
pension fund and other employee benefit plan obligations and liabilities; (v)
all Guaranteed Obligations; and (vi) deferred taxes.
3
<PAGE>
"Default Condition" shall mean the occurrence of any event which,
-----------------
after satisfaction of any requirement for the giving of notice or the lapse of
time, or both, would become an Event of Default.
"Default Rate" shall mean that interest rate per annum equal to two
------------
percent (2%) plus the stated interest rate effective under each Note from time
to time.
"EBITDA" shall mean the net earnings of Borrower and its consolidated
------
Subsidiaries for any fiscal period before interest, income taxes, depreciation
and amortization expense for such period, determined under GAAP.
"Eligible Accounts" shall mean that portion of the Accounts Receivable
-----------------
Collateral of Borrower consisting of the net billed dollar amount of accounts
owing to Borrower by its Account Debtors subject to no counterclaim, defense,
setoff or deduction, excluding, however, in any event, but without limitation,
------------------
unless otherwise waived in writing by Lender, any account: which is owing by any
Account Debtor having any past due accounts with Borrower, except for commercial
accounts of Borrower, and, in the case of commercial accounts of Borrower, any
account of an Account Debtor which is either more than ninety (90) days past
invoice date or as to which twenty-five percent (25%) or more of the accounts of
any Account Debtor are more than ninety (90) days past invoice date; (ii) as to
which Lender does not have a first priority security interest; or (iii) which
has been excluded by Lender for purposes hereof, which it reserves the right to
do, in its sole discretion, exercised in a commercially reasonable manner.
"Eligible Installment Sales Orders" shall mean that portion of
---------------------------------
Borrower's Accounts Receivable Collateral consisting of the net unbilled dollar
amount of installment sales made by Borrower for its products or services to its
Account Debtors subject to no counterclaim, defense, setoff or deduction,
excluding, however, in any event, but without limitation, unless otherwise
- ------------------
waived in writing by Lender, any such purchase order: (i) which is owing by any
Account Debtor having any past due accounts with Borrower, except for commercial
accounts of Borrower, and, in the case of commercial accounts of Borrower, any
account of an Account Debtor which is either more than ninety (90) days past
invoice date or as to which twenty-five percent (25%) or more of the accounts of
any Account Debtor are more than ninety (90) days past invoice date; (ii) as to
which Lender does not have a first priority security interest; or (iii) which
has been excluded by Lender for purposes hereof, which it reserves the right to
do, in its sole discretion, exercised in a commercially reasonable manner.
"Eligible Inventory" shall mean the Inventory Collateral of Borrower,
------------------
provided that such Inventory Collateral (i) is located at one of the locations
set forth on Exhibit A; (ii) is subject to a valid and perfected first priority
security interest in favor of Lender; and (iii) is not obsolete, slow moving, a
custom item, defective, irregular, discontinued good or "seconds."
"Employee Benefit Plan" shall mean any employee welfare benefit plan
---------------------
or any employee pension benefit plan, as those terms are defined in Section 3(l)
and 3(2) of ERISA, for the benefit of employees of Borrower or any Subsidiary or
any other entity which is a member of a "controlled group" or under "common
control" with Parent, as such terms are defined in Section 4001(a)(14) of ERISA.
4
<PAGE>
"Equipment Collateral" shall mean all equipment of Borrower, or in
--------------------
which it has rights, whether now owned or hereafter acquired, wherever located,
including, without limitation, all machinery, fixtures, furniture, furnishings,
leasehold improvements, rolling stock, motor vehicles, plant equipment,
computers and other office equipment and office furniture, together with any and
all attachments and accessions, substitutes and replacements, and tools, spare
parts, and repair parts used or useful in connection therewith.
"ERISA" shall mean the Employee Retirement Income Security Act of
-----
1974, as may be amended from time to time.
"Event of Default" shall mean any of the events or conditions
----------------
described in Article 14, provided that any requirement for the giving of notice
or the lapse of time, or both, has been satisfied.
"Executive Office" shall mean the chief executive office of Borrower
----------------
which is located at 6655 Sugarloaf Parkway, Duluth, Gwinnett County, Georgia
30097.
"Fiscal Year" shall mean the fiscal year of Borrower concluding as of
-----------
December 31 in each calendar year.
"Fixed Charge Coverage Ratio" shall mean, for any fiscal period, on a
---------------------------
combined basis, the ratio which the sum of Net Income of Borrower and its
consolidated Subsidiaries for such period plus total depreciation and
----
amortization expense, lease expense and interest expense of Borrower and its
consolidated Subsidiaries for such period bears to the sum of total lease
expense, interest expense, capitalized interest and the current maturities of
the long-term debt of Borrower and its consolidated Subsidiaries for such
period, all as determined under GAAP.
"GAAP" shall mean generally accepted accounting principles,
----
consistently applied.
"Guaranteed Obligations" shall mean, with respect to any Person, all
----------------------
obligations of such Person which in any manner directly or indirectly guarantee
or assure, or in effect guarantee or assure, the payment or performance of any
indebtedness, dividend or other obligation of any other Person or assure or in
effect assure the holder of any such obligations against loss in respect
thereof, including, without limitation, any such obligations incurred through an
agreement, contingent or otherwise: (a) to purchase such obligations or any
property constituting security therefor; (b) to advance or supply funds for the
purchase or payment of such obligations or to maintain a working capital or
other balance sheet condition; or (c) to lease Property or to purchase any debt
or equity securities or other Property or services.
"Intangibles Collateral" shall mean all general intangibles of
----------------------
Borrower, whether now existing or hereafter acquired or arising, including,
without limitation, all copyrights, royalties, trademarks, trade names, tax
refunds, rights to tax refunds, service marks, patent and
5
<PAGE>
proprietary rights, permits, licenses, sublicenses, leases, subleases,
usufructs, trade secrets, diagrams and all customer lists.
"Interest Expense" for any fiscal period of Borrower, shall mean
----------------
interest expense of Borrower during such period on that portion of the Debt of
Borrower consisting of Debt for borrowed funds, including, without limitation,
the Obligations.
"Interest Period" shall mean, in the case of the determination of any
---------------
LIBOR-based rate, a one-, two- or three-month period as determined by Borrower.
"Inventory Collateral" shall mean all inventory of Borrower, or in
--------------------
which it has rights, whether now owned or hereafter acquired, wherever located
including goods in transit, including, without limitation, all goods of Borrower
held for sale or lease or furnished or to be furnished under contracts of
service, all goods held for display or demonstration, goods on lease or
consignment, returned or repossessed goods, all raw materials, work-in-process,
finished goods and supplies used or consumed in Borrower's business, together
with all documents, documents of title, dock warrants, dock receipts, warehouse
receipts, bills of lading or orders for the delivery of all, or any portion, of
the foregoing.
"Leverage Ratio" shall mean, for any fiscal period, as to the Borrower
--------------
on a consolidated basis, the ratio of the sum of total Debts minus Subordinated
Debt to the sum of combined Tangible Net Worth plus Subordinated Debt, all as
determined under GAAP.
"LIBOR" shall mean, for any Interest Period, the rate per annum at
-----
which deposits in United States dollars for such Interest Period, and for the
amount of the requested LIBOR Advance, are offered in the London interbank
market at approximately 11:00 a.m. (London time) two Business Days before the
first day of such Interest Period, as published or reprinted through the
Reuter's Screen or such other recognized quote service as is acceptable to the
Lender; provided, that, at the Lender's sole option, such rate may be adjusted
by dividing such rate by a percentage equal to one (1) minus the then average
stated maximum rate (stated as a decimal) of all reserve requirements applicable
to any member of the Federal Reserve System in respect of Eurocurrency
liabilities as defined in Regulation D of the Board of Governors of the Federal
Reserve System (or any successor categories for such liabilities under such
Regulation D).
"LIBOR Advance" shall mean any borrowing hereunder which bears
-------------
interest based on LIBOR.
"Lien" shall mean any deed to secure debt, deed of trust, mortgage or
----
similar instrument, and any lien, security interest, preferential arrangement
which has the practical effect of constituting a security interest, security
title, pledge, charge, encumbrance or servitude of any kind, whether by
consensual agreement or by operation of statute or other law, and whether
voluntary or involuntary, including, without limitation, any conditional sale or
other title retention agreement or lease in the nature thereof.
6
<PAGE>
"Loan Documents" shall mean this Agreement, any Notes, any financing
--------------
statements covering the Collateral, and any and all other documents,
instruments, certificates and agreements executed and/or delivered by a Borrower
in connection herewith, or any one, more, or all of the foregoing, as the
context shall require.
"Margin" shall mean an amount equal to the sum of (i) eighty-five
------
percent (85%) of the face dollar amount, as at the date of determination, of
Eligible Accounts of Borrower, plus (ii) seventy percent (70%) of the face
----
dollar amount, as at the date of determination, of Eligible Installment Sales
Orders of Borrower, plus (iii) the lesser of forty percent (40%) of the net book
----
value of Eligible Inventory of Borrower or $2,500,000.
"Margin Requirement" shall have the meaning ascribed to such term in
------------------
Section 2.1(a).
"Margin Stock" shall have the meaning ascribed to such term in Section
------------
221.2(h) (or any successor provision) of Regulation U of the Board of Governors
of the Federal Reserve System.
"MPPAA" shall mean the Multiemployer Pension Plan Amendments Act of
-----
1980, amending Title IV of ERISA.
"Multiemployer Plan" shall have the meaning set forth in Section
------------------
4001(a)(3) of ERISA.
"Net Income" shall mean, for any fiscal period of any Person, the net
----------
income (or loss), after provisions for taxes (either actual, accrued or deemed,
in the case of a pass-through entity determined as if the highest marginal
individual income tax rate were applicable), of such Person on a consolidated
basis for such period (taken as a single accounting period) determined in
conformity with GAAP, minus (to the extent otherwise included therein and
-----
without duplication) (i) any gains or losses, together with any related
provisions for taxes, realized by such Person upon any sale of its assets other
than in the ordinary course of business, (ii) any other non-recurring gains or
losses, and (iii) any income or loss of any other Person acquired prior to the
date such other Person becomes a Subsidiary of the Person whose "Net Income" is
being measured or is merged into or consolidated with the Person whose "Net
Income" is being measured or all or substantially all of such other Person's
assets are acquired by the Person whose "Net Income" is being measured.
"Notes" shall mean, collectively, the Revolving Note and any other
-----
promissory notes or other instruments at an time or from time to time evidencing
any Obligations.
"Obligations" shall mean any and all Debts, liabilities and
-----------
obligations of Borrower to Lender, including without limiting the generality of
the foregoing, any indebtedness, liability or obligation of Borrower to Lender
arising hereunder or as a result hereof, whether evidenced by the Notes, the
other Loan Documents or otherwise, any and all extensions or renewals thereof in
whole or in part; any indebtedness, liability or obligation of Borrower to
Lender under any later or future advances or loans made by Lender to Borrower,
and any and all extensions or renewals thereof in whole or in part; any and all
present and future indebtedness of Borrower to other creditors which is
purchased by Lender from such other creditors; and any and all future or
additional indebtedness, liabilities or obligations of Borrower to
7
<PAGE>
Lender whatsoever and in any event, whether existing as of the date hereof or
hereafter arising, whether arising under a loan, lease, credit card
arrangements, line of credit, letter of credit or other type of financing, and
whether direct, indirect, absolute or contingent, as maker, endorser, guarantor,
surety or otherwise, and whether evidenced by, arising out of, or relating to, a
promissory note, bill of exchange, check, draft, bond, letter of credit,
guaranty agreement, bankers, acceptance, foreign exchange contract, commitment
fee, service charge or otherwise.
"PBGC" shall mean the Pension Benefit Guaranty Corporation.
----
"Permitted Encumbrances"shall mean (i) Liens for taxes not yet due and
----------------------
payable or being contested as permitted by Section 11.8; (ii) carriers',
warehousemen's, mechanics', materialmen's, repairmen's or other, like Liens
arising in the ordinary course of business, payment for which is not yet due or
which are being contested in good faith and by appropriate proceedings; (iii)
pledges or deposits in connection with worker's compensation, unemployment
insurance and other social security legislation; (iv) deposits to secure the
performance of utilities, leases, statutory obligations and surety and appeal
bonds and other obligations of a like nature incurred in the ordinary course of
business; (v) bankers, Liens arising by statute or under customary terms
regarding depository relationships on deposits held by financial institutions;
(vi) restrictions imposed by licenses and leases; (vii) any Liens in favor of
Lender, whether in respect of the Collateral or otherwise; (viii) rights of
rental and lease customers; (ix) purchase money Liens on purchase money Debt
permitted hereunder; and (x) those other Liens (if any) described on Exhibit "B"
-----------
attached hereto.
"Person" shall mean any individual, sole proprietorship, partnership,
------
joint venture, trust, unincorporated organization, association, corporation,
limited liability company, institution, entity, party or government (whether
territorial, national, federal, state, county, city, municipal or otherwise,
including, without limitation, any instrumentality, division, agency, body or
department thereof).
"Plan" shall mean any employee benefit plan or other plan for any
----
employees of Borrower and any employees of any Subsidiary or any other entity
which is a member of a controlled group or under common control with Borrower,
as such terms are defined in Section 4001(a)(14) of ERISA, and which is subject
to the provisions of Title IV of ERISA.
"Property" shall mean any interest in any property or asset of any
--------
kind, whether real, personal or mixed, or tangible or intangible.
"Reportable Event" shall mean any of the events described in Section
----------------
4043(b) of ERISA.
8
<PAGE>
"Restricted Investment" means any acquisition of Property by Borrower
---------------------
in exchange for cash or other Property, whether in the form of an acquisition of
stock, debt security, or other indebtedness or obligation, or the purchase or
acquisition of any other Property, or by loan, advance, capital contribution, or
subscription, except acquisitions of the following: (a) fixed assets to be used
------
in the business of Borrower so long as the costs thereof constitute Capital
Expenditures permitted hereunder; (b) goods held for sale or rental or to be
used in the provision of services by Borrower in the ordinary course of
business; (c) current assets arising from the sale or rental of goods or the
rendition of services in the ordinary course of business of Borrower; (d) direct
obligations of the United States of America, or any agency thereof, or
obligations guaranteed by the United States of America, provided, however, that
-----------------
such obligations mature within one (1) year from the date of acquisition
thereof; (e) certificates of deposit maturing within one (1) year from the date
of acquisition, or overnight bank deposits, in each case issued by, created by,
or with a bank or trust company organized under the laws of the United States or
any state thereof having capital and surplus aggregating at least One Hundred
Million Dollars ($100,000,000); and (f) commercial paper given the highest
rating by a national credit rating agency and maturing not more than two hundred
seventy (270) days from the date of creation thereof.
"Revolving Advance" shall mean an advance made to Borrower by Lender
-----------------
under the Revolving Line of Credit, which shall be evidenced by the Revolving
Note.
"Revolving Line of Credit" shall refer to the committed revolving line
------------------------
of credit opened by the Lender in favor of Borrower, pursuant to the provisions
of Section 2.1.
"Revolving Note" shall mean the Amended and Restated Revolving
--------------
Promissory Note, dated of even date herewith, made by Borrower to the order of
Lender, in the principal amount of the Revolving Line of Credit, evidencing the
Revolving Line of Credit, together with any renewals or extensions thereof, in
whole or in part, and any amendments, supplements, replacements or substitutions
thereof. The Revolving Note shall be substantially in the form of Exhibit "C"
-----------
attached hereto.
"Subsidiary" shall mean any corporation, partnership, business
----------
association or other entity (including any Subsidiary of any of the foregoing)
of which Borrower owns at any time during the term of this Agreement, directly
or indirectly, fifty percent (50%) or more of the capital stock or equity
interest having ordinary power for the election of directors or others
performing similar functions. Any representation, warranty or covenant contained
in this Agreement which includes the term "Subsidiaries" shall mean and refer to
any Subsidiary which was such as of the date of determination for purposes of
such representation, warranty or covenant.
"Subordinated Debt" shall mean any Debt which has been subordinated,
-----------------
in right of payment and claim, to the rights and claims of Lender in respect of
the obligations in a form and substance satisfactory to Lender.
"Tangible Net Worth" shall mean the consolidated net worth of Borrower
------------------
and its consolidated Subsidiaries, determined as of the end of any fiscal period
of Borrower under
9
<PAGE>
GAAP, minus, any and all assets, on a combined basis, of Borrower constituting
(i) goodwill, patents, copyrights, trademarks, trade names and other intangible
assets, (ii) write-ups of assets, (iii) unamortized debt discount and expense,
(iv) long-term deferred charges, (v) any Debt owing by any Affiliate to Borrower
(excluding, for this purpose, any Debt owing by Borrower to any other Borrower).
"Termination Date" shall mean May 1, 2000; provided, however, that, at
---------------- -------- -------
Lender's election, by the giving of written notice to Borrower to such effect
prior to such termination date or, if such termination date is extended pursuant
hereto, any subsequent anniversary of such termination date, Lender may extend
the "Termination Date" from year-to-year, in which case the "Termination Date"
shall be the termination date then in effect.
"UCC" shall mean the Uniform Commercial Code--Secured Transactions of
---
Georgia (O.C.G.A. Title 11, Article 9), as amended.
1.2 Use of Defined Terms.
---------------------
All terms defined in this Agreement and the Exhibits shall have the same
defined meanings when used in any other Loan Documents, unless the context shall
require otherwise.
1.3 Accounting Terms.
----------------
All accounting terms not specifically defined herein shall have the
meanings generally attributed to such terms under GAAP.
1.4 UCC Terms.
---------
The terms "accounts", "chattel paper", "instruments", "general
intangibles", "inventory", "equipment", "fixtures", "documents", "products" and
"proceeds", as and when used in the Loan Documents, shall have the same meanings
given to such terms under the UCC.
1.5 Terminology.
-----------
All personal pronouns used in this Agreement, whether used in the
masculine, feminine or neuter gender, shall include all other genders; the
singular shall include the plural, and the plural shall include the singular.
Titles of Articles and Sections in this Agreement are for convenience only, and
neither limit nor amplify the provisions of this Agreement, and all references
in this Agreement to Articles, Sections, Subsections, paragraphs, clauses,
subclauses or Exhibits shall refer to the corresponding Article, Section,
Subsection, paragraph, clause, subclause of, or Exhibit attached to, this
Agreement, unless specific reference is made to the articles, sections or other
subdivisions divisions of, or Exhibit to, another document or instrument. Each
reference to any document, agreement, instrument or other paper shall be a
reference to each such document, agreement, instrument or paper as it shall be
amended, modified, supplemented, extended, renewed or replaced from time to
time.
10
<PAGE>
1.6 Exhibits.
--------
All Exhibits attached hereto are by reference made a part hereof.
2. THE FINANCING.
-------------
Upon execution of this Agreement and compliance with its terms, including,
without limitation, the conditions precedent set forth in Section 17.1 hereof,
Lender agrees to make available to Borrower the Revolving Line of Credit on the
following terms and conditions:
2.1 Revolving Line of Credit.
------------------------
(a) Lender agrees to open a committed revolving line of credit (the
"REVOLVING LINE OF CREDIT" or "REVOLVING CREDIT") in favor of Borrower in the
- ------------------------- ----------------
maximum aggregate principal amount of Thirty-Five Million Dollars ($35,000,000)
so that during the period commencing on the date hereof and ending on the
Termination Date or the earlier termination of the Revolving Line of Credit
pursuant to Section 2.4 or Article 15 below, Borrower may borrow and repay and
re-borrow Revolving Advances up to a maximum aggregate principal amount equal,
in the aggregate, to Thirty-Five Million Dollars ($35,000,000); subject,
-------
however, to the further requirement that at no time shall the aggregate
- -------
principal amount of Revolving Advances owing by Borrower under the Revolving
Line of Credit exceed the Margin (such requirement being referred to herein as
the "MARGIN REQUIREMENT"). If at any time hereafter the Margin Requirement is
------------------
not satisfied by Borrower, then Borrower agrees to repay im mediately the then
principal balance of the Revolving Advances owing by it by that amount necessary
to satisfy the Margin Requirement applicable to it. The Debt arising from the
disbursement of any and all Revolving Advances shall be evidenced by the
Revolving Note, which shall be executed and delivered by Borrower simultaneously
herewith. Each request for a Revolving Advance shall be made by Borrower to
Lender in such manner as Lender may request from time to time hereafter
(including, without limitation, by telephone or facsimile transmission), or, as
Lender and Borrower, may mutually agree hereafter, by pre-approved automatic
disbursement. Without limitation of the preceding provi sions, the principal
amount of the Revolving Note shall be due and payable from collections and other
proceeds of Collateral in accordance with the provisions of Article 3 below and
shall be due and payable in full on the Termination Date or on the date of any
earlier termination of the Revolving Line of Credit pursuant to Section 2.4 or
Article 15 below.
2.2 Interest and Fees.
-----------------
Subject to Section 15.1 of this Agreement, interest and fees shall be
charged on Revolving Advances (in each case computed based on a 360-day year and
the actual number of days elapsed) in accordance with the following provisions:
(a) Interest. (i) All Revolving Advances shall bear interest at
--------
a fluctuating rate per annum equal to the Base Rate, as in effect from time to
time, calculated on the basis of a 360-day year and actual days elapsed;
provided, however, that, so long as no Event of Default
- -------- -------
11
<PAGE>
then exists, Borrower may, by a written notice delivered to Lender not later
than 10:00 a.m. (Atlanta, Georgia time) on the second (2nd) Business Day prior
to the first (1st) day of each calendar month (commencing in January 1999)
direct that interest accrue on the principal of any particular Revolving Advance
outstanding from time to time during the Interest Period designated by the
Borrower in such notice at a rate per annum equal to LIBOR plus the number of
----
basis points in excess thereof set forth below corresponding to the applicable
Leverage Ratio requirement (the "LIBOR MARGIN") and for such Interest Period as
-------------
is selected by Borrower with respect to each such Revolving Advances:
<TABLE>
<CAPTION>
If Leverage Ratio Is: Then the LIBOR Margin Is:
-------------------- ------------------------
<S> <C>
Greater than 1.75 to 1.0 but not greater than 2.0 to 1.0 200 basis points
Greater than 1.50 to 1.0 but not greater than 1.75 to 1.0 175 basis points
Greater than 1.25 to 1.0 but not greater than 1.5 to 1.0 150 basis points
Greater than 1.0 to 1.0 but not greater than 1.25 to 1.0 125 basis points
Up to 1.0 to 1.0 100 basis points
</TABLE>
Each such designation by Borrower of the interest rate based on LIBOR and of an
Interest Period shall be irrevocable and shall remain in effect throughout such
Interest Period. In the event Borrower selects an Interest Period in excess of
one (1) month in length, such Interest Period and the interest rate based on
LIBOR related thereto shall remain in effect hereunder for each full calendar
month thereafter which is covered by such Interest Period. Upon determining the
interest rate based on LIBOR for an Interest Period requested by Borrower,
Lender shall promptly notify Borrower by telephone (confirmed in writing) of
such determination, and such determination shall, absent manifest error, be
final, conclusive and binding for all purposes. Borrower's selection of the
interest rate based on LIBOR for a particular Interest Period shall not affect
Borrower's ability to borrow hereunder during such Interest Period, subject to
the terms of this Agreement. Upon the expiration of an applicable Interest
Period, the applicable Revolving Advance bearing a LIBOR-based rate shall
thereafter bear interest at the Base Rate unless the Borrower provides other
instructions to the Lender in accordance herewith.
(b) Payment of Interest. All interest payable on the Revolving
-------------------
Advances shall be payable monthly in arrears on the first day of each month
hereafter (for the preceding calendar month or portion thereof, as the case may
be).
2.3 Method of Making Payments.
-------------------------
All payments owing under or pursuant to this Agreement, whether of
principal, interest, fees or otherwise, shall be made without defense, set-off
or counterclaim to Lender not later than 2:00 p.m. Atlanta, Georgia time on the
date when due and shall be made in lawful money of the United States of America
in immediately available funds at the head office of Lender in Atlanta, Georgia.
