<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1999
REGISTRATION NO. 333-79929
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
PRE-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------------
INNOTRAC CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
GEORGIA 7389 58-1592285
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
6655 SUGARLOAF PARKWAY
DULUTH, GEORGIA 30097
(678) 584-4000
(Address, including zip code, and telephone number including area code, of
registrant's principal executive offices)
SCOTT D. DORFMAN
CHIEF EXECUTIVE OFFICER
6655 SUGARLOAF PARKWAY
DULUTH, GEORGIA 30097
(678) 584-4000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
<TABLE>
<S> <C>
DAVID A. STOCKTON, ESQ. PATRICIA A. WILSON, ESQ.
JAN M. DAVIDSON, ESQ. TROUTMAN SANDERS LLP
KILPATRICK STOCKTON LLP 5200 NATIONSBANK PLAZA
1100 PEACHTREE STREET, N.E., SUITE 2800 600 PEACHTREE STREET, N.E.
ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30308
(404) 815-6500 (404) 885-3000
(404) 815-6555 (FAX) (404) 885-3900 (FAX)
</TABLE>
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are being offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act of 1933, check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act of 1933, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434
under the Securities Act of 1933, check the following box. [ ]
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON A DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION
8(A), MAY DETERMINE.
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<PAGE> 2
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. INNOTRAC AND THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES
UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION IS EFFECTIVE. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT
AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY
JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
SUBJECT TO COMPLETION, DATED JULY 22, 1999
PRELIMINARY PROSPECTUS
2,500,000 SHARES
(INNOTRAC LOGO)
INNOTRAC CORPORATION
COMMON STOCK
------------------------------
This is a public offering of 2,500,000 shares of common stock of Innotrac
Corporation. We are selling 2,100,000 shares and the selling shareholders named
in this prospectus are selling 400,000 shares. We will not receive any of the
proceeds from the sale of shares by the selling shareholders.
Our common stock is traded on the Nasdaq National Market under the symbol
"INOC." On July 21, 1999, the last reported sale price for our common stock was
$24.75 per share.
SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN RISKS THAT YOU
SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS
APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
------------------------------
<TABLE>
<CAPTION>
PER
SHARE TOTAL
-------- --------
<S> <C> <C>
Public offering price....................................... $ $
Underwriting discount....................................... $ $
Proceeds, before expenses, to us............................ $ $
Proceeds, before expenses, to the selling shareholders...... $ $
</TABLE>
------------------------------
The underwriters may, under certain circumstances, purchase up to an additional
275,000 shares from the selling shareholders and 100,000 shares from us at the
public offering price less the underwriting discount.
The underwriters are severally underwriting the shares being offered in this
prospectus. The underwriters expect to deliver the shares against payment in New
York, New York on , 1999.
------------------------------
BEAR, STEARNS & CO. INC.
THE ROBINSON-HUMPHREY COMPANY
J.C. BRADFORD & CO.
The date of this prospectus is , 1999.
<PAGE> 3
[FLOWCHART AND CAPTIONS]
[The graphic on this page is a flow chart depicting the four core competencies
provided by Innotrac Corporation. At the top left of the page, under the
caption, "clients," is a graphic containing the corporate logos for Ameritech,
Southwestern Bell, Siemens, NAPA, The Home Depot, Bell Atlantic, Pacific Bell,
TCI, BellSouth and US West. The flow chart moves to a picture of an individual
providing an overhead presentation to a group of business people next to the
caption "CONSULTATIVE SERVICES." The following bullet points are beneath this
caption: Channel Management, Marketing Strategy, Product Strategy, Customized
Billing Options, Promotions and Forecasting. The next picture in the flow chart
is of two individuals working at a computer terminal in a computer room above
the caption "TECHNOLOGY SERVICES." The following bullet points are beneath this
caption: EDI, IVR, Database Management and Internet Services. The next picture
in the flow chart is the Innotrac Corporation logo, which is in the center of
the page. The next picture in the flow chart is of an individual working in a
distribution center. Above the picture is the caption "DISTRIBUTION SERVICES,"
with the following bullet points beneath this caption: Product Ownership,
Fulfillment, Purchasing Management, and Inventory Management. The next picture
in the flow chart is of a customer support call center next to the caption
"CUSTOMER SUPPORT SERVICES." Beneath this caption are the following bullet
points: Call Center, Technical Support, Returns Management and Re-Ships and
Refunds. The last picture in the flow chart is of a customer on her telephone
ordering a product underneath the caption "end users."]
<PAGE> 4
PROSPECTUS SUMMARY
This summary contains basic information about us and the offering. Because
it is a summary, it does not contain all the information that you should
consider before investing. You should read the entire prospectus carefully,
including the section entitled "Risk Factors" and our financial statements and
the related notes to those statements included in this prospectus. Except as
otherwise required by the context, references in this prospectus to "we," "our"
and "us" refer to Innotrac Corporation, or, where appropriate, to Innotrac and
the affiliated companies with which it conducted business prior to its May 1998
initial public offering. Unless otherwise specified, all information in this
prospectus assumes no exercise of the underwriters' over-allotment option.
INNOTRAC CORPORATION
Innotrac provides customized, technology-based marketing support and
distribution services to large corporations that outsource these functions. We
target companies that have (1) a large customer base, (2) numerous and/or
geographically diverse subsidiary or affiliate operations, (3) extensive
marketing needs or (4) complex point-of-distribution requirements. Our
comprehensive services enable our clients to manage their sales channels
efficiently. Since 1994, we have focused on the telecommunications industry
because of its high growth characteristics and increasing marketing needs.
During that time, the majority of our growth has come from sales and
distribution services related to Caller ID equipment. We believe we have created
an outsourcing model that utilizes our core competencies, which include:
- consultative services
- channel management, marketing and product strategy
- customized and flexible billing options
- promotions
- sales and marketing information and forecasting
- technology services
- electronic data interface, or EDI, integration
- interactive voice response, or IVR
- database management
- distribution services
- product ownership, consignment and warehousing
- fulfillment
- purchasing management
- inventory management
- end user customer support services
- inbound call center services and technical support
- returns and refunds processing
In order to perform these functions in-house, a company may be required to
develop expensive, labor-intensive infrastructures, which may divert its
resources and management's focus from its principal business. By assuming
responsibility for these tasks, we strive to create a "one stop approach" to
improve the quality of the non-core operations of our clients and to reduce
their operating costs.
Approximately 97% of our 1998 revenues and 98% of our revenues for the
three months ended March 31, 1999 came from sales of Caller ID equipment and
related services to BellSouth Telecommunications, Inc., Pacific Bell,
Southwestern Bell Telephone Co. and US West Communications Services, Inc. and
their customers. Caller ID equipment includes corded and cordless telephones
with built-in Caller ID and stand-alone devices.
We believe that the flexibility of our services allows us to attract
clients in many industries. We have provided literature and point-of-sale
distribution for a number of years to companies including Home Depot U.S.A.,
Inc., Siemens Energy & Automation Inc. and National Automotive Parts
Association, or NAPA. In 1999, we began to sell and distribute cable modems to
customers of Tele-Communications,
1
<PAGE> 5
Inc., or TCI. In addition, we intend to apply our existing core competencies to
help businesses distribute their products through the internet. We are pursuing
relationships with companies that offer various e-commerce solutions but do not
have our distribution and end user support capabilities. For example, we
recently entered into a relationship with IBM to make our distribution and call
center services available to certain IBM e-commerce customers.
STRATEGY
Our strategy is to take advantage of trends towards outsourcing marketing
support and distribution services by utilizing our comprehensive services,
reputation for quality service and strong client relationships. The key elements
of our strategy are to:
- maximize marketing support and product distribution services to our
existing telecommunications clients,
- grow our telecommunications client base,
- expand customer distribution channels through e-commerce,
- build long-term client relationships and
- continue our investment in technology.
RECENT DEVELOPMENTS
Based on preliminary information, Innotrac's net revenues increased 58.2%
to $57.5 million for the three months ended June 30, 1999 compared to $36.3
million for the three months ended June 30, 1998. Because of our new business
model, gross margins decreased to 16.0% of net revenues from 27.0% of net
revenues. Under the new model, we bill our largest telecommunications clients
directly for products we sell to their customers, which reduces our credit risk.
Our net income increased 25.8% to $3.3 million, or $0.36 per diluted share, for
the three months ended June 30, 1999 from $2.6 million, or $0.33 per diluted
share, for the prior comparable period.
Our net revenues for the six months ended June 30, 1999 increased 111.9% to
$124.8 million compared to $58.9 million for the six months ended June 30, 1998.
Gross margins decreased to 14.3% of net revenues from 27.1% of net revenues.
Innotrac's net income increased 64.2% to $6.6 million, or $0.72 per diluted
share, for the six months ended June 30, 1999 from $4.0 million, or $0.54 per
diluted share, for the prior comparable period.
For the three months ended June 30, 1999, the total number of Caller ID
units distributed increased 114.3% to 1.4 million units compared to 672,000
units for the three months ended June 30, 1998. Sales of Caller ID units
increased 65.5% for the three months ended June 30, 1999 as compared to the
prior comparable period, and accounted for 59.5% of the total Caller ID units
distributed during the period. The number of units distributed under promotional
giveaway programs -- for which we receive a fee -- increased 278.2% for the
three months ended June 30, 1999 as compared to the prior comparable period, and
accounted for the remaining 40.5% of Caller ID units distributed.
For the six months ended June 30, 1999, 3.7 million Caller ID units were
distributed, an increase of 149.1% from the 1.5 million units distributed during
the six months ended June 30, 1998. Caller ID unit sales increased 138.0% and
distributions for a fee increased 161.9% for the six months ended June 30, 1999
from the prior comparable period. Sales represented 51.1% of total volume and
fee-based distributions represented 48.9% of total Caller ID units distributed
during the six months ended June 30, 1999.
------------------------------
We were incorporated in Georgia on August 8, 1984, and our initial public
offering was conducted on May 6, 1998. In conjunction with that offering, eight
affiliated companies were consolidated into Innotrac. Our principal executive
offices are located at 6655 Sugarloaf Parkway, Duluth, Georgia 30097. Our
telephone number is (678) 584-4000.
------------------------------
This prospectus contains trademarks and names of persons other than
Innotrac, which are the property of their respective owners.
2
<PAGE> 6
THE OFFERING
Common stock offered:
by us............................ 2,100,000 shares
by the selling shareholders...... 400,000 shares
Common stock to be outstanding after
the offering.......................... 11,109,995 shares(1)
Use of proceeds....................... - repayment of bank borrowings,
- establishment of a new call center,
- upgrade of computer and network
hardware and
- general corporate purposes,
including working capital needs.
See "Use of Proceeds."
Nasdaq National Market symbol......... INOC
- ---------------
(1) Excludes 472,150 shares of common stock issuable upon exercise of stock
options outstanding under our Stock Option and Incentive Award Plan as of
July 21, 1999. Options for 90,001 shares are currently exercisable.
3
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table sets forth Innotrac's summary financial data. Except
for "Other Data," the following data was derived from our consolidated financial
statements and accompanying notes, some of which are included in this
prospectus. "Pro forma net income" and "Pro forma net income per share" reflect
the results of Innotrac and formerly affiliated companies as if they had been
one corporation taxable at the corporate level for all periods presented.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS EXCEPT SHARE DATA; 1994 AND THREE MONTHS DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net............................. $17,380 $44,886 $71,297 $87,978 $139,673 $22,565 $67,320
Cost of revenues.......................... 11,274 30,658 55,519 67,986 108,785 16,412 58,717
------- ------- ------- ------- -------- ------- -------
Gross profit.............................. 6,106 14,228 15,778 19,992 30,888 6,153 8,603
------- ------- ------- ------- -------- ------- -------
Operating expenses:
Selling, general and administrative
expenses.............................. 2,289 6,510 10,391 12,572 15,642 3,428 2,440
Depreciation and amortization........... 214 293 429 631 943 138 379
------- ------- ------- ------- -------- ------- -------
Total operating expenses................ 2,503 6,803 10,820 13,203 16,585 3,566 2,819
------- ------- ------- ------- -------- ------- -------
Operating income.......................... 3,603 7,425 4,958 6,789 14,303 2,587 5,784
------- ------- ------- ------- -------- ------- -------
Other (income) expense:
Interest expense........................ 622 1,090 1,457 1,788 956 315 373
Other................................... 67 (73) 94 118 35 6 (20)
------- ------- ------- ------- -------- ------- -------
Total other expense..................... 689 1,017 1,551 1,906 991 321 353
------- ------- ------- ------- -------- ------- -------
Income before income taxes................ 2,914 6,408 3,407 4,883 13,312 2,266 5,431
Income tax (provision) benefit............ (356) (793) (212) 77 (3,743) 61 (2,145)
------- ------- ------- ------- -------- ------- -------
Net income................................ $ 2,558 $ 5,615 $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286
======= ======= ======= ======= ======== ======= =======
Pro forma net income...................... $ 1,573 $ 3,941 $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286
======= ======= ======= ======= ======== ======= =======
Pro forma net income per share:
Basic................................... $ 0.24 $ 0.61 $ 0.32 $ 0.46 $ 1.01 $ 0.21 $ 0.37
Diluted................................. 0.24 0.61 0.32 0.46 1.00 0.21 0.36
Weighted average common shares
outstanding:
Basic................................... 6,500 6,500 6,500 6,500 8,096 6,500 9,000
Diluted................................. 6,500 6,500 6,500 6,500 8,155 6,500 9,127
OTHER DATA:
Total telecommunications products
shipped................................. 261 550 1,650 1,758 2,858 800 2,227
</TABLE>
<TABLE>
<CAPTION>
AS OF MARCH 31, 1999
----------------------
AS
AS OF DECEMBER 31, ADJUSTED
--------------------------------------------------- FOR THIS
1994 1995 1996 1997 1998 HISTORICAL OFFERING
----------- ------- ------- ------- ------- ---------- --------
(IN THOUSANDS; 1994 AND MARCH 31 DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital............................... $ 1,237 $ (616) $(1,042) $ 1,521 $26,853 $30,380 $78,996
Property and equipment, net................... 5,059 9,099 10,939 7,609 7,463 7,224 7,224
Total assets.................................. 13,548 30,414 49,037 32,497 73,992 105,166 122,163
Total debt.................................... 5,874 8,642 22,580 13,187 15,811 31,694 75
Shareholders' equity.......................... 1,624 3,195 4,540 4,827 34,294 37,580 86,196
</TABLE>
4
<PAGE> 8
RISK FACTORS
You should carefully consider the following risk factors before investing
in our common stock. The risks and uncertainties described below are not the
only ones we face. The risks set forth below are in addition to risks that apply
to most businesses, which could also seriously harm the business of Innotrac.
If any of these risks actually occur, our business, financial condition or
results of operations could be materially adversely affected. This could cause
the trading price of our common stock to decline, and you could lose all or part
of your investment.
WE RELY ON A SMALL NUMBER OF CLIENTS. IF WE LOSE ONE OR MORE OF OUR LARGEST
CLIENTS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Innotrac focuses on developing long-term relationships with large
corporations. In recent years, this focus has been on telecommunications
companies. A relatively small number of our clients account for a significant
portion of our revenues. Our three largest clients, BellSouth, Pacific Bell, and
Southwestern Bell, accounted for an aggregate of approximately 87%, 93%, 95% and
94% of net revenues for 1996, 1997, 1998 and the three months ended March 31,
1999. BellSouth accounted for approximately 82%, 85%, 59% and 35% of net
revenues for those same periods. If we lose one or more of our largest clients,
then our business, results of operations and financial condition could be
materially adversely affected. If one of these clients is lost, we cannot assure
you that we will be able to replace that client with others that generate
comparable revenues or profits.
WE DO NOT HAVE WRITTEN CONTRACTS WITH SOME OF OUR CLIENTS, INCLUDING SOME OF OUR
MAJOR TELECOMMUNICATIONS CLIENTS. EVEN OUR WRITTEN CONTRACTS GENERALLY DO NOT
GUARANTEE SPECIFIC VOLUME LEVELS AND CAN USUALLY BE TERMINATED ON LITTLE NOTICE.
We do not have written agreements with some of our major telecommunications
clients. Some of our written agreements with telecommunications companies have
expired, including the contract with US West. We currently provide services to
those and other clients pursuant to oral agreements. These agreements can be
terminated by either party at any time. If these agreements are terminated, our
financial condition and results of operations could be materially adversely
affected. We are negotiating new written agreements with US West and some of our
other clients. We cannot assure you, however, that we will be able to obtain
those agreements on favorable terms, or at all.
We have written agreements with other telecommunications clients, including
BellSouth. Those agreements are generally terminable for cause. Some agreements
provide for termination without cause on short notice. Our 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. BellSouth
commits to a minimum monthly Caller ID sales volume in its agreement with us.
However, most of our agreements do not assure specific volume or revenue levels.
In addition, our contracts generally do not provide that we will be the client's
exclusive service provider.
IF THE MARKET FOR TELECOMMUNICATIONS PRODUCTS OR SERVICES CHANGES, OUR BUSINESS
COULD BE ADVERSELY AFFECTED.
Our success depends upon our ability to distribute advanced
telecommunications equipment. We cannot assure you that we will be able to
continue to distribute state-of-the-art telecommunications equipment. Our
business, results of operations and financial condition could be materially
adversely affected if:
- the telecommunications products we distribute, and the related services
offered by our clients, do not gain or sustain marketplace acceptance,
- our telecommunications clients fail to adequately promote these products
and services or
- our telecommunications clients lose market share.
5
<PAGE> 9
Currently, we rely heavily upon the distribution of Caller ID equipment to
the end user customers of our telecommunications clients for our revenues. We
also depend upon these clients to promote Caller ID service. We plan our
operations partly based on estimates of "market penetration," which represents
the percentage of customers with telephone lines capable of receiving Caller ID
service that actually subscribe for the service. Our business, results of
operations and financial condition could be materially adversely affected if:
- actual Caller ID market penetration rates are lower than estimated,
- market saturation is reached or
- new technologies replace Caller ID.
WE ASSUME RISKS ASSOCIATED WITH BUYING, WAREHOUSING AND SELLING OR RENTING
PRODUCTS TO CUSTOMERS, AND OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE
MISMANAGE THESE RISKS.
We purchase Caller ID equipment and other telecommunications products from
third party vendors in connection with some of our distribution services.
Consequently, we assume the risks of inventory obsolescence, damage to units,
product returns and theft. If we cannot manage these risks, we may not be able
to resell the products we buy at a profit, or even recover their cost, and our
business, results of operations and financial condition could be materially
adversely affected. Our inventory risk could increase in the future because our
e-commerce strategy contemplates our owning products offered by e-commerce
clients. Moreover, inventory risks may be greater for products we may distribute
via e-commerce than for products we currently distribute.
THE NEW TELECOMMUNICATIONS PRODUCTS WE ARE DISTRIBUTING MAY NOT ACHIEVE MARKET
SUCCESS AND MAY COMPETE WITH PRODUCTS WE ALREADY DISTRIBUTE FOR OTHER CLIENTS.
We have begun to or are seeking to distribute orders for other
telecommunications products. These include cable modems and digital subscriber
line, or DSL, modems. Both products are relatively new technologies that
facilitate high-speed data transmission over the internet. We cannot assure you
that these products or other new products will achieve widespread acceptance or
market penetration. There is also a risk that competing technologies will
replace these products. The sale and distribution of these new products are
closely related to our established Caller ID equipment distribution services.
However, we cannot assure you that we will successfully integrate these new
distribution programs with our existing business.
Some of the products we distribute compete with each other. Many of these
technologies and services are offered by our current telecommunications clients.
Potential competing services and technologies include telephone company-related
wireline technologies like traditional analog modems and integrated services
digital network modems. We cannot assure you that we will be able to obtain, or
retain, distribution service business from telecommunications companies with
competing products and technologies.
IF OUR NEW E-COMMERCE INITIATIVE FAILS, OUR BUSINESS COULD BE NEGATIVELY
IMPACTED.
We are seeking to expand the range of distribution channels we offer by
developing the ability to sell services and products via the internet
(electronic, or e-commerce). We have very little experience in selling products
online. The success of this new initiative depends upon, among other things, our
ability to:
- recruit, hire and retain qualified personnel to assist in this new
service,
- integrate our new e-commerce service into our existing marketing support
services,
- develop relationships with clients who can cost effectively offer
products that are popular with internet shoppers and
- finance growth of our e-commerce service during its developmental stage.
Even if we successfully address these risks, we cannot assure you that our
new e-commerce initiative will succeed. Our e-commerce services, when fully
developed, may not be attractive to existing or new clients. If demand for them
does arise, they may not be quickly profitable, if at all. Because e-commerce is
a new business for us, we cannot predict the products or clients that may use
our e-commerce business or
6
<PAGE> 10
the other services we may offer. We may be affected by the pace at which
customers change their online shopping habits or preferences. If our e-commerce
initiative fails, our business, financial condition or results of operations
could be materially adversely affected, particularly if significant financing
costs are not recouped.
The decision to implement our e-commerce solutions presents a potential
e-commerce client with significant enterprise-wide implications and involves a
substantial commitment of its management's attention. Sales cycles for our
e-commerce services, therefore, could be longer than for our traditional
marketing support business as a result of lengthy client evaluation and approval
processes over which we have little or no control. Unpredictable sales cycles in
the developmental phase of our e-commerce business could hamper timely
evaluation of its success or failure. Unpredictable sales cycles could also
contribute to significant fluctuations in our operating results on a quarterly
basis.
OUR NEW E-COMMERCE BUSINESS WILL DEPEND ON CONTINUED GROWTH IN THE USE AND
COMMERCIAL VIABILITY OF THE INTERNET. IF THE INTERNET FAILS TO CONTINUE TO GROW,
OUR E-COMMERCE BUSINESS MAY NOT SUCCEED, AND OUR BUSINESS MAY BE HARMED.
Commercial use of the internet is relatively new. Internet and e-commerce
usage may be inhibited for a number of reasons, including:
- increased government regulation,
- insufficient availability, reliability or capacity of telecommunications
services,
- security and authentication concerns,
- difficulty of access and
- inconsistent service quality.
If the internet develops as a commercial medium more slowly than we expect,
it will adversely affect our e-commerce business. Alternatively, if internet and
e-commerce usage grows too quickly, the internet may not be able to support this
growth or its performance and reliability may decline. If internet outages or
delays occur frequently in the future, web usage -- including usage of our
clients' e-commerce web sites -- could grow more slowly or decline.
IF WE ARE NOT ABLE TO CONTINUE OR MANAGE OUR GROWTH, OUR BUSINESS COULD BE
ADVERSELY AFFECTED.
Our operations have grown significantly in recent years. Our business,
results of operations and financial condition could be materially adversely
affected if we cannot effectively manage our growth. Our continued success
depends upon our ability to:
- initiate, develop and maintain existing and new client relationships,
- respond to competitive developments,
- continue to develop our sales infrastructure,
- attract, train, motivate and retain management and other personnel and
- maintain the high quality of our services.
We expect that our continued rapid growth will significantly strain our
management, operations, employees and resources. We cannot assure you that we
will be able to:
- maintain or accelerate our current growth,
- effectively manage our expanding operations or
- achieve planned growth on a timely or profitable basis.
IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE
ADVERSELY AFFECTED.
We believe there has recently been a significant increase in businesses
outsourcing services not directly related to their principal business
activities. Our business, results of operations and financial condition could be
materially adversely affected if the outsourcing trend declines or reverses, or
if corporations bring previously outsourced functions back in-house.
Particularly during general economic downturns, businesses may bring in-house
previously outsourced functions in order to avoid or delay layoffs.
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<PAGE> 11
IF WE ARE NOT ABLE TO RETAIN OR EMPLOY QUALIFIED EMPLOYEES, INCLUDING KEY
EXECUTIVES, OUR EMPLOYMENT-RELATED COSTS MAY RISE AND OUR RESULTS OF OPERATIONS
COULD SUFFER.
We may not be able to retain or employ qualified managers.
We depend in large part on the abilities and continuing efforts of our
executive officers and senior management. Our business and prospects could be
materially adversely affected if (1) current officers and managers do not
continue in their key roles and we cannot attract and retain qualified
replacements or (2) we cannot attract and retain additional qualified personnel
to sustain growth. We do not have employment agreements with our executive
officers. We cannot assure you that we will be able to retain them. We only
maintain key man life insurance on Scott D. Dorfman, in the amount of $3.5
million. In order to support growth, we must effectively recruit, develop and
retain additional qualified management personnel. We cannot assure you that in
the future we will be able to recruit and retain additional qualified managers.
We may not be able to retain or employ other qualified employees.
Our success depends largely on our ability to recruit, hire, train and
retain qualified employees. If we cannot do so, our business, results of
operations or financial condition could be materially adversely affected. Our
industry is very labor-intensive and has experienced high personnel turnover. If
our employee turnover rate increases significantly, our recruiting and training
costs could rise and our operating effectiveness and productivity could decline.
New clients or new large-scale marketing support programs may require
accelerated recruiting, hiring and training. We cannot assure you that we will
be able to continue to hire, train and retain sufficient qualified personnel to
adequately staff new marketing support programs.
Some of our operations, particularly our technical support and customer
service, require specially trained personnel. In addition, the unemployment rate
in the geographic area where our facilities are located is relatively low. Our
need for specially trained personnel and low unemployment rates may make it more
difficult and costly to hire and retain qualified personnel.
Currently, we are not a party to any collective bargaining agreements. None
of our employees is unionized. Although we consider our relationship with our
employees to be good, there have been occasional unionization initiatives at
Innotrac, particularly among our call center personnel. If our employees were to
join unions, we could incur increased wages, employee benefits and
employment-related administrative costs. We could also experience an increased
risk of work stoppages. A significant portion of our operating expenses relates
to labor costs. Therefore, an increase in wages or employee benefits could
materially adversely affect our business, results of operations or financial
condition.
IF OUR SYSTEMS OR EQUIPMENT FAIL OR IF OUR FACILITIES ARE DAMAGED, OUR BUSINESS
COULD BE INTERRUPTED. LIKEWISE, IF OUR CLIENTS OR SHIPPERS EXPERIENCE
INTERRUPTIONS IN THEIR OPERATIONS, OUR BUSINESS COULD BE ADVERSELY AFFECTED.
Innotrac's operations are dependent upon its ability to protect its
distribution facilities, call center, computer and telecommunications equipment
and software systems against damage and failures. If our business is interrupted
either from accidents or the intentional acts of others, our results of
operations or financial condition could be materially adversely affected. Damage
or failures could result from fire, power loss, equipment malfunctions, system
failures related to the Year 2000 problem, natural disasters and other causes.
Because we currently have only one call center and one distribution facility, we
cannot rely on backup facilities in the event of widespread damage or failures
at these locations. Our property and business interruption insurance may not
adequately compensate us for these losses.
Our clients' businesses may also be harmed from any system or equipment
failures we experience. In that event, our relationship with these clients may
deteriorate, we may lose these clients, our ability to attract new clients may
be negatively affected and we could be exposed to liability. The risks from any
system failures we suffer to any e-commerce clients whose web sites we host on
our servers may be more
8
<PAGE> 12
acute than those our traditional clients face. Consequently, business
interruptions may pose a greater risk to our e-commerce business.
Interruptions could also result from the intentional acts of others, like
"hackers." If our systems are penetrated by computer hackers, or if computer
viruses infect our systems, our computers could fail, or proprietary information
could be misappropriated. Moreover, as we develop our e-commerce business, web
sites we host for clients could be subject to these same risks.
If our clients suffer similar interruptions in their operations, for any of
the reasons discussed above or for others, our business could also be negatively
affected. Our telecommunications clients' computer systems, for instance,
interface with our own. If they suffer interruptions in their systems, the link
to our systems could be severed and sales of telecommunications equipment could
be slowed or stopped.
We also rely on third-party carriers including United Parcel Service of
America, Inc. and Federal Express Corporation to ship products from our
distribution facility to purchasers. If our shippers experience
interruptions -- from labor strikes, for example -- our ability to distribute
products could be impaired.
COMPETITION MAY HURT OUR BUSINESS.
We operate in highly competitive markets and expect this environment to
persist and intensify in the future. Because our marketing support services
comprise marketing and product consultation, sales channel management,
distribution and back-end support, including our call center operations, we have
many competitors who offer one or more of these services. Our competitors
include:
- in-house marketing support operations of our current and potential
clients,
- other firms offering specific services, like fulfillment and call center
operations, and
- large marketing support services firms.
In addition, our new e-commerce business is in a relatively new and highly
competitive industry. Our 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.
A number of our competitors have developed or may develop financial and
other resources greater than ours. Additional competitors with greater name
recognition and resources may enter our markets. Our existing or potential
clients' in-house operations are also significant competitors. Our performance
and growth could be negatively impacted if:
- existing clients decide to provide, in-house, services they currently
outsource,
- potential clients retain or increase their in-house capabilities or
- existing clients consolidate their outsourced services with other
companies.
In addition, competitive pressures from current or future competitors could
result in significant price erosion, which could in turn materially adversely
affect our business, financial condition and results of operations. For more
information about our competition, see "Business -- Competition."
IF WE ARE NOT ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY, OUR BUSINESS WILL BE
MATERIALLY ADVERSELY AFFECTED.
Our success depends significantly upon our ability to:
- enhance existing services,
- develop applications to focus on our clients' needs and
- introduce new services and products to respond to technological
developments.
If we fail to maintain our technological capabilities or respond
effectively to technological changes, our business, results of operations and
financial condition could be materially adversely affected. We cannot assure you
that we will select, invest in and develop new and enhanced technology on a
timely basis in the future in order to meet our clients' needs and maintain
competitiveness. We provide details about our technology in
"Business -- Technology."
9
<PAGE> 13
OUR SOFTWARE CONVERSION MAY NOT BE SUCCESSFUL OR IT MAY BE DELAYED, WHICH COULD
NEGATIVELY AFFECT OUR BUSINESS.
Our business is substantially dependent on our computer and
telecommunications equipment and software systems. We are upgrading some of our
computer hardware and software and converting some other existing programs to
our new software system. If we cannot successfully convert these programs, our
business, results of operations and financial condition could be materially
adversely affected. We have experienced delays and difficulties in converting
our software. We cannot assure you that we can effectively or efficiently
convert our programs to the new system.
OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY CAUSE SIGNIFICANT SWINGS IN THE
MARKET PRICE FOR OUR COMMON STOCK.
Our operating results may fluctuate in the future based on many factors.
These factors include, among other things:
- changes in the telecommunications industry,
- changes in the marketing support services industry,
- changes in the timing and level of client-specific marketing programs,
including the timing and nature of promotions,
- unpredictable sales cycles for our e-commerce business,
- increased competition and
- changes in customer purchasing patterns for products we distribute.
Due to these and any unforeseen factors, it is possible that in some future
quarter our operating results may be below the expectations of public market
analysts and investors. If that variance occurs, our common stock price would
likely decline materially. In view of our recent significant growth, we believe
that period-to-period comparisons of our financial results are not necessarily
meaningful or indicative of future performance.
BECAUSE PROFIT MARGINS HAVE NARROWED, OUR PROFITS MAY FLUCTUATE MORE IN THE
FUTURE THAN THEY HAVE IN THE PAST.