If and to the extent that any such payment is not made by a Borrower when due or
if Borrower and Lender then have mutually agreed to a pre-approved automatic
advance to make such payment, Borrower hereby authorizes and directs Lender to
charge any demand deposit account maintained by Borrower with Lender for the
amount of such payment or, in lieu thereof or in addition thereto, as necessary,
to debit any such payment as a Revolving Advance (whether
12
<PAGE>
or not an over-advance is created thereby). Whenever any payment to be made
hereunder or pursuant hereto shall be stated to be due on a day which is not a
Business Day, the due date thereof shall be extended to the next succeeding
Business Day and, with respect to payments of principal, interest thereon shall
be payable at the applicable rate during such extension.
2.4 Prepayments; Early Termination.
------------------------------
(a) Revolving Advances may be repaid and, subject to borrowing
availability, re-borrowed at any time and from time to time by Borrower up to,
but not including, the Termination Date; provided, however, that if any
-------- -------
Revolving Advance is prepaid at a time when it bears interest at a LIBOR-based
rate before the expiration of the applicable Interest Period, Borrower shall pay
to Lender any and all reasonable costs which Lender must pay as a result of such
prepayment which the Lender would not otherwise have paid if the Revolving
Advance, as the case may be, were paid at the end of the applicable Interest
Period.
(b) In addition to the foregoing, Borrower may at any time prior
to the Termination Date, and whether or not a Default Condition or Event of
Default then exists, terminate this Agreement; provided however, that: (1) any
-------- -------
such termination must be preceded by at least three (3) days written notice to
the Lender; (2) Borrower shall be required to pay in full both (A) all
outstanding Revolving Advances owing by it, together with all accrued and unpaid
interest thereon and all accrued and unpaid fees and expense which are then due
and payable by Borrower hereunder and under any other Loan Document and (3)
notwithstanding such termination, no Collateral of Borrower shall be released
and all Collateral of Borrower shall continue to secure all Obligations of
Borrower then and thereafter outstanding unless and until all such Obligations
of Borrower are fully paid and satisfied.
2.5 Use of Proceeds.
---------------
All proceeds of Revolving Advances shall be used for working capital
purposes in the ordinary course of Borrower's business.
2.6 Increased Costs or Reduced Return.
---------------------------------
If, due to either (a) the introduction of or any change in or in the
interpretation of any U.S. law or regulation, or (b) the compliance with any
guideline or request from any governmental authority, there shall be any
increase in the cost to Lender of maintaining its commitments hereunder or
agreeing to make or making, funding or maintaining Revolving Advances to
Borrower, or any reduction in the rate of return on Lender's capital as a
consequence of its obligations hereunder to a level below that which Lender
would have achieved but for such events described in clauses (a) and (b) above,
Borrower shall, from time to time, upon demand by Lender, pay to Lender
additional amounts sufficient to compensate Lender for such increased costs or
reduced return within ten (10) Business Days of receipt of the receipt of the
certificate referred to below. A certificate identifying with reasonable
specificity the basis for and the amount of such increased costs or reduced
return shall be submitted to
13
<PAGE>
Borrower by Lender and shall be conclusive and binding for all purposes, absent
manifest error. In determining such amount, Lender shall use reasonable
averaging and attribution methods.
2.7 Indemnification of Lender.
-------------------------
At all times prior to and after the consummation of the transactions
contemplated by this Agreement, Borrower agrees to hold Lender, its directors,
officers, employees, agents, Affiliates, successors and assigns harmless from
and to indemnify Lender and its directors, officers, employees, agents,
Affiliates, successors and assigns against, any and all losses, damages, costs
and expenses (including, without limitation, attorney's fees, costs and
expenses) incurred by any of the foregoing, whether direct, indirect or
consequential, as a result of or arising from or relating to any "Proceedings"
(as defined below) by any Person, whether threatened or initiated, asserting a
claim for any legal or equitable remedy against any Person under any statute,
case or regulation, including, without limitation, any federal or state
securities laws or under any common law or equitable case or otherwise, arising
from or in connection with this Agreement, and any other of the transactions
contemplated by this Agreement except to the extent such losses, damages, costs
or expenses are due to the wilful misconduct or gross negligence of Lender. As
used herein, "Proceedings" shall mean actions, suits or proceedings before any
-----------
court, governmental or regulatory authority. Borrower further agrees to
indemnify any Person to whom Lender transfers or sells all or any portion of its
interest in the Obligations or participations therein on terms substantially
similar to the terms set forth above. Lender shall not be responsible or liable
to any Person for consequential damages which may be alleged as a result of this
Agreement or any of the transactions contemplated hereby. The obligations of
Borrower under this Section 2.7 shall survive the termination of this Agreement
and payment of the Obligations but shall terminate upon expiration of the
applicable statute or period of limitations.
3. COLLECTIONS.
-----------
3.1 Collateral Reserve Account; Lockbox Accounts.
--------------------------------------------
To the extent such has not been done prior to the Closing Date, then on the
Closing Date, Borrower shall establish, and thereafter shall maintain, with
Lender, a separate Collateral Reserve Account, or series thereof, as Lender may
permit or require, into which Borrower shall be obliged to transfer and deliver
all cash, checks, drafts, items and other instruments for the payment of money
which Borrower has received or may at any time hereafter receive in full or
partial payment for its Inventory Collateral or otherwise as proceeds of its
Accounts Receivable Collateral and any other Collateral; and pending such
transfer and delivery, Borrower shall be deemed to hold any such funds in trust
for the benefit of Lender. All collected balances in Borrower's Collateral
Reserve Account shall be applied by Lender on a daily basis in payment of
Borrower's Revolving Advances. Borrower shall not be entitled to draw on its
Collateral Reserve Account without the prior written consent of Lender;
provided, however, that, at any time during which collected balances exist in
- -------- -------
the Collateral Reserve Account, if there are no Revolving Advances then owing by
Borrower and no other Obligations are then due and payable
14
<PAGE>
by Borrower, and provided that no Default Condition or Event of Default is in
existence, Borrower may withdraw such collected balances, or any portion
thereof, therefrom for use in its business operations. Lender may, additionally,
at any time after the occurrence and during the continuance of an Event of
Default, in its sole discretion, direct Account Debtors to make payments on the
Accounts Receivable Collateral, or portions thereof, of one, or more, or
Borrower directly to Lender, and the Account Debtors are hereby authorized and
directed to do so by Borrower upon Lender's direction, and the funds so received
shall also be deposited in Borrower's Collateral Reserve Account, and applied as
aforesaid.
4. SECURITY INTEREST -- COLLATERAL.
-------------------------------
As security for the payment of the Revolving Advances owing by it and all
other obligations whatsoever of Borrower to Lender and the performance by
Borrower of all covenants and requirements hereunder and under the other Loan
Documents, Borrower hereby grants to Lender a continuing, general lien upon and
security interest and title in and to the following described Property, wherever
located, whether now existing or hereafter acquired or arising (herein, the
"COLLATERAL"), namely: (a) the Accounts Receivable Collateral; (b) the Inventory
- -----------
Collateral; (c) the Equipment Collateral; (d) the Intangibles Collateral; (e)
the Balances Collateral; and (f) all products and/or proceeds of any and all of
the foregoing, including, without limitation, insurance or condemnation
proceeds, all Property received wholly or partly in trade or exchange for any of
the foregoing, and all rents, revenues, issues, profits and proceeds arising
from the sale, lease, license, encumbrance, collection or any other temporary or
permanent disposition of any of the foregoing or any interest therein.
5. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS
------------------------------------------------------- --------
RECEIVABLE COLLATERAL.
---------------------
With respect to the Accounts Receivable Collateral, Borrower hereby
represents, warrants and covenants to Lender as set forth in Section 5.1 through
5.4, inclusive.
5.1 Bona Fide Accounts.
------------------
Each item of the Accounts Receivable Collateral arises or will arise under
a contract between Borrower and the Account Debtor, or from the bona fide sale,
rental or delivery of goods to or performance of services for, the Account
Debtor.
15
<PAGE>
5.2 Good Title; No Existing Encumbrances.
------------------------------------
Borrower has good title to its Accounts Receivable Collateral free and
clear of all Liens thereon other than any Permitted Encumbrances, and no
financing statement covering the Accounts Receivable Collateral is on file in
any public office other than any evidencing Permitted Encumbrances.
5.3 Right to Assign; No Further Encumbrances.
----------------------------------------
Borrower has full right, power and authority to make this assignment of the
Accounts Receivable Collateral and hereafter will not pledge, hypothecate, grant
a security interest in, sell, assign, transfer, or otherwise dispose of the
Accounts Receivable Collateral, or any interest therein.
5.4 Power of Attorney.
-----------------
Borrower irrevocably designates and appoints Lender its true and lawful
attorney either in the name of Lender or in the name of Borrower to ask for,
demand, sue for, collect, compromise, compound, receive, receipt for and give
acquittances for any and all sums owing or which may become due upon any items
of the Accounts Receivable Collateral and, in connection therewith, to take any
and all actions as Lender may deem necessary or desirable in order to realize
upon the Accounts Receivable Collateral, including, without limitation, power to
endorse in the name of Borrower, any checks, drafts, notes or other instruments
received in payment of or on account of the Accounts Receivable Collateral, but
Lender shall not be under any duty to exercise any such authority or power or in
any way be responsible for the collection of the Accounts Receivable Collateral.
Lender hereby agrees that it will not exercise the foregoing power of attorney
except after the occurrence of, and during the continuation of, an Event of
Default.
6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INVENTORY
-----------------------------------------------------------------
COLLATERAL.
-----------
With respect to the Inventory Collateral, Borrower hereby represents,
warrants and covenants to Lender as set forth in Sections 6.1 through 6.5,
inclusive.
6.1 Sale of Inventory Collateral.
----------------------------
Borrower will not sell, lease, rent, exchange, or otherwise dispose of any
of the Inventory Collateral without the prior written consent of Lender, except
in the ordinary course of business for cash or on open account or on terms of
payment ordinarily extended to its customers. Upon the sale, lease, exchange,
rental or other disposition of any Inventory Collateral, the security interest
and lien created and provided for herein, without break in continuity and
without further
16
<PAGE>
formality or act, shall continue in and attach to any proceeds thereof,
including, without limitation, accounts, contract rights, shipping documents,
documents of title, bills of lading, warehouse receipts, dock warrants, dock
receipts and cash or non-cash proceeds, and in the event of any unauthorized
sale, shall continue in the Inventory Collateral itself.
6.2 Insurance.
---------
Borrower agrees that it will obtain and maintain insurance on the Inventory
Collateral, in such amounts and against such risks as Lender may reasonably
request, with insurers having a Best's rating of at least "A-" (unless otherwise
approved by Lender), with loss payable to Lender and reflecting Lender as an
additional insured as its interest may appear. Such insurance shall not be
cancelable by Borrower, unless with the prior written consent of Lender, or by
Borrower's insurer, unless with at least thirty (30) days advance written notice
to Lender.
6.3 Good Title; No Existing Encumbrances.
------------------------------------
Except with respect to any Permitted Encumbrances, Borrower owns the
Inventory Collateral free and clear of any Lien, and no financing statements or
other evidences of the grant of a security interest respecting the Inventory
Collateral exist on the public records as of the date hereof other than any
evidencing any Permitted Encumbrances.
6.4 Right to Grant Security Interest; No Further Encumbrances.
---------------------------------------------------------
Borrower has the right to grant a security interest in the Inventory
Collateral. Borrower will pay all taxes and other charges against the Inventory
Collateral, and Borrower will not use the Inventory Collateral illegally or
allow the Inventory Collateral to be encumbered except for the security interest
in favor of Lender granted herein and except for any Permitted Encumbrances.
6.5 Location of Inventory Collateral.
--------------------------------
Borrower hereby represents and warrants to Lender that, as of the date
hereof, the Inventory Collateral (except for certain portions thereof in transit
or located upon the premises of a rental or lease customer) of Borrower is
situated only at one or more of the Collateral Locations and Borrower covenants
with Lender not to locate the Inventory Collateral at any location other than a
Collateral Location or the premises of a rental or lease customer without at
least thirty (30) days prior written notice to Lender. In addition, to the
extent Borrower should warehouse any of the Inventory Collateral at any time
hereafter, Borrower acknowledges and agrees that such warehousing may be
conducted only by Borrower or warehousemen who have been pre-approved by Lender
and who, in any event, shall issue non-negotiable warehouse receipts in Lender's
name to evidence any such warehousing of goods constituting Inventory
Collateral. In any event, Borrower will not consign any Inventory Collateral to
any Person other than Borrower except upon first obtaining Lender's prior
written consent thereto.
17
<PAGE>
7. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO EQUIPMENT
------------------------------------------------------- ---------
COLLATERAL.
----------
With respect to the Equipment Collateral, Borrower hereby represents,
warrants and covenants to Lender as set forth in Section 7.1 through 7.5,
inclusive.
7.1 Sale of Equipment Collateral.
----------------------------
Borrower will not sell, lease, rent, exchange, or otherwise dispose of any
of the Equipment Collateral other than in the ordinary course of Borrower's
business without the prior written consent of Lender.
7.2 Insurance.
---------
Borrower agrees that it will obtain and maintain insurance on its Equipment
Collateral with such companies and in such amounts and against such risks as
Lender may reasonably request, with loss payable to Lender and reflecting Lender
as an additional insured as its interests may appear. Such insurance shall not
be cancelable by Borrower, unless with the prior written consent of Lender, or
by Borrower's insurer, unless with at least thirty (30) days advance written
notice to Lender.
7.3 Good Title; No Existing Encumbrances.
------------------------------------
Borrower owns its Equipment Collateral free and clear of any prior Lien
thereon other than with respect to any Permitted Encumbrances and no financing
statements or other evidences of the grant of a security interest respecting the
Equipment Collateral exist on the public records as of the date hereof other
than any evidencing any Permitted Encumbrances.
7.4 Right to Grant Security Interest; No Further Encumbrances.
---------------------------------------------------------
Borrower has the right to grant a security interest in its Equipment
Collateral. Borrower will pay all taxes and other charges against its Equipment
Collateral. Borrower will not use any Equipment Collateral illegally or allow
any Equipment Collateral to be encumbered except for the security interest in
favor of Lender granted herein and except for any Permitted Encumbrances.
7.5 Location.
--------
As of the date hereof, the Equipment Collateral is located only at one or
more of the Collateral Locations or the premises of a rental or lease customer
and, hereafter, Borrower
18
<PAGE>
covenants with Lender not to locate Equipment Collateral at any location other
than a Collateral Location without at least thirty (30) days advance written
notice to Lender.
8. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO BALANCES
----------------------------------------------------------------
COLLATERAL.
----------
With respect to the Balances Collateral, Borrower hereby represents,
warrants and covenants to Lender as set forth in Section 8.1 through 8.2,
inclusive.
8.1 Ownership.
---------
Borrower owns its Balances Collateral free and clear of any Liens, except
in favor of Lender and except for Permitted Encumbrances.
8.2 Liens.
-----
Borrower will not incur, create or suffer to exist any Lien upon its
Balances Collateral or sell, convey, hypothecate, pledge or assign its right,
title or interest therein, without the prior written consent of Lender thereto
other than for the Lien created hereunder and the Permitted Encumbrances.
9. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INTANGIBLES
-------------------------------------------------------------------
COLLATERAL.
----------
With respect to the Intangibles Collateral, Borrower hereby represents,
warrants and covenants to Lender as set forth in Sections 9.1 through 9.3,
inclusive.
9.1 Ownership.
---------
Borrower owns its Intangibles Collateral free and clear of any Liens
thereon other than with respect to any Permitted Encumbrances and no financing
statements or other evidences of the grant of a security interest respecting the
Intangibles Collateral exist on the public records as of the date hereof other
than any evidencing any Permitted Encumbrances.
9.2 Liens.
-----
Hereafter, Borrower will not incur, create or suffer to exist any Lien upon
the Intangibles Collateral, except for the security interest granted herein and
except for any Permitted Encumbrances, or sell, convey, hypothecate, pledge or
assign its right, title or interest therein.
9.3 Preservation.
------------
19
<PAGE>
Hereafter, Borrower will take all necessary and appropriate measures to
obtain, maintain, protect and preserve the Intangibles Collateral including,
without limitation, registration thereof with the appropriate state or federal
governmental agency or department.
10. GENERAL REPRESENTATIONS AND WARRANTIES.
--------------------------------------
In order to induce Lender to enter into this Agreement, Borrower hereby
represents and warrants to Lender (which representations and warranties,
together with the representations and warranties of Borrower contained in
Articles 5, 6, 7, 8 and 9 shall be deemed to be renewed as of the date of the
making of each Revolving Advance and after giving effect to all transactions and
actions permitted by this Agreement as set forth in Sections 10.1 through 10.17,
inclusive.
10.1 Existence and Qualification.
---------------------------
Borrower is a corporation duly organized and validly existing under, and
has filed (or will file prior to the due date therefor) its certified statement
of annual registration and paid all fees due for the current year under, the
laws of the State of Georgia. Borrower has its principal place of business,
chief executive office and office where it keeps all of its books and records at
the Executive Office and is duly qualified as a foreign corporation in good
standing in any other state wherein the conduct of its business or the ownership
of its Property requires such qualification and the failure to so qualify would
result in a material forfeiture. Except as may be set forth on Exhibit "D"
-----------
attached hereto, Borrower does not do business under any name or trade style
other than the name first inscribed hereinabove in the recitals hereto.
10.2 Authority; Validity and Binding Effect.
--------------------------------------
Borrower has the power to make, deliver and perform under the Loan
Documents, and to borrow hereunder, and has taken all necessary and appropriate
corporate or partnership action to authorize the execution, delivery and
performance of the Loan Documents. This Agreement constitutes, and the
remainder of the Loan Documents, when executed and delivered for value received,
will constitute, the valid obligations of Borrower, legally binding upon it and
enforceable against it in accordance with their respective terms, except as may
be limited by bankruptcy, insolvency or other, similar laws affecting the
enforcement of creditor's rights generally. The undersigned officers or
representatives of Borrower are duly authorized and empowered to execute, attest
and deliver this Agreement and the remainder of the Loan Documents for and on
behalf of Borrower, and to bind Borrower accordingly thereby.
10.3 No Material Litigation.
-----------------------
There are no proceedings pending or, so far as Borrower or its officers
know, threatened, before any court or administrative agency which in Borrower's
present opinion could reasonably be expected to materially and adversely affect
the financial condition or operations of Borrower.
10.4 Taxes.
-----
20
<PAGE>
Borrower has filed or caused to be filed all tax returns required to be
filed by it and have paid all taxes shown to be due and payable by it on said
returns or on any assessments made against them.
10.5 Organization.
------------
The articles of incorporation of and bylaws of Borrower are in full force
and effect under the laws of the State of Georgia and all amendments (if any)
thereto have been duly and properly made under and in accordance with all
applicable laws.
10.6 Insolvency.
----------
After giving effect to the funding of the initial Revolving Advances to be
made on the Closing Date, and the other transactions contemplated by this
Agreement and the uses by Borrower of the proceeds of the such loans and
advances as provided hereunder, (a) the fair value and present fair saleable
value of Borrower's assets are in excess of the total amount of Borrower's
liabilities, including known contingent liabilities; (b) Borrower will not have
incurred debts, nor will it intend to incur debts, beyond its ability to pay
such debts as they mature; and (c) Borrower does not have unreasonably small
capital to carry on Borrower's business as theretofore operated and all
businesses in which Borrower is about to engage. As used in this Section 10.7,
"debt" means any liability on a claim, and "claim" means (i) the right to
payment, whether or not such right is reduced to judgment, liquidated,
unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed,
legal, equitable, secured or unsecured, or (ii) the right to an equitable remedy
for breach of performance if such breach gives rise to a right to payment,
whether or not such right to an equitable remedy is reduced to judgment, fixed,
contingent, matured, unmatured, disputed, undisputed, secured or unsecured.
10.7 Title.
-----
Borrower owns all of its Properties subject to no Lien of any kind except
as otherwise disclosed in writing to Lender and, as to the Collateral, except
------
for the Permitted Encumbrances.
10.8 Margin Stock.
------------
No Borrower is engaged principally, or as one of its important activities,
in the business of purchasing or carrying any Margin Stock and no part of the
proceeds of any borrowing made pursuant hereto will be used to purchase or carry
any Margin Stock or to extend credit to others for the purpose of purchasing or
carrying any Margin Stock, or be used for any purpose which violates, or which
is inconsistent with, the provisions of Regulation X of the Board of Governors
of the Federal Reserve System. In connection herewith, if requested by Lender,
Borrower will furnish to each Lender a statement in conformity with the
requirements of Federal Reserve Form F.R. U-1 referred to in Regulation U of
said Board to the foregoing effect.
21
<PAGE>
10.9 No Violations.
-------------
The execution, delivery and performance by Borrower of this Agreement and
the Loan Documents have been duly authorized by all necessary corporate or
partnership action and do not and will not require any consent or approval of
the shareholders or any partner of Borrower which will not have been obtained
prior to the Closing Date, violate any provision of any material law, rule,
regulation (including, without limitation, Regulation X of the Board of
Governors of the Federal Reserve System), order, writ, judgment, injunction,
decree, determination or award presently in effect having applicability to
Borrower or of the articles of incorporation or bylaws of Borrower, or result in
a breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which Borrower is a
party or by which it or its properties may be bound or affected; and Borrower is
not in default under any such material law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award or any such indenture,
agreement, lease or instrument.
10.10 ERISA.
-----
Borrower is in substantial compliance with the requirements of ERISA with
respect to each Employee Benefit Plan. No fact, including, but not limited to,
any Reportable Event exists in connection with any Plan which, more likely than
not, would constitute grounds for the termination of any such Plan by the PBGC
or for the appointment by the appropriate United States district court of a
trustee to administer any such Plan. Borrower does not maintain or contribute to
any Plan which has an "accumulated funding deficiency" (as defined in Section
412 of the Internal Revenue Code). Borrower does not maintain or contribute to
any Plan which has incurred any material liability to the PBGC (other than for
premium payments due in the ordinary course of business, which premiums will be
paid when due and payable). Borrower does not maintain or contribute to any
Plan which has insufficient assets to qualify for a standard termination
pursuant to Section 4041 of ERISA. Borrower is not required pursuant to the
terms of any applicable collective bargaining agreement to pay or accrue any
contributions with respect to any Plan which is a Multiemployer Plan and there
has been no complete or partial withdrawal by Borrower from any such
Multiemployer Plan within the contemplation of MPPAA. Except as concurrently
herewith disclosed to Lender in writing, (A) Borrower does not maintain or
contribute to any Employee Benefit Plan which provides medical benefits, life
insurance benefits or other welfare benefits as defined in Section 3(1) of ERISA
(excluding severance pay and benefits required under Section 601 of ERISA) for
former employees of Borrower, and (B) Borrower does not maintain or contribute
to any non-qualified, unfunded deferred compensation plan. Neither Borrower nor
any fiduciary with respect to any Employee Benefit Plan has engaged in a
"Prohibited transaction" within the meaning of Section 4975 of the Internal
Revenue Code or Section 406 of ERISA with respect to any Employee Benefit Plan.
10.11 Financial Statements.
--------------------
The audited financial statements of Borrower for its most recently
completed fiscal year and the unaudited financial statements of Borrower for the
most recently completed fiscal quarter, copies of which have heretofore been
furnished to Lender, are complete and accurately
22
<PAGE>
and fairly represent the financial condition of Borrower, the results of its
operations and the transactions in its equity accounts as of the date and for
the periods referred to therein, and have been prepared in accordance with GAAP
throughout the period involved. There is no material Debt of Borrower as of the
date of such financial statements which is not reflected therein or in the notes
thereto. There has been no material adverse change in the financial conditions
or operations of Borrower since the respective dates of the balance sheets
contained in such financial statements.
10.12 Purchase of Collateral.
----------------------
Borrower has not purchased any of the Collateral in a bulk transfer or in a
transaction which was outside the ordinary course of the business of Borrower's
seller.
10.13 Pollution and Environmental Control.
-----------------------------------
Borrower has obtained all permits, licenses and other authorizations which
are required under, and is in material compliance with all Environmental Laws
the noncompliance with which would or might have a material adverse effect on
its business, financial condition or Property.
10.14 Possession of Franchises, Licenses, Etc.
---------------------------------------
Borrower possesses all franchises, certificates, licenses, permits and
other authorizations from governmental political subdivisions or regulatory
authorities, and all patents, trademarks, service marks, trade names,
copyrights, licenses and other rights, free from burdensome restrictions, that
are necessary for the ownership, maintenance and operation of any of its
material Property and assets, and Borrower is not in violation of any thereof
which would or might have a material adverse effect on its business, financial
condition or Property.
10.15 Disclosure.
----------
To Borrower's knowledge, neither this Agreement nor any other document,
certificate or statement furnished to Lender by or on behalf of Borrower in
connection herewith contain any untrue statement of a material fact or omits to
state a material fact necessary in order to make the statements contained herein
and therein not misleading. To Borrower's knowledge, there is no fact peculiar
to Borrower which materially adversely affects or in the future may (so far as
Borrower can now reasonably foresee) materially adversely affect the business,
Property or assets, or financial condition of Borrower which has not been set
forth in this Agreement or in the other documents, certificates and statements
furnished to Lender by or on behalf of Borrower prior to the date hereof in
connection with the transactions contemplated hereby, when taken as a whole.
10.16 Subsidiaries.
------------
23
<PAGE>
Borrower has no Subsidiaries.
10.17 Year 2000 Readiness.
-------------------
Borrower represents and warrants that it has developed, or will have
developed by June 30, 1999, a comprehensive plan (the "Y2K Plan") for insuring
that Borrower's computer hardware, software and related systems will be Y2K
compliant. Borrower represents and warrants that it has taken or will take all
required actions to meet each Y2K Plan milestone such that all computer
hardware, software and related systems will be Year 2000 compliant in accordance
with its Y2K Plan. "Y2K compliant" shall mean that all applicable computer
hardware, software and related systems used by Borrower in its business
operations will (i) handle date information involving any and all dates before,
during or after January 1, 2000, including accepting input, providing output and
performing date calculations in whole or in part, (ii) operate accurately
without interruption on or in respect of any and all dates before, during or
after January 1, 2000 and without any change in performance, (iii) respond to
and process two digit year input without creating any ambiguity as to the
century, and (iv) store and provide date input information without creating any
ambiguity as to the century.
11. GENERAL AFFIRMATIVE COVENANTS.
-----------------------------
Borrower covenants to Lender that from and after the date hereof, and until
such time as Lender shall have terminated this Agreement in writing, Borrower
will comply with and cause each Subsidiary to comply with the covenants set
forth in Sections 11.1 through 11.18, inclusive.
11.1 Records Respecting Collateral.
-----------------------------
All records of Borrower with respect to the Collateral will be kept at the
Executive Office (as it may be changed pursuant to Section 11.12) and will not
be removed from such address without the prior written consent of Lender.
11.2 Further Assurances.
------------------
Borrower shall duly execute and/or deliver (or cause to be duly executed
and/or delivered) to Lender any instrument, invoice, document, document of
title, dock warrant, dock receipt, warehouse receipt, bill of lading, order,
financing statement, assignment, waiver, consent or other writing which may be
reasonably necessary to Lender to carry out the terms of this Agreement and any
of the other Loan Documents and to perfect its security interest in and
facilitate the collection of the Collateral, the proceeds thereof, and any other
property at any time constituting security to Lender. Borrower shall perform or
cause to be performed such acts as Lender may reasonably request to establish
and maintain for Lender a valid and perfected Lien on the Collateral, free and
clear of any Liens other than in favor of Lender and other than the Permitted
Encumbrances.
24
<PAGE>
11.3 Right to Inspect.
----------------
Lender (or any person or persons designated by it) shall, in its sole
discretion, have the right to call at any place of business of Borrower or any
of its Subsidiaries at any reasonable time during normal business hours upon
advance notice reasonable under the circumstances), and, without hindrance or
delay, inspect the Collateral and inspect, audit, check and make extracts from
Borrower's or such Subsidiary's books, records, journals, orders, receipts and
any correspondence and other data relating to the Collateral, to Borrower's or
its Subsidiaries, business or to any other transactions between the parties
hereto. Without limiting the foregoing, Lender shall be entitled to perform
periodic field audits of Borrower's operations. Lender shall hold in confidence
Borrower's and its Subsidiaries' confidential or proprietary information
obtained pursuant to this Agreement and shall not disclose the same to any third
party, except: (i) as required by law or by judicial or administrative process
-------
or to appropriate regulatory authorities and (ii) to Lender's attorneys and
accountants, who have previously or contemporaneously therewith been advised of
the confidential and proprietary nature of such information, and who have agreed
to maintain the confidential nature thereof.
11.4 Reports.
-------
Borrower shall within forty-five (45) days after the end of each fiscal
quarter furnish or cause to be furnished to Lender a status report concerning
Borrower's Accounts Receivable, certified by a duly authorized officer on behalf
of Borrower in such form as is reasonably acceptable to Lender. Additionally,
Lender may, at any time, request that Borrower verify the individual account
balances of the individual Account Debtors by such means as Borrower and Lender
then mutually agree, provided that, after any Event of Default has continued and
while it is continuing Lender shall have the further right to verify such
balances directly. In any event, upon request from Lender, made at any time
hereafter, Borrower shall furnish Lender with a then current Account Debtor
address list.
11.5 Settlement Sheets.
-----------------
To the extent requested by Lender, by the twentieth (20th) day of each
calendar month for the calendar month just ended, or more frequently if
requested by Lender, Borrower shall prepare and deliver to Lender a settlement
report with respect to satisfaction of the Margin Requirement as of the date of
report submission (to include a calculation of Eligible Accounts) to be in such
form as Lender may deliver for such purpose to Borrower from time to time
hereafter, the statements in which, in each instance, shall be certified as to
truth and accuracy by a duly authorized officer on behalf of Borrower.
25
<PAGE>
11.6 Periodic Financial Statements of Borrower.
-----------------------------------------
Borrower shall, as soon as practicable, and in any event within forty-five
(45) days after the end of each fiscal quarter, furnish to Lender, unaudited
financial statements of Borrower and its consolidated Subsidiaries, on a
consolidating basis, including balance sheets and income statements, for the
fiscal quarter then ended, and for the fiscal year to date, certified as to
truth and accuracy by Borrower's chief executive officer or chief financial
officer.
11.7 Annual Financial Statements of Borrower.
---------------------------------------
Borrower shall, as soon as practicable, and in any event within one hundred
twenty (120) days after the end of each Fiscal Year, furnish to Lender the
annual audit report of Borrower and its consolidated Subsidiaries, on a combined
basis, including a balance sheet, and statement of cash flow, as appropriate
(but, for the current fiscal year being a balance sheet only), certified without
material qualification, by Arthur Andersen, LLP or such other independent
certified public accountants selected by Borrower but acceptable to Lender, and
prepared in accordance with GAAP. Borrower shall cause said accountants to
furnish Lender, together with the aforesaid audit report, a statement that, in
the normal course of making their examination of such financial statements, they
obtained no knowledge of any Event of Default or Default Condition relating to
this Agreement or the Notes, or, in lieu thereof, a statement specifying the
nature and period of existence of any such Event of Default or Default Condition
disclosed by their examination.
11.8 Payment of Taxes.
----------------
Borrower shall pay and discharge all taxes, assessments and governmental
charges upon its income and its Property the non-payment of which could
reasonably be expected to have a material adverse effect on Borrower's financial
condition or business operations prior to the date on which penalties attach
thereto, unless and to the extent only that (x) such taxes, assessments and
governmental charges are being contested in good faith and by appropriate
proceedings by Borrower or its applicable Subsidiary and (y) Borrower maintains
reasonable reserves on its books therefor in accordance with GAAP.
11.9 Maintenance of Insurance.
------------------------
In addition to and cumulative with any other requirements imposed herein or
in any Loan Document on Borrower with respect to insurance, Borrower shall
maintain insurance with responsible insurance companies on such of its Property,
in such amounts and against such risks as is customarily maintained by similar
businesses operating in the same vicinity, but in any event to include public
liability, worker's compensation, loss, damage, flood, windstorm, fire, theft,
extended coverage and product liability insurance in amounts reasonably
satisfactory to Lender, which such insurance shall not be cancellable by
Borrower, unless with the prior written consent of Lender, or by Borrower's
insurer, unless with at least thirty (30) days advance written
26
<PAGE>
notice to Lender thereof. Borrower shall file with Lender on or before the
Closing Date and annually upon Lender's request thereafter copies of insurance
policies, certified by an officer of Borrower's insurance company, to Lender's
satisfaction, of such insurance then in effect stating the names of the
insurance companies, the amounts and rates of insurance, the date of expiration
thereof, the properties and risks covered thereby and the insured with respect
thereto, and, within thirty (30) days after notice in writing from Lender,
obtain such additional insurance as Lender may reasonably request.
11.10 Maintenance of Property.
-----------------------
Borrower shall maintain its Properties in good working condition, ordinary
wear and tear excepted.
11.11 Certificate of No Event of Default; Compliance Certificate;
-----------------------------------------------------------
Notice of Default.
- -----------------
Borrower shall, on a quarterly basis not later than forty-five (45) days
after the close of each of its first three (3) fiscal quarters and not later
than one hundred twenty (120) days after the close of its Fiscal Year, certify
to Lender, in a statement executed by Borrower's chief executive officer or
chief financial officer, as appropriate, that no Event of Default and no Default
Condition exists or has occurred and is existing, or, if an Event of Default or
Default Condition exists, specifying the nature and period of existence thereof
and setting forth the action which Borrower proposes to take with respect
thereto. Such certificate shall be accompanied by the certificate of such
officer on behalf of Borrower showing, in reasonable detail, compliance with
Sections 12.1 through 12.3, inclusive, by Borrower for the immediately preceding
fiscal quarter. In addition, promptly upon its becoming aware of the occurrence
of any Default Condition or Event of Default, Borrower will notify Lender
thereof in writing, specifying the nature and period of existence thereof and
the action which Borrower proposes to take with respect thereto.
11.12 Change of Principal Place of Business, Etc.
------------------------------------------
Borrower hereby understands and agrees that if, at any time hereafter, it
elects either (i) to move its Executive Office, (ii) to change its name,
identity or its structure to other than a corporate structure, or (iii) to add
any Collateral Location, Borrower will notify Lender in writing at least thirty
(30) days prior thereto and take such action in regard thereto as Lender may
reasonably request to continue the perfection of the Lender's security interest
in the Collateral in respect of such change.
11.13 Waivers.
-------
With respect to each of the Collateral Locations, Borrower will obtain such
waivers of lien, estoppel certificates or subordination agreements as Lender may
reasonably require to insure the priority of its security interest in that
portion of the Collateral situated at such locations.
27
<PAGE>
11.14 Preservation of Corporate Existence.
-----------------------------------
Borrower shall preserve and maintain its corporate existence, rights,
franchises and privileges in its jurisdiction of incorporation, and qualify and
remain qualified as a foreign corporation or partner ship (if applicable) in
each Collateral Location state and each jurisdiction in which such qualification
is necessary or desirable in view of its business and operations or the
ownership of its Property to avoid a material forfeiture.
11.15 Compliance with Laws.
--------------------
Borrower shall comply in all material respects with the requirements of all
applicable laws, rules, regulations and orders of any governmental authority,
noncompliance with which would materially adversely affect its business or
credit. Without limiting the foregoing, Borrower shall obtain and maintain all
permits, licenses and other authorizations which are required under, and
otherwise comply with, all Environmental Laws (as defined in Section
11.18(a)(i)), and all laws pertaining to consumer credit, privacy and telephonic
transmissions.
11.16 ERISA.
-----
Borrower shall: (i) make prompt payments of contributions required by the
terms of each Employee Benefit Plan or to meet the minimum funding standards set
forth under ERISA with respect to each Employee Benefit Plan to which such
standards apply; (ii) notify Lender immediately of any fact, including, but not
limited to, any Reportable Event, arising in connection with any Plan which,
more likely than not, would constitute grounds for the termination thereof by
the PBGC or for the appointment by the appropriate United States district court
of a trustee to administer the Plan; (iii) notify Lender immediately of
Borrower's or any Subsidiary's intent to terminate any Plan; (iv) notify Lender
immediately of the adoption of an amendment to any Plan (or of any other Event)
which causes any Plan to fail to have sufficient assets to qualify for a
standard termination under Section 4041 of ERISA; (v) notify Lender immediately
if the aggregate unfunded liability with regard to all Plans increases to an
amount in excess of One Hundred Thousand Dollars ($100,000); (vi) notify Lender
immediately such if Borrower obtains information indicating that the aggregate
withdrawal liability with regard to all Plans increases to an amount in excess
of One Hundred Thousand Dollars ($100,000); (vii) notify Lender immediately of
any filing of a request for a waiver of the minimum funding standard with regard
to any Employee Benefit Plan to which such standard applies; (viii) promptly
after receipt thereof, furnish to Lender a copy of any notice received by
Borrower or any of its Subsidiaries from the PBGC relating to the intention of
the PBGC to terminate any Plan or to appoint a trustee to administer any Plan;
(ix) promptly after receipt thereof furnish to Lender a copy of any notice
received by Borrower or any Subsidiary of Borrower from the Internal Revenue
Service relating to the intention of the Internal Revenue Service to disqualify
any Employee Benefit Plan or to refuse to grant a favorable determination letter
with regard to any Employee Benefit Plan; (x) notify Lender immediately of any
lawsuit, claim for damages or administrative proceeding in which an Employee
Benefit Plan or a fiduciary with respect thereto is a defendant, wherein the
amount of damages claimed exceeds, either alone or in the aggregate with all
other such lawsuits, claims and administrative proceedings, One Hundred Thousand
28
<PAGE>
Dollars ($100,000); and (xi) furnish to Lender, promptly upon its request
therefor, such additional information concerning each and every Employee Benefit
Plan, including, but not limited to, the annual report required to be filed
under ERISA, as may be reasonably requested.
11.17 Litigation.
----------
Promptly, upon its receipt of notice or knowledge thereof, Borrower will
report to Lender any lawsuit or administrative proceeding in which Borrower or
any of its Subsidiaries is a defendant wherein the amount of damages claimed
against Borrower or any of its Subsidiaries exceeds One Hundred Thousand Dollars
($100,000).
11.18 Environmental Compliance.
------------------------
(a) Definitions. The following definitions shall apply for
-----------
purposes of this Section 11.18:
(i) "Environmental Law" shall mean any federal, state or local
-----------------
statute, regulation or ordinance or any judicial or administrative decree
or decision now or hereafter promulgated with respect to any "Hazardous
Substance" (as hereinafter defined), drinking water, ground water,
landfills, open dumps, storage tanks, underground storage tanks, solid
waste, waste water, storm water runoff, waste emissions, or wells. Without
limiting the generality of the foregoing, the term Environmental Law shall
encompass each of the following statutes, as may be amended from time to
time, and all regulations from time to time promulgated thereunder: the
Comprehensive Environmental Response, Compensation and Liability Act of
1980 (codified in scattered sections of 26 U.S.C.; 33 U.S.C.; 42 U.S.C. and
42 U.S.C. (S) 9601 et seq.), the Clean Water Act of 1977 (33 U.S.C. (S)
-------
1251 et seq.), the Clean Air Act (42 U.S.C. (S) 7401 et seq.), the Resource
------- -------
Conservation and Recovery Act of 1976 (42 U.S.C. 9 6901 et seq.), the Safe
-------
Drinking Water Act (21 U.S.C. (S) 349; 42 U.S.C. (S)(S) 201 and 300f
through 300j-9) and the Toxic Substances Control Act (15 U.S.C. (S) 2601 et
--
seq.).
----
(ii) "Release" shall mean any spilling, leaking, pumping,
-------
emitting, emptying, discharging, injecting, storing, escaping, leaching,
dumping, or discharging, burying, abandoning, or disposing into the
environment by Borrower or any Subsidiary or any predecessor in interest of
Borrower.
(iii) "Hazardous Substance" shall mean each and every element,
-------------------
compound, chemical mixture, petroleum and gas product, substance,
contaminant, pollutant including, without limitation, substances which are
toxic, carcinogenic, ignitable, corrosive or otherwise dangerous to human,
plant or animal health or well-being, and any other substance defined as a
"hazardous substance," "hazardous waste," "hazardous material," "toxic
material," "toxic waste," or "special waste" under any Environmental Law
and any other substance which by law requires special handling in its
collection, storage, treatment or disposal.
29
<PAGE>
(b) Indemnity for Liabilities. Borrower shall indemnify Lender and
-------------------------
hold Lender harmless from and against any and all claims, demands, losses,
liabilities, strict liabilities, damages, sanctions, penalties, fines, injuries,
expenses, costs (including attorney's fees), settlements, or judgments of any
and every kind whatsoever paid incurred or suffered by, or asserted against,
Lender by any Person arising out of, in connection with or related in any way to
(a) the Release or presence at, from, on, in or under any Collateral Location of
any Hazardous Substance, or (b) any act, omission, condition, conduct,
transaction or occurrence at, from, on or under any Collateral Location in
violation of any Environmental Law, in each case, if and to the extent caused by
or within the control of Borrower or any Subsidiary.
(c) Notice to Lender. If Borrower receives any notice of (i) Release
----------------
of any Hazardous Substance, notification of which must be given to any
governmental agency under any Environmental Law, or notification of which has,
in fact, been given to any governmental agency, or (ii) any complaint, order,
citation or notice with regard to air emissions, water discharges, or any other
environmental health or safety matter affecting Borrower or any Collateral
Location from any person or entity (including, without limitation, the
Environmental Protection Agency), then Borrower shall immediately notify Lender
orally and in writing of said Release, complaint, order, citation or notice.
(d) Environmental Audit. Lender shall have the right, after the
-------------------
occurrence of any event required to be reported to Lender pursuant to Section
11.18(c) hereof which is caused by or within the control of Borrower, in its
sole discretion, exercised in a commercially reasonable manner, to require
Borrower to perform, at Borrower's expense using an environmental consultant
selected by Borrower and acceptable to Lender, an environmental audit and, if
deemed necessary by Lender, an en vironmental risk assessment, each of which
must be satisfactory to Lender. Should Borrower fail to order any such
environmental audit or risk assessment within thirty (30) days after Lender's
written request, Lender shall have the right but not the obligation to retain an
environmental consultant to perform any such environmental audit or risk
assessment. All costs and expenses incurred by Lender in the exercise of such
rights may be charged by Lender as Revolving Advances.
(e) Survival. Assignability, and Transferability. The indemnity set
---------------------------------------------
forth in subsection (a) of this Section 11.18 shall survive any exercise by
Lender or Lender of any remedies under this Agreement or any Loan Document,
including without limitation any power of sale, and shall not merge with any
deed or bill of sale given by Borrower to Lender in lieu of foreclosure or any
deed or bill of sale given pursuant to a foreclosure. It is agreed and intended
by Borrower and Lender that the indemnity set forth above in subsection (a) of
this Section 11.18 may be assigned or otherwise transferred by Lender to its
successors and assigns and to any subsequent purchasers of all or any portion of
any Collateral by, through or under Lender, without notice to Borrower and
without any further consent of any other Person. To the extent consent to any
such assignment or transfer is required by applicable law, advance consent to
any such assignment or transfer is hereby given by Borrower in order to maximize
the extent and effect of the warranties, representations, and indemnity given
hereby.
12. FINANCIAL COVENANTS.
--------------------
30
<PAGE>
From and after the date hereof, and until such time as Lender shall have
terminated this Agreement in writing, the covenants set forth in Sections 12.1
and 12.3, inclusive, shall apply to Borrower on a consolidated basis in respect
of its financial condition and performance.
12.1 Debt/Tangible Net Worth Ratio.
-----------------------------
Borrower shall have at all times a Leverage Ratio of not more than 2.5:1.
12.2 Tangible Net Worth.
------------------
The Tangible Net Worth of Borrower shall at all times be at least Thirty
Million Dollars ($30,000,000), all as determined under GAAP, and shall annually
increase over the amount as of the year end of the prior Fiscal Year.
12.3 Fixed Charge Coverage Ratio.
---------------------------
Borrower shall maintain as of the end of each fiscal quarter in each Fiscal
Year a Fixed Charge Coverage Ratio of at least 1.2:1, as determined under GAAP
on a rolling four (4) quarters' basis.
13. NEGATIVE COVENANTS.
------------------
Borrower covenants to Lender that from and after the date hereof and until
such time as Lender shall have terminated this Agreement in writing, Borrower
will not, without the prior written consent of Lender, do or permit to be done
by any Subsidiary any of the things or acts set forth in Sections 13.1 through
13.11, inclusive.
13.1 No Liens.
--------
Create, assume, or suffer to exist any Lien of any kind in or on any of its
Property except for Permitted Encumbrances.
------ ---
13.2 Debt.
----
Incur, assume, or suffer to exist any Debt, except for: (i) the Obligations
------ ---
and any other Debt for borrowed funds existing on the date of this Agreement;
(ii) Debt for borrowed funds incurred pursuant to financial contractual
agreements made and entered into, and disclosed in writing to Lender, prior to
the date of this Agreement; (iii) Debt for borrowed funds owing to Lender,
whether hereunder or otherwise; (iv) trade payables and contractual obligations
to suppliers and customers incurred in the ordinary course of business; (v)
accrued pension fund and other employee benefit plan obligations and liabilities
(provided, however, that such Debt does not result in the existence of any Event
of Default or Default Condition under any other provision of this Agreement);
(vi) deferred taxes; (vii) Debt resulting from endorsements of negotiable
instruments received in the ordinary course of its business; (viii) Debt arising
in respect of "Permitted Encumbrances"; (ix) Debt arising from the receipt of
intercompany loans
31
<PAGE>
or advances from any Subsidiary; and (x) purchase money Debt not exceeding at
any one time, in the aggregate, Five Hundred Thousand Dollars ($500,000).
13.3 Contingent Liabilities.
----------------------
Guarantee, endorse, become surety with respect to or otherwise become
directly or contingently liable for or in connection with the obligations of any
other Person, except guarantees in favor of Lender and endorsements of
negotiable instruments for collection in the ordinary course of business.
13.4 Distributions.
-------------
Except as otherwise provided herein, pay any dividend, make any
distribution or take any action which would have an effect equivalent to any of
the foregoing; provided, however, that, notwithstanding the foregoing so long as
-------- -------
no Event of Default then exists or would be caused by or result from the making
of such payment, Borrower may pay dividends and make distributions from time to
time in an amount not in excess of forty percent (40%) of Borrower's Net Income.
13.5 Stock Redemptions, Etc.
----------------------
Purchase, redeem, or otherwise acquire for value any shares of any class of
capital stock if (i) any Event of Default then exists or would be caused by or
result from the making of such payment or (ii) Borrower is then prohibited from
doing so by applicable law.
13.6 Restricted Investment.
---------------------
Make any Restricted Investment, except that Borrower may make loans and
advances to any of its Subsidiaries at any time or from time to time.
13.7 Merger, Transfer, Etc.
---------------------
Dissolve or otherwise terminate its corporate status; or enter into any
merger, reorganization or consolidation; make any substantial change in the
basic type of business conducted by it as of the date hereof; or sell, assign,
lease or otherwise dispose of (whether in one transaction or a series of
transactions) all, substantially all or a substantial part of its property or
assets, other than sales in the ordinary course of business.
13.8 ERISA.
-----
Permit any Plan to become underfunded such that it would not have
sufficient assets in order to quality for a standard termination under Section
4041 of ERISA.
13.9 Transactions with Affiliates.
----------------------------
32
<PAGE>
Enter into, or be a party to, any transaction with any Affiliate of
Borrower, except in the ordinary course of and pursuant to the reasonable
requirements of its business and upon fair and reasonable terms that are no less
favorable to Borrower or such Subsidiary than would be obtained in a comparable
arm's length transaction with a Person not an Affiliate or as otherwise may be
approved in writing by Lender from time to time hereafter, upon full disclosure
to Lender, or has been disclosed to Lender on or before the date hereof.
13.10 Fiscal Year.
-----------
Change its Fiscal Year end from that in effect on the Closing Date, except
that Borrower may change its Fiscal Year to December 31.