Our gross profit as a percentage of our gross revenues has declined
recently from historical levels, primarily because we are now billing our
largest telecommunications clients directly for products sold to their
customers, or end users, rather than billing their customers directly for the
products. Because we do not currently assume the credit risk of these clients'
customers, we charge lower unit prices for the products we distribute, resulting
in lower gross profit margins on these products. We expect these lower gross
profit margins to continue under our direct client billing model. With a
narrowed gross profit margin, we must rely on increased gross revenues to
maintain or increase our net profit. We also expect that our operating profits
in the future will be more sensitive to decreases in revenues and increases in
operating costs than in the past. We will have less capacity to absorb increased
operating expenses and still maintain profitability. Our gross profit as a
percentage of gross revenues for the three months ended March 31, 1999 was 13%
compared to 27% for the three months ended March 31, 1998. That percentage was
22%, 23% and 22% for the years ended December 31, 1998, 1997 and 1996.
Declining per-unit prices for the products we distribute also contribute to
narrowing gross margins. As competition and other factors force prices down for
Caller ID and other telecommunications equipment, there is a risk that our cost
of products sold will not decline at the same rate. For further information
about our results of operations, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
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<PAGE> 14
WE MAY LOSE REVENUE OR INCUR ADDITIONAL COSTS BECAUSE OF THE YEAR 2000 ISSUE.
Our efforts to address the Year 2000 issue may not be adequate.
The efficient operation of our business depends in part on our computer
software programs and operating systems. If these programs and systems are not
Year 2000 compliant and suffer failures from their inability to recognize dates
after December 31, 1999, our business, financial condition or results of
operations could be materially adversely affected. These programs and systems
are used in:
- inventory management,
- sales,
- financial reporting,
- pricing,
- shipping and
- administrative functions.
We believe that our information technology, or IT, systems, and other
non-IT systems are either Year 2000 compliant or substantially compliant. We
could experience business interruptions and systems failures that could
materially adversely affect our business if (1) any of these remedial efforts
fail to eliminate Year 2000 problems in our IT and non-IT systems or (2) we fail
to identify all systems that require attention. If unforeseen failures do occur,
emergency remediation expenses could also have a material adverse effect on our
business, results of operations or financial condition. We anticipate completing
testing of our Year 2000 efforts in September 1999. We cannot assure you,
however, that our Year 2000 efforts will be completed before December 31, 1999.
We also cannot assure you that these efforts, if completed, will successfully
remediate all Year 2000 problems.
Our suppliers, clients, financial institutions and others may not adequately
address the Year 2000 issue.
We also depend on the efficient operation of the computer systems of
suppliers, clients, financial institutions and others which interface with our
systems. Because third-party systems or software may not be Year 2000 compliant,
we may incur unanticipated expenses to remedy any problems caused by failures.
These problems could in turn materially adversely affect our business, results
of operations and financial condition. We are obtaining documentation from third
parties concerning their Year 2000 compliance programs and the possibility of
any Year 2000-related interface difficulties that may affect us. To date, no
significant concerns have been identified. We are developing contingency plans
to address potential Year 2000 failures of these entities. However, Year
2000-related operating problems or expenses may arise in connection with our
systems' interface with the computer systems and software of our suppliers,
clients, financial institutions and others.
OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES
OR INCREASE OUR COSTS.
In connection with any outbound telemarketing services that we may provide,
we must comply with federal and state regulations. These include 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 we initiate outbound telemarketing
services, these rules and regulations would apply to that portion of our
business.
Furthermore, there may be additional federal and state legislation or
changes in regulatory implementation. These changes could include
interpretations under the Telecommunications Act of 1996 restricting the ability
of telecommunications companies to use consumer proprietary network information,
or CPNI. New legislation or regulatory implementation in the future may
significantly increase compliance costs or limit our activities, our clients'
activities or the activities of companies to which we outsource
11
<PAGE> 15
outbound telemarketing functions. Additionally, we could be responsible for
failing to comply with regulations applicable to our clients or companies to
which we outsource telemarketing.
Our new e-commerce business may be subject to many of the same laws and
regulations. It is uncertain how these existing laws and regulations will be
applied to our e-commerce business, if at all. There is a risk that unfavorable
interpretations or applications of these existing laws, or the implementation of
new laws and regulations specifically addressing e-commerce, particularly with
respect to privacy issues, could impede our e-commerce business.
If unfavorable federal or state legislation or regulations affecting Caller
ID service, e-commerce or other technology or products we sell or distribute are
adopted, our business, financial condition and results of operations could be
materially adversely affected. See "Business -- Government Regulation" for
further information about government regulation of our business.
SCOTT D. DORFMAN WILL CONTINUE TO CONTROL INNOTRAC AFTER THIS OFFERING. HE MAY
MAKE DECISIONS WITH WHICH YOU WILL NOT AGREE.
Because he will own approximately half of the outstanding shares of common
stock after this offering, Scott D. Dorfman, who is our Chairman, President and
Chief Executive Officer, will likely control the composition of our board of
directors. Consequently, he will substantially influence our business, policies
and affairs. This voting concentration may have the effect of discouraging,
delaying or preventing a change in control of Innotrac, even one that you
believe is beneficial to you as a shareholder. Following the offering, Mr.
Dorfman will beneficially own approximately 52% of the outstanding common stock
or slightly less than 50% if the underwriters' over-allotment option is
exercised in full. See "Principal and Selling Shareholders" for information on
the ownership of Innotrac's common stock.
WE WILL USE A PORTION OF THE NET PROCEEDS FROM THIS OFFERING FOR GENERAL
CORPORATE PURPOSES. WE MAY USE THESE PROCEEDS IN WAYS WITH WHICH YOU DISAGREE.
We intend to use a portion of the net proceeds of this offering for
unspecified general corporate purposes, including working capital needs. Our
management will have significant discretion in the use of these funds, and you
may disagree with the way these funds are spent. We cannot assure you that
proceeds dedicated to general corporate purposes will be invested to yield a
significant return, or any return at all.
SOME PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND OUR RIGHTS
AGREEMENT MAY DISCOURAGE TAKEOVERS THAT YOU BELIEVE ARE IN YOUR INTEREST.
Innotrac's articles of incorporation and bylaws contain some provisions
that may delay, discourage or prevent an attempted acquisition or change in
control of Innotrac. The articles and bylaws establish:
- a board of directors classified into three classes of directors with the
directors of each class having staggered, three-year terms,
- the board's authority to issue series of preferred stock with special
powers, preferences and rights,
- the board's authority to consider constituencies other than the
shareholders -- including employees, customers and the community -- in
making decisions, including decisions regarding control of Innotrac,
- removal of directors only for cause and
- noncumulative voting for directors.
In addition, we have adopted a rights agreement with Reliance Trust Company
as agent for the shareholders. The rights agreement provides that holders of
common stock will be entitled to purchase Innotrac preferred stock with special
voting, distribution and liquidation rights, or acquire shares of Innotrac
common stock, if a third party acquires beneficial ownership of 15% or more of
the common stock. In certain circumstances, shareholders are also entitled to
purchase the stock of (1) a company
12
<PAGE> 16
issuing shares in exchange for Innotrac shares in a merger or tender offer or
(2) a company acquiring most of Innotrac's assets.
These provisions of our articles of incorporation and bylaws and the rights
agreement could discourage tender offers or other transactions that might
otherwise result in your receiving a premium over the market price for your
common stock. See "Description of Capital Stock" for more information about our
articles of incorporation, bylaws and rights agreement.
THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND MAY CONTINUE TO BE
VOLATILE AFTER THE OFFERING, AND THE VALUE OF YOUR INVESTMENT MAY DECLINE.
The market price of our common stock has been volatile in the past and may
continue to be volatile after the offering. This volatility may cause
precipitous drops in the price of our common stock on the Nasdaq National
Market. These drops may cause your investment in our common stock to lose
significant value. The market price is affected by:
- variations in Innotrac's quarterly operating results,
- changes in financial estimates by securities analysts,
- changes in general conditions in the economy or the financial markets,
- other developments affecting Innotrac, its industry, clients or
competitors and
- the operating and stock price performance of companies that investors
deem comparable to Innotrac.
This volatility has had a significant effect on the market prices of
securities issued by many companies for reasons unrelated to their operating
performance. Therefore, we cannot predict the market price for our common stock
after the offering.
FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT ITS MARKET PRICE.
After the offering is completed, we will have approximately 11.1 million
shares of common stock outstanding. Of these shares, approximately 5.0 million
shares, including the 2.5 million shares offered by this prospectus, or
approximately 5.4 million shares if the underwriters' over-allotment option is
exercised in full, will be freely tradable unless held by affiliates of
Innotrac, as defined under the Securities Act of 1933. All of the remaining
shares are "restricted securities" as that term is defined by Rule 144 under the
Securities Act and will be eligible for sale in compliance with Rule 144. We
have agreed, along with the selling shareholders and our executive officers and
directors, for a period of 90 days after the date of this prospectus, not to
sell or otherwise dispose of any of our shares of common stock without the prior
written consent of Bear, Stearns & Co. Inc. Consequently, approximately 6.2
million shares of common stock, including 90,001 shares subject to currently
exercisable options, or approximately 5.9 million shares if the over-allotment
option is exercised in full, will become eligible for sale by the selling
shareholders and our executive officers and directors in the public market when
the lock-up period expires on October , 1999, subject to the limitations of
Rule 144. In addition, we have filed a registration statement on Form S-8
registering for public sale 800,000 shares allocated to our Stock Option and
Incentive Award Plan. During the 90-day lock-up period, we may (1) issue shares
of common stock upon the exercise of currently outstanding options under this
plan and (2) grant options under this plan that do not vest and are not
exercisable during the lock-up period.
Following the offering and the lock-up period, sales of substantial amounts
of common stock in the public market, pursuant to Rule 144 or otherwise, or even
the potential of sales, could adversely affect the prevailing market price of
the common stock. Our ability to raise additional capital through equity
issuances could also be impaired. For information about the ability of certain
shareholders to sell their shares, see "Shares Eligible for Future Sale."
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<PAGE> 17
WE DO NOT PLAN TO PAY DIVIDENDS ON OUR COMMON STOCK.
We presently intend to retain our earnings to finance our growth and
expansion and for general corporate purposes. Consequently, we do not plan to
pay any cash dividends to our shareholders in the foreseeable future. In
addition, our revolving credit facility contains limitations on the payment of
cash dividends and other distributions of assets.
COMPLETING AND INTEGRATING ACQUISITIONS MAY BE DIFFICULT. WE MAY NOT BE ABLE TO
COMPLETE THEM SUCCESSFULLY, AND WE MAY NEED ADDITIONAL FINANCING TO DO SO.
We have never acquired another company. In the future, however, we may
pursue acquisitions of companies whose businesses extend or complement ours. We
cannot, however, assure you that we will be able to successfully acquire
suitable target companies on favorable terms or integrate these companies with
our existing business, particularly in light of our inexperience with
acquisitions. If we complete an acquisition, we cannot assure you that the
acquisition will enhance our business, results of operations or financial
condition in the future. We could use a portion of our capital resources and
proceeds from this public offering for acquisitions. We may require additional
debt or equity financing for future acquisitions. Additional financing, however,
may not be available on favorable terms, or at all.
FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES
We have made forward-looking statements in this prospectus. These
statements are subject to risks and uncertainties, and there can be no
guarantees that these statements will prove to be correct. Forward-looking
statements include assumptions as to how we may perform in the future. When we
use words like "seek," "strive," "believe," "expect," "anticipate," "predict,"
"potential," "continue," "will," "may," "could," "intend," "plan" and "estimate"
or similar expressions, we are making forward-looking statements. For those
statements we claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
You should understand that the following important factors, in addition to those
discussed elsewhere in this prospectus, could affect our future results and
could cause those results to differ materially from those expressed in our
forward-looking statements. These factors include:
- our reliance on a small number of clients,
- trends in the market for our products and services,
- risks of buying, warehousing and selling or renting products to our
customers,
- trends in the marketing support service and telecommunications
industries,
- trends in e-commerce,
- whether we can continue and manage growth,
- changes in the trend toward outsourcing,
- increased competition,
- effects of changes in profit margins,
- the unknown effects of possible system failures and rapid changes in
technology,
- estimated increases in Caller ID penetration in various parts of the
United States,
- trends in government regulation and
- payment of dividends.
We have based these statements on our current expectations about future
events. Although we believe that the expectations reflected in our
forward-looking statements are reasonable, we cannot guarantee you that these
expectations actually will be achieved. We are under no duty to update any of
the forward-looking statements after the date of this prospectus to conform
those statements to actual results. In evaluating these statements, you should
consider various factors, including the risks outlined in the section entitled
"Risk Factors," beginning on page 5. You should also consider the cautionary
statements contained in the reports we have filed with the Securities and
Exchange Commission. These factors may cause our actual results to differ
materially from any forward-looking statements.
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<PAGE> 18
USE OF PROCEEDS
Innotrac is offering for sale 2,100,000 shares of common stock by this
prospectus. Our net proceeds from the sale of these shares are estimated to be
approximately $48.6 million, assuming an offering price of $24.75 per share, the
last reported sale price of our common stock on the Nasdaq National Market on
July 21, 1999, and after deducting the underwriting discount and estimated
offering expenses. If the underwriters exercise their option to purchase an
additional 100,000 shares from us to cover over-allotments, our estimated net
proceeds will be approximately $51.0 million.
We will not receive any proceeds from the sale of 400,000 shares of common
stock by the selling shareholders or any proceeds resulting from the
underwriters' exercise of their option to purchase an additional 275,000 shares
from the selling shareholders to cover over-allotments.
We expect to use our net proceeds for the following purposes:
- repayment of borrowings under our line of credit facility with a bank,
- the establishment of a new call center, including equipment and leasehold
improvements,
- upgrading our computer and network hardware and
- general corporate purposes, including working capital.
Our indebtedness under our line of credit bears interest, at our option, at
(1) our lender's base rate or (2) a rate equal to the London interbank rate, or
LIBOR, subject to adjustment in certain circumstances at the lender's option,
plus a variable number of basis points, from 100 to 200, determined by our ratio
of indebtedness to tangible net worth. As of March 31, 1999, the interest rate
on our indebtedness was 5.94%. If we do not prepay it, our indebtedness matures
in June 2002.
We may from time to time consider possible acquisitions of related
businesses and the use of net proceeds from this offering to finance those
acquisitions. We do not have any present agreements or commitments for, and are
not presently engaged in active negotiations with respect to, any particular
acquisition prospects.
Pending application of the net proceeds as described above, we will invest
the net proceeds in short-term, interest-bearing investment grade or government
securities.
DIVIDEND POLICY
We have never paid cash dividends on our common stock. We currently intend
to retain our earnings to finance the expansion of our business and do not
anticipate paying cash dividends in the foreseeable future. Any future
determination regarding cash dividend payments will be made by our board of
directors and depends upon the following factors:
- earnings,
- capital requirements,
- our financial condition,
- restrictions in financing agreements and
- other factors deemed relevant by the board of directors.
Dividend payments are restricted by our revolving credit facility. If we
are not in default on our credit facility, we can pay dividends of up to 40% of
our net income in any fiscal period.
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<PAGE> 19
PRICE RANGE OF COMMON STOCK
Our common stock began trading on the Nasdaq National Market under the
symbol "INOC" on May 7, 1998. Prior to that time, there was no trading market
for our common stock. The following table sets forth for the periods indicated
the high and low sales prices of our common stock on the Nasdaq National Market.
<TABLE>
<CAPTION>
HIGH LOW
------- -------
<S> <C> <C>
1998
Second Quarter (beginning May 7).......................... $13.250 $ 8.875
Third Quarter............................................. $13.500 $ 6.750
Fourth Quarter............................................ $24.375 $ 5.750
1999
First Quarter............................................. $19.000 $10.000
Second Quarter............................................ $21.000 $12.500
Third Quarter (through July 21)........................... $26.750 $19.250
</TABLE>
The market price for our common stock is volatile and fluctuates in
response to a wide variety of factors. See "Risk Factors -- The market price of
our common stock has been volatile and may continue to be volatile after the
offering, and the value of your investment may decline."
The approximate number of holders of record of our common stock as of July
20, 1999 was 31. The approximate number of beneficial holders of our common
stock as of March 26, 1999 was 1,550.
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<PAGE> 20
CAPITALIZATION
The following table sets forth, as of March 31, 1999,
- Innotrac's actual cash and cash equivalents and capitalization and
- Innotrac's pro forma cash and cash equivalents and capitalization as
adjusted to reflect the application of the net proceeds from this
offering at an assumed public offering price of $24.75 per share.
You should read the data set forth below in conjunction with the more
detailed information found in "Use of Proceeds," "Selected Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the consolidated financial statements and accompanying notes and
the other financial data included elsewhere in this prospectus.
<TABLE>
<CAPTION>
MARCH 31, 1999
---------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS
EXCEPT SHARE DATA;
UNAUDITED)
<S> <C> <C>
Cash and cash equivalents................................... $ 274 $17,271
======= =======
Debt:
Line of credit facility................................... 31,619 --
Long-term debt(1)......................................... 75 75
------- -------
Total debt........................................ 31,694 75
------- -------
Shareholders' equity:
Preferred stock, $0.10 par value; 10,000,000 shares
authorized; none issued and outstanding................ -- --
Common stock, $0.10 par value; 50,000,000 shares
authorized;
8,999,995 shares issued and outstanding actual;
11,099,995 shares issued and outstanding, as
adjusted(2)............................................ 900 1,110
Additional paid-in capital(2)............................. 24,838 73,244
Retained earnings......................................... 11,842 11,842
------- -------
Total shareholders' equity........................ 37,580 86,196
------- -------
Total capitalization....................... $69,274 $86,271
======= =======
</TABLE>
- ---------------
(1) Includes current portion of related indebtedness.
(2) Excludes 472,150 shares of common stock reserved for issuance pursuant to
stock options granted under our Stock Option and Incentive Award Plan as of
July 21, 1999. Options for 90,001 shares are currently exercisable. For a
description of the Plan, see Note 10 of notes to consolidated financial
statements.
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<PAGE> 21
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for Innotrac. The
selected historical statement of operations data for each of the years ended
December 31, 1995, 1996, 1997 and 1998 and the selected historical balance sheet
data as of December 31, 1995, 1996, 1997 and 1998 have been derived from
Innotrac's consolidated financial statements, some of which are included in this
prospectus. These consolidated financial statements and notes have been audited
by Arthur Andersen LLP, independent public accountants. The selected historical
statement of operations data for the year ended December 31, 1994 and the three
months ended March 31, 1998 and 1999 and the selected historical balance sheet
data as of December 31, 1994, March 31, 1998 and March 31, 1999 have been
derived from our unaudited consolidated financial statements. In the opinion of
management, the unaudited consolidated financial statements include all
adjustments, consisting only of normal recurring adjustments, necessary to
present fairly the data for those periods. Operating results for interim periods
are not necessarily indicative of results for the full fiscal year. You should
read the selected historical financial data in conjunction with "Use of
Proceeds," "Management's Discussion and Analysis of Financial Condition and
Results of Operations," the consolidated financial statements and accompanying
notes and other financial data included elsewhere in this prospectus.
"Pro forma net income" and "Pro forma net income per share" reflect the
results of Innotrac and formerly affiliated companies as if they had been one
corporation taxable at the corporate level for all periods presented.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
----------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS EXCEPT SHARE DATA; 1994 AND THREE MONTHS DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues, net................ $17,380 $44,886 $71,297 $87,978 $139,673 $22,565 $67,320
Cost of revenues............. 11,274 30,658 55,519 67,986 108,785 16,412 58,717
------- ------- ------- ------- -------- ------- -------
Gross profit................. 6,106 14,228 15,778 19,992 30,888 6,153 8,603
------- ------- ------- ------- -------- ------- -------
Operating expenses:
Selling, general and
administrative
expenses................ 2,289 6,510 10,391 12,572 15,642 3,428 2,440
Depreciation and
amortization............ 214 293 429 631 943 138 379
------- ------- ------- ------- -------- ------- -------
Total operating expenses... 2,503 6,803 10,820 13,203 16,585 3,566 2,819
------- ------- ------- ------- -------- ------- -------
Operating income............. 3,603 7,425 4,958 6,789 14,303 2,587 5,784
------- ------- ------- ------- -------- ------- -------
Other (income) expense:
Interest expense........... 622 1,090 1,457 1,788 956 315 373
Other...................... 67 (73) 94 118 35 6 (20)
------- ------- ------- ------- -------- ------- -------
Total other expense........ 689 1,017 1,551 1,906 991 321 353
------- ------- ------- ------- -------- ------- -------
Income before income taxes... 2,914 6,408 3,407 4,883 13,312 2,266 5,431
Income tax (provision)
benefit.................... (356) (793) (212) 77 (3,743) 61 (2,145)
------- ------- ------- ------- -------- ------- -------
Net income................... $ 2,558 $ 5,615 $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286
======= ======= ======= ======= ======== ======= =======
Pro forma net income......... $ 1,573 $ 3,941 $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286
======= ======= ======= ======= ======== ======= =======
</TABLE>
18
<PAGE> 22
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------------------------------- -----------------
1994 1995 1996 1997 1998 1998 1999
----------- ------- ------- ------- -------- ------- -------
(IN THOUSANDS EXCEPT SHARE DATA; 1994 AND THREE MONTHS DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Pro forma net income per
share:
Basic...................... $ 0.24 $ 0.61 $ 0.32 $ 0.46 $ 1.01 $ 0.21 $ 0.37
Diluted.................... 0.24 0.61 0.32 0.46 1.00 0.21 0.36
Weighted average common
shares outstanding:
Basic...................... 6,500 6,500 6,500 6,500 8,096 6,500 9,000
Diluted.................... 6,500 6,500 6,500 6,500 8,155 6,500 9,127
OTHER DATA:
Total telecommunications
products shipped........... 261 550 1,650 1,758 2,858 800 2,227
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF MARCH 31,
----------------------------------------------- ------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- ------- ------- --------
(IN THOUSANDS; 1994 AND MARCH 31 DATA UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital................ $ 1,237 $ (616) $(1,042) $ 1,521 $26,853 $ 2,174 $ 30,380
Property and equipment, net.... 5,059 9,099 10,939 7,609 7,463 7,931 7,224
Total assets................... 13,548 30,414 49,037 32,497 73,992 38,993 105,166
Total debt..................... 5,874 8,642 22,580 13,187 15,811 13,385 31,694
Shareholders' equity........... 1,624 3,195 4,540 4,827 34,294 5,967 37,580
</TABLE>
19
<PAGE> 23
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of Innotrac's results of operations and financial
condition should be read in conjunction with the consolidated financial
statements and accompanying notes included elsewhere in this prospectus. This
discussion may contain certain forward-looking statements that are beyond our
control. Actual results may differ materially from those expressed or implied by
these forward-looking statements. Factors that could cause actual results to
differ include, but are not limited to, those discussed under "Risk Factors"
beginning on page 5.
OVERVIEW
Innotrac provides customized, technology-based marketing support and
distribution services to large corporations that outsource these functions.
Since 1994, we have focused on the telecommunications industry because of its
high growth characteristics and increasing marketing needs. We provide marketing
support services and distribution of Caller ID units, Caller ID telephones and
other telecommunications products to BellSouth, Pacific Bell, Southwestern Bell
and US West and their customers. Recently, we began providing services to
customers of Ameritech Services Inc., Cincinnati Bell Inc. and Bell Atlantic
Corporation.
In 1991, we initiated a fulfillment program to sell or rent Caller ID
stand-alone devices to BellSouth customers. Customers paid us for these products
by check or credit card. In 1993, we began billing the charges on BellSouth
customers' telephone bills in interest-free installments. As part of that
program, we acquired Caller ID and other telecommunications equipment from third
party manufacturers, while assuming collections risk on customer payments. In
November 1998, we entered into a new contract with BellSouth pursuant to which
we continue to provide Caller ID hardware and other equipment, including corded
and cordless telephones with built-in Caller ID, to BellSouth customers. We now
bill BellSouth, rather than BellSouth customers, for these products.
Upon receipt of an order, we ship the product, track inventory levels and
sales and marketing data and maintain call center operations to handle customer
service and technical support. From time to time, rather than acquiring units
and selling or leasing them to BellSouth customers, we distribute, for a fee,
Caller ID hardware that BellSouth has purchased from various third-party
manufacturers.
Under our programs with Southwestern Bell and Pacific Bell, like our new
contract with BellSouth, we bill the respective telecommunications clients
directly for the telecommunications units that are sold to their end users. The
clients are then responsible for billing and collecting from their customers. As
a result of this change in our payment model, unit prices and our gross margin
are lower than historical levels. We generally experience lower bad debt
expenses, which are included in selling, general and administrative expenses,
because telecommunications clients, rather than their end user customers, pay us
for the equipment. These lower expenses substantially offset the decline in
gross margin. The change in our payment model has had little effect on our
operating margin to date.
We have experienced significant growth in revenue in recent years. This
growth stems primarily from growth in Caller ID market penetration and
Innotrac's consultative selling with respect to product-based marketing support
services. According to industry sources, market penetration of Caller ID
services in the United States as of December 31, 1998 was approximately 30% and
is expected to reach approximately 75% by 2007. BellSouth indicates that through
the end of first quarter 1999 its Caller ID penetration was 38%. We believe that
opportunities exist, for example, in the market areas served by Pacific Bell,
where market penetration for Caller ID lags behind the national average because
regulatory issues delayed the release of Caller ID. Caller ID equipment sales
may eventually level off as the Caller ID market matures. We believe that by
distributing other telecommunications products for existing customers, growing
our telecommunications company client base and expanding customer distribution
channels through e-commerce, we will be able to offset any eventual maturity in
our Caller ID business.
20
<PAGE> 24
The following table sets forth the percentage of total net revenues derived
from services provided to each of the following clients for the years ended
December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and
1999. Percentages may not sum due to rounding.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------- ----------------
1996 1997 1998 1998 1999
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
BellSouth........................................... 82% 85% 59% 70% 35%
Southwestern Bell................................... -- -- 11 -- 31
Pacific Bell........................................ 5 8 25 23 28
US West............................................. 2 2 2 2 4
-- -- -- -- --
Total..................................... 90% 95% 97% 95% 98%
== == == == ==
</TABLE>
Net revenues from services rendered to BellSouth for the three months ended
March 31, 1998 compared to the three months ended March 31, 1999 increased 48%.
The decline in revenues from BellSouth customers as a percentage of total
revenues for the three months ended March 31, 1999 results from the
diversification of our client base.
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped (including installment sales). Revenues are
reduced for estimated product returns and allowances, which are based on our
historical experience.
The largest component of our expenses is our 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 our expenses includes selling, general and
administrative, or SG&A, expenses. This expense item is comprised of (1)
financial, human resources, administrative and marketing functions that are not
allocable to specific client services and (2) bad debt expense.
Bad debt expense represents a provision for installments and rentals that
will be deemed uncollectible based on Innotrac'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 expense, which is related to
revenues.
RECENT DEVELOPMENTS
Based on preliminary information, Innotrac's net revenues increased 58.2%
to $57.5 million for the three months ended June 30, 1999 compared to $36.3
million for the three months ended June 30, 1998. Because of our new business
model, gross margins decreased to 16.0% of net revenues from 27.0% of net
revenues. Our net income increased 25.8% to $3.3 million, or $0.36 per diluted
share, for the three months ended June 30, 1999 from $2.6 million, or $0.33 per
diluted share, for the prior comparable period.
Our net revenues for the six months ended June 30, 1999 increased 111.9% to
$124.8 million compared to $58.9 million for the six months ended June 30, 1998.
Gross margins decreased to 14.3% of net revenues from 27.1% of net revenues.
Innotrac's net income increased 64.2% to $6.6 million, or $0.72 per diluted
share, for the six months ended June 30, 1999 from $4.0 million, or $0.54 per
diluted share, for the prior comparable period.
21
<PAGE> 25
For the three months ended June 30, 1999, the total number of Caller ID
units distributed increased 114.3% to 1.4 million units compared to 672,000
units for the three months ended June 30, 1998. Sales of Caller ID units
increased 65.5% for the three months ended June 30, 1999 as compared to the
prior comparable period, and accounted for 59.5% of the total Caller ID units
distributed during the period. The number of units distributed under promotional
giveaway programs -- for which we receive a fee -- increased 278.2% for the
three months ended June 30, 1999 as compared to the prior comparable period, and
accounted for the remaining 40.5% of Caller ID units distributed.
For the six months ended June 30, 1999, 3.7 million Caller ID units were
distributed, an increase of 149.1% from the 1.5 million units distributed during
the six months ended June 30, 1998. Caller ID unit sales increased 138.0% and
distributions for a fee increased 161.9% for the six months ended June 30, 1999
from the prior comparable period. Sales represented 51.1% of total volume and
fee-based distributions represented 48.9% of total Caller ID units distributed
during the six months ended June 30, 1999.
RESULTS OF OPERATIONS
The following table sets forth summary operating data, expressed as a
percentage of revenues, for the years ended December 31, 1996, 1997 and 1998 and
the three-month periods ended March 31, 1998 and 1999. Operating results for any
period are not necessarily indicative of results for any future period. The
rounded percentages below are calculated using the detailed information
contained in the consolidated financial statements and accompanying notes
included in this prospectus.
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------ ----------------
1996 1997 1998 1998 1999
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Cost of revenues..................................... 77.9% 77.3% 77.9% 72.7% 87.2%
Gross profit......................................... 22.1 22.7 22.1 27.3 12.8
Selling, general and administrative expenses......... 14.6 14.3 11.2 15.2 3.6
Operating income..................................... 7.0 7.7 10.2 11.5 8.6
Interest expense..................................... 2.0 2.0 0.7 1.4 0.5
Income before income taxes........................... 4.8 5.6 9.5 10.0 8.1
</TABLE>
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31,
1998
Revenues. Innotrac's net revenues increased 198.3% to $67.3 million for
the three months ended March 31, 1999 from $22.6 million for the three months
ended March 31, 1998. Revenues increased primarily due to (1) a 171.4% increase
in Caller ID units distributed to 2.2 million units and (2) an increase in the
percentage of units sold to 46.9% of total unit volume versus 33.8% for the
three months ended March 31, 1998. This was partially offset by a decrease in
average per unit prices of Caller ID units. Our reserve for returns and
allowances increased slightly in terms of dollars, but decreased as a percentage
of revenues. The reserve was $2.1 million (3.2% of net revenues) for the three
months ended March 31, 1999 compared to $2.0 million (8.7% of net revenues) for
the three months ended March 31, 1998.
Cost of Revenues. Innotrac's cost of revenues increased 257.8% to $58.7
million for the three months ended March 31, 1999 compared to $16.4 million for
the three months ended March 31, 1998. Cost of revenues increased primarily due
to an increase in cost of equipment associated with the increase in units we
sold.
Gross Profit. For the three months ended March 31, 1999, Innotrac's gross
profit increased 39.8% to $8.6 million as compared to $6.2 million for the three
months ended March 31, 1998. The increase in gross profit was due primarily to
the increase in revenue. Gross margins decreased to 12.8% of revenues from 27.3%
of revenues. Gross margins declined for several reasons. First, for strategic
reasons, we conducted a promotional program that resulted in $11.0 million in
revenues and $11.0 million in cost of sales. Innotrac chose to conduct the
program in order to strengthen its relationship with a client. In addition,
gross margins were impacted by the broadening of our client base and the shift
to the direct
22
<PAGE> 26
client billing model. For these clients we were able to charge lower unit prices
and, as a result, we experienced lower gross margins. This decline was
substantially offset by lower bad debt expenses, which are included in selling,
general and administrative expenses.