14. EVENTS OF DEFAULT.
-----------------
The occurrence of any events or conditions described in Sections 14.1
through 14.14 shall constitute an Event of Default hereunder, provided that any
requirement for the giving of notice or the lapse of time, or both, has been
satisfied.
14.1 Notes.
-----
Borrower shall fail to make any payment of principal of or interest on the
Revolving Note within five (5) calendar days after the date when due.
14.2 Obligations.
-----------
Borrower shall fail to make any payments of principal of or interest on any
of the Obligations (other than the Notes) or any other Obligations to Lender,
within five (5) calendar days after receipt of notice from Lender of such
failure to make payment (or after satisfaction of any shorter or longer
requirement for the giving of notice or the lapse of time, or both, contained in
the applicable agreement pertaining to such Obligations).
14.3 Misrepresentations.
------------------
Borrower shall make any representations or warranties in any of the Loan
Documents or in any certificate or statement furnished at any time hereunder or
in connection with any of the Loan Documents which, when taken as a whole,
proves to have been untrue or misleading in any material respect when made or
furnished.
14.4 Covenants.
---------
Borrower shall default in the observance or performance of any covenant or
agreement contained herein or in any of the other Loan Documents (other than a
failure described in Sections 14.1 or 14.2), unless such default is cured within
ten (10) calendar days after Borrower's receipt of notice from Lender of such
Default Condition.
33
<PAGE>
14.5 Damage, Loss, Theft or Destruction of Collateral.
------------------------------------------------
There shall have occurred material uninsured damage to, or loss, theft or
destruction of, any part of the Collateral of Borrower, or Borrower considered
as a whole, having a then current value in excess of One Hundred Thousand
Dollars ($100,000), unless such default is cured within ten (10) days after
Borrower, receipt of notice from Lender of such Default Condition.
14.6 Other Debts.
-----------
Borrower shall default in connection with any agreement evidencing,
securing or relating to any other Debt to, or under any operating lease with,
either Lender or, with respect to any Debt of One Hundred Thousand Dollars
($100,000) or more with any creditor other than a Lender, unless such default is
cured within thirty (30) days after Borrower's receipt of notice from Lender of
such Default Condition.
14.7 Voluntary Bankruptcy.
--------------------
Borrower shall file a voluntary petition in bankruptcy or a voluntary
petition or answer seeking liquidation, reorganization, arrangement,
readjustment of its debts, or for any other relief under the Bankruptcy Code, or
under any other act or law pertaining to insolvency or debtor relief, whether
state, federal, or foreign, now or hereafter existing; Borrower, shall enter
into any agreement indicating its consent to, approval of, or acquiescence in,
any such petition or proceeding; Borrower shall apply for or permit the
appointment by consent or acquiescence of a receiver, custodian or trustee of
Borrower for all or a substantial part of its Property; Borrower shall make an
assignment for the benefit of creditors; or Borrower shall be unable or shall
fail to pay its debts generally as such debts become due; or Borrower shall
admit, in writing, its inability or failure to pay its debts generally as such
debts become due.
14.8 Involuntary Bankruptcy.
----------------------
There shall have been filed against Borrower an involuntary petition in
bankruptcy or seeking liquidation, reorganization, arrangement, readjustment of
its debts or for any other relief under the Bankruptcy Code, or under any other
act or law pertaining to insolvency or debtor relief,, whether state, federal or
foreign, now or hereafter existing, which has not been dismissed within ninety
(90) days of the date the petition is filed; Borrower shall suffer or permit the
involuntary appointment of a receiver, custodian or trustee of Borrower or for
all or a substantial part of its Property; or Borrower shall suffer or permit
the issuance of a warrant of attachment, execution or similar process against
all or any substantial part of the Property of Borrower.
14.9 Judgments.
---------
Final judgments or orders for the payment of money are rendered against
Borrower the aggregate amount of One Hundred Thousand Dollars ($100,000) or more
(exclusive of amounts covered by insurance) which are not satisfied within sixty
(60) days after their being rendered.
34
<PAGE>
14.10 ERISA.
-----
The occurrence of any of the following events: (i) the termination of any
Plan in a distress termination under Section 4041(c) of ERISA or an involuntary
termination under Section 4042 of ERISA; (ii) the filing of a request for a
waiver of the minimum funding standard with regard to any Employee Benefit Plan:
(iii) the occurrence of any event which causes any Plan to cease to have
sufficient assets at all times so as to qualify for a standard termination under
Section 4041 of ERISA; (iv) the occurrence of any event which causes the
unfunded liability with regard to all such Plans in the aggregate to become an
amount in excess of One Hundred Thousand Dollars ($100,000); (v) the occurrence
of any event which causes the withdrawal liability with regard to all Plans to
become an amount in excess of One Hundred Thousand Dollars ($100,000); (vi) the
appointment of a trustee by an appropriate United States district court to
administer any Plan; or (vii) the institution of any proceedings by the PBGC to
terminate any such Plan or to appoint a trustee to administer any such Plan;
unless, in each case, such default is cured within thirty (30) days after
Borrower's receipt of notice from Lender of such Default Condition.
14.11 Change of Control.
-----------------
Scott Dorfman shall cease to own, beneficially and of record, with
unlimited power to vote, at least fifty percent (50%) of the issued and
outstanding capital stock of Borrower.
14.12 Material Adverse Change.
-----------------------
The occurrence of any material change in the business, financial condition
or results of operations of Borrower which Lender reasonably determines, in good
faith, materially and adversely affects the ability of Borrower to pay and
perform its Obligations to Lender unless such default is cured within thirty
(30) days after Borrower's receipt of notice from Lender of such Default
Condition.
14.13 Change of Management.
--------------------
If Scott Dorfman shall cease to serve as the Chief Executive Officer of
Borrower or, if another officer of Borrower is given such title, to hold a
position with Borrower in which he would nevertheless be entitled to exercise
the authority of the highest executive officer of Borrower.
15. REMEDIES.
--------
35
<PAGE>
Upon the occurrence and during the continuation of any Default Condition or
Event of Default, Lender's obligation to extend financing under the Revolving
Line of Credit shall immediately cease and the Revolving Line of Credit shall
terminate; provided, however, that if such obligations have ceased and
-------- -------
commitments terminated due to the occurrence of a Default Condition, and such
Default Condition does not become an Event of Default due to its having been
cured or waived before it has matured into an Event of Default, then such
obligation shall be reinstated as of the date such Default Condition is cured or
waived. Upon the occurrence or existence of any Event of Default, or at any
time thereafter, without prejudice to the rights of Lender to enforce its claims
against Borrower for damages for failure by Borrower to fulfill any of its
obligations hereunder, subject only to prior receipt by Lender of payment in
full of all Obligations then outstanding in a form acceptable to Lender, Lender
shall have all of the rights and remedies described in Sections 15.1 through
15.4, inclusive, and Lender may exercise any one, more, or all of such remedies,
in its sole discretion, without thereby waiving any of the others.
15. Acceleration of the Obligations.
-------------------------------
Lender, at its option, may by written notice, effective upon receipt,
declare all of the obligations (including but not limited to that portion
thereof evidenced by any Notes) to be immediately due and payable (and in the
event a voluntary or involuntary case is commenced under the Bankruptcy Code by
or against Borrower as a debtor, all Obligations automatically will be due and
payable without any notice or declaration by Lender), whereupon the same shall
become immediately due and payable without presentment, demand, protest, notice
of nonpayment or any other notice required by law relative thereto, all of which
are hereby expressly waived by Borrower, anything contained herein to the
contrary notwithstanding and, in connection therewith, Lender shall have the
right to increase the rate of interest charged on the Notes, without further
notice, to a rate per annum equal to the Default Rate. Thereafter, Lender, at
its option, may, but shall not be obligated to, accept less than the entire
amount of Obligations due, if tendered, provided, however, that unless then
agreed to in writing by Lender, no such acceptance shall or shall be deemed to
constitute a waiver of any Event of Default or a reinstatement of any
commitments of Lender hereunder.
15.2 Remedies of a Secured Party.
---------------------------
Lender shall thereupon have the rights and remedies of a secured party
under the UCC in effect on the date thereof (regardless of whether the same has
been enacted in the jurisdiction where the rights or remedies are asserted),
including, without limitation, the right to take the Collateral or any portion
thereof into its possession, by such means (without breach of the peace) and
through agents or otherwise as it may elect (and, in connection therewith,
demand that Borrower assemble the Collateral owned by it at a place or places
and in such manner as the Lender shall prescribe), and sell, lease or otherwise
dispose of the Collateral or any portion thereof in its then condition or
following any commercially reasonable preparation or processing, which
disposition may be by public or private proceedings, by one or more contracts,
as a unit or in parcels, at any time and place and on any terms, so long as the
same are commercially reasonable. Lender may apply the proceeds of any such
sale or disposition of Borrower's
36
<PAGE>
Collateral to any of the obligations of Borrower in such order as Lender, in its
sole discretion, may elect. Lender shall give the affected Borrower written
notice of the time and place of any public sale of the Collateral or the time
after which any other intended disposition thereof is to be made, except where
the Collateral is perishable or threatens to decline speedily in value or is of
a type customarily sold on a recognized market. The requirement of sending
reasonable notice shall be met if such notice is given to Borrower pursuant to
Section 16.9 at least ten (10) calendar days before such disposition. Expenses
of retaking, holding, insuring, preserving, protecting, preparing for sale or
selling or the like with respect to the Collateral shall include, in any event,
reasonable attorneys' fees and other legally recoverable collection expenses,
all of which shall constitute Obligations.
15.3 Set Off.
-------
In addition to such other rights and remedies with respect to the Balances
Collateral as may exist from time to time hereafter in favor of Lender, whether
by way of setoff, banker's lien, consensual security interest or otherwise, upon
the occurrence of any Event of Default hereunder, each Lender may charge any
part or all of the obligations of such Lender to Borrower represented by items
constituting the Balances Collateral in the possession and control of Lender
against the Obligations of Borrower without prior notice to or demand upon
Borrower.
15.4 Other Remedies.
--------------
Unless and except to the extent expressly provided for to the contrary
herein, the rights of Lender specified herein shall be in addition to, and not
in limitation of, Lender's rights under the UCC, as amended from time to time,
or any other statute or rule of law or equity, or under any other provision of
any of the Loan Documents, or under the provisions of any other document,
instrument or other writing executed by Borrower or any third party in favor of
Lender, all of which may be exercised successively or concurrently.
16. MISCELLANEOUS.
-------------
16.1 Waiver.
------
Each and every right granted to Lender under this Agreement, or any of the
other Loan Documents, or any other document delivered hereunder or in connection
herewith or allowed it by law or in equity, shall be cumulative and may be
exercised from time to time. No failure on the part of Lender to exercise, and
no delay in exercising, any right shall operate as a waiver thereof, nor shall
any single or partial exercise by Lender of any right preclude any other or
future exercise thereof or the exercise of any other right. No waiver by Lender
of any Default Condition or Event of Default shall constitute a waiver of any
subsequent Default Condition or Event of Default.
16.2 Governing Law.
-------------
37
<PAGE>
This Agreement and the other Loan Documents, and the rights and obligations
of the parties hereunder and thereunder, shall be governed by, and construed and
interpreted in accordance with, the laws of the State of Georgia.
16.3 Survival.
--------
All representations, warranties and covenants made herein shall survive the
execution and delivery of all of the Loan Documents.
16.4 No Assignment by Borrower.
-------------------------
No assignment hereof shall be made by Borrower without the prior written
consent of Lender. Lender may assign, or sell participations and undivided
ownership interests in, its rights, title and interest herein and in the Loan
Documents at any time hereafter with written notice to, but without necessity of
consent from, Borrower.
16.5 Counterparts.
------------
This Agreement may be executed in two or more counterparts, each of which
when fully executed shall be an original, and all of said counterparts taken
together shall be deemed to constitute one. and the same agreement.
38
<PAGE>
16.6 Reimbursement.
-------------
Borrower agrees pay to the Lender on demand all reasonable out-of-pocket
costs and expenses that Lender may pay or incur in connection with the
negotiation, preparation, consummation, enforcement and termination of this
Agreement and the other Loan Documents, including, without limitation: (a)
reasonable attorneys, fees and disbursements; (b) costs and expenses (including
reasonable attorneys, fees and disbursements) for any amendment, supplement,
waiver, consent or subsequent closing in connection with the Loan Documents and
the transactions contemplated thereby; (c) costs and expenses of lien and title
searches and title insurance; (d) taxes, fees and other charges for recording
any deeds to secure debt, deeds of trust, mortgages,, filing financing
statements and continuations, and other actions to perfect, protect and continue
the Lien of Lender in the Collateral; (e) sums paid or incurred to pay for any
amount or to take any action required of Borrower under the Loan Documents that
Borrower fails to pay or take; (f) costs of appraisals, inspections, and
verifications of the Collateral, including, without limitation, reasonable costs
of travel, lodging, and meals for inspections of the Collateral and Borrower's
operations by Lender; (g) costs and expenses of preserving and protecting the
credit or the Collateral; and (h) costs and expenses (including reasonable
attorneys, and paralegals, fees and disbursements) paid or incurred to obtain
payment of the Obligations, enforce the Lien in the Collateral, sell or
otherwise realize upon the Collateral, and otherwise enforce the provisions of
the Loan Documents or to defend any claims made or threatened against Lender or
either Lender arising out of the transactions contemplated hereby. Borrower
further agrees to reimburse Lender for its actual out-of-pocket costs and
expenses incurred in conducting field examinations and inspections of Borrower
and its Properties in addition to the foregoing. The foregoing shall not be
construed to limit any other provisions of the Loan Documents regarding costs
and expenses to be paid by Borrower. All of the foregoing costs and expenses
may, in the discretion of Lender, be charged to Borrower's loan account as
Revolving Advances. Borrower will also pay all expenses incurred by them in
this transaction. In the event Borrower becomes a debtor under the Bankruptcy
Code, Lender's secured claim in such case shall include interest on the
Obligations and all fees, costs and charges pro vided for herein (including,
without limitation, reasonable attorneys' fees) all for the extent allowed by
the Bankruptcy Code.
16.7 Successors and Assigns.
----------------------
This Agreement shall be binding upon and inure to the benefit of the
successors and permitted assigns of the parties hereto.
16.8 Severability.
------------
If any provision of any of the Loan Documents or the application thereof to
any party thereto or circumstances shall be invalid or unenforceable to any
extent, the remainder of such Loan Documents and the application of such
provisions to any other party thereto or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
39
<PAGE>
16.9 Notices.
-------
All notices, requests and demands to or upon the respective parties hereto
shall be deemed to have been properly given or made when personally delivered or
five (5) calendar days after being deposited in the mail, registered or
certified mail, return receipt requested, with sufficient postage prepaid,
addressed as follows or to such other address as may be designated hereafter in
writing by the respective parties hereto:
Borrower:
Innotrac Corporation
6655 Sugarloaf Parkway
Duluth, Georgia 30097
Attn: Scott Dorfman, President
With a copy to:
Kilpatrick Stockton LLP
Suite 2800
1100 Peachtree Street
Atlanta, Georgia 30309-4530
Attn: Gregory K. Cinnamon, Esq.
Lender:
SouthTrust Bank, N.A.
One Georgia Center
27th Floor
600 West Peachtree Street
Atlanta, Georgia 30308
Attn: Noble Jones, Vice President
With a copy to:
Smith, Gambrell & Russell, LLP
Suite 3100, Promenade II
1230 Peachtree Street, N.E.
Atlanta, Georgia 30326
Attn: L. Brett Lockwood, Esq.
except in cases where it is expressly provided herein or by applicable law that
such notice, demand or request is not effective until received by the party to
whom it is addressed in which instance rejection or other refusal to accept or
the inability to deliver because of changed address of which no notice was given
shall be deemed to be receipt of the notice, demand or request sent. By giving
at least thirty (30) days written notice thereof, Borrower or Lender shall have
the right
40
<PAGE>
time to time and at any time to change their respective addresses and each shall
have the right to specify any other address within the continental United States
of America.
16.10 Entire Agreement; Amendments.
----------------------------
This Agreement, together with the Loan Documents executed in connection
therewith, collectively constitute the entire agreement between the parties
hereto with respect to the subject matter hereof. Neither this Agreement or any
Loan Document nor any provision hereof or thereof may be changed, waived,
discharged, modified or terminated orally, but only by an instrument in writing
signed by the party against whom enforcement is sought.
16.11 Time of the Essence.
-------------------
Time is of the essence in this Agreement and the other Loan Documents.
16.12 Interpretation.
--------------
No provision of this Agreement shall be construed against or interpreted to
the disadvantage of any party hereto by any court or other governmental or
judicial authority by reason of such party having or being deemed to have
structured or dictated such provision.
16.13 Lender Not Joint Venturer.
-------------------------
Neither this Agreement nor any agreements, instruments, documents or
transactions contemplated hereby (including the Loan Documents) shall in any
respect be interpreted, deemed or construed as making Lender a partner or joint
venturer with Borrower or as creating any similar relationship or entity, and
Borrower agrees that it will not make any contrary assertion, contention, claim
or counterclaim in any action, suit or other legal proceeding involving either
Lender or Borrower.
16.14 Jurisdiction.
------------
Borrower agrees that any legal action or proceeding with respect to this
Agreement or any Loan Document may be brought in the courts of the State of
Georgia or the United States District Court, Northern District of Georgia,
Atlanta Division. By execution of this Agreement, Borrower hereby submits to
each such jurisdiction, hereby expressly waiving whatever rights may correspond
to it by reason of its present or future domicile. Nothing herein shall affect
the right of Lender to commence legal proceedings or otherwise proceed against
Borrower in any other jurisdiction or to serve process in any manner permitted
or required by law.
16.15 Acceptance.
----------
This Agreement, together with the other Loan Documents, shall not become
effective unless and until delivered to Lender at its office in Atlanta, Georgia
and accepted in writing by
41
<PAGE>
Lender thereafter at such office as evidenced by its execution hereof (notice of
which delivery and acceptance is hereby waived by Borrower).
16.16 Payment on Non-Business Days.
----------------------------
Whenever any payment to be made hereunder or under any Note shall be stated
to be due on a day which is not a Business Day, such payment may be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest hereunder or under the Notes.
16.17 UCC Terminations.
----------------
Borrower agrees that Lender shall not be required to execute any such UCC
termination statements with respect to any Collateral unless and until all
Obligations have been paid in full and Lender shall have terminated this
Agreement in writing, which Lender shall do within a reasonable amount of time
after the Obligations have been paid in full.
16.18 Cure of Default by Lender.
-------------------------
If, hereafter, Borrower defaults in the performance of any duty or
obligation to Lender hereunder or under any Loan Document or to any other Person
(including, without limitation, any lessor, licensor, vendor, processor,
shipper, carrier or warehouseman), Lender may, at its option, but without
obligation, in order to protect or preserve Lender's credit or the Collateral,
Cure such default and any costs, fees and expenses incurred by Lender in
connection therewith including, without limitation, for the purchase of
insurance, the payment of taxes and the removal or settlement of liens and
claims, shall be deemed to be Revolving Advances, made to Borrower, whether or
not this creates an over-advance hereunder, and shall be payable in accordance
with its terms.
16.19 Recitals.
--------
All recitals contained herein are hereby incorporated by reference into
this Agreement and made part thereof.
16.20 Attorney-in-Fact.
----------------
Borrower hereby designates, appoints and empowers Lender irrevocably as its
attorney-in-fact, at Borrower's cost and expense, to do in the name of Borrower
from and after the occurrence of, and during the continuation of, any Event of
Default, any and all actions which Lender may deem reasonably necessary or
advisable to carry out the terms hereof upon the failure, refusal or inability
of Borrower to do so, and Borrower hereby agrees to indemnify and hold Lender
harmless from any costs., damages, expenses or liabilities arising against or
actually incurred by Lender in connection therewith, except those arising from
the willful misconduct or gross negligence of Lender. This power of attorney,
being coupled with an interest, shall be irrevocable, shall continue until all
obligations have been satisfied in full and this Agreement has
42
<PAGE>
been terminated by Lender in writing and shall be in addition to Lender's other
rights, powers and remedies.
16.21 Sole Benefit.
------------
The rights and benefits set forth in this Agreement and in all the other
Loan Documents are for the sole and exclusive benefit of the parties thereto and
may be relied upon only by them.
16.22 Termination of this Agreement.
-----------------------------
This Agreement, together with all Loan Documents, shall continue in full
force and effect as to Borrower notwithstanding (i) the passage of the
Termination Date, (ii) the early termination of this Agreement by any one
Borrower pursuant to Section 2.4(b) or (iii) the termination of the Revolving
Line of Credit pursuant to Article 15, unless and until Borrower has complied
fully and in all respects with Section 2.4(b), in the case of any voluntary
early termination of this Agreement by Borrower, or Borrower has made full
payment and satisfaction of all Obligations of Borrower to Lender after
termination of the Revolving Line of Credit, on or after the Termination Date or
prior thereto in the case of any early involuntary termination. When Borrower
has so complied with this Section, this Agreement will terminate.
16.23 Acknowledgment by Borrower. Borrower hereby acknowledges and
--------------------------
agrees that this Agreement is intended to be an integrated amendment and
restatement of the Prior Loan Agreement, and this Agreement is not intended as a
forgiveness or novation of the indebtedness heretofore outstanding under the
Prior Loan Agreement, and that the Obligations under this Agreement are entitled
in all respects to the benefit of the security intended to be afforded by the
Collateral and the other Loan Documents whether heretofore executed or otherwise
executed in connection with this Agreement.
17. CONDITIONS PRECEDENT.
--------------------
17.1 Conditions to Initial Revolving Advance.
---------------------------------------
The conditions precedent set forth below shall constitute express
conditions precedent to any obligation of Lender to make Revolving Advance
hereunder.
(a) Resolutions and Incumbency Certificate of Borrower. Receipt by
--------------------------------------------------
Lender of resolutions and incumbency certificates from the Secretary or
Assistant Secretary of Borrower, to be substantially in the form of Exhibit "E"
-----------
attached hereto.
(c) Opinion of Counsel. Receipt by Lender of an opinion of counsel
------------------
from legal counsel to Borrower, in form and substance acceptable to Lender.
(d) Loan Documents. Receipt by Lender of any and all other Loan
--------------
Documents, duly executed in form and substance acceptable to Lender.
43
<PAGE>
(e) Other Documents. Receipt by Lender of any and all other
---------------
documents, agreements and instructs that Lender may reasonably request in
connection with the transactions contemplated by this Agreement.
(f) No Default. No Default Condition or Event of Default shall have
----------
occurred and be continuing.
(g) Representations and Warranties. All representations and
------------------------------
warranties contained in the Agreement shall be true and correct in all material
respects on the date of each Revolving Advance.
[SIGNATURES APPEAR ON FOLLOWING PAGES]
44
<PAGE>
IN WITNESS WHEREOF, Borrower and Lender have set their hands, and
Borrower has affixed its seal, all as of the day and year first above
written.
"BORROWER"
INNOTRAC CORPORATION (SEAL)
By: /s/ S. Dorfman
-----------------------------------
Name: Scott Dorfman
---------------------------------
Title: President
--------------------------------
Attest: /s/ John H. Nichols III
-------------------------------
Name: John H. Nichols III
---------------------------------
Title: Vice President and Chief
Financial Officer
--------------------------------
"LENDER"
SOUTHTRUST BANK, N.A.