Selling, General and Administrative Expenses. SG&A expenses for the three
months ended March 31, 1999 decreased 28.8% to $2.4 million, or 3.6% of
revenues, compared to $3.4 million, or 15.2% of revenues, for the three months
ended March 31, 1998. Our bad debt expense was $417,000 (0.6% of net revenues)
for the three months ended March 31, 1999 as compared to $1.7 million (7.6% of
net revenues) for the three months ended March 31, 1998. The decrease in bad
debt expense was due primarily to the shift to the direct client billing model.
The increase in other SG&A expenses was due to increased sales and marketing
efforts and increased administrative costs to support our growth.
Income Taxes. Our effective tax rates for the three months ended March 31,
1999 and 1998 were 39.5% and (2.6)%, respectively. The effective tax rates were
lower than statutory rates for the three months ended March 31, 1998 due to the
amount of income attributable to the pass-through entities involved in the
combination of Innotrac and related pass-through entities (the "Consolidation")
at the same time as consummation of our initial public offering in May 1998. For
more information concerning the Consolidation, see Note 1 of notes to
consolidated financial statements. We expect our effective tax rate in future
periods to approximate the level for the three months ended March 31, 1999.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Revenues. Innotrac'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 1998, we distributed 2.9 million units
as we increased our percentage of units sold (as opposed to distributed for a
fee) to 62.3% of total unit volume. During 1997, we distributed 1.8 million
units, or 56.9% of total unit volume. The 1998 increase was partially offset by
a decrease in average per unit prices of Caller ID units. Our reserve for
returns and allowances increased to $11.1 million (7.9% of net revenues) for the
year ended December 31, 1998 from $6.3 million (7.2% of net revenues) for the
year ended December 31, 1997.
Cost of Revenues. Our 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 increase was primarily due to an increase in cost
of equipment associated with the increase in units we sold as described above.
This increase was partially 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 write-down resulted from
obsolescence problems related to the delayed start-up of the Pacific Bell Caller
ID program because of California regulatory issues.
Gross Profit. For the year ended December 31, 1998, our 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, clients for which
Innotrac does not assume the bad debt risk, as described above. We were
therefore able to charge lower unit prices to Southwestern Bell and Pacific
Bell. As a result, we experienced lower gross margins. This was substantially
offset by lower bad debt expenses. During the fourth quarter of 1998, BellSouth
sales were converted to a similar program.
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. Our
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
new direct client billing model in which the client assumes the bad debt risk of
its customers in exchange for a lower sales price. Other SG&A expenses increased
over the prior
23
<PAGE> 27
year due to increased sales and marketing efforts, increased insurance and
benefits expenses and administrative costs to support our growth.
Interest Expense. Interest expense decreased to $1.0 million for the year
ended December 31, 1998 from $1.8 million for the year ended December 31, 1997.
The decrease is primarily due to repayment of a note payable from a bank and a
subordinated note payable to a shareholder from the proceeds received from our
May 1998 initial public offering and lower bank borrowings under our line of
credit from the previous year end.
Income Taxes. Our effective tax rates for the years ended December 31,
1998 and 1997 were 28.1% and (1.6)%, respectively. The change from 1997 to 1998
was primarily the result of a lower level of income attributable to certain
pass-through entities prior to the Consolidation.
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues. Our 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 resulting from the conclusion of a
distribution program performed in connection with the 1996 Olympic Games and an
increase in our reserve for returns and allowances to $6.3 million (7.2% of net
revenues) for the year ended December 31, 1997 from $3.5 million (4.9% of net
revenues) for the year ended December 31, 1996. In addition, our sales to
Pacific Bell customers during 1997 and 1996 were less than expected due to
regulatory issues 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. Our 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 equipment could not be sold above its
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 establishment of our Duluth, Georgia call center.
Gross Profit. For the year ended December 31, 1997, our 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 write-down and the costs associated with
the Duluth 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 our 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 our higher revenue volume and
higher Caller ID market penetration. We believe that increased Caller ID market
penetration results in an increase in sales of Caller ID units to consumers
having higher credit risks. We believe 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.
24
<PAGE> 28
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 our 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 our subordinated debt in 1997 compared to 1996 due
to a repayment of this debt by Innotrac in September 1996.
Income Taxes. Our 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 certain
pass-through entities prior to the Consolidation.
LIQUIDITY AND CAPITAL RESOURCES
We fund our operations and capital expenditures primarily through cash flow
from operations and borrowings from banks. We had cash and cash equivalents of
approximately $274,000, $3.4 million and $554,000 at March 31, 1999, December
31, 1998 and December 31, 1997, respectively. We maintain a $40.0 million
revolving line of credit with a bank, maturing in June 2002, which was increased
from $35.0 million in April 1999. Borrowings under the line of credit bear
interest at our option at the bank's base rate, as adjusted from time to time,
or LIBOR, subject to adjustment in certain circumstances at the lender's option,
plus up to 200 basis points. At March 31, 1999, our interest rate was 5.94%. In
May 1998, we repaid a term loan with a bank that would have matured in July 1999
and bore interest at 8.95% per annum. We also repaid 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. Both were repaid with proceeds received from our May 1998 initial public
offering. At March 31, 1999, $31.6 million was outstanding under our line of
credit. In June 1999, we entered into a lease for a new call center and
distribution facility. As a result of that lease, rental expense will increase
approximately $550,000 a year through 2004.
During the three months ended March 31, 1999, we used $18.1 million in cash
flow from operating activities compared to the generation of $2.3 million in the
same period in 1998. We used $9.1 million in cash flow from operating activities
during the year ended December 31, 1998, 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 the three months ended March 31, 1999 and the year ended
December 31, 1998 as compared to the comparable prior periods was due to higher
working capital requirements resulting from increases in accounts receivable
(principally installment receivables and receivables from Pacific Bell,
Southwestern Bell and BellSouth) and inventory due to increased sales volume.
The increase in cash flow from operating activities in 1997 was due to lower
working capital requirements resulting from decreased accounts receivable due to
shorter installment periods and reduced inventory. The shorter installment
periods were due to the change in length of installment sales from generally one
year to four to six months. The inventory reduction was due to the utilization
of inventory purchased in 1996 as part of the build-up for the rollout of the
Pacific Bell program, which was delayed for regulatory reasons.
During the three months ended March 31, 1999, net cash used in investing
activities was $880,000 as compared to $1.8 million in the same period of 1998.
This decrease was primarily due to a decrease in the number of purchases of
Caller ID units for rent plus reductions in the level of expenditures associated
with Innotrac's computer and software additions to handle growth in business.
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. The decrease in 1998 was primarily due to a decrease in the number
of purchases of Caller ID units for rent. This was partially offset by
expenditures associated with our software upgrade, the purchase of new furniture
and equipment for our new corporate headquarters and distribution facility and
the expansion of our Duluth 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.
25
<PAGE> 29
During the three months ended March 31, 1999, net cash provided by
financing activities was $15.9 million compared to $453,000 used in financing
activities in the same period in 1998. This increase was primarily due to
increased borrowings on our line of credit. The increased borrowings supported
working capital requirements resulting from increases in accounts receivable due
to the increased sales volume during the first three months of 1999 as compared
to the same period in 1998. 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, we received $26.7 million in
the initial public offering completed on May 11, 1998, net of fees and expenses
associated with the initial public offering. We 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 consolidated with Innotrac in connection with the initial public offering,
and reduced our borrowings under the line of credit by $13.8 million. After the
initial public offering, we 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.
We estimate that our cash and financing needs through 1999 will be met by
cash flows from operations and our line of credit facility, as well as from the
proceeds of this offering if it is consummated. However, any increase in our
growth rate, shortfalls in anticipated revenues, increases in anticipated
expenses or significant acquisitions could have a material adverse effect on our
liquidity and capital resources. These events would require us 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 these sources of financing are insufficient or unavailable we
will be required to modify our growth and operating plans in accordance with the
extent of available funding. There can be no assurance that we will be able to
raise any capital on acceptable terms or at all.
YEAR 2000 COMPLIANCE
The efficient operation of our business is dependent in part on our
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 our
information technology, or IT, systems, and other non-IT systems are either Year
2000 compliant or substantially compliant. The cost of the upgrades is expected
to be approximately $120,000, approximately $70,000 of which has been incurred
through April 1999. We do not anticipate additional material expenditures for
Year 2000 compliance issues.
Our 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 and (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 March 31, 1999:
<TABLE>
<CAPTION>
PHASE: I II III
- ------ --- --- ---
<S> <C> <C> <C>
IT Systems........................................... 97% 75% 50%
Non-IT Systems....................................... 100% 95% 95%
</TABLE>
The assessment phase is complete and the remediation phase is substantially
complete, and testing will continue into the third quarter of 1999.
We are in the process of obtaining documentation from our suppliers,
clients, financial institutions and others as to the status of their Year 2000
compliance programs and the possibility of any interface
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difficulties relating to Year 2000 compliance that may affect us. To date, no
significant concerns have been identified; however, there is a risk that Year
2000-related operating problems or expenses will arise with our computer systems
and software or in connection with our interface with the computer systems and
software of our suppliers, clients, financial institutions and others. Because
these third-party systems or software may not be Year 2000 compliant, we are in
the process of developing contingency plans to address Year 2000 failures of
these entities with which we interface. Our contingency plans are being
developed to address issues like: (1) the inability to receive customer order
information electronically from our major clients and (2) the inability of one
or more of the manufacturers of the Caller ID products we sell to produce
products due to that company's Year 2000 failure. If the first scenario were to
happen, we would be required to receive and enter this information manually into
our order processing system, which could increase our labor costs. If the second
scenario were to occur, we would be required to find alternate vendors and
potentially incur additional costs to do so. We could be required to incur
unanticipated expenses to remedy any problems, which could have a material
adverse effect on our business, results of operations and financial condition.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
We believe our exposure to market risks is immaterial. We hold no market
risk sensitive instruments for trading purposes. At present, we do not employ
any derivative financial instruments, other financial instruments or derivative
commodity instruments to hedge any market risks and we do not currently plan to
employ them in the future. To the extent that we have borrowings outstanding
under our credit facility, we have market risk relating to the amounts of our
borrowings because interest rates under the credit facility are variable. Our
exposure is immaterial due to the short-term nature of these borrowings.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board 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 our financial statements.
In March 1998, the American Institute of Certified Public Accountants
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. Innotrac adopted this
statement in January 1999, and it did not have a material impact on the
financial statements.
\
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BUSINESS
Innotrac provides customized, technology-based marketing support and
distribution services to large corporations that outsource these functions. We
target companies that have (1) a large customer base, (2) numerous and/or
geographically diverse subsidiary or affiliate operations, (3) extensive
marketing needs or (4) complex point-of-distribution requirements. Our
integrated services provide clients a more efficient and comprehensive means of
delivering products and information to their end user customers. We enable our
clients to manage their sales channels efficiently by utilizing our core
competencies, which include:
- consultative services
- channel management, marketing and product strategy
- customized and flexible billing options
- promotions
- sales and marketing information and forecasting
- technology services
- electronic data interface, or EDI, integration
- interactive voice response, or IVR
- database management
- distribution services
- product ownership, consignment and warehousing
- fulfillment
- purchasing management
- inventory management
- end user customer support services
- inbound call center services and technical support
- returns and refunds processing
Since 1994, we have focused on the telecommunications industry because of
its high growth characteristics and increasing marketing needs. The majority of
our growth during this time period has come from sales and services related to
telecommunications products, specifically Caller ID equipment, including corded
and cordless telephones with built-in Caller ID and stand-alone devices.
Approximately 97% of our 1998 revenues and 98% of our revenues for the three
months ended March 31, 1999 came from sales to BellSouth, Pacific Bell,
Southwestern Bell and US West and their customers.
We intend to apply our existing core competencies to help our clients sell
their products through the internet. We expect our e-commerce solution to
provide our clients with an additional distribution channel for offering their
products and services to their end user customers. We believe that our "one stop
shop" approach appeals to large corporations that seek to reduce the expense and
management of outsourcing to numerous service providers.
In order to perform marketing support and distribution functions in-house,
a company may be required to develop expensive, labor intensive infrastructures,
which may divert its resources and management's focus from its principal
business. By assuming responsibility for these tasks, we strive to improve the
quality of the non-core operations of our clients and to reduce their operating
costs.
We believe that the flexibility of our services allows us to attract
clients in many industries. We have provided technical literature and
point-of-sale distribution for a number of years to companies in other
industries, including Home Depot, Siemens and NAPA. In 1999, we began to sell
and distribute cable modems to customers of TCI.
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STRATEGY
Our strategy is to take advantage of trends towards outsourcing marketing
support and distribution services by utilizing our comprehensive services,
reputation for quality service and strong client relationships. We believe that
there are meaningful opportunities to grow our business with existing clients
and other large corporations increasingly seeking outsourcing solutions. The
following are key elements of this strategy.
- MAXIMIZE MARKETING SUPPORT AND PRODUCT DISTRIBUTION SERVICES TO EXISTING
TELECOMMUNICATIONS CLIENTS. We integrate ourselves into our telecommunications
clients' distribution channels so that we can help them increase the sales of
their products and services. We provide marketing support services and
distribution of Caller ID units, Caller ID telephones and other
telecommunications equipment for BellSouth, Pacific Bell, Southwestern Bell and
US West. According to industry sources, market penetration of Caller ID services
in the U.S. as of December 31, 1998 was approximately 30% and is expected to
reach approximately 75% by 2007. Management believes that there are significant
growth opportunities to provide Caller ID related products as the market
penetration of Caller ID increases. We expect other opportunities to arise as
consumer demand grows for advanced telecommunications products to support
network services, including DSL, e-mail, web-based technology, voice mail and
call waiting. We believe that we are well situated to market the next generation
of telecommunications products these clients provide to their customers.
- GROW TELECOMMUNICATIONS CLIENT BASE. We intend to expand our client base
in the telecommunications area by utilizing the industry expertise we have
developed to date. We believe we are well positioned to build relationships with
other clients in this industry, including independent local exchange carriers
and cable companies, by capitalizing on our long-standing relationships with
several leading clients in the telecommunications industry. In pursuit of this
strategy, we have recently begun to provide services to Bell Atlantic,
Ameritech, Cincinnati Bell and TCI.
- EXPAND CUSTOMER DISTRIBUTION CHANNELS THROUGH E-COMMERCE. We believe
that our marketing support and distribution services can be applied to
telecommunications companies and other businesses seeking to enter e-commerce by
outsourcing product distribution. When we focused on the telecommunications
business, we hired experienced industry personnel to provide consultative
support for various accounts. Likewise, in the e-commerce area we have hired the
personnel to help our clients sell their products through the internet. We
recently launched e-commerce distribution services for one client and are
soliciting other e-commerce distribution clients. Our strategy is to develop
relationships with companies that offer e-commerce solutions such as web
development, systems integration and similar services. Our goal is to complement
these companies' services with our distribution and end user support
capabilities. For example, we recently entered into a relationship with IBM to
make our distribution and call center support services available to certain IBM
e-commerce customers. Under this arrangement, IBM, at its option, will provide
information about our services to its e-commerce customers and will identify
these customers to us. As we apply our core competencies to the e-commerce
channel, we intend to become a "one-stop" distributor for manufacturers and
large corporations planning to use the internet as an additional sales channel.
Our goal is to offer solutions to product distribution via the internet that
will encompass:
- internet marketing and product strategy consultation,
- web concept and design,
- product ownership or consignment and warehousing of products,
- inventory and sales reporting,
- end user fulfillment,
- online order tracking,
- online secure payment processing,
- e-mail verification of orders,
- complete end user customer support,
- returns and refund processing and
- technical support.
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- BUILD LONG-TERM CLIENT RELATIONSHIPS. By assessing a client's industry,
products, services, processes and culture, we strive to develop solutions that
reduce the costs and investment required to deliver that client's marketing
support programs. Our services are designed to be an extension of our clients'
marketing and distribution efforts. We believe that this consultative
partnership, combined with extensive integration between our processes and
systems and those of our clients and our complete range of services, cultivates
long-term client relationships. We believe that this approach also creates
substantial opportunities to expand relationships with existing clients by
cross-selling the full range of our services. For example, we have provided
services to NAPA since 1994, Home Depot since 1993 and Siemens and BellSouth
since 1987 and have, in each case, expanded the scope of services provided to
these clients.
- CONTINUE INVESTMENT IN TECHNOLOGY. Historically, we have maintained a
commitment to the use of technology. We intend to continue to upgrade and
enhance our computer hardware and software applications. We expect that these
investments in our technology will permit us to continue to provide high
quality, flexible and powerful services to our clients. This commitment has
enabled us to provide value-added services like flexible end user billing for
telecommunications products. We are also able to establish automated interfaces
between our system and clients' systems. For example, we recently developed a
method to allow a client that did not have EDI links to transmit its product
order files to us using a customized internet web page to simulate an EDI
transmission. For other clients, we establish EDI links to allow them to deliver
information to us. Likewise, we transmit billing information for our
telecommunication clients' customers' phone bills by EDI. We believe that our
use of technology to connect clients to us provides a competitive advantage and
results in closer client relationships and reduced labor costs. We also believe
that continued technological advances, particularly those utilizing the
internet, will provide new opportunities for us to customize our services
further. We intend to use part of the proceeds of this offering to continue to
upgrade our computer and network hardware.
MARKETING SUPPORT SERVICES
We design customized, technology-based marketing support solutions for our
clients. We act as an extension of our clients in reaching their end user
customers. Our full range of services are described below and can be offered to
clients who sell products and services through the traditional sales channels or
the e-commerce channel.
CONSULTATIVE SERVICES
We offer consultative services to our clients regarding their sales,
marketing and distribution channels, which include:
Channel Management, Marketing and Product Strategy. We strive to create
strategic relationships with our clients. We assist our clients in managing
their sales channels by assigning a client services team to each client to
understand the client's operations, customer service processes, culture,
requirements and goals. We are often in the field to train our clients' sales
staffs and promote product sales. To the extent requested by a client, we will
assist in formulating its marketing strategy and address product forecasting,
pricing, sourcing and promotional opportunities. We also consult with clients
about the products they sell to their customers. In addition, we seek new
revenue sources for our clients and address process and product improvements.
For clients who seek e-commerce solutions, we can provide internet marketing and
product strategy. We believe our value-added channel management and strategy
services integrate us into our clients' sales channels and increase our value to
our clients.
Customized and Flexible Billing Options. We believe that one of the key
services we offer is convenient payment options for end users to pay for
products. For example, we offer our clients product billing solutions, like the
billing option program we pioneered for BellSouth in 1993 in which customers
could pay for Caller ID equipment and telephones through interest-free
installments on their phone bill. We can implement payment alternatives for
clients, like billing in installments on credit cards. As part of our e-commerce
strategy, we offer universal payment processing software in conjunction with
shopping cart
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software for sales through the e-commerce channel. We design the payment method
to fit the needs of our client, its customers and the distribution channel.
Promotions. We design and manage targeted promotional activities for our
clients. We consult with clients to determine which products to promote and how
to increase sales through coupons, rebate and other programs. We work with our
clients to determine how much rebate or discount will be given to the end user
and the manner in which an end user can access a program. Once established, we
implement and manage the promotion, providing such services as creative design,
verification, database management, results tracking, check printing and
disbursement and the program's back-end customer support.
Sales and Marketing Information and Forecasting. As a supplement to our
services, we provide sales reports and inventory analysis, program results and
detailed order processing information. We have developed flexible technologies
and reporting procedures that convert raw data gathered during the course of a
marketing support program into useful, customized reports. These reports provide
a basis for our client's responses to customer needs and inquiries. For example,
information obtained during a customer telephone call is captured by our
database marketing and management systems and is then incorporated into
customized reports. We use this information to help our clients prepare and
update forecasted sales information. These reports also are used by us and our
clients to monitor performance of various marketing programs. On-line functions
allow clients to monitor their programs in real-time to obtain comprehensive
trend analyses and modify program parameters as necessary. We provide clients
with customized reports via computer-to-computer transmission, disk, magnetic
tape and the internet. We also provide cost-center based accounting reports for
clients who utilize our services for subsidiary and intra-company fulfillment
transactions.
TECHNOLOGY SERVICES
Our technology helps us provide marketing support services to our clients.
We provide the following technology-based services:
Electronic Data Interface Integration. We use EDI to link our systems to
our clients' systems, which permits the automatic exchange of information. Our
telecommunications clients generally transmit sales orders for Caller ID
equipment and other products to us via EDI. We can also provide sales, billing
and individual customer order status updates to our clients through EDI links.
The open architecture of our systems facilitates adapting our EDI capabilities
to new clients and new marketing programs. We also develop methods to allow
clients without EDI capabilities to transmit their order files to us through
other methods.
Interactive Voice Response. In many cases, our call center services are
offered through IVR systems. These menu driven systems allow customers to route
their calls by selecting from several offerings. Our IVR systems include text to
speech capabilities, which allow the IVR systems to "read" specific, real-time
data from the client's databases and convert it into speech based on cues from a
caller. These systems generally reduce personnel and physical plant expenses
associated with a call center while expanding the operating capabilities of the
center. Technical support is also integrated into our IVR systems, so that an
end user can obtain answers to technical questions, from an automated system
rather than a call center representative, regarding the products they purchased.
Database Management. We can manage client databases independently or in
conjunction with other marketing support programs. Independent database
management begins with the client providing the information to establish the
database or our obtaining the data from information generated through a client's
web site. We then customize and manage this data to provide client reports. In
addition, our integrated marketing support programs generate information about
customers, demographics, recurring technical problems and other useful marketing
data. We are then able to create customized databases that evolve with our
ongoing marketing support and customer service programs. This data is a source
of valuable information as we evaluate ongoing programs and plan and design
future programs with our clients.
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DISTRIBUTION SERVICES
Effective distribution of our clients' products and services is another of
our core competencies and has been a key component in our revenue growth. Our
capabilities in this area are described below.
Product Ownership, Consignment and Warehousing. As a part of our
comprehensive approach, we often acquire products that our clients offer and
warehouse them in our distribution facility. At a client's option, we can also
hold its inventory on consignment, in which case we distribute consigned client
products to the client's end user customers for a per-unit fee. We believe that
our flexibility in product ownership models gives us a competitive advantage in
maintaining and building client relationships.
Fulfillment. We are committed to offering our clients' products and
services to their customers on a timely and accurate basis. Our personnel
process, pack and ship product orders and requests for promotional, technical
and educational literature, signage and point of sale materials for clients. We
use several custom-designed semi-automated packaging and labeling lines to pack
and ship products. By utilizing this technology, we are able to reduce labor
costs and provide more timely shipments to our clients' customers. We streamline
and customize the distribution procedures for each client based upon the product
request and the tracking, reporting and inventory controls necessary to
implement that client's marketing support program.
Purchasing Management. We place orders for products we distribute with
vendors selected by us or our clients. Our purchasing management services
include assisting a client in negotiating product pricing with the vendor, as
well as forecasting product quantities required for normal business programs or
promotions. By managing the timing of purchases, we are better able to control
the inventory risk that we incur when we own the products our clients offer,
while providing a value-added service to our clients.
Inventory Management. An integral part of our marketing support services
is the on-line monitoring and control of a client's inventory. We provide
automated inventory management to assure real-time stock counts of a client's
products, literature, signage and other items. These inventory systems enable us
to provide management information to maintain consistent and timely reorder
levels and supply capabilities and also enable the client to assess quickly
stock balances, pricing information, reorder levels and inventory values. We
offer this information to the client on a real-time basis through our internet
gateway or direct dial-up. Inventory management data is also utilized in our
reporting services. We utilize bar coding equipment in our inventory management
systems which improves the efficiency of stock management and selection.
END USER CUSTOMER SUPPORT SERVICES
Our fourth core competency relates to support services we provide to our
clients' customers. We believe this is critical to a comprehensive marketing
solution. These customer support services are described below.
Inbound Call Center Services and Technical Support. Our call center
representatives resolve questions regarding shipping, billing and technical
support as well as a variety of other questions. From time to time they may sell
advanced equipment and extended warranties to customers who call us.
Inquiries generally relate to a customer's purchase of a product or a
customer's need for ongoing assistance. These end users dial a support number
printed on the product or in the documentation accompanying the product. To
handle the call properly, Innotrac's automated call distributor identifies each
inbound call by the toll-free number dialed and immediately routes the call to
the IVR system or an Innotrac representative. The IVR system attempts to resolve
support issues by guiding the customer through a series of interactive
questions. If IVR automatic resolution cannot solve the problem, the call is
routed to one of our service representatives who is specially trained in the
applicable client's business and products. Our call center representatives can
enter customer information into our call-tracking system, listen to a question
and quickly access a proprietary network database using a graphical interface to
answer a customer's question. A senior representative is available to provide
additional assistance for complex or
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unique customer questions. Customer requests are generally resolved with a
single call, whether answered by a trained representative or our automated
systems.
As additional product information becomes available over the course of a
marketing program, we promptly integrate this information into our database to
ensure that IVR and representatives' answers are based upon the latest product
information.
Returns and Refunds Processing. The representatives respond to customer
calls about product returns and refunds and obtain information about customer
service problems. They facilitate a customer's return of a product by providing
a bar-coded label to the customer for return of a product. When the returned
item is processed and entered into our system, it automatically triggers a
pre-set action for reshipment of a product or refund to the customer.
TECHNOLOGY
Our use of technology enables us to design and deliver services for each
client's marketing support needs. Our information technology group, or IT Group,
has developed our 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. We are
in the process of deploying an Oracle-based enterprise resource planning
software system, which features a fourth generation language technology that
will allow for quick and efficient changes to programs, systems and reports.
This system will standardize our computer services and allow for even greater
flexibility and capacity.
The open architecture of our computer system permits us 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, our IT Group
works with our client services team to modify the program on an ongoing basis.
Information can be exchanged via EDI, internet access and direct-dial
applications. We believe that our technology platform provides us with the
resources to continue to offer leading edge services to current and new clients
and to integrate our systems with theirs. We believe that the integrity of
client information is adequately protected by our data security system and our
off-site disaster back-up storage facilities.
Our call center utilizes a sophisticated Rockwell Spectrum Automatic Call
Distributor, or ACD, switch to handle call management functions. This ACD system
has the capacity to handle 2,400 call center representatives simultaneously, and
is currently supporting over 450 representatives simultaneously. Additionally,
the ACD system is integrated with software designed to enable management to
automatically staff and supervise the call center based on call length and call
volume data compiled by the ACD system.
PERSONNEL AND TRAINING
Our success in recruiting, hiring and training large numbers of skilled
employees and obtaining large numbers of hourly employees during peak periods
for distribution and call center operations is critical to our ability to
provide high quality marketing support services. Call center 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,
we offer competitive pay, hire primarily full-time employees who are eligible to
receive a full range of employee benefits, and provide employees with clear,
visible career paths.
As of April 30, 1999, we had 838 employees, of which approximately 98% were
full-time and 2% were part-time. Management believes that the demographics
surrounding our facilities and our reputation, stability, compensation and
benefit plans should allow us to continue to attract and retain qualified
employees.
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Currently, we are not a party to any collective bargaining agreements. None
of our employees is unionized. Although we consider our relationship with our
employees to be good, we have experienced occasional unionization initiatives,
particularly among our call center personnel.
COMPETITION
In tailoring services to client needs, we compete on the basis of quality,
reliability of service, efficiency, technical superiority, speed, flexibility
and price. We compete with many companies, some of which have greater resources
than us, with respect to various portions of our business. Those companies
include fulfillment businesses, call center operations, database management
firms, web developers and e-commerce service providers. We believe that our
comprehensive and integrated services differentiate us from many of those
competitors. We continuously explore new outsourcing service opportunities,
typically in circumstances where clients are experiencing inefficiencies in
non-core areas of their businesses and management believes we can develop a
superior outsourced solution on a cost-effective basis. We primarily compete
with the in-house operations of our current and potential clients and also
compete with certain companies that provide similar services on an outsourced
basis, many of whom have greater resources than Innotrac.
GOVERNMENT REGULATION
The Caller ID services offered by our 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, or the ECPA, and several state statutes. In March 1994, a Federal
Communications Commission, or FCC, report preempted certain state regulation of
interstate calling party number parameter, or 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, or 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 customer proprietary network information,
or CPNI. CPNI includes information that is personal to customers, including
where, when and to whom a customer places a call, as well as the types of
telecommunications services to which the customer subscribes and the extent
these services are used. The FCC interprets the CPNI restrictions to permit
telecommunications carriers, including BellSouth, Pacific Bell and US West, to
use CPNI without customer approval to market services that are related to the
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customer's existing service relationship with his or her carrier. Before
carriers may use CPNI to market services outside a customer's existing service
relationships, the carrier must obtain express customer permission. Because we
are dependent upon the efforts of our clients to promote and market their
equipment and services, laws and regulations inhibiting those clients' ability
to market these equipment and services to their existing customers could have a
material adverse effect on our business, results of operations and financial
condition.
Telephone sales practices are regulated at both the federal and state
level. These regulations primarily relate to outbound teleservices, which we
currently outsource to another company. Outbound teleservices are regulated by
the rules of the FCC under the Federal Telephone Consumer Protection Act of
1991, the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of
1994 and various state regulations regarding telephone solicitations. We believe
that we are in compliance with these federal statutes and the FCC rules
thereunder and the various state regulations and that we would operate in
compliance with those rules and regulations if we were to engage in outbound
teleservice operations in the future.
Our new e-commerce business may be subject to many of the same laws and
regulations. It is uncertain how some of these existing laws and regulations
will be applied to our e-commerce business, if at all. Unfavorable
interpretations or applications of these laws in the e-commerce context,
particularly with respect to privacy issues, could impede our e-commerce
business. New laws and regulations specifically addressing e-commerce could also
affect us.
We work closely with our clients, companies to which we outsource outbound
teleservices and their respective advisors to ensure that we and our client are
in compliance with these regulations. We cannot predict whether the status of
the regulation of Caller ID services or e-commerce will change and what effect,
if any, this change would have on us or our industry.
INTELLECTUAL PROPERTY
We have used the service mark "Innotrac" since 1985. We have obtained
Georgia state registrations and have filed applications for federal and European
Community registration of this service mark and other marks used by us in our
business. 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 our registration of our
service mark "Innotrac" or the other marks we are seeking to register, or that
our service marks will not be challenged by other users. Our operations
frequently incorporate proprietary and confidential information. In accordance
with industry practice, we rely upon a combination of contract provisions and
trade secret laws to protect the proprietary technology we use and to deter
misappropriation of our proprietary rights and trade secrets.
PROPERTIES
Our headquarters and distribution facilities are located in 250,000 square
feet of leased space in Duluth, Georgia. Our 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 Innotrac's expansion requirements. The lease for our Duluth
facility commenced in October 1998 and has a term of 10 years with 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. We have not yet determined whether to exercise this purchase
option.
We provide teleservices through our call center located in Duluth, Georgia.
We currently lease the center on a month-to-month basis and are in the process
of negotiating a new lease agreement. The call center is currently configured
with approximately 460 workstations and has room to expand to approximately 700
workstations. It currently operates from 8:00 a.m. until midnight Monday through
Friday and from 9:00 a.m. to 6:00 p.m. on Saturday.