By: /s/ Noble Jones
-----------------------------------
Noble Jones, Vice President
45
<PAGE>
Exhibit "A" - Collateral Locations [omitted]
Exhibit "B" - Additional Permitted Encumbances [omitted]
Exhibit "C" - Form of Revolving Note
Exhibit "D" - Trade Names and Trade Styles [omitted]
Exhibit "E" - Form of Secretary's Certificate [omitted]
<PAGE>
EXHIBIT "C"
-----------
FORM OF REVOLVING NOTE
COUNTY OF FULTON $35,000,000
STATE OF GEORGIA January 25, 1999
AMENDED AND RESTATED
REVOLVING PROMISSORY NOTE
-------------------------
1. FOR VALUE RECEIVED, INNOTRAC CORPORATION ("Borrower" OR THE
--------
"BORROWER") promises to pay to the order of SOUTHTRUST BANK, N.A., ("Lender"),
-------- ------
at the principal office of Lender in Atlanta, Georgia, or at such other place as
Lender hereafter may direct in writing, in legal tender of the United States of
America, the principal sum of Thirty-Five Million Dollars ($35,000,000), or so
much thereof as may be disbursed to Borrower and remains outstanding from time
to time hereafter under that certain "Revolving Line of Credit" opened by Lender
in favor of Borrower pursuant to the terms of that certain Amended and Restated
Loan and Security Agreement, dated as of January 25, 1999, as amended, between
Lender and Borrower (hereinafter, as it may be further amended or supplemented
from time to time, called the "Loan Agreement"), the terms and provisions of
--------------
which are hereby incorporated herein by reference and made a part hereof, on the
"Termination Date" (as defined in the Loan Agreement), with interest thereon
(computed on the daily outstanding principal balance, for the actual number of
days outstanding, on the basis of a 360 day year) on each advance evidenced
hereby from date of advance until paid in full at the rate per annum prescribed
therefor in the Loan Agreement. Accrued interest on the unpaid principal
balance hereof from time to time outstanding shall be due and payable monthly,
commencing on the first day of the calendar month succeeding the date hereof and
continuing on the same day of each succeeding calendar month thereafter and at
maturity. This Note does not represent a novation or forgiveness of any prior
indebtedness evidenced by the Note.
2. Borrower agrees, in the event that this Note or any portion hereof is
collected by law or through an attorney at law, to pay all costs of collection,
including, without limitation, reasonable attorneys' fees.
3. This Note evidences borrowing under, is subject to and secured by, and
shall be paid and enforced in accordance with, the terms of the Loan Agreement,
and is the "Revolving Note" defined in Section 1.1 thereof.
4. Nothing herein shall limit any right granted to Lender by any other
instrument or by law or equity.
5. Borrower hereby waives demand, protest, notice of demand, protest and
nonpayment and any other notice required by law relative hereto, except to the
extent as otherwise may be provided for in the Loan Agreement.
6. In no contingency or event whatsoever, whether by reason of
advancement of the proceeds hereof or otherwise, shall the amount paid or agreed
to be paid to Lender for the use,
<PAGE>
forbearance or detention of money advanced hereunder exceed the highest lawful
rate permissible under any law which a court of competent jurisdiction may deem
applicable hereto; and, in the event any such payment is inadvertently paid by
Borrower or inadvertently received by Lender, such excess sum shall be, at
Borrower's option, returned to Borrower forthwith or credited as a payment of
principal, but shall not be applied to the payment of interest. It is the intent
hereof that Borrower not pay or contract to pay, and that Lender not receive or
contract to receive, directly or indirectly in any manner whatsoever, interest
in excess of that which may be paid by Borrower under applicable law.
IN WITNESS WHEREOF, Borrower has caused this Note to be signed and sealed
as of the day and year first above written.
INNOTRAC CORPORATION (SEAL)
By: /s/ Scott Dorfman
-------------------------------
Name: Scott Dorfman
Title: President
Attest: /s/ John H. Nichols III
---------------------------
Name: John H. Nichols III
Title: Vice President and Chief
Financial Officer
<PAGE>
EXHIBIT 10.15
-------------
Innotrac Corporation
--------------------
1999 Senior Executive Compensation Plan
---------------------------------------
The compensation for senior executives at Innotrac will consist of three
elements: base salary, short term incentive bonus and a long-term incentive
bonus (LTIP). The base salaries will be determined annually by the Compensation
Committee of the Board of Directors("Compensation Committee or Committee") or a
subcommittee thereof.
Short Term Cash Bonus
- ---------------------
The short-term bonuses will be calculated using a target percentage of the base
salary as follows: CEO -- 100%, Sr. VPs. -- 60%, VPs. -- 50%, AVPs. -- 20%.
Director level employees are typically at 10% (with certain individual
exceptions) and the components of the director level plan are described in a
separate document. For the purpose of determining the short-term bonus amounts
for 1999 and future years, we will use a formula that is weighted 75% EBITDA
actual versus budget and 25% revenue versus budget. Using this weighting will
keep the focus on managing our growth profitably. The bonuses will be adjusted
using a three up-three down formula for each percent that the company exceeds or
misses the budgeted amounts up to a doubling of the targeted bonus amount. After
the targeted bonus is doubled, the bonus factor will increase in one up
increments. Using this method, if the bonus factor is less than .67, the
individual bonus is $0. This formula will be reviewed annually by the
Compensation Committee and the individual bonuses will be subject to review by
the Committee based on the individual's performance.
LTIP
- ----
The long-term bonus will consist of additional options for the individual
executive, issued pursuant to the Company's Stock Option Plan. The amount of
options available is calculated using a formula that takes the future price of
the Company's stock price into effect from the beginning of the year over a five
year time frame using a 20% annual compound growth rate. The end of year price
is calculated and divided into the LTIP dollars to determine the number of
options available. The LTIP dollars for each individual will be calculated using
the same method as the short-term bonuses. The options granted will be rounded
to the nearest 500 units, at the discretion of the compensation Committee. This
formula will be reviewed annually by the Compensation Committee and the
individual bonuses will be subject to review by the Committee based on the
individual's performance.
<PAGE>
EXHIBIT 10.16
-------------
AIRCRAFT LEASE
THIS AIRCRAFT LEASE is made and entered into as of the 19th day of
February, 1998, by and between SD Holdings, Inc. a Georgia corporation
("LESSOR"), and Innotrac Corporation, a Georgia corporation ("LESSEE").
W I T N E S S E T H
- - - - - - - - - -
WHEREAS, Lessor owns that certain Piper aircraft, aircraft serial
number 4608030, registration number N213JP, together with one (1) engine, model
number TSIO S50 C, and all propellers, radar, equipment, electronics equipment
and attachments (collectively, the "AIRCRAFT"); and
WHEREAS, Lessee desires to lease the Aircraft from Lessor for proper
business use by Lessee and its affiliates, and Lessor is willing to lease from
the Aircraft from Lessor subject to the terms and conditions contained herein;
NOW, THEREFORE, for and in consideration of the mutual premises,
covenants and agreements contained herein, the parties hereto agree as follows:
1. TERM: The initial term of this Lease shall commence on the date
----
the Aircraft is delivered to Lessee and will continue thereafter for a period of
three (3) years until February 19, 2001, unless earlier terminated as
hereinafter provided, and shall continue for successive one (1) year periods
under the terms and conditions provided herein, unless written notice to the
contrary is given by either party hereto to the other party at least thirty (30)
days prior to the expiration of any such one-year period, unless sooner
terminated as hereinafter provided.
2. RENT: The annual rent payable hereunder by Lessee to Lessor shall
----
be $72,000.00, payable in equal monthly installments of $6,000.00 on or before
the first day of each calendar month during the term of this Lease. The monthly
rental payments shall be paid to Lessor at Lessor's address, as provided in
SECTION 15 below, or at such other address as Lessor may designate in writing to
Lessee from time to time.
3. RECORDS AND HOME AIRPORT: Lessee shall maintain accurate aircraft
------------------------
and engine log books and such other records, logs and books as the Federal
Aviation Administration ("FAA") may from time to time require, showing the full
flight time of the Aircraft and shall keep such logs in the Aircraft and
available for inspection by Lessor or its representatives at all reasonable
times. During the term hereof, the Aircraft shall be permanently
<PAGE>
based at Peachtree-DeKalb Airport (the "HOME AIRPORT"), the cost of which shall
be paid by Lessee.
4. MAINTENANCE AND RETURN: (a) Except as set forth in SECTION 4(B)
----------------------
below, Lessee shall at all times at Lessee's expense keep the Aircraft in a
fully operative condition and completely airworthy in accordance with the
manufacturer's standards, as announced from time to time, and requirements of
the FAA or any other governmental or similar body having jurisdiction over the
ownership, maintenance or operation of the Aircraft. Lessee shall permit the
performance of all maintenance and repair work thereon only by or under the
supervision of properly qualified and rated personnel and in compliance with FAA
and other applicable governmental requirements. Any replacements or
substitutions of parts or improvements to the Aircraft made by Lessee or Lessor
shall become and remain the property of Lessor. Upon the expiration of the term
hereof, Lessee shall return the Aircraft to Lessor at such reasonable place as
may be designated by Lessor in the same condition as it was when received by
Lessee, normal wear and tear excepted. Lessor shall have no obligation, but
shall have the right, to perform any maintenance or repair work required by
reason of Lessee's failure to perform such work, and all costs and expenses
incurred by Lessor in connection therewith shall be immediately payable by
Lessee to Lessor upon demand by Lessor.
(b) Lessor shall be responsible for the scheduled maintenance,
as determined in accordance with applicable FAA requirements, of the engines and
props and shall cause all such portions of the Aircraft to be maintained,
rebuilt, repaired and/or replaced, in accordance with applicable requirements of
the FAA.
5. WARRANTY: Lessee hereby acknowledges receipt of the Aircraft and
--------
represents that the Aircraft has been examined and tested by Lessee. Lessor
hereby assigns to Lessee all applicable manufacturer's and mechanics warranties
with respect to the Aircraft to the extent that the same shall be assignable.
LESSOR MAKES NO WARRANTY OR REPRESENTATION, EXPRESS OR IMPLIED, WITH RESPECT TO
THE AIRCRAFT, AND EXPRESSLY EXCLUDES, AND LESSEE ACKNOWLEDGES THE EXCLUSION OF,
ANY AND ALL WARRANTIES OR REPRESENTATIONS, WHETHER OF MERCHANTABILITY, FITNESS
FOR USE OR OTHERWISE.
6. INSURANCE: (a) Lessee, at its sole cost and expense, shall
---------
procure and maintain in effect during the term hereof a satisfactory policy or
policies of insurance with insurers satisfactory to Lessor providing full hull
coverage of the Aircraft for the benefit of Lessor including all risk and
foreign object damage, both in flight and not in flight, whether in possession
of Lessee or Lessor, in an amount equal to at least the replacement value of the
Aircraft, but in no event less than $375,000. The proceeds of such coverage
shall be payable to Lessor.
(b) Lessee, at its sole cost and expense, shall procure and maintain
in effect during the term hereof a satisfactory policy or policies of insurance
with insurers satisfactory to
2
<PAGE>
Lessor providing passenger liability, public liability, and property damage
liability in a single amount not less than $1,000,000, insuring Lessor and
Lessee against claims for death or for injury to persons or loss of or damage to
property in connection with the possession, use or operation of the Aircraft.
The proceeds of such coverage shall be payable to Lessor and Lessee as their
interests shall appear.
(c) Lessee shall deliver to Lessor a copy or copies of the policy or
policies by which the foregoing coverage shall have been procured or a
certificate of the carrier or other evidence satisfactory to Lessor that such
insurance coverage is in effect; provided, however, that Lessor shall be under
-------- -------
no duty either to ascertain the existence of, or to examine, such insurance, or
to advise Lessee in the event such insurance shall not comply with the
requirements hereof. Lessor shall have the right to approve the policy or
policies effecting such insurance, but shall have no duty to do so. In the event
of failure on the part of Lessee to provide insurance as aforesaid, Lessor may,
at its option, procure such insurance and the cost thereof shall be payable to
Lessor by Lessee upon demand.
(d) The policy or policies effecting the coverage required by this
SECTION 6 shall expressly provide that the interests of Lessor thereunder shall
not be affected by any breach by Lessee of any policy provision, and that such
policy or policies shall be cancelable only upon at least thirty (30) days'
prior written notice to Lessor. Every such policy shall contain a mortgagee
endorsement in usual form in favor of any party having a security interest in
the Aircraft.
7. LOSS OR DAMAGE TO OR TAKING OF AIRCRAFT: Lessee shall bear all
---------------------------------------
risks of loss or damage to the Aircraft and of the taking, confiscation or
requisition (of use or title) thereof by any governmental authority during the
term hereof, provided, however, that if loss or damage is caused by the gross
-------- -------
negligence of Lessor while Lessor is in possession of the Aircraft under SECTION
9 herein, then Lessor shall bear such loss or damage. In the event of loss or
damage to the Aircraft while not in Lessor's possession, or the taking of the
Aircraft, Lessee shall immediately report such loss or damage or taking to
Lessor, to the carrier or carriers of all insurance thereon, and, as required by
law, to governmental agencies, and shall furnish such information, execute such
documents and do any and all other acts and things necessary to facilitate the
collection of the proceeds of any insurance policy or policies thereon, or
awards for such taking. In the event of such loss, damage or taking, the rights,
liabilities and obligations of the parties hereto shall be as follows:
(a) In the event that the Aircraft is lost or taken or is damaged
beyond repair and the proceeds of any applicable insurance policy or policies
payable as a result thereof, or awards for such taking, shall be less than
$100,000, then Lessee shall pay to Lessor an additional sum equal to the
remainder after subtracting the amount of such proceeds or awards so payable
from $100,000. Upon the receipt by Lessor of all monies due under this
subsection (a) in the event of such loss, damage or taking, this Lease shall
terminate.
3
<PAGE>
(b) In the event that the Aircraft is partially damaged, then this
Lease shall remain in full force and effect, and Lessee shall, at its cost and
expense, and in a timely manner, fully repair and restore the Aircraft to its
condition prior to the occurrence of such damage, and this Lease shall thereupon
continue in full force and effect. Such repair and restoration shall be effected
only in accordance with plans and specifications approved in advance in writing
by Lessor. Upon the completion of such repair and restoration, Lessor shall
reimburse Lessee for the costs thereof to the extent of any proceeds of
insurance received by Lessor and covering such damage, such reimbursement to be
contingent upon the execution by Lessee of all documents and the doing by Lessee
of any and all other acts and things required for the recovering of such
insurance proceeds.
8. USAGE, FEES AND LIENS: Lessee shall use the Aircraft solely for
---------------------
its own use or the use of its Affiliates (as defined below) in the ordinary
course of business; provided, that Lessee may allow Scott Dorfman to make
--------
personal use of the Aircraft. Lessee shall not, without prior written consent of
Lessor, (i) sublease the Aircraft, (ii) enter into "time sharing agreements" or
"interchange agreements" (as respectively defined in Sections 91.501(c)(1) and
(2) of the FAA Regulations, 14 C.F.R. (S) 91.501(c)(1) and (2)), (iii) use the
Aircraft for the purpose of "commuter" or "on-demand" operations (as
respectively defined in Sections 119.3 of the FAA Regulations, 14 C.F.R. (S)
119.3), nor (iv) use the Aircraft to provide transportation of cargo and/or
passengers for compensation or hire. Lessee shall not use the Aircraft in any
manner which shall violate any provision of any policy of insurance thereon, or
any law or regulation of any governmental authority, including but not limited
to, the FAA, and any fine, penalty or forfeiture, whether resulting from any
such violation or otherwise, shall be the sole responsibility of Lessee. Lessee
shall pay when due all license fees and other fees and assessments necessary for
the securing of all licenses, certificates of title and other permits required
for the operation of the Aircraft. Lessee shall have no right to consent to any
lien or liens on the Aircraft. Any liens (other than liens expressly permitted
hereby or liens incurred by Lessor) shall be discharged at the sole cost and
expense of Lessee, who shall indemnify and save Lessor harmless against any such
lien or liens. "AFFILIATES" shall mean Scott Dorfman and any natural person or
entity directly or indirectly controlling Lessor, or controlled by or under
common control with Lessor, whether through ownership of voting securities, by
contract, or otherwise.
9. DEFAULT: Time is of the essence of this Lease. Default in the
-------
payment of any rent hereunder or default in the making of any other payment or
in the performance of any other obligation or covenant of Lessee under this
Lease; the making of a general assignment for the benefit of creditors by
Lessee; the suspension of business or the commission by Lessee of any act
amounting to a business failure; any change in, or termination of, Lessee's
corporate existence (except a merger, consolidation or reorganization in which
the obligations of Lessee are assumed by the surviving corporation); the filing
of a lien against Lessee, any of Lessee's property, or Lessee's interest in the
Aircraft; or the institution of bankruptcy, reorganization, liquidation,
receivership or similar proceedings by or against Lessee and, if instituted
against Lessee, its consent thereto or the failure to cause such proceedings to
be discharged or stayed
4
<PAGE>
within thirty (30) days thereafter, shall constitute an event of default
hereunder and shall give rise to the rights on the part of Lessor described in
SECTION 10 hereof.
10. RIGHTS OF LESSOR UPON DEFAULT OF LESSEE: Upon the occurrence of
---------------------------------------
any of the events of default described in SECTION 9 hereof Lessor may, in its
discretion, do any one or more of the following:
(a) Terminate this Lease upon ten (10) days' written notice to
Lessee.
(b) Whether or not the term of this Lease is terminated, take
immediate possession of the Aircraft, wherever situated, and for such purpose
enter upon any premises without liability for so doing. Lessor shall hold the
Aircraft so repossessed free and clear of this Lease and of any of the rights of
Lessee hereunder.
(c) Whether or not action has been taken under subsection (a) or (b)
next above, sell, dispose of, hold, use or lease the Aircraft as Lessor, in its
sole discretion, may decide, without any duty to account to Lessee with respect
to such action or any proceeds thereof.
After default, Lessee shall be liable for, and Lessor may recover from Lessee,
(i) all unpaid rent to the date of such delivery or repossession, (ii) all other
sums payable by Lessee pursuant to the provisions of this Lease, (iii) all other
losses and damages sustained by Lessor by reason of such default, and (iv) all
costs and expenses incurred by Lessor by reason of such default.
11. PREVENTION OF DEFAULT: Any provision of this Lease to the
---------------------
contrary notwithstanding, Lessor shall exercise no right upon default by Lessee
of other than a monetary default until ten (10) days after the giving of notice
by Lessor to Lessee of such default and the failure of Lessee to cure such
default prior to the expiration of such 10-day period.
12. INDEMNITY: Lessee shall indemnify and hold Lessor harmless from
---------
and against any and all claims, demands, liabilities, losses, damages or
injuries of whatever kind and nature (including attorneys' fees), however
caused, resulting directly or indirectly from or pertaining to Lessee's
possession, use, operation, maintenance or condition of the Aircraft. The
foregoing indemnity shall not be affected by any termination of this Lease.
13. TAXES: Lessee agrees to pay, and to indemnify and hold Lessor
-----
harmless from, all license and registration fees and all taxes, including
without limitation, income, withholding, franchise, sales, use, ad valorem,
value added, personal property, stamp or other taxes, levies, imposts, duties,
charges or withholdings of any nature (together with any penalties, fines or
interest thereon) imposed against any such party or the Aircraft by any federal,
state or local government or taxing authority in the United States or by any
foreign government or any subdivision thereof upon or with respect to the
Aircraft (excluding, however, federal, state and local taxes on, or measured by,
the net income of Lessor) unless, and to the extent only, that any such tax,
levy, impost, duty, charge or withholding is being contested by Lessee in good
5
<PAGE>
faith and by appropriate proceedings so long as such proceedings do not involve
any danger of the sale, forfeiture or loss of the Aircraft or any interest
therein. In case any report or return is required to be made with respect to any
obligation under this SECTION 13, Lessee will either (after notice to Lessor)
make such report or return in such manner as will show the ownership of the
Aircraft in Lessor and send a copy of such report or return to Lessor or will
notify Lessor of such requirement and make such report or return in such manner
as shall be satisfactory to Lessor. All amounts payable to Lessor by Lessee
pursuant to this SECTION 13 shall be payable on written demand by Lessor. All of
the indemnities contained in this SECTION 13 shall continue in full force and
effect notwithstanding the expiration or other termination of this Lease and are
expressly made for the benefit of, and shall be enforceable by, Lessor, its
successors and assigns.
14. MISCELLANEOUS:
-------------
(a) Inspection. Lessor shall have the right to inspect the Aircraft
----------
at any time upon 24 hours prior notice.
(b) Late Payments. Lessee shall pay to Lessor interest at the rate of
-------------
fifteen percent (15%) per annum, or the maximum amount permitted by applicable
law, whichever is lesser, on all sums not paid by Lessee to Lessor when due and
owing under any provision of this Lease from the date of delinquency until paid.
(c) Rights and Remedies. Lessor's rights and remedies in respect of
-------------------
any of the terms and conditions of this Lease shall be cumulative and not
exclusive, and shall be in addition to all other rights and remedies in its
favor.
(d) Non-waiver. No party hereto shall, by act, delay, omission or
----------
otherwise, be deemed to have waived any of its rights or remedies hereunder
unless such waiver is in writing and signed by the waiving party. A waiver by
either party of any of its rights or remedies hereunder shall not be construed
as a waiver of any succeeding breach or default in the same or any other term or
condition hereof.
(e) Modifications In Writing. Any change or modification to this
------------------------
Lease must be in writing and must be executed by the party against whom such
amendment is sought to be enforced.
(f) Entire Agreement. This Lease supersedes all prior agreements,
----------------
oral or written, and all other communications regarding the subject matter
hereof.
(g) Headings. The headings used herein are for reference and
--------
convenience only and shall not enter into the interpretation hereof.
(h) Governing Law. The validity, construction and performance of this
-------------
Lease shall be governed by the laws of the State of Georgia, exclusive of choice
of law provisions.
6
<PAGE>
(i) Severability. If any provision of this Lease is held by a court
------------
of competent jurisdiction to be unenforceable, the remaining provisions of this
Lease will remain in full force and effect.
(j) Survival. All amounts due hereunder, together with SECTIONS 5,
--------
10, 11 AND 13 shall survive the expiration or termination of this Lease for any
reason.
(k) Accession. All equipment, engines, radios, accessories,
---------
instruments and parts now or hereafter used in connection with the Aircraft
shall become part of the Aircraft by accession.
15. NOTICE: If, under this Lease, one party is required to give
------
notice to the other, such notice shall be deemed given if sent by certified or
registered mail, national overnight courier, or telecopy, provided it is
properly addressed or directed, to the intended recipient at recipient's address
or telecopy number set forth below:
TO LESSOR: Scott Dorfman TO LESSEE: Innotrac Corporation
c/o Innotrac Corporation 1828 Meca Way
1828 Meca Way Norcross, Georgia 30093
Norcross, Georgia 30093 Attn:Chief Financial Officer
telecopy: (770) 717-2111 telecopy: (770) 717-2111
Any such notice or communication will be deemed to have been duly given
immediately if given or made in person or by telecopy (confirmed by the
recipient), or one day after delivery by national courier, or three days after
mailing (if given or made by mail), and in proving same it will be sufficient to
show that the envelope containing the same was delivered to the delivery or
postal service and duly addressed, or that receipt of a facsimile was confirmed
by the recipient as provided above. Any party entitled to notice may change the
address or telecopy number to which notices or other communications to such
party will be delivered, mailed or transmitted by giving notice thereof to the
parties hereto in the manner provided in this section.
16. COMPLIANCE WITH FAA REGULATIONS SECTION 91.25: Lessee covenants
---------------------------------------------
that, in compliance with Section 91.25 of the FAA Regulations (14 C.F.R. (S)
91.25), Lessee shall:
(a) mail a copy of this Lease to:
Aircraft Registration Branch
P.O. Box 25724
Oklahoma City, OK 73125
7
<PAGE>
within 24 hours of the execution of this Lease; and
(b) carry a copy of the Lease in the Aircraft, and the copy shall be
available to the Federal Aviation Administrator or any person to whom he has
delegated his authority in the matter concerned; and
(c) at least 48 hours prior to the first flight of the Aircraft under
this Lease, notify (by telephone or in person) the FAA Flight Standards Office
nearest the airport where such flight will originate to inform the FAA of (i)
the location of the airport of departure, (ii) the departure time, and (iii) the
registration number of the Aircraft.
17. TRUTH IN LEASING STATEMENT: In compliance with Section 91.54 of
--------------------------
the FAA Regulations (14 C.F.R. (S) 91.54) the parties hereby acknowledge and
agree as follows:
(a) THE AIRCRAFT HAS BEEN MAINTAINED AND INSPECTED UNDER CHAPTER I OF
THE FEDERAL AVIATION ADMINISTRATION'S REGULATIONS (14 C.F.R. (S) 1.1 ET SEQ.)