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In June 1999, we entered into a lease for a new facility in Pueblo,
Colorado with an initial term of five years with two five year renewal options.
The facility provides approximately 87,000 square feet of floor space. We plan
to use approximately 45,000 square feet for a second call center, which will
include quality assurance, administrative, training and management space. The
call center will eventually support about 350 workstations. We anticipate
opening the new call center in the third quarter of 1999. The remaining 42,000
square feet is available for future development as distribution space.
LEGAL PROCEEDINGS
We are not a party to any material legal proceeding. We are, from time to
time, a party to litigation arising in the normal course of our business.
Management believes that none of these actions, individually or in the
aggregate, will have a material adverse effect on our financial position or
results of operations.
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<PAGE> 40
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Our executive officers and directors are as follows:
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION TERM EXPIRES
- ---- --- -------- ------------
<S> <C> <C> <C>
Scott D. Dorfman(1)(3)............. 41 President, Chief Executive Officer, 2001
and Chairman of the Board
David L. Ellin(1).................. 40 Senior Vice President, Chief 2001
Operating Officer, and Director
Larry C. Hanger.................... 44 Senior Vice President -- Business 2002
Development and Director
John H. Nichols, III............... 45 Senior Vice President, Chief --
Financial Officer and Secretary
Don L. Colter, Jr.................. 38 Vice President -- Operations --
Stephen J. Walden.................. 55 Vice President -- Electronic --
Commerce
Will Hendrick...................... 42 Vice --
President -- Telecommunications
Bruce V. Benator(1)(2)............. 41 Director 2002
Martin J. Blank(2)(3).............. 52 Director 2000
William H. Scott, III(2)(3)........ 52 Director 2000
</TABLE>
- ---------------
(1) Member of executive committee
(2) Member of audit committee
(3) Member of compensation committee
Mr. Dorfman founded Innotrac and has served as President, Chief Executive
Officer and Chairman of the Board since its inception in 1984. Prior to founding
Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc., 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 us in 1986 and has served as Senior Vice President and
Chief Operating Officer since November 1997 and as a director since December
1997. He served as 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. Hanger joined Innotrac in 1994 and has served as Vice
President -- Business Development since November 1997 and as a director since
December 1997. He was promoted to Senior Vice President in April 1999. He served
as Innotrac's Department Manager of Business Development from 1994 to November
1997, and was responsible for the management of the telecommunication equipment
marketing and service business. From 1979 to 1994, Mr. Hanger served as Project
Manager -- Third Party Marketing at BellSouth, where he managed the marketing
program for BellSouth's network services and was involved in implementing the
billing options program for BellSouth with Innotrac.
Mr. Nichols joined Innotrac in November 1997 as Vice President and Chief
Financial Officer. He was appointed Secretary in July 1998 and was promoted to
Senior Vice President in April 1999. 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.
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<PAGE> 41
Mr. Colter joined Innotrac in 1995 and has served as Vice
President -- Operations since November 1997. He served as Innotrac's Chief
Financial Officer from 1995 to November 1997. Prior to joining Innotrac, from
1993 to 1995, Mr. Colter was 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. Walden joined Innotrac in January 1999 as Vice President -- Electronic
Commerce. From 1998 to 1999, he served as Senior Vice President for Internet
Strategy at Premiere Technologies, Inc. responsible for managing a new,
internet-based product line integrating telephony services with internet
technology. Prior to that, from 1996 to 1998, he was Vice President of Content
and Commerce for BellSouth.net, a BellSouth subsidiary. Mr. Walden was President
of Walden Associates, a media and technology consulting group, from 1995 to
1996. From 1988 to 1995, he held positions with Prodigy Services Company.
Earlier in his career, he was employed with Grey Advertising, Warner Amex Cable
Communications, Time Inc.'s Manhattan Cable TV, and Home Box Office.
Mr. Hendrick joined Innotrac in April 1999 as Vice
President -- Telecommunications. Prior to joining Innotrac, from November 1997
to February 1999 he served as Vice President and General Manager for the former
telecommunications division of InteliData Technologies Corp., which designed and
distributed consumer telephone products. He also served as Vice
President -- Sales at InteliData and its predecessor from August 1995 to
November 1997. He held the position of Senior Director -- Product Management
with BellSouth from January 1993 to July 1995, and has also served as
Director -- Product Development for that company. Mr. Hendrick has 20 years
experience in the telecommunications industry.
Mr. Benator is the Managing Partner of Williams Benator & Libby, LLP,
certified public accountants, and has been a director since December 1997. 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.
Mr. Blank has been a director since December 1997 and is a co-founder of
Automobile Protection Corporation, or APCO, a publicly held corporation engaged
in the marketing of extended vehicle service contracts and warranty programs.
Mr. Blank has served as Secretary and Director of APCO since its inception in
1984 and as Chairman of the Board and Chief Operating Officer since 1988. Mr.
Blank's experiences prior to co-founding APCO include the practice of law and
the representation of and financial management for professional athletes. Mr.
Blank is admitted to the bar in the States of Georgia and California.
Mr. Scott has been a director since December 1997 and has served as
President and Chief Operating Officer of ITC Holding Company, Inc., the parent
company of ITC Service Company, since 1991. He has been a director of ITC
Holding Company since 1989, and served as its Executive Vice President from 1989
to 1991. Mr. Scott is a director of nFront, Inc., a software and outsourcing
company providing internet banking solutions to small and mid-sized banks;
Powertel, Inc., a wireless telecommunications services company operating in the
southeastern United States; KNOLOGY Holdings, Inc., a broadband
telecommunications services company currently operating in Alabama, Florida,
Georgia and South Carolina; ITC DeltaCom, Inc., a full service
telecommunications provider to business customers in the southeastern United
States; and MindSpring Enterprises, Inc., an internet service provider.
MEETINGS AND COMMITTEES OF THE BOARD
The board of directors meets on a regular basis to supervise, review, and
direct Innotrac's business and affairs. 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 our affairs. We have no standing nominating committee or other
committee performing similar functions.
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<PAGE> 42
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.
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 Scott comprise the members of the audit
committee.
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 Innotrac'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.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued by
Innotrac for services rendered during the fiscal years ended December 31, 1998
and 1997, to or for Innotrac's chief executive officer and each of its 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 percent of an officer's total salary and bonus. None of
the executive officers has an employment agreement with Innotrac.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
ANNUAL 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 Board and 1997 226,179 25,000 -- 9,526
Chief Executive Officer
David L. Ellin............................. 1998 145,000 87,000 -- 10,241(2)
Senior Vice President and Chief Operating 1997 137,692 70,000 155,000 --
Officer
Larry C. Hanger............................ 1998 100,000 100,000 -- 500(2)
Senior Vice President 1997 89,343 35,000 25,000 --
John H. Nichols, III....................... 1998 125,000 75,000 -- 1,502(2)
Senior Vice President, Chief Financial 1997 10,576 4,807 20,000 --
Officer and Secretary(3)
Don L. Colter.............................. 1998 92,606 46,300 -- 3,457(2)
Vice President 1997 78,832 40,000 25,000 --
</TABLE>
- ---------------
(1) Includes (a) Innotrac's matching contribution to deferred compensation plan
in the approximate amount of $24,232 and (b) the full dollar amount of
premiums, $1,986, paid by Innotrac with respect to split-dollar life
insurance on the life of Mr. Dorfman.
(2) Represents Innotrac's matching contribution to deferred compensation plan.
(3) Mr. Nichols's employment by Innotrac commenced November 1997.
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<PAGE> 43
Innotrac 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.
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.................................. 55,000 100,000(2) $456,325 $902,500
Senior Vice President and Chief
Operating Officer
Larry C. Hanger................................. -- 25,000(2) -- 225,625
Senior Vice President
John H. Nichols, III............................ -- 20,000(2) -- 180,500
Senior Vice President, Chief
Financial Officer and Secretary
Don L. Colter................................... -- 25,000(2) -- 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 Innotrac's common stock on the Nasdaq National Market as of
the last business day of its fiscal year, December 31, 1998, which was
$18.125 per share.
(2) 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.
DIRECTORS' COMPENSATION
We pay our outside directors an annual fee of $10,000, and additional fees
of $250 and $100, respectively, for each board meeting and committee meeting
attended. We also reimburse all directors for their travel and other expenses
incurred in connection with attending board or committee meetings.
We intend to grant additional options for 5,000 shares annually to each of
our outside directors, on the day we hold our annual meeting of shareholders.
The exercise price will be the closing price of our common stock reported on the
Nasdaq National Market on the date of grant. One-third of the options will be
immediately exercisable, the next third will vest on the first anniversary of
the date of grant, and the last third, on the second anniversary. On May 11,
1999, we granted options for 5,000 shares -- 1,667 of which are presently
exercisable -- to each of Messrs. Benator, Blank and Scott under this plan.
These options are exercisable at $17.688 per share.
In addition, on May 6, 1998 we granted each of Messrs. Benator, Blank and
Scott, and Mr. Campbell B. Lanier, III, a former director, immediately
exercisable options to purchase 10,000 shares of common stock at an exercise
price of $12.
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 our President and Chief
Executive Officer, neither Mr. Blank nor Mr. Scott is a current officer or
former officer of Innotrac. We have entered into some transactions with Mr.
Dorfman as described in "Related Party Transactions."
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<PAGE> 44
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth information concerning the beneficial
ownership of common stock, which is the only class of voting stock of Innotrac,
by:
- each person known to Innotrac to beneficially own more than 5% of the
common stock,
- each director and Named Executive Officer,
- all of Innotrac's directors and executive officers as a group and
- the selling shareholders.
Unless otherwise indicated below, at July 21, 1999, 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>
PERCENTAGE BENEFICIALLY OWNED
NUMBER OF SHARES --------------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED(1) PRIOR TO OFFERING AFTER OFFERING(2)
- ---------------- --------------------- ----------------- -----------------
<S> <C> <C> <C>
Scott D. Dorfman................. 6,074,162(3)(4) 67.4% 52.0%(5)
SAFECO Corporation............... 917,600(6)(7) 10.2 8.3
SAFECO Asset Management
Company........................ 808,100(6)(8) 9.0 7.3
SAFECO Common Stock Trust........ 676,000(6)(9) 7.5 6.1
ITC Service Company.............. 383,333 4.3 2.6(10)
David L. Ellin................... 87,500(11) 1.0 *
John H. Nichols, III............. 2,000 * *
Don L. Colter.................... 1,000 * *
Bruce V. Benator................. 11,667(12) * *
Martin J. Blank.................. 13,667(12) * *
William H. Scott, III............ 398,000(12)(13) 4.4 2.7(14)
All directors and executive
officers as a group (10
persons)....................... 6,587,996 72.4% 55.2%(15)
</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 the person or group has the right
to acquire within 60 days or with respect to which the 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
the 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
the 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 July 21, 1999,
there were 9,009,995 shares of common stock outstanding.
(2) Assumes no exercise of the over-allotment options Innotrac and the selling
shareholders have granted to the underwriters.
(3) Mr. Dorfman's address is 6655 Sugarloaf Parkway, Duluth, Georgia 30097.
(4) Includes an aggregate of 148,033 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.
(5) If the over-allotment option is exercised in full, Mr. Dorfman will own
49.7% of the outstanding shares of common stock.
(6) Information given at February 11, 1999.
(7) 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
(a) registered investment companies for which SAFECO AMC serves as
investment adviser and (b) employee benefit plans for which SAFECO serves
as plan sponsor.
(8) 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.
(9) The address of SAFECO CST is 10865 Willows Road NE, Redmond, Washington
98052. SAFECO CST is an investment company for which SAFECO AMC serves as
investment adviser.
(10) If the over-allotment option is exercised in full, ITC Service Company will
own 1.9% of the outstanding shares of common stock.
(11) Includes 55,000 shares subject to presently exercisable stock options.
(12) Includes 11,667 shares subject to presently exercisable stock options.
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<PAGE> 45
(13) Includes 383,333 shares owned of record by ITC Service Company, with
respect to which Mr. Scott is an officer and director. Mr. Scott disclaims
beneficial ownership of these shares.
(14) If the over-allotment option is exercised in full, Mr. Scott may be deemed
to beneficially own 2.0% of the outstanding shares of common stock.
(15) If the over-allotment option is exercised in full, the directors and
executive officers as a group may be deemed to beneficially own 52.3% of
the outstanding shares of common stock.
Scott D. Dorfman is the founder, Chairman of the Board, President and Chief
Executive Officer of Innotrac. He is one of the selling shareholders in this
offering. Mr. Dorfman is offering 300,000 of his shares of common stock and has
granted the underwriters an option to purchase 200,000 shares at the public
offering price to cover any over-allotments. Mr. Dorfman will beneficially own
5,774,162 shares of Innotrac's common stock after the offering or 5,574,162
shares if the over-allotment option is exercised in full.
ITC Service Company, or ITC, is the other selling shareholder in this
offering. Mr. Scott, one of our directors, is also a director and officer of
ITC. ITC is offering 100,000 shares of common stock and has granted the
underwriters an option to purchase 75,000 shares at the public offering price to
cover over-allotments. ITC will beneficially own 283,333 shares after the
offering, or 208,333 shares if the over-allotment option is exercised in full.
Both Mr. Dorfman and ITC have engaged in some transactions with us. See
"Related Party Transactions" for a description of these matters. We will not
receive any of the proceeds of any sales of the shares by the selling
shareholders. We will bear substantially all expenses of the offering.
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<PAGE> 46
RELATED PARTY TRANSACTIONS
FORMATION AND CONSOLIDATION RELATED MATTERS
Scott D. Dorfman, our President, Chairman of the Board and Chief Executive
Officer and one of the selling shareholders in this offering, guaranteed our
obligations under our previous credit facility with a bank, which consisted of a
$25 million revolving line of credit and a $2 million term loan. He also
guaranteed a subordinated note in the principal amount of $3.5 million which
bore interest at the prime rate plus 8.0% per annum payable to ITC, the other
selling shareholder in this offering. The bank guarantee terminated upon the
completion of our initial public offering in May 1998 and the subordinated note
was repaid with a portion of the proceeds from the initial public offering.
In connection with the Consolidation, Mr. Dorfman, together with his
children, and 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 1997 and
1998. Mr. Scott, who has been an Innotrac director since December 1997, and Mr.
Campbell B. Lanier, III, an Innotrac director from December 1997 until May 1999,
are officers and directors of ITC. They are also officers, directors and
principal shareholders of ITC Holding Company, the parent company 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 Innotrac common stock were owned
as follows: Mr. Dorfman -- 6,116,662 shares (including 148,033 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.
In February 1998, we 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, we redeemed
for approximately $590,000 from Arnold Dorfman all of his shares in a second
affiliated entity that was a party to the Consolidation.
We lease 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.
We are responsible for maintenance, insurance, taxes, fuel and other expenses
associated with the aircraft.
During 1997, we paid $145,914 in fees to Williams Benator & Libby, LLP,
certified public accountants, for accounting and consulting services. In 1998,
we paid them $94,000 in fees. Bruce V. Benator, one of our directors, is
Managing 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 Innotrac 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.
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<PAGE> 47
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of our common stock in the public
market, or the perception that such sales could occur, could adversely affect
the market price of our common stock and could impair our ability to raise
capital through the sale of equity securities. Upon completion of this offering,
we will have 11,109,995 shares of common stock outstanding (11,209,995 shares if
the underwriters' over-allotment option is exercised in full). Of these shares,
approximately 5 million shares (including the 2.5 million sold in this
offering), or 5.4 million shares if the underwriters' over-allotment option is
exercised in full, will be freely tradable without restrictions or further
registration under the Securities Act, unless held by "affiliates" of Innotrac
as that term is defined in Rule 144 under the Securities Act. Any shares sold to
affiliates may not be sold without registration under the Securities Act, or an
applicable exemption such as Rule 144.