WITHIN THE 12-MONTH PERIOD IMMEDIATELY PRECEDING THE DATE OF THE EXECUTION OF
THIS LEASE. LESSEE CERTIFIES THAT OPERATIONS OF THE AIRCRAFT UNDER THIS LEASE
WILL COMPLY WITH THE APPLICABLE MAINTENANCE AND INSPECTION REQUIREMENTS OF PART
91 OF THE FEDERAL AVIATION ADMINISTRATION'S REGULATIONS.
(b) LESSEE SHALL BE RESPONSIBLE FOR THE OPERATIONAL CONTROL OF THE
AIRCRAFT UNDER THIS LEASE AND ANY EXTENSION HEREOF EXCEPT AS PROVIDED IN SECTION
9 HEREOF FOR USE OF THE AIRCRAFT BY LESSOR. LESSEE CERTIFIES THAT IT UNDERSTANDS
ITS RESPONSIBILITIES FOR COMPLIANCE WITH APPLICABLE FEDERAL AVIATION
REGULATIONS.
SIGNATURE: /s/ John H. Nichols, III
NAME: Innotrac Corporation
ADDRESS: 1828 Meca Way, Norcross, Georgia 30093
LESSOR CERTIFIES THAT IT UNDERSTANDS ITS RESPONSIBILITIES FOR
COMPLIANCE WITH APPLICABLE FEDERAL AVIATION REGULATIONS.
SIGNATURE: /s/ Scott Dorfman
NAME: SD Holdings, Inc.
ADDRESS: c/o 1828 Meca Way, Norcross, Georgia 30093
8
<PAGE>
(c) AN EXPLANATION OF FACTORS BEARING ON OPERATIONAL CONTROL AND
PERTINENT FEDERAL AVIATION REGULATIONS CAN BE OBTAINED FROM THE NEAREST FAA
FLIGHT STANDARDS DISTRICT OFFICE.
18. TERMINATION OF PRIOR LEASE: That certain Airplane Lease
--------------------------
Agreement, effective March 1, 1996, by and between Innotrac Corporation and
Scott Dorfman, is hereby terminated in its entirety and shall be of no further
force and effect from and after the date hereto.
[SIGNATURES APPEAR ON FOLLOWING PAGE]
9
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Lease under
seal as of the day and year first above written.
SD HOLDINGS, INC.
By: /s/ Scott Dorfman
-------------------------------
Scott Dorfman, President
INNOTRAC CORPORATION
By: /s/ John H. Nichols, III
-------------------------------
John H. Nichols, III
Chief Financial Officer
10
<PAGE>
EXHIBIT 13.1
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, 1998, 1997 and 1996 and the selected historical balance sheet data
for the periods then ended have been derived from the Consolidated Financial
Statements that have been audited by Arthur Andersen LLP, independent public
accountants.
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
( in 000's, except per share amounts)
<S> <C> <C> <C> <C> <C>
Results for year:
Revenues, net ........................................... $139,673 $87,978 $71,297 $44,886 $17,380
Cost of revenues (1) .................................... 108,785 67,986 55,519 30,658 11,274
-------- ------- ------- ------- -------
Gross profit ............................................ 30,888 19,992 15,778 14,228 6,106
-------- ------- ------- ------- -------
Operating expenses:
Selling, general and administrative
Expenses .............................................. 15,642 12,572 10,391 6,510 2,289
Depreciation and
Amortization (1) ...................................... 943 631 429 293 214
-------- ------- ------- ------- -------
Total operating expenses ............................... 16,585 13,203 10,820 6,803 2,503
-------- ------- ------- ------- -------
Operating income ........................................ 14,303 6,789 4,958 7,425 3,603
-------- ------- ------- ------- -------
Other (income) expense:
Interest expense ....................................... 956 1,788 1,457 1,090 622
Other .................................................. 35 118 94 (73) 67
-------- ------- ------- ------- -------
Total other expense .................................... 991 1,906 1,551 1,017 689
-------- ------- ------- ------- -------
Income before income
Taxes .................................................. 13,312 4,883 3,407 6,408 2,914
Income tax benefit
(provision) ............................................ (3,743) 77 (212) (793) (356)
-------- ------- ------- ------- -------
Net income .............................................. 9,569 4,960 3,195 5,615 2,558
======== ======= ======= ======= =======
Pro forma net income...................................... 8,186 3,003 2,095 3,941 1,573
======== ======= ======= ======= =======
Pro forma net income per share-basic .................... 1.01 0.46 0.32 0.61 0.24
Pro forma net income per share-diluted .................. 1.00 0.46 0.32 0.61 0.24
Year-end financial position:
Current assets............................................ $ 66,416 $24,330 $37,845 $21,156 $ 8,270
Current liabilities....................................... 39,563 22,809 38,887 21,772 7,033
Working capital ......................................... 26,853 1,521 (1,042) (616) 1,237
Property and equipment, net ............................. 7,463 7,609 10,939 9,099 5,059
Total assets ............................................ 73,992 32,497 49,037 30,414 13,548
Long-term obligations ................................... 135 3,944 4,779 4,729 4,278
Total liabilities......................................... 39,698 26,753 43,666 26,501 11,311
Shareholders' equity .................................... 34,294 4,827 4,540 3,195 1,624
Common Stock Information:
Average number of common shares
Outstanding.............................................. 8,096 6,500 6,500 6,500 6,500
Common stock price per share:
High................................................. 24 3/8 N/A N/A N/A N/A
Low.................................................. 5 3/4 N/A N/A N/A N/A
Year-end............................................. 18 1/8 N/A N/A N/A N/A
Book value per common share............................... 4.24 0.74 0.70 0.49 0.25
Other Data:
Capital expenditures...................................... $ 5,739 $ 6,937 $ 7,972 $ 6,568 $ 4,729
</TABLE>
F-1
<PAGE>
(1) Cost of revenue includes $2,900, $3,711, $3,005, $1,750 and $620 for the
years ended December 31, 1998, 1997, 1996, 1995 and 1994, respectively, related
to depreciation on rental equipment.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the results of operations and financial condition
of the Company should be read in conjunction with the Consolidated Financial
Statements and Notes thereto. This discussion may contain certain forward-
looking statements that 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 include, but are
not limited to, the reliance on a small number of major clients; risk associated
with product-based marketing support services; risks of entering new lines of
businesses; reliance on the telecommunications industry; ability to continue and
manage growth; the impact of the trend toward outsourcing; dependence on labor
force; risks associated with rapidly changing technology and the Company's
conversion to new software; risk associated with competition; risks associated
with fluctuations in operating and quarterly results; dependence on key
personnel; risk associated with Year 2000 compliance; compliance with government
regulation; difficulties of completing and integrating acquisitions and other
factors discussed in more detail under "Business" in the Company's annual report
or Form 10-K.
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 (either outright or in four to six month
installments) 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. In November 1998, the Company entered into a new
contract with BellSouth. Under the contract, the Company provides Caller ID
hardware and other equipment to BellSouth customers. The Company bills
BellSouth, rather than BellSouth customers, for the items, thereby reducing the
Company's bad debt exposure. 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. From
time to time, rather than acquiring units and selling or leasing them to
BellSouth customers, the Company distributes, for a fee, Caller ID hardware that
BellSouth has purchased from various third-party manufacturers.
To leverage its experience and infrastructure investment related to the
BellSouth marketing support program, the Company entered into an agreement with
Pacific Bell in June 1996 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. In June 1998, the Company entered into an agreement with a vendor to
Southwestern Bell to fulfill Caller ID related telecommunications equipment. The
Company exchanged its exclusive arrangement with Pacific Bell in California to
become a fulfillment vendor for Southwestern Bell, Pacific Bell and Nevada Bell.
Under the Company's programs with Southwestern Bell and Pacific Bell, the
Company bills the respective company directly for the Caller ID units that are
sold to their end users. Southwestern Bell or Pacific Bell is then responsible
for billing and collecting from the consumer. As a result, the Company expects
unit prices and top line margin in future periods to be lower than historical
levels. This will be offset by lower bad debt expenses which are included in
general and administrative expenses.
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 January 1999 its Caller ID penetration had
F-2
<PAGE>
increased to approximately 36%. Services provided to BellSouth and its customers
accounted for 59%, 85% and 82% of the Company's net revenues for the years ended
December 31, 1998, 1997 and 1996, 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 the market matures. According to
industry sources, market penetration of Caller ID services in the U.S. as of
December 31, 1998 was approximately 29% 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. Additionally, the Company contacts previous purchasers of
Caller ID products to promote new enhanced Caller ID products.
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped (including installment sales) or rentals are
provided. Revenues are reduced for an estimate of product returns and
allowances. This provision is calculated based on the Company's historical
experience applied to current sales.
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, information
technology support, 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, human resources and administrative
functions that are not allocable to specific client services, as well as bad
debt expense. Bad debt expense represents a provision for installments and
rentals that will be deemed uncollectible based on the Company's historical
experience, as well as billing adjustments from telecommunications providers.
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, 1998, 1997 and 1996.
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 and notes thereto.
<TABLE>
<CAPTION>
Years Ended
December 31,
------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Revenues, net ........................................ 100.0% 100.0% 100.0%
Cost of revenues ..................................... 77.9 77.3 77.9
Gross profit ......................................... 22.1 22.7 22.1
Selling, general and administrative expenses ......... 11.2 14.3 14.6
Operating income ..................................... 10.2 7.7 7.0
Interest expense ..................................... 0.7 2.0 2.0
Income before income taxes ........................... 9.5% 5.6% 4.8%
</TABLE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
F-3
<PAGE>
Revenues. The Company's net revenues increased 58.8% to $139.7 million for
the year ended December 31, 1998 from $88.0 million for the year ended December
31, 1997. The increase in revenues during 1998 was primarily due to a 61.3%
increase in Caller ID units sold in 1998. During 1988, the Company fulfilled
2.9 million units as it increased its percentage of units sold to 62.3% of
total unit volume. During 1997, the Company fulfilled 1.8 million units or
56.9% of total unit volume. The 1998 increase was offset by a decrease in
average per unit prices of Caller ID units. The Company's reserve for returns
and allowances increased from $6.3 million (7.2% of net revenues) for the year
ended December 31, 1997 to $11.1 million (7.9% of net revenues) for the year
ended December 31, 1998.
Cost of Revenues. The Company's cost of revenues increased 60.0% to $108.8
million for the year ended December 31, 1998 compared to $68.0 million for the
year ended December 31, 1997. This was primarily due to an increase in cost of
equipment associated with the increase in units sold by the Company as described
above offset by a $1.3 million decrease from 1997 in rental equipment losses to
$3.2 million and a $1.6 million write-down on Caller ID equipment in the year
ended December 31, 1997. The writedown resulted from obsolescence issues related
to the regulatory-delayed start-up of the Pacific Bell program.
Gross Profit. For the year ended December 31, 1998, the Company's gross
profit increased 54.5% to $30.9 million or 22.1% of revenues as compared to
$20.0 million or 22.7% of revenues for the year ended December 31, 1997. The
increase in gross profit was primarily due to the increase in revenues. The
decrease in gross margin was due primarily to the increasing percentage of
business derived from Southwestern Bell and Pacific Bell where the Company does
not assume the bad debt risk, as described above. Therefore, it is able to
charge lower unit prices to Southwestern Bell and Pacific Bell, and as a result,
the Company experiences lower gross margins. This is offset by lower bad debt
expenses. During the fourth quarter of 1998, BellSouth sales were switched over
to a similar program. The Company expects its gross margins in future periods
to be reduced from historical levels, which will be offset by lower bad debt
expenses.
Selling, General and Administrative Expenses. SG&A expenses for the year
ended December 31, 1998 were $15.6 million or 11.2% of revenues compared to
$12.6 million or 14.3% of revenues for the year ended December 31, 1997. 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,
was $8.2 million (5.9% of net revenue) for the year ended December 31, 1998 as
compared to $7.8 million (8.8% of net revenue) for the year ended December 31,
1997. The decrease in bad debt expense as a percentage of revenue was primarily
due to the Company's new sales approach on new business where the client assumes
the bad debt risk in exchange for a lower sales price. Other SG&A expenses
increased over prior year due to increased sales and marketing efforts,
increased insurance and benefits expenses and administrative costs to support
the Company's growth.
Interest Expense. Interest expense decreased from $1.8 million for the year
ended December 31, 1997 to $1.0 million for the year ended December 31, 1998.
The decrease is primarily due to repayment of a note payable from a bank and
subordinated note payable to a shareholder from the proceeds received from the
initial public offering and lower bank borrowings under the Company's line of
credit from the previous year ended.
Income Taxes. The Company's effective tax rates for the years ended December
31, 1998 and 1997 were 28.2% and (1.6)%, respectively. The change from 1997 to
1998 was primarily the result of a lower level of income attributable to the
pass-through entities involved in the Consolidation prior to the consolidation.
As a result of the Consolidation, the Company expects its effective tax rate in
future periods to increase to statutory levels.
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
F-4
<PAGE>
for returns and allowances from $3.5 million (4.9% of net revenues) for the year
ended December 31, 1996 to $6.3 million (7.2% of net revenues) 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
including a $1.9 million increase from 1996 in rental equipment losses to $4.5
million and a $1.6 million write-down 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 increased 26.6% to $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.
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 (8.8% of net revenues) for the year ended December 31,
1997 as compared to $5.8 million (8.1% of net revenues) for the year ended
December 31, 1996. The increase in bad debt expense and the allowance for
doubtful accounts (inclusive of the reserve for returns and allowances) (22.1%
of gross accounts receivable) 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."
Liquidity and Capital Resources
Prior to its initial public offering, the Company had 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 $3.4 million and $554,000 at December 31, 1998 and
1997, respectively. The Company maintains a $35.0 million revolving line of
credit with a bank, maturing in May 2000, which was increased from $25.0 million
in January 1999. 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, 1998, the interest rate was
6.75%. In May 1998, the Company repaid a term loan with a bank that would have
F-5
<PAGE>
matured in July 1999 and bore interest at 8.95% per annum, along with a
subordinated note payable to a shareholder, which would have matured in April
1999 and bore interest at a particular bank's prime rate, as adjusted from time
to time, plus 8.0% per annum, with proceeds received from the initial public
offering on May 11, 1998. At December 31, 1998, $15.7 million was outstanding
under the line of credit.
As of December 31, 1998, 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 office into which the Company moved in
October 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 $984,000. As a part of the agreement,
during the year ended December 31, 1998, the Company acquired these interests.
During the year ended December 31, 1998, the Company used $9.1 million in
cash flow from operating activities compared to the generation of $18.9 million
and $88,000 in cash flow from operating activities for the years ended December
31, 1997 and 1996, respectively. The decrease in cash flow from operating
activities in 1998 was due to higher working capital requirements resulting from
increases in accounts receivable (principally installment receivables and
receivables from Pacific Bell and Southwestern Bell) and inventory due to the
increased sales volume during the twelve months of 1998 as compared to the same
period in 1997. 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 as the Company changed the length
of its installment sales from generally one year to four to six months and
reduced inventory as the Company utilized inventory purchased in 1996 as part of
the build-up for the rollout of the Pacific Bell program, which was delayed for
various regulatory issues.
During the years ended December 31, 1998, 1997 and 1996, net cash used in
investing activities was $5.7 million, $6.9 million and $8.0 million,
respectively. This decrease in 1998 was primarily due to a decrease in the
number of purchases of Caller ID units for rent, partially offset by
expenditures associated with the Company's software upgrade and new furniture
and equipment for new corporate facility and expansion of its call center to
service new clients. The decrease in 1997 was primarily due to a decrease in
the number of purchases of telecommunications equipment for rent.
During the year ended December 31, 1998, the net cash provided by financing
activities was $17.7 million compared to $13.4 million used in financing
activities in the same period in 1997. During the year ended December 31, 1996,
the net cash provided by financing activities was $9.8 million. During the year
ended December 31, 1998, the Company received $26.7 million in the initial
public offering completed on May 11, 1998, net of fees associated with the
initial public offering. The Company used a portion of the proceeds to repay
$4.6 million of long-term debt, $7.5 million in distributions of undistributed
earnings to shareholders of affiliated flow through entities that were merged
into the Company in conjunction with the initial public offering, and reduced
its borrowings under the line of credit by $13.8 million. Subsequent to the
initial public offering, the Company has made periodic borrowings against the
line of credit to fund short term working capital needs, resulting in a net
increase in borrowings on the line of credit of $7.2 million for the year ended
December 31, 1998. The use of cash for financing activities for the year ended
December 31, 1997 reflects repayments under the line of credit and term loan.
The Company estimates that its cash and financing needs through 1999 will be
met by cash flows from operations and its line of credit facility. However, any
increase 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
F-6
<PAGE>
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. Management believes
that the Company's information technology ("IT") systems, including the existing
systems and programs that will be replaced as a part of an upgrade of the
Company's system architecture, and other non IT systems are either Year 2000
compliant or will be compliant by June 30, 1999 after applying vendor supplied
patches, or upgrades to these systems. The cost of the upgrades, excluding the
new information system described above is expected to be approximately $ 85,000.
Approximately $20,000 of which has been incurred through February 1999. The
Company does not anticipate additional material expenditures for Year 2000
compliance issues.
The Company's Year 2000 compliance efforts for both IT and non-IT systems
include three major phases: (1) inventory all systems, assess whether there are
any Year 2000 issues, and develop a compliance plan for all systems; (2)
remediate any Year 2000 problems; (3) test systems subsequent to remediation.
The chart below shows the estimated completion status of each of these phases
expressed as a percentage of completion as of December 31, 1998:
<TABLE>
<CAPTION>
Phase: I II III
---------------------------------------
<S> <C> <C> <C>
IT Systems 97% 50% 10%
Non-IT Systems 100% 95% 95%
</TABLE>
The Company anticipates that the assessment and remediation phases will be
complete as of June 30, 1999 and the testing will continue into the third
quarter of 1999.
The Company is in the process of obtaining documentation from its suppliers,
clients, financial institutions and others as to the status of their Year 2000
compliance programs and 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 is in the process of
developing contingency plans to address Year 2000 failures of these entities
with which the Company interfaces. The Company's contingency plans are being
developed to address such issues as: (1) The inability of the Company to receive
customer order information electronically from its major clients; and (2) The
inability of one or more of the manufacturers of the Caller ID products the
Company sells to produce due to that company's Year 2000 failure. If the first
scenario were to happen, the Company would be required to receive and enter this
information manually into its order processing system which could increase the
Company's labor costs. If the second scenario were to occur, the Company would
be required to find alternate vendors and potentially incur additional costs to
do so. 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 conditions.
Quantitative and Qualitative Disclosure About Market Risks
The Company believes its exposure to market rate fluctuations on its
investments are immaterial due to the short-term nature of those investments.
To the extent that the Company has borrowings outstanding under its credit
facility, it has market risk relating to such amounts because interest rates
under the credit facility are variable. Such exposure is immaterial due to the
short-term nature of such borrowings. Currently, the Company has no plans to
enter into any hedging arrangements with respect to such borrowings.
F-7
<PAGE>
Recent Accounting Pronouncements
The FASB has issued Statement No. 133, Accounting for Derivative Instruments
and Hedging Activities, which must be adopted by the year 2000. This statement
establishes accounting and reporting standards for derivative instruments --
including certain derivative instruments embedded in other contracts -- and for
hedging activities. Adoption of this statement is not expected to have a
material impact on the Company's financial statements.
In March 1998, the American Institute of Certified Public Accountants (AICPA)
issued a new Statement of Position, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement requires
capitalization of certain costs of internal-use software. The Company adopted
this statement in January 1999, and has not yet determined its impact on the
financial statements.
F-8
<PAGE>
INDEX TO THE FINANCIAL STATEMENTS
OF INNOTRAC CORPORATION
<TABLE>
<S> <C>
Consolidated Financial Statements
Report of Independent Public Accountants........................................................ F-10
Consolidated Balance Sheets as of December 31, 1998 and 1997.................................... F-11
Consolidated Statements of Operations for the Years Ended December 31, 1998, 1997 and 1996...... F-12
Consolidated Statements of Partners', Members' and Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996.............................................................. F-13
Consolidated Statements of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996...... F-14
Notes to Consolidated Financial Statements...................................................... F-15
</TABLE>
F-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innotrac Corporation:
We have audited the accompanying consolidated balance sheet of INNOTRAC
CORPORATION (a Georgia corporation) as of December 31, 1998 and the combined
balance sheet of INNOTRAC 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 the related combined
statements of operations, partners', members' and shareholders' equity and cash
flows for the years ended December 31, 1998, 1997 and 1996. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Innotrac
Corporation as of December 31, 1998 and the 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 the results of their
operations and their cash flows for the years ended December 31, 1998, 1997 and
1996 in conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
- -----------------------
Arthur Andersen LLP
Atlanta, Georgia
January 31, 1999
F-10
<PAGE>
INNOTRAC CORPORATION,
CONSOLIDATED BALANCE SHEETS
(In 000's)
<TABLE>
<CAPTION>
December 31,
-------------------
ASSETS 1998 1997
------ -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalents ......................................................... $ 3,379 $ 554
Accounts receivable, net (Note 3)................................................... 44,354 20,081
Inventories......................................................................... 14,381 2,936
Deferred tax assets (Note 6)........................................................ 2,866 386
Prepaid expenses and other current assets........................................... 1,436 373
------- -------
Total current assets............................................................... 66,416 24,330
------- -------
Property and equipment:
Rental equipment.................................................................... 6,891 10,433
Computer, machinery and transportation equipment.................................... 1,390 1,558
Furniture, fixtures and leasehold improvements...................................... 4,949 720
------- -------
13,230 12,711
Less accumulated depreciation and amortization...................................... 5,767 5,102
------- -------
7,463 7,609
------- -------
Other assets, net.................................................................... 113 558
------- -------
Total assets....................................................................... $73,992 $32,497
======= =======
</TABLE>
<TABLE>
<CAPTION>
December 31,
------------------
1998 1997
------- -------
LIABILITIES AND PARTNERS', MEMBERS',
AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
<S> <C> <C>
Current portion of long-term debt (Note 4)............................................... $ 68 $ 738
Line of credit (Note 4)................................................................. 15,736 8,545
Accounts payable........................................................................ 9,387 4,766
Distributions payable (Note 2).......................................................... 70 1,007
Accrued expenses........................................................................ 12,336 7,435
Other................................................................................... 1,966 318
------- -------
Total current liabilities.............................................................. 39,563 22,809
------- -------
Noncurrent liabilities:
Subordinated debt (Note 4).............................................................. 0 3,500
Long-term debt (Note 4)................................................................. 7 404
Deferred tax liabilities (Note 6)....................................................... 106 40
Other................................................................................... 22 0
------- -------
Total noncurrent liabilities........................................................... 135 3,944
------- -------
Total liabilities...................................................................... 39,698 26,753
------- -------
Commitments and contingencies (Note 5)...................................................
Redeemable capital stock (Note 7)........................................................ 0 917
------- -------
Partners', members' and shareholders' equity (Note 8):
Partners' capital....................................................................... 0 1,759
Members' deficit........................................................................ 0 (490)
Common stock............................................................................ 900 5
Additional paid-in capital.............................................................. 24,838 14
Retained earnings....................................................................... 8,556 3,539
------- -------
Total partners', members' and shareholders' equity..................................... 34,294 4,827
------- -------
Total liabilities and partners', members' and shareholders' equity..................... $73,992 $32,497
======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated balance
sheets.
F-11
<PAGE>
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In 000's except data per share)
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1998 1997 1996
---------- -------- --------
<S> <C> <C> <C>
Revenues, net.................................... $139,673 $87,978 $71,297
Cost of revenues................................. 108,785 67,986 55,519
-------- ------- -------
Gross profit................................ 30,888 19,992 15,778
-------- ------- -------
Operating expenses:
Selling, general and administrative
Expenses...................................... 15,642 12,572 10,391
Depreciation and amortization................... 943 631 429
-------- ------- -------
Total operating expenses..................... 16,585 13,203 10,820
-------- ------- -------
Operating income.................................. 14,303 6,789 4,958
-------- ------- -------
Other (income) expense:
Interest expense................................ 956 1,788 1,457
Other........................................... 35 118 94
-------- ------- -------
Total other expense.......................... 991 1,906 1,551
-------- ------- -------
Income before income taxes........................ 13,312 4,883 3,407
Income tax (provision)benefit..................... (3,743) 77 (212)
-------- ------- -------
Net income................................... $ 9,569 $ 4,960 $ 3,195
======== ======= =======
Unaudited Pro Forma Data:
Income tax provision............................. $ (5,126) $(1,880) $(1,312)
======== ======= =======
Pro forma net income............................. $ 8,186 $ 3,003 $ 2,095
======== ======= =======
Pro forma net income per share-basic.......... $1.01 $0.46 $0.32
======== ======= =======
Pro forma net income per share-diluted........... $1.00 $0.46 $0.32
======== ======= =======
Average Common Shares Outstanding
Basic......................................... 8,096 6,500 6,500
Diluted....................................... 8,155 6,500 6,500
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-12
<PAGE>
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
(In 000's)
<TABLE>
<CAPTION>
Partners' Members' Common Paid-In Retained
Capital Deficit Stock Capital Earnings Total
---------- --------- ------- ------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995........... $ 1,108 $ 0 $ 5 $ 14 $ 2,068 $ 3,195
Member contributions 0 2 0 0 0 2
Net income........................... 1,323 (39) 0 0 1,911 3,195
Distributions to shareholders, (235)
Members and partners................ (529) 0 0 (977) (1,741)
Accreted dividends on redeemable
Capital stock....................... 0 0 0 0 (111) (111)
------- ----- ---- ------- ------- -------
Balance, December 31, 1996........... 1,902 (272) 5 14 2,891 4,540
Net income (loss).................... 3,541 (233) 0 0 1,652 4,960
Distributions to shareholders,
Members and partners................ (3,684) 15 0 0 (917) (4,586)
Accreted dividends on redeemable
Capital stock....................... 0 0 0 0 (87) (87)
------- ----- ---- ------- ------- -------
Balance, December 31, 1997........... 1,759 (490) 5 14 3,539 4,827
Distributions to shareholders, (4,836) (209) 0 0 (9,792)
Members and partners............ (4,747)
Merger of companies (461) 288 645 (1,667) 1,195 0
Record deferred taxes associated
with merger......................... 0 0 0 0 3,016 3,016
Proceeds from sale of common stock, net 0 0 250 26,491 0 26,741
Net income (loss).................... 3,538 411 0 0 5,620 9,569
Accreted dividends on redeemable
Capital stock....................... 0 0 0 0 (67) (67)
------- ----- ---- ------- ------- -------
Balance, December 31, 1998........... $ 0 $ 0 $900 $24,838 $ 8,556 $34,294
======= ===== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-13
<PAGE>
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In 000's)
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net income............................................................... $ 9,569 $ 4,960 $ 3,195
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................................... 943 631 429
Depreciation--rental equipment.......................................... 2,900 3,711 3,005
Loss on disposal of rental equipment.................................... 2,158 4,479 2,538
Subordinated debt accretion............................................. 0 0 164
Deferred income taxes................................................... 602 (537) (107)
Decrease (increase) in accounts receivable.............................. (24,273) 5,379 (6,753)
Decrease (increase) in inventories...................................... (11,445) 7,085 (7,683)
Decrease in prepaid expenses and other assets........................... (734) (485) (327)
(Decrease) increase in accounts payable................................. 4,621 (8,960) 3,611
Increase in accrued expenses............................................ 4,901 2,250 2,484
Other................................................................... 1,670 369 (468)
-------- -------- -------
Net cash provided by (used in) operating
Activities............................................................ (9,088) 18,882 88
Cash flows from investing activities:
Accrued equipment purchases.............................................. 0 (1,595) (272)
Purchases of property and equipment...................................... (5,739) (5,342) (7,700)
-------- -------- -------
Net cash used in investing activities.................................. (5,739) (6,937) (7,972)
--------- --------- --------
Cash flows from financing activities:
Net (repayments) borrowings under lines of credit........................ 7,191 (8,685) 13,169
Proceeds from long-term debt............................................. 0 0 2,096
Repayment of long-term debt.............................................. (1,067) (702) (328)
Repayment of subordinated debt........................................... (3,500) 0 (1,000)
Loan commitment fees..................................................... 0 (125) (200)
Proceeds from members' contributions..................................... 0 0 2
Proceeds from initial public offering, net 26,741 0 0
Redemption of redeemable capital stock................................... (984) 0 0
Distributions to shareholders, members and
Partners............................................................... (10,729) (3,884) (3,890)
-------- -------- -------
Net cash (used in) provided by financing
Activities............................................................ 17,652 (13,396) 9,849
-------- -------- -------
Net increase (decrease) in cash and cash equivalents...................... 2,825 (1,451) 1,965
Cash and cash equivalents, beginning of period............................ 554 2,005 40
-------- -------- -------
Cash and cash equivalents, end of period.................................. $ 3,379 $ 554 $ 2,005
======== ======== =======
Supplemental cash flow disclosures:
Cash paid for interest................................................... $ 1,006 $ 1,788 $ 1,207
======== ======== =======
Cash paid for income taxes, net of refunds
received................................................................ $ 1,493 $ 86 $ 892
======== ======== =======
Non cash transactions:
Accreted dividends on Redeemable Capital Stock........................... $ 67 $ 87 $ 111
======== ======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-14
<PAGE>
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Organization
Innotrac Corporation ("Innotrac" or The "Company") is a full service
provider of customized technology based marketing support services. The
majority of the Company's operation is directly related to the sale and
distribution of caller identification display devices (Caller ID units). Prior
to May 6, 1998, Innotrac operated as eight separate affiliates: 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.") (collectively referred to herein as
the "Companies"). The Companies were all owned 100% by one shareholder or his
immediate family except for RenTel, SellTel, and Providers L.P. (which each had
a 10% minority interest owned by one party). The minority interests of RenTel
and SellTel were owned by a related party of the shareholder.
On May 6, 1998, Innotrac consolidated these eight entities (the
"Consolidation"), effective simultaneously with, and as a condition to, the
Company's initial public offering (the "Offering") of 2.5 million shares, at an
initial public offering price of $12.00 per share (See Footnote 8).
For accounting purposes, Providers, L.P. was deemed to be the acquiring entity
and its balance sheet carried over at historical cost. Since the other entities
that were parties to the Consolidation were wholly-owned by either the majority
shareholder of Providers L.P. or his direct relatives, those entities were
considered to be under common control, and the balance sheets of such entities
also carried over at historical cost.
2. Significant Accounting Policies
Principles of Combination and Consolidation
Prior to the Consolidation, the accompanying combined financial statements
include the accounts of the Companies and were prepared on the accrual basis of
accounting. Significant intercompany accounts and transactions have been
eliminated in the combination. Combined financial statements were 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.
Subsequent to the Consolidation, the accompanying financial statements include
the consolidated accounts of Innotrac. Significant intercompany accounts and
transactions have been eliminated in the consolidation.
Pro Forma Net Income and Net Income per Share
In conjunction with the Consolidation, HomeTel Providers, Inc., Providers LP,
RenTel #1, RenTel #2, and SellTel #2 lost their non C corporation status for tax
purposes. Accordingly, the pro forma income taxes reflect income taxes at
statutory rates applied to pro forma earnings. In addition the pro forma
earnings per share reflect the Consolidation as if it had occurred at the
beginning of each period presented.
F-15
<PAGE>
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 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 three 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 59%, 85% and 82% of total revenues
for the years ended December 31, 1998, 1997 and 1996, 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>
F-16
<PAGE>
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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.
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. Equipment rental
losses were approximately $2,158,000, $4,479,000 and $2,538,000 for the years
ended December 31, 1998, 1997 and 1996 respectively, and are included in "Cost
of revenues" in 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, as a C corporation, utilizes 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.
Prior to the Consolidation, the shareholders of certain affiliated companies
had 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. In addition, other entities were limited liability companies which
are not subject to federal and state income taxes. Accordingly, no provisions
for federal and certain state income taxes related to these entities have been
made in the accompanying financial statements.
Prior to the Consolidation, it was 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 these
entities. During the years ended December 31, 1998, 1997 and 1996, distributions
of approximately $2,292,000, $4,586,000 and $1,741,000, respectively, were
recorded, of which approximately $70,000 and $1,007,000 were accrued and unpaid
as of December 31, 1998 and 1997, respectively. Additionally, in conjunction
with the consolidation (Note 1), the Company distributed $7,500,000 of the
undistributed earnings of approximately $9,000,000 to the owners of certain
pass-thru entities.
F-17
<PAGE>
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
Revenue Recognition
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped or rentals are provided. Revenues are reduced
for an estimate of product returns and allowances (Note 3).
Fair Value of Financial Instruments
The carrying values of the Company's financial instruments approximate their
fair values.
Advertising Costs
The Company expenses all advertising costs as incurred.
Recent Accounting Pronouncements
In 1998, the Company was subject to the provisions of Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information". These statements had no impact on the Company's financial
statements as it has no comprehensive income elements other than distributions
to owners and returns on equity and its financial statements reflect how the
"key operating decisions maker" views the business. The Company will continue
to review these statements over time to determine if any additional disclosures
are necessary based on evolving circumstances.
3. Accounts Receivable
The Companies' accounts receivable include amounts that are billed in
installments over a five to seven month period. Accounts receivable were
composed of the following at December 31, 1998 and 1997 (in 000s):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Billed receivables ................... $32,081 $15,812
Unbilled installment receivables ..... 17,208 9,976
------- -------
Total receivables .................... 49,289 25,788
Less allowances ...................... (4,935) (5,707)
------- -------
$44,354 $20,081
======= =======
</TABLE>
Management believes that the allowances for doubtful accounts and returns
reduce the gross accounts receivable to net amounts that will be collected.
F-18
<PAGE>
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
4. Financing Obligations
Financing obligations as of December 31, 1998 and 1997 consisted of the
following (in 000s):
<TABLE>
<CAPTION>
1998 1997
------- -------
<S> <C> <C>
Borrowings under revolving credit agreement (up to $25,000,000); 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 (7.75% and 8.5% at December 31, 1998 and 1997, respectively),
or at the Company's option, LIBOR plus a margin (6.75% at December 31, 1998),
expires on November 15, 1999, secured by all assets of the Company................... $15,736 $ 8,545
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, 1998) 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; note was paid in full in May 1998 ........... 0 3,500
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; note 0 1,056
was paid in full in May 1998 ....................................................
Other ................................................................................... 75 86
------- -------
15,811 13,187
Current portion ........................................................................ 15,804 9,283
------- -------
$ 7 $ 3,904
======= =======
</TABLE>
Scheduled maturities of financing obligations are as follows (in 000s):
<TABLE>
<S> <C>
1999........................................................................................... 15,804
2000........................................................................................... 7
-------
Total....................................................................................... $15,811
=======
</TABLE>
The weighted average interest rate on the revolving line of credit agreement
was 7.6% and 8.6% for the years ending December 31, 1998 and 1997, respectively.
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, 1998.
In January 1999, the revolving credit agreement was increased to $35,000,000
and expiration date extended to May 1, 2000.
F-19
<PAGE>
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED 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, 1998 are as
follows (in 000s):
<TABLE>
<S> <C>
1999 ................................................................... $1,433
2000 ................................................................... 904
2001 ................................................................... 903
2002 ................................................................... 903
2003 ................................................................... 924
Thereafter ............................................................. 4,818
------
Total minimum lease payments ........................................... $9,885
======
</TABLE>
Rent expense under all operating leases totaled approximately $1,231,000,
$1,121,000 and $770,000 during the years ended December 31, 1998, 1997 and 1996,
respectively.
Marketing Support Agreement
The Company has an agreement, which expires in September 2003, 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 (a) after March 15, 2000 by the telecommunications
company without cause upon 120 days notice or (b) by the telecommunications
company for cause upon 10 days 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 Company is subject to legal proceedings and claims that arise in the
ordinary course of business. There are no material pending legal proceedings to
which the Company are a party.
F-20
<PAGE>
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
6. Income Taxes
Details of the income tax (provision) benefit for the years ended December 31,
1998, 1997 and 1996 are as follows (in 000s):
<TABLE>
<CAPTION>
1998 1997 1996
------- ------ ------
<S> <C> <C> <C>
Current ............. $(3,141) $(460) $(319)
Deferred ............ (602) 537 107
------- ----- -----
$(3,743) $ 77 $(212)
======= ===== =====
</TABLE>
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, 1998 and 1997 are as follows (in 000s):
<TABLE>
<CAPTION>
1998 1997
------ ------
<S> <C> <C>
Noncurrent deferred tax (liabilities) assets:
Property, plant, equipment basis differences ..................... $ (114) $ 43
Conversion from cash to accrual taxpayer method--long term ....... 0 (83)
Other ............................................................ 8 0
------ -----
(106) (40)
------ -----
Current deferred tax assets (liabilities):
Reserves for uncollectable accounts .............................. 2,372 524
Reserve for returns and equipment losses .......................... 526 0
Conversion from cash to accrual taxpayer method--current ......... (36) (143)
Other ............................................................ 4 5
------ -----
2,866 386
------ -----
Net deferred tax asset .............................................. $2,760 $ 346
====== =====
</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.
Effective with the Consolidation, the Company coverted all of its entities
that were non-C-corporations status for income tax reporting purposes to C-
corporation status and recorded a one-time benefit of approximately $3 million
related to certain temporary differences at these entities.
A reconciliation of the income tax (benefit) provision computed at statutory
rates to the income tax provision for the years ended December 31, 1998, 1997
and 1996 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Federal statutory rate ............................................... 35.0% 34.0% 34.0%
</TABLE>
F-21
<PAGE>
<TABLE>
<S> <C> <C> <C>
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit ........................ 6.0 1.4 3.6
Income taxable directly to shareholders, partners and members
(Note 2) ........................................................ (13.3) (37.9) (31.8)
Other ................................................................ 0.5 0.9 0.4
----- ----- -----
28.2% (1.6)% 6.2%
===== ===== =====
</TABLE>
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED STATEMENTS-(Continued)
7. Redeemable Capital Stock
In September 1993, the Company obtained $1,000,000 of financing from a related
party in the form of subordinated debt, in two entities that were involved in
the Consolidation. 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 of these entities. The terms of the
callable common stock provided each of these entities the option to call the
common stock at predetermined amounts on or before September 30, 1998 beginning
in September, 1996. If the Company did not call the common stock interests, the
Company was 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 Company accounted for the callable common stock as redeemable
equity.
The Company 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 1), the
Company redeemed the shares of one entity in February 1998 for $390,000 and the
shares of the other entity for $594,000 in December 1998.
8. Shareholders' Equity
Innotrac has authorized 50,000,000 shares of Common Stock, $0.10 par value,
and 10,000,000 shares of Preferred Stock, $0.10 par value. On December 12,
1997, Innotrac effected a 70.58823 for- 1 stock split resulting in 1,080,000
shares outstanding. Additionally, in exchange for their previous ownership
interests, 5,420,000 shares of $0.10 par value common stock were issued to the
remaining entity owners pari-passu based on their relative value to the
consolidated group except for the minority stockholder of one of the affiliated
entities, whose ownership interests was repurchased as scheduled in the fourth
quarter of 1998. After the Consolidation, there were an aggregate of 6,500,000
shares outstanding. As discussed in Note 1, on May 6, 1998 the Company
completed an initial public offering of 2.5 million shares at a price of $12.00
per share for net proceeds of approximately $26,741,000. As of December 31,
1998, there were 9,000,000 shares of common stock outstanding.
9. Employee Retirement Plan
F-22
<PAGE>
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 or older. Participants may elect to defer up to
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, 1998, 1997 and
1996 were not material.
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED 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, 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, 1998, stock options to purchase an aggregate of 343,000
shares at $9.10 per share of Common Stock had 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. At
December 31, 1998, 323,475 options were outstanding with a weighted average
contractual life of 8.9 years. 55,000 options were exercisable at December 31,
1998 at $9.10 per share.
Additionally, the Company granted stock options to purchase an aggregate of
40,000 shares on the effective date of the Offering to four non-employee members
of the Board of Directors at $12 (the intial public offering price) which vested
immediately upon grant. 40,000 options were exercisable at December 31, 1998 at
$12.00 per share.
A summary of the status of the Company's Stock Option Plan and other options
at December 31, 1998 is as follows (in thousands):
<TABLE>
<CAPTION>
Shares Weighted Average Price
------ ----------------------
<S> <C> <C>
</TABLE>
F-23
<PAGE>
<TABLE>
<S> <C> <C>
Outstanding at December 31, 1996 0 $ 0.00
Granted 343 9.10
Outstanding at December 31, 1997 343 9.10
Granted 40 12.00
Forfeited (20) 9.10
---
Outstanding at December 31, 1998 363 9.42
---
</TABLE>
The remaining weighted average contractual life of the options outstanding
at December 31, 1998 is 8.9 years and the weighted average price of the 95,000
exercisable options at December 31, 1998 is $10.32.
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
The total value of options granted during 1998 and 1997 was computed as
approximately $3,013,000 and $2,172,000 which would be amortized on a pro forma
basis over the vesting period of the options. Had compensation cost for stock
options been determined under SFAS No. 123, the Company's net income and net
income per share would have been the following pro forma amounts:
<TABLE>
<CAPTION>
Year ended December 31,
------------------------------------------
1998 1997
------------------- --------------------
<S> <C> <C>
Net income
Pro forma $8,186 $3,003
Pro forma adjusted for the $7,402 $2,686
Impact of SFAS 123
Diluted net income per share
Pro forma $ 1.00 $ 0.46
Pro forma adjusted for the $ 0.91 $ 0.41
Impact of SFAS 123
</TABLE>
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 using the Black-Scholes option-pricing model as prescribed by
SFAS 123 using the following weighted average assumptions:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Risk-free interest rate ........ 5.17% 5.17%
Expected dividend yield ........ 0% 0%
Expected lives ................. 2.7 Years 2.7 Years
Expected volatility ............ 86.0% 106.0%
</TABLE>
F-24
<PAGE>
EXHIBIT 23.1
------------
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the incorporation
by reference in the Registration Statement on Form S-8 filed with the Securities
and Exchange Commission on October 23, 1998 (No. 333-66045) of Innotrac
Corporation of our reports, dated January 31, 1999, included in the December 31,
1998 Annual Report on Form 10-K of Innotrac Corporation.
/s/ ARTHUR ANDERSEN LLP
Atlanta, Georgia
March 22, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INNOTRAC CORPORATION FOR THE YEAR ENDED DECEMBER 31,
1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> $2,272,000
<SECURITIES> 1,107,000
<RECEIVABLES> 49,289,000
<ALLOWANCES> 4,935,000
<INVENTORY> 14,381,000
<CURRENT-ASSETS> 66,416,000
<PP&E> 13,230,000
<DEPRECIATION> 5,767,000
<TOTAL-ASSETS> 73,992,000
<CURRENT-LIABILITIES> 39,563,000
<BONDS> 0
0
0
<COMMON> 25,738,000
<OTHER-SE> 8,556,000
<TOTAL-LIABILITY-AND-EQUITY> 73,992,000
<SALES> 139,673,000
<TOTAL-REVENUES> 139,673,000
<CGS> 0
<TOTAL-COSTS> 108,785,000
<OTHER-EXPENSES> 16,585,000
<LOSS-PROVISION> 19,349,000
<INTEREST-EXPENSE> 956,000
<INCOME-PRETAX> 13,312,000
<INCOME-TAX> 3,743,000
<INCOME-CONTINUING> 9,569,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 9,569,000
<EPS-PRIMARY> 1.01
<EPS-DILUTED> 1.00
</TABLE>
<PAGE>
EXHIBIT 99.1
------------
[Innotrac Letterhead]
April 9, 1999
To Our Shareholders:
On behalf of the Board of Directors and management of Innotrac Corporation,
I cordially invite you to the Annual Meeting of Shareholders to be held on May
11, 1999, at 9:00 AM, Eastern Time, at the Company's offices located at 6655
Sugarloaf Parkway, Duluth, Georgia 30097.
At the Annual Meeting, shareholders will be asked to consider and vote upon
the election of two directors of the Company, each of whom is currently a
director of the Company, and such other matters as may properly come before the
meeting or any adjournment thereof. Information about the nominees and certain
other matters is contained in the accompanying Proxy Statement. A copy of the
Company's 1998 Annual Report to Shareholders, which contains financial
statements and other important information about the Company's business, is also
enclosed.
It is important that your shares of stock be represented at the meeting,
regardless of the number of shares you hold. You are encouraged to specify your
voting preferences by marking and dating the enclosed proxy card. However, if
you wish to vote for re-electing the nominees for director specified herein, all
you need to do is sign and date the proxy card.
Please complete and return the proxy card in the enclosed envelope, whether
or not you plan to attend the meeting. If you do attend and wish to vote in
person, you may revoke your proxy at that time.
I hope you are able to attend, and look forward to seeing you.
Sincerely,
Scott D. Dorfman
President, Chairman of the Board and
Chief Executive Officer
<PAGE>
INNOTRAC CORPORATION
6655 SUGARLOAF PARKWAY
DULUTH, GEORGIA 30097
_____________________________
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 11, 1999
__________________________
To the Shareholders of
Innotrac Corporation:
Notice is hereby given that the Annual Meeting of Shareholders of Innotrac
Corporation will be held at 9:00 AM, Eastern Time, on Tuesday, May 11, 1999, at
the Company's offices, 6655 Sugarloaf Parkway, Duluth, Georgia 30097, for the
following purposes:
1. To elect two directors whose terms will expire in 2002; and
2. To consider such other matters as may properly come before the meeting
and any adjournment or postponement thereof.
Only shareholders of record on March 26, 1999, are entitled to notice of
and to vote at the Annual Meeting and any adjournment or postponement thereof.
A Proxy Statement and a Proxy solicited by the Board of Directors are
enclosed herewith. Please sign, date and return the Proxy promptly in the
enclosed business reply envelope. If you attend the meeting you may, if you
wish, withdraw your Proxy and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS,
John H. Nichols, III
APRIL 9, 1999 Secretary
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, PLEASE FILL IN,
DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED BUSINESS
REPLY ENVELOPE, WHICH REQUIRES NO POSTAGE IF MAILED IN THE UNITED STATES. THE
PROXY MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE, AND IF YOU ARE PRESENT AT
THE ANNUAL MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT THAT TIME AND
EXERCISE THE RIGHT TO VOTE YOUR SHARES PERSONALLY.
<PAGE>
[INNOTRAC LOGO]
PROXY STATEMENT
DATED APRIL 9, 1999
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 11, 1999
This Proxy Statement is furnished to shareholders in connection with the
solicitation of proxies by the Board of Directors of Innotrac Corporation
("Innotrac" or the "Company") for use at Innotrac's 1999 Annual Meeting of
Shareholders ("Annual Meeting") to be held on Tuesday, May 11, 1999, including
any postponement, adjournment or adjournments thereof, for the purposes set
forth in the accompanying Notice of Annual Meeting. Management intends to mail
this Proxy Statement and the accompanying form of proxy to shareholders on or
about April 9, 1999.
Only shareholders of record at the close of business on March 26, 1998 (the
"Record Date"), are entitled to notice of and to vote in person or by proxy at
the Annual Meeting. As of the Record Date, there were 8,999,995 shares of
common stock, $.10 par value per share ("Common Stock"), of Innotrac outstanding
and entitled to vote at the Annual Meeting. The presence of a majority of such
shares is required, in person or by proxy, to constitute a quorum for the
conduct of business at the Annual Meeting. Each share is entitled to one vote
on any matter submitted for vote by the shareholders. The vote required for
approval of each matter submitted to the shareholders is described with the
discussion of that matter in this Proxy Statement.
Proxies in the accompanying form, duly executed and returned to the
management of the Company, and not revoked, will be voted at the Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the shareholder
at any time prior to the voting of the proxy by delivery of a subsequently dated
proxy, by written notification to the Secretary of the Company or by personally
withdrawing the proxy at the Annual Meeting and voting in person.
Proxies that are executed, but that do not contain any specific
instructions, will be voted for the election of all the nominees for directors
specified herein. The persons appointed as proxies will vote in their
discretion on any other matter that may properly come before the Annual Meeting
or any postponement, adjournment or adjournments thereof, including any vote to
postpone or adjourn the Annual Meeting.