The outstanding shares of common stock that will not be freely tradeable
after this offering (estimated to be 6.1 million shares, or 5.8 million shares
if the underwriters' over-allotment option is fully exercised) were issued and
sold by Innotrac in private transactions in reliance upon the exemption from
registration contained in Section 4(2) of the Securities Act and are restricted
securities under Rule 144. These shares may not be sold unless they are
registered under the Securities Act or are sold pursuant to an applicable
exemption from registration, including the exemption pursuant to Rule 144.
In general, under Rule 144 as currently in effect, a person who has
beneficially owned any of our restricted shares for at least one year would be
entitled to sell in broker's transactions or to market makers within any
three-month period a number of shares that does not exceed (1) the greater of
one percent of the then outstanding shares of our common stock (estimated to be
about 111,000 shares after completion of this offering) or (2) the average
weekly trading volume of our common stock on the Nasdaq National Market during
the four calendar weeks preceding the date on which notice of the sale is filed
with the SEC. Sales under Rule 144 are also subject to certain manner of sale
restrictions and notice requirements and to the availability of current public
information concerning Innotrac.
A person (or persons whose shares are aggregated) who is not an affiliate
of Innotrac at any time during the 90 days preceding a sale, and who has
beneficially owned shares for at least two years, would be entitled to sell
those shares under Rule 144(k) without regard to the availability of current
public information, volume limitations, manner of sale provisions, or notice
requirements. The above is a summary of Rule 144 and is not intended to be a
complete description thereof.
We have agreed that we will not, for a period of 90 days after the date of
this prospectus, without the prior written consent of Bear, Stearns & Co. Inc.,
issue, sell, offer or agree to sell, grant any option to purchase, or otherwise
dispose of any shares of our common stock or any securities convertible,
exchangeable or exercisable for such shares, except that, during the 90-day
lock-up period, we may (1) issue common stock pursuant to the exercise of
currently outstanding stock options under our Stock Option and Incentive Award
Plan and (2) grant options under this plan that do not vest and are not
exercisable during the lock-up period. The selling shareholders and our
executive officers and directors have agreed that they will not, for a period of
90 days after the date of this prospectus, without the prior written consent of
Bear, Stearns & Co. Inc., issue, sell, offer or agree to sell, grant any option
to purchase, pledge, make any short sale, establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act
of 1934 or otherwise dispose of any shares of our common stock or any securities
convertible, exchangeable or exercisable for such shares. Upon completion of
this 90-day period, the shares owned by the selling shareholders and our
executive officers and directors will become eligible for immediate public
resale, subject to the limitations of Rule 144.
We have filed a registration statement on Form S-8 under the Securities Act
to register a total of 800,000 shares of common stock issuable under the
Innotrac Corporation Stock Option and Award Incentive Plan. Shares issued upon
the exercise of stock options or other rights thereunder will be eligible for
resale in the public market without restriction, subject to Rule 144 limitations
applicable to affiliates of Innotrac. Options for 472,150 shares of common stock
are outstanding, 90,001 of which are currently exercisable.
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<PAGE> 48
No prediction can be made as to the effect, if any, that sales of common
stock by existing shareholders in reliance upon Rule 144 or otherwise will have
on the market price prevailing from time to time. Nevertheless, sales of
substantial amounts of common stock in the public market, or the perception that
such sales could occur, could adversely affect the prevailing market price.
These sales may also make it more difficult for us to sell equity securities or
equity-related securities in the future at a time and price that we deem
appropriate.
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<PAGE> 49
DESCRIPTION OF CAPITAL STOCK
Innotrac's authorized capital stock consists of 50,000,000 shares of common
stock, $0.10 par value per share, and 10,000,000 shares of preferred stock,
$0.10 par value per share, having the rights and privileges as the board of
directors may from time to time determine. Immediately prior to this offering,
9,009,995 shares of common stock and no shares of preferred stock were issued
and outstanding.
The following summary of our capital stock does not purport to be complete.
It is qualified in its entirety by reference to Innotrac's amended and restated
articles of incorporation, its amended and restated bylaws and the rights
agreement between Innotrac and Reliance Trust Company as rights agent, filed as
exhibits to the registration statement of which this prospectus forms a part,
and the applicable provisions of the Georgia Business Corporation Code.
COMMON STOCK
Holders of common stock are entitled to one vote per share on any issue
submitted to a vote of the shareholders and do not have cumulative voting rights
in the election of directors. Accordingly, the holders of a majority of the
outstanding shares of common stock voting in an election of directors can elect
all of the directors then standing for election, if they choose to do so. All
shares of common stock are entitled to share equally in any dividends Innotrac's
board of directors may, in its discretion, declare out of sources legally
available therefor. See "Dividend Policy." If Innotrac dissolves, liquidates or
winds up, holders of common stock are entitled to receive on a ratable basis all
of our assets available for distribution, in cash or in kind, after payment or
provision for payment of all of our debts and liabilities and any preferential
amount due to holders of preferred stock. Holders of common shares do not have
preemptive or other subscription rights, conversion or redemption rights, or any
rights to share in any sinking fund. All currently outstanding common stock
shares are, and the shares offered hereby (when sold in the manner contemplated
by this prospectus) will be, fully paid and nonassessable.
PREFERRED STOCK
Our articles of incorporation authorize the board of directors, from time
to time, to issue shares of preferred stock in one or more series. They may
establish the number of shares to be included in any such series, and may fix
the designations, powers, preferences and rights (including voting rights) of
the shares of each such series and any qualifications, limitations, or
restrictions on preferred shares. No shareholder authorization is required for
the issuance of these shares of preferred stock unless imposed by then
applicable law. Shares of preferred stock may be issued for any general
corporate purposes, including acquisitions. The board of directors may issue one
or more series of preferred stock with rights more favorable with regard to
voting, dividends and liquidation than the rights of holders of common stock.
Issuance of a series of preferred stock also could be used for the purpose of
preventing a hostile takeover of Innotrac, even if the takeover is considered to
be desirable by the holders of the common stock. Issuance of a series of
preferred stock could otherwise adversely affect the voting power of the holders
of common stock, and could serve to perpetuate the board of directors' control
of Innotrac under certain circumstances. Other than the issuance of the series
of preferred stock previously authorized by the board of directors in connection
with the shareholder rights plan described below, Innotrac has no current plans
that would result in the issuance of any shares of preferred stock.
CERTAIN ANTI-TAKEOVER PROVISIONS OF INNOTRAC'S ARTICLES OF INCORPORATION AND
BYLAWS
Staggered Board of Directors; Removal; Filling Vacancies. The articles of
incorporation provide that the board of directors will consist of between five
and eleven directors. The board currently consists of six directors, three of
whom are not Innotrac employees. The board of directors is divided into three
classes of directors serving staggered three-year terms. The classification of
directors makes it more difficult for shareholders to change the composition of
the board of directors. Innotrac believes, however, that the longer time
required to elect a majority of a classified board of directors will help to
ensure the continuity and stability of Innotrac's management and policies. The
classification provisions could also have the effect
46
<PAGE> 50
of discouraging a third party from accumulating large blocks of Innotrac's stock
or attempting to obtain control of Innotrac, even though such an attempt might
be beneficial to Innotrac and its shareholders. Accordingly, shareholders could
be deprived of certain opportunities to sell their shares of common stock at a
higher price than might otherwise be the case. The shareholders will be entitled
to vote on the election or removal of directors, with each share entitled to one
vote.
The bylaws generally provide that, unless the board of directors otherwise
determines, any vacancies will be filled by the affirmative vote of a majority
of the remaining directors, even if less than a quorum. A director may be
removed only with cause by the vote of the holders of a majority of the shares
entitled to vote for the election of directors at a meeting of the shareholders
called for the purpose of removing such director. A vacancy resulting from an
increase in the number of directors may be filled by action of the board of
directors.
Shareholder Rights Plan. On December 11, 1997, our board of directors
declared a dividend of one preferred share purchase right for each share of
Innotrac common stock. Each share purchase right entitles the registered holder
to purchase from Innotrac one one-hundredth (1/100) of a share of Innotrac
Series A Participating Cumulative Preferred Stock, par value $0.10 per share, at
a price of $60.00 per one one-hundredth of a Series A preferred share. The
exercise price and the number of Series A preferred shares issuable upon
exercise are subject to adjustments from time to time to prevent dilution. The
share purchase rights are not exercisable until the earlier to occur of (1) 10
days following a public announcement that a person or group of affiliated or
associated persons (an "Acquiring Person") have acquired beneficial ownership of
15% or more of the outstanding common stock or (2) 10 business days following
the commencement of, or announcement of an intention to make, a tender offer or
exchange offer the consummation of which would result in the beneficial
ownership by a person or group of 15% or more of the outstanding shares of
common stock.
In the event that Innotrac is acquired in a merger or other business
combination transaction or 50% or more of its consolidated assets or earning
power is sold after a person or group has become an Acquiring Person, proper
provision will be made so that each holder of a share purchase right, other than
share purchase rights beneficially owned by the Acquiring Person (which will
thereafter be void), will thereafter have the right to receive, upon the
exercise thereof at the then current exercise price of the share purchase right,
that number of shares of common stock of the acquiring company which at the time
of such transaction will have a market value of two times the exercise price of
the share purchase right. In the event that any person or group of affiliated or
associated persons becomes an Acquiring Person, proper provision shall be made
so that each holder of a share purchase right, other than share purchase rights
beneficially owned by the Acquiring Person (which will thereafter be void), will
thereafter have the right to receive upon exercise, without payment of the
exercise price, that number of shares of Innotrac common stock having a market
value of the exercise price of the share purchase right.
Series A preferred shares purchasable upon exercise of the share purchase
rights will not be redeemable. Each Series A preferred share will be entitled to
a minimum preferential quarterly dividend payment of $1.00 per share but will be
entitled to an aggregate dividend of 100 times the dividend declared per share
of common stock. In the event Innotrac liquidates, the holders of the Series A
preferred shares will be entitled to a minimum preferential liquidation payment
of $100.00 per share but will be entitled to an aggregate payment of 100 times
the payment made per share of common stock. Each Series A preferred share will
have 100 votes, voting together with the shares of common stock. Finally, in the
event of any merger, consolidation or other transaction in which shares of
common stock are exchanged, each Series A preferred share will be entitled to
receive 100 times the amount received per share of common stock. These rights
are protected by customary antidilution provisions.
Prior to the date the share purchase rights are exercisable, the share
purchase rights may not be detached or transferred separately from the common
stock. The share purchase rights will expire on January 1, 2008, unless that
expiration date is extended or unless the share purchase rights are earlier
redeemed or exchanged by Innotrac, in each case, as described below. At any time
prior to the acquisition by a person or group of affiliated or associated
persons of beneficial ownership of 15% or more of the outstanding common stock,
Innotrac's board of directors may redeem the share purchase rights in whole,
47
<PAGE> 51
but not in part, at a price of $0.001 per share purchase right. Immediately upon
any redemption of the share purchase rights, the right to exercise the share
purchase rights will terminate and the only right of the holders of share
purchase rights will be to receive the redemption price. A more detailed
description and terms of the share purchase rights are set forth in a rights
agreement between Innotrac and Reliance Trust Company as rights agent. This
rights agreement could have the effect of discouraging tender offers or other
transactions that might otherwise result in Innotrac shareholders receiving a
premium over the market price for their common stock.
Ability to Consider Other Constituencies. The articles of incorporation
permit the board of directors, in determining what is believed to be in the best
interest of Innotrac, to consider the interests of its employees, customers,
suppliers and creditors, the communities in which offices or other
establishments of Innotrac are located and all other factors the directors may
consider pertinent, in addition to considering the effects of any actions on
Innotrac and its shareholders. Pursuant to this provision, the board of
directors may consider numerous judgmental or subjective factors affecting a
proposal, including certain non-financial matters. On the basis of these
considerations, the board may oppose a business combination or other transaction
which, viewed exclusively from a financial perspective, might be attractive to
some, or even a majority, of our shareholders.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
Our bylaws provide for indemnification of directors to the fullest extent
permitted by Georgia law. The articles of incorporation, to the extent permitted
by Georgia law, eliminate or limit the personal liability of directors to
Innotrac and its shareholders for monetary damages for certain breaches of
fiduciary duty and the duty of care. Such indemnification may be available for
liabilities arising in connection with this offering. To the extent that
limitation of liability or indemnification for liabilities under the Securities
Act may be permitted to directors, officers or persons controlling Innotrac
under the foregoing provisions, Innotrac has been informed that, in the opinion
of the SEC, such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable. Our bylaws also allow us to
indemnify our officers, employees, agents and other persons to the fullest
extent permitted by Georgia law. Our bylaws obligate us, under certain
circumstances, to advance expenses to our directors and officers in defending an
action, suit or proceeding for which indemnification may be sought. We have
entered into indemnification agreements with our directors and executive
officers.
Our bylaws also provide that we have the power to purchase and maintain
insurance on behalf of any person who is or was one of our directors, officers,
employees or agents against any liability asserted against that person or
incurred by that person in these capacities, where we would have the power to
indemnify that person against these liabilities under Georgia law. We can also
indemnify someone serving in one of these capacities for us who is or was
serving as a director, officer, trustee, general partner, employee or agent of
one of our subsidiaries or, at our request, of any other organization, against
these liabilities. We maintain insurance on behalf of all of our directors and
executive officers.
OTHER MATTERS
Innotrac's common stock has traded on the Nasdaq National Market under the
symbol "INOC" since May 7, 1998.
The transfer agent and registrar for Innotrac's common stock is Reliance
Trust Company, Atlanta, Georgia.
48
<PAGE> 52
UNDERWRITING
Innotrac, the selling shareholders and the underwriters for the offering
named below, for whom Bear, Stearns & Co. Inc., The Robinson-Humphrey Company,
LLC and J.C. Bradford & Co. are acting as representatives, have entered into an
underwriting agreement with respect to the shares being offered. Subject to
certain conditions set forth in the underwriting agreement, each underwriter has
severally agreed to purchase the number of shares indicated in the following
table:
<TABLE>
<CAPTION>
UNDERWRITERS NUMBER OF SHARES
- ------------ ----------------
<S> <C>
Bear, Stearns & Co. Inc.....................................
The Robinson-Humphrey Company, LLC..........................
J.C. Bradford & Co..........................................
---------
Total............................................. 2,500,000
=========
</TABLE>
If the underwriters sell more than the total number set forth in the table
above, they have an option to buy up to an additional (1) 275,000 shares from
the selling shareholders and (2) 100,000 shares from Innotrac to cover such
sales. They may exercise that option, in whole or in part, at any time within 30
days after the date of this prospectus. If any shares are purchased pursuant to
this option, the underwriters will purchase the shares in approximately the same
proportion as set forth in the table above.
The offering of the shares is made for delivery when, as and if accepted by
the underwriters and subject to prior sale and to withdrawal, cancellation or
modification of the offering without notice. The underwriters reserve the right
to reject an order for the purchase of shares in whole or in part.
The following table shows the per share and total underwriting discounts
and commissions to be paid to the underwriters by Innotrac and the selling
shareholders. These amounts are shown assuming both no exercise and full
exercise of the underwriters' option to purchase additional shares from the
selling shareholders and Innotrac.
<TABLE>
<CAPTION>
PAID BY THE SELLING
PAID BY INNOTRAC SHAREHOLDERS
--------------------------- ---------------------------
NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Per share................................ $ $ $ $
Total.......................... $ $ $ $
</TABLE>
Shares the underwriters sell to the public will initially be offered at the
public offering price on the cover of this prospectus. Any shares the
underwriters sell to securities dealers may be sold at a discount of up to
$ per share from the public offering price. Any securities dealers the
underwriters sell to may resell those shares to certain other brokers or dealers
at a discount of up to $