A copy of the Company's 1998 Annual Report to Shareholders is being
furnished herewith to each shareholder of record as of the close of business on
the Record Date. Copies of the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 will be provided free of charge upon written
request to:
INNOTRAC CORPORATION
6655 SUGARLOAF PARKWAY
DULUTH, GEORGIA 30097
ATTN.: CHIEF FINANCIAL OFFICER
If the person requesting the Annual Report on Form 10-K for the year ended
December 31, 1998 was not a shareholder of record on the Record Date, the
request must include a representation that the person was a beneficial owner of
Common Stock on that date. Copies of any exhibits to the Company's Annual
Report on Form 10-K for the year ended December 31, 1998 will also be furnished
on request and upon payment of the Company's expenses in furnishing the
exhibits.
-1-
<PAGE>
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The following table sets forth the information concerning the beneficial
ownership of Common Stock, which is the only class of voting stock of the
Company, at January 1, 1999, by (i) each person known to the Company to
beneficially own more than 5% of the Common Stock, (ii) each director and
designated highly compensated executive officer and (iii) all directors and
executive officers of the Company as a group. Unless otherwise indicated below,
the persons named below had sole voting and investment power with respect to all
shares of the Common Stock shown as beneficially owned by them.
<TABLE>
<CAPTION>
Number of Shares
BENEFICIAL OWNER Beneficially Owned(1) PERCENTAGE BENEFICIALLY OWNED
- ----------------- --------------------------------------- -----------------------------
<S> <C> <C>
Scott D. Dorfman................................. 6,075,667(2) (3) 67.5%
SAFECO Corporation............................... 917,600(4) 10.2
SAFECO Asset Management Company.................. 808,100(5) 9.0
SAFECO Common Stock Trust........................ 676,000(6) 7.5
David L. Ellin................................... 87,500(7) 1.0
Larry C. Hanger.................................. -- --
John H. Nichols, III............................. 2,000 *
Don L. Colter.................................... 1,000 *
Bruce V. Benator................................. 10,000(8) *
Martin J. Blank.................................. 12,000(8) *
Campbell B. Lanier, III.......................... 414,333(8)(9)(10) 4.6
William H. Scott, III............................ 396,333(8)(9) 4.4
All directors and executive officers as a group
(9 persons)..................................... 6,615,500 72.7
</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 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.
As of January 1, 1999, there were 8,999,995 shares of Common Stock
outstanding.
(2) Mr. Dorfman's address is 6655 Sugarloaf Parkway, Duluth, Georgia 30097.
(3) Includes an aggregate of 148,037 shares owned by Mr. Dorfman's wife
individually, as custodian for the benefit of his children and through
trusts for the benefit of Mr. Dorfman's children.
(4) The address of SAFECO Corporation ("SAFECO") is SAFECO Plaza, Seattle,
Washington 98185. According to a joint Schedule 13G filed February 11,
1999, SAFECO is the parent holding company of SAFECO Asset Management
Company ("SAFECO AMC") and disclaims beneficial ownership of the reported
shares, which include the shares reported by SAFECO AMC and SAFECO Common
Stock Trust ("SAFECO CST"). The reported shares are beneficially owned by
(i) registered investment companies for which SAFECO AMC serves as
investment adviser and (ii) employee benefit plans for which SAFECO serves
as plan sponsor.
(5) The address of SAFECO AMC is 601 Union Street, Suite 2500, Seattle,
Washington 98101. SAFECO AMC is an investment adviser and disclaims
beneficial ownership of the reported shares, which are beneficially owned
by registered investment companies for which SAFECO AMC serves as
investment adviser, and include the shares reported by SAFECO CST.
(6) The address of SAFECO Common Stock Trust ("SAFECO CST") is 10865 Willows
Road NE, Redmond, Washington 98052. SAFECO CST is an investment company for
which SAFECO AMC serves as investment adviser.
(7) Includes 55,000 shares subject to presently exercisable stock options.
(8) Includes 10,000 shares subject to presently exercisable stock options.
(9) Includes 383,333 shares owned of record by ITC Service Company, 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.
(10) Includes 1,000 shares owned by Mr. Lanier's wife.
-2-
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
A report on Form 3 reporting the beneficial ownership of the Company's
Common Stock was due from each executive officer and director on the date of the
initial public offering of the Company's Common Stock. The forms were
inadvertently filed late by those officers and directors.
ELECTION OF DIRECTORS
(ITEM NUMBER 1 ON THE PROXY CARD)
The Bylaws of Innotrac provide that the Board of Directors shall consist of
not less than five nor more than eleven directors, with the exact number being
set from time to time by the Board or the shareholders. The Board presently
consists of seven directors, four of whom are independent directors. One
current independent director, Campbell B. Lanier, III, has notified the Board
that he intends to resign shortly after the 1999 Annual Meeting of Shareholders
due to schedule and time constraints. The Board does not currently intend to
fill the vacancy that will be created by his resignation.
The Board of Directors is divided into three classes of directors serving
staggered three-year terms. Two directors are to be elected at the meeting for
a three-year term expiring in 2002. The Board has nominated Larry C. Hanger and
Bruce V. Benator for those positions.
Directors are elected by a plurality of the votes cast by the holders of
shares of Common Stock entitled to vote for the election of directors at a
meeting at which a quorum is present. A quorum will be present for the Annual
Meeting when the holders of a majority of the shares outstanding on the Record
Date are present in person or by proxy. An abstention and a broker non-vote are
included in determining whether a quorum is present, but will not affect the
outcome of the vote for the election of directors. Unless otherwise indicated
on a proxy, all duly executed proxies granted by the holders of Common Stock
will be voted individually at the Annual Meeting for the election of each
nominee. Each nominee has indicated that he will serve if elected, but if the
situation should arise that any nominee is no longer able or willing to serve,
the proxy may be voted for the election of such other person as may be
designated by the Board of Directors.
The following information as of February 8, 1999 has been furnished by the
nominees for director and the continuing directors. Except as otherwise
indicated, the nominees and the continuing directors have been or were engaged
in their present or last principal employment, in the same or a similar
position, for more than five years.
Name (Age) Information About the Nominees and the Continuing Directors
---------- -----------------------------------------------------------
Nominees for Director at the Meeting and Whose Term Will Expire in 2002
- -----------------------------------------------------------------------
<TABLE>
<S> <C>
LARRY C. HANGER (44) 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 Corporation, where he managed the marketing program for BellSouth's
network services.
BRUCE V. BENATOR (41) Mr. Benator is the Managing 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. From 1979 to 1984, Mr. Benator was
employed by Ernst & Young, LLP.
</TABLE>
-3-
<PAGE>
Directors Whose Terms Expire in 2000
- ------------------------------------
<TABLE>
<S> <C>
MARTIN J. BLANK (52) 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.
CAMPBELL B. LANIER, III (48) 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 Service Company. 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. ("Mindspring"), an Internet service provider; K&G Men's Center,
Inc., a discount retailer of men's clothing; 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.
WILLIAM H. SCOTT, III (51) 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, KNOLOGY, ITC DeltaCom and MindSpring.
</TABLE>
Directors Whose Terms Expire in 2001
- ------------------------------------
<TABLE>
<S> <C>
SCOTT D. DORFMAN (41) 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. At Paymaster, Mr. Dorfman gained
experience in distribution, tracking and inventory control by developing and
managing Paymaster's mail order catalog.
DAVID L. ELLIN (40) Mr. Ellin joined Innotrac in 1986 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.
</TABLE>
-4-
<PAGE>
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors of the Company meets on a regular basis to
supervise, review, and direct the business and affairs of the Company. During
the Company's 1998 fiscal year, the Board held two meetings. The Board of
Directors has established an Executive Committee, an Audit Committee and a
Compensation Committee to which it has assigned certain responsibilities in
connection with the governance and management of the Company's affairs. The
Company has no standing nominating committee or other committee performing
similar functions.
Each of the directors attended 75% of the Board meetings and meetings
of committees on which he served, except for Mr. Lanier who was absent at a
meeting of the Audit Committee at which he was represented by Mr. Scott.
Executive Committee. The Executive Committee, pursuant to authority
delegated by the Board, from time to time considers certain matters in lieu of
convening a meeting of the full Board, subject to any restrictions in applicable
law related to the delegation of certain powers to a committee of the Board.
Messrs. Dorfman, Ellin and Benator comprise the members of the Executive
Committee. The Executive Committee held seven meetings during fiscal 1998.
Audit Committee. The Audit Committee recommends the appointment of
independent public accountants, reviews the scope of audits proposed by the
independent public accountants, reviews internal audit reports on various
aspects of corporate operations and periodically consults with the independent
public accountants on matters relating to internal financial controls and
procedures. Messrs. Benator, Blank and Lanier comprise the members of the Audit
Committee. The Audit Committee held one meeting during fiscal 1998.
Compensation Committee. The Compensation Committee is responsible for
the review and approval of compensation of employees above a certain salary
level, the review of management recommendations relating to incentive
compensation plans, the administration of the Company's stock option and senior
executive compensation plans, the review of compensation of directors and
consultation with management and the Board on senior executive continuity and
organizational matters. Messrs. Dorfman, Blank and Scott comprise the members
of the Compensation Committee. The Compensation Committee held no meetings
during fiscal 1998 and one in January 1999.
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 May 6, 1998 the Company granted each of
Messrs. Benator, Blank, Lanier and Scott presently exercisable options to
purchase 10,000 shares of Common Stock at an exercise price of $12.
-5-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued
by the Company for services rendered during the fiscal years ended December 31,
1998 and 1997, to or for the Company's chief executive officer and each of the
Company's four other most highly compensated executive officers (the "Named
Executive Officers"). The total amount of perquisites, personal benefits and
other annual compensation paid to the Named Executive Officers do not in any
case exceed the lesser of $50,000 or ten per cent of such officer's total salary
and bonus.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
--------------------------------- ------------
SECURITIES
FISCAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS OPTIONS(#) COMPENSATION
- ------------------------------- ----- ------ ----- ---------- ------------
<S> <C> <C> <C> <C> <C>
Scott D. Dorfman, 1998 $356,855 $250,000 -- $ 26,218(1)
President, Chairman of the 1997 226,179 25,000 -- 9,526
Board and Chief Executive
Officer
David L. Ellin 1998 145,000 87,000 -- 10,241(2)
Senior Vice President and Chief 1997 137,692 70,000 155,000 --
Operating Officer
Larry C. Hanger 1998 100,000 100,000 -- 500(2)
Vice President 1997 89,343 35,000 25,000 --
John H. Nichols, III 1998 125,000 75,000 -- 20,000 1,502(2)
Vice President, Chief Financial 1997 10,576 4,807 --
Officer and Secretary(3)
Don L. Colter 1998 92,606 46,300 -- 3,4577(2)
Vice President 1997 78,832 40,000 25,000 --
</TABLE>
_________________
(1) Includes (i) Company matching contribution to deferred compensation plan in
the approximate amount of $24,232 and (ii) the full dollar amount of
premiums, $1,986, paid by the Company with respect to split-dollar life
insurance on the life of Mr. Dorfman.
(2) Represents Company matching contribution to deferred compensation plan.
(3) Mr. Nichols's employment by the Company commenced November 1997.
The Company did not grant any options to its Named Executive Officers
during fiscal 1998, nor were any Company-granted options exercised by any Named
Executive Officers. The following table sets forth the year-end value of
unexercised options held by the Named Executive Officers at the fiscal year
ended December 31, 1998.
-6-
<PAGE>
FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS
FISCAL YEAR END AT FISCAL YEAR END(1)
------------------------------------- ------------------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Scott D. Dorfman, -- -- -- --
President, Chairman of the
Board and Chief Executive
Officer
David L. Ellin 55,000(2) 100,000(3) $456,325 $902,500
Senior Vice President and Chief
Operating Officer
Larry C. Hanger -- 25,000(3) -- 225,625
Vice President
John H. Nichols, III -- 20,000(3) -- 180,500
Vice President, Chief Financial
Officer and Secretary (1)
Don L. Colter -- 25,000(3) -- 225,625
Vice President
</TABLE>
__________________________
(1) As required by the rules of the Securities and Exchange Commission, the
value of unexercised in-the-money options is calculated based on the closing
sale price of the Company's Common Stock on the NASDAQ as of the last
business day of its fiscal year, December 31, 1998, which was $18.125 per
share.
(2) The option is presently exercisable.
(3) 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.
EMPLOYMENT AGREEMENTS
None of the Company's executive officers has an employment agreement with the
Company.
CERTAIN TRANSACTIONS
FORMATION OR COMBINATION RELATED MATTERS
In connection with the consolidation on May 6, 1998 of the eight affiliated
entities that previously conducted the business of the Company (the
"Consolidation"), Mr. Dorfman, together with his children, and ITC Service
Company ("ITC"), received distributions of $7.1 million and $400,000,
respectively, from certain pass-through entities that were parties to the
Consolidation. The distributions represented a portion of these entities'
accumulated earnings. In addition, each of the entities reimbursed Mr. Dorfman
and ITC for estimated tax payments with respect to their earnings for 1998. Two
directors of the Company, Messrs. Lanier and Scott, are officers, directors and
principal shareholders of ITC.
As a result of the Consolidation, and as consideration for their respective
interests in the affiliated entities that were parties to the Consolidation,
immediately after the Consolidation shares of Common Stock of the Company were
owned as follows: Mr. Dorfman--6,116,667 shares (including 148,037 shares owned
individually by his wife, as custodian for the children and through trusts for
the benefit of his children and taking into account some subsequent
dispositions) and ITC--383,333 shares.
-7-
<PAGE>
In February 1998, the Company redeemed for approximately $390,000 from
Arnold Dorfman, the father of Scott D. Dorfman, all of his shares in one of the
entities that was a party to the Consolidation. In December 1998, the Company
redeemed for approximately $590,000 from Arnold Dorfman all of his shares in a
second affiliated entity that was a party to the Consolidation.
The Company leases a single engine aircraft from a company wholly-owned by
Scott D. Dorfman pursuant to a three-year lease that provides for annual rent of
$72,000. The Company is responsible for maintenance, insurance, taxes, fuel and
other expenses associated with the aircraft.
In 1998, the Company paid $94,000 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.
POLICY RESPECTING RELATED PARTY TRANSACTIONS
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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Dorfman, Blank and Scott comprised the members of the Compensation
Committee during fiscal 1998. While Mr. Dorfman is the President and Chief
Executive Officer of the Company, neither Mr. Blank or Mr. Scott is an officer
or former officer of the Company.
REPORT OF COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report sets forth the current components of the Company's compensation
programs for its executive officers and describes the basis on which fiscal 1998
compensation determinations were made with respect to the executive officers of
the Company, including Mr. Dorfman, the Chief Executive Officer and the other
Named Executive Officers of the Company. Mr. Dorfman does not participate as a
member of the Committee in any deliberations or discussions regarding his
compensation as an employee of the Company.
Because Innotrac, in its current configuration, was formed in May 1998, the
Company's compensation programs were not fully implemented in fiscal 1998.
Fiscal 1998 compensation decisions with respect to base salaries were made prior
to the establishment of the Compensation Committee of the Board of Directors
(the "Committee") in December 1997. In its January 1999 meeting, the Committee
made decisions with respect to bonus payments approved for executive officers
for fiscal 1998.
GENERAL COMPENSATION PHILOSOPHY
The programs and policies for the compensation of the Company's executive
officers are designed to link the compensation of executive officers to the
performance of the Company. These programs are intended to align the financial
interests of the Company's executive officers with those of its shareholders.
The Company uses a combination of base salary, short-term performance
bonuses and long-term incentive plans to tie executive compensation to increases
in the Company's earnings and return on shareholders' equity. The Company's
compensation programs consist of the following basic components:
. Competitive base salaries,
. Annual incentive cash bonuses,
. Long-term incentive stock options, appreciation rights or bonuses and
. Customary benefits.
-8-
<PAGE>
The Committee will review and determine the appropriateness of the
compensation paid to each of the executive officers of the Company from time to
time (and at least annually), with the philosophy described above as its basis.
While promoting initiative and providing incentives for superior performance by
executives on behalf of the Company for the benefit of its shareholders, the
Committee also will seek to assure that the Company is able to compete for and
retain talented personnel who will lead the Company in achieving levels of
financial performance that will enhance shareholder value over the long-term as
well as the short-term.
BASE SALARIES
The Company has established the current base salaries of its executive
officers without reference to specific Company performance criteria. The base
salaries for all executive officers during fiscal 1998 were determined prior to
the constitution of the Committee. The Committee reviews salaries of the
Company's executive officers on an annual basis.
STOCK INCENTIVE PLAN
In November 1997, the Company adopted the Stock Option and Incentive Award
Plan ("Stock Incentive Plan") to provide key employees, officers, directors,
contractors and consultants with incentives to promote the financial success of
the Company. Under the Stock Incentive Plan, the Company may award incentive
stock options, non-qualified stock options, restricted stock awards and stock
appreciation rights. To date, the Company has issued incentive stock options
and non-qualified stock options under the Stock Incentive Plan.
During fiscal 1998, the Company did not grant any options or other stock
incentives to the Company's executive officers pursuant to its Stock Incentive
Plan. The following Named Executive Officers were granted incentive stock
options in the indicated number of shares in early 1999:
Ellin 6,000
Hanger 3,500
Nichols 5,000
Colter 3,500
------
Total: 18,000
No options were granted to Mr. Dorfman. The Company granted options to purchase
20,000 shares of Common Stock to Stephen J. Walden, who was recently hired by
the Company as Vice President of Electronic Commerce.
SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN
For fiscal 1999, the Company will provide incentive compensation to
executive officers and certain key employees of the Company through its Senior
Executive Incentive Compensation Plan ("Executive Plan"). The Executive Plan is
designed to offer compensation opportunities that are tied directly to Company
performance. In addition, the Executive Plan is designed to foster equity
ownership in the Company by its executive officers and other participants.
Pursuant to the Executive Plan, the Committee (other than Mr. Dorfman with
respect to himself) will establish the specific criteria and performance
measures each year that will be applicable to the Company's Named Executive
Officers for the purpose of earning incentive compensation or bonuses for such
year under the Executive Plan.
Under the Executive Plan, annual target cash bonus levels, expressed as a
percentage of base salary, are assigned to each level of management. The actual
amount of cash bonus awarded at the end of the fiscal year depends upon the
application of a formula gauged to the financial performance of the Company.
The formula is linked to the differences between projected and actual values for
the Company's earnings before interest, income taxes, depreciation and
amortization (EBITDA) and its net revenue for a fiscal year. The formula will
be reviewed annually by the Committee and the individual bonuses based on such
formula will be subject to review by the Committee based on the performance of
individual officers.
The Executive Plan also provides for the granting of options to purchase
shares of Company Common Stock. Share price targets are calculated over a five-
year term using the initial public offering price as a base and
-9-
<PAGE>
compounding at a 20% annual growth rate. Officers will receive an option grant
equal to their annual cash bonus target divided by the projected end-of-year
share price, and rounded at the Committee's discretion to the next nearest 500
shares. This formula will also be reviewed annually by the Committee and the
individual stock incentives based on such formula will be subject to review by
the Committee based on the performance of individual officers.
BENEFITS
Executives also participate, on a voluntary basis, in the Company's regular
employee benefit programs, including group medical and dental coverage, group
life insurance and group long-term disability insurance. In addition, executive
officers can participate in a deferred compensation plan with respect to which
the Company provides matching contributions. The rate of match depends upon the
officer's number of years in service, and ranges from 25% of a participant's
contribution for less than 5 years of service to 100% for 10 years or more.
SECTION 162(M)
Section 162(m) of the Internal Revenue Code of 1986, as amended, limits the
deductibility of certain compensation paid to each of the chief executive
officer and the four other most highly compensated executives of a publicly held
corporation to $1 million annually. In fiscal 1998, the Company did not pay
"compensation" within the meaning of Section 162(m) to such executive officers
in excess of $1 million and does not believe it will do so in the near future.
The Company's policy at this time is to maintain the tax deductibility of
compensation to such officers under Section 162(m).
Scott D. Dorfman -- Martin J. Blank -- William H. Scott, III
(Members of Committee during fiscal 1998)
-10-
<PAGE>
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return of the Company's Common Stock against the
cumulative total return of The Nasdaq Stock Market (U.S.) Index and the Nasdaq
Non-Financial Index for the period commencing on May 7, 1998 and ending on
December 31, 1998.
<TABLE>
<CAPTION>
CUMULATIVE TOTAL RETURN
--------------------------------------------------------------------
<S> <C> <C>
5/7/98 12/31/98
INNOTRAC CORPORATION 100 138
NASDAQ STOCK MARKET (U.S.) 100 118
NASDAQ NON-FINANCIAL 100 120
</TABLE>
-11-
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The Board of Directors, upon recommendation of the Audit Committee,
appoints each year the firm that will serve as the Company's independent public
accountants. The Board has appointed Arthur Andersen LLP, which firm served as
independent public accountants for the Company during the past fiscal year, to
serve as such accountants for the current fiscal year. Such appointment is not
subject to ratification or other vote by the shareholders.
A representative of Arthur Andersen LLP is expected to be present at the
Annual Meeting, with the opportunity to make a statement if he or she desires to
do so, and is expected to be available to respond to appropriate questions.
SHAREHOLDERS' PROPOSALS FOR 2000 ANNUAL MEETING
Any shareholder who wishes to present a proposal appropriate for
consideration at the Company's 2000 Annual Meeting of Shareholders must submit
the proposal in proper form to the Company at its address set forth on the first
page of this Proxy Statement no later than December 11, 1999 for the proposal to
be considered for inclusion in the Company's proxy statement and form of proxy
relating to such Annual Meeting. The Company must be notified of any other
shareholder proposal intended to be presented for consideration at the 2000
Annual Meeting not later than February 24, 2000 or else proxies may be voted on
such proposal at the discretion of the persons named in the proxy.
OTHER MATTERS
All of the expenses involved in preparing, assembling, and mailing this
Proxy Statement and the materials enclosed herewith and soliciting proxies will
be paid by the Company. It is estimated that such costs will be nominal. The
Company may reimburse banks, brokerage firms and other custodians, nominees and
fiduciaries for expenses reasonably incurred by them in sending proxy materials
to beneficial owners of stock. The solicitation of proxies will be conducted
primarily by mail but may include telephone, telegraph or oral communications by
directors, officers, or regular employees of the Company, acting without special
compensation.
The Board of Directors is aware of no other matters, except for those
incidental to the conduct of the Annual Meeting, that are to be presented to
shareholders for formal action at the Annual Meeting. If, however, any other
matters properly come before the Annual Meeting or any postponement,
adjournment, or adjournments thereof, it is the intention of the persons named
in the proxy to vote the proxy in accordance with their judgment.
Shareholders are urged to fill in, date and sign the accompanying form of
proxy and return it to the Company as soon as possible.
BY ORDER OF THE BOARD OF DIRECTORS,
John H. Nichols, III
Secretary
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<PAGE>
COMMON STOCK
OF INNOTRAC CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE MAY 11, 1999
ANNUAL MEETING OF SHAREHOLDERS.
The undersigned hereby appoints Scott D. Dorfman and John H. Nichols, III,
and each of them, the proxy of the undersigned to vote the Common Stock of the
undersigned at the Annual Meeting of Shareholders of INNOTRAC CORPORATION (the
"Company") to be held on May 11, 1999, and any adjournment or postponement
thereof.
1. Election of directors
Larry C. Hanger
Bruce V. Benator
_____ FOR all nominees for director listed above (except as marked to the
contrary).
_____ WITHHOLD AUTHORITY to vote for all nominees listed above.
_____ WITHHOLD AUTHORITY to vote for an individual nominee. Write name(s)
below.
___________________________________________
2. In accordance with their best judgment with respect to any other matters
that may properly come before the meeting.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THE PROXY AND ACCOMPANYING PROXY STATEMENT AND UNLESS
INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY
WILL BE SO VOTED.
___________________________________
Please sign this Proxy exactly as name
appears on the Proxy.
Note: When signing as attorney, trustee,
administrator, or guardian, please give your
title as such. In the case of joint
tenants, each joint owner must sign.
Date:___________________________, 1999
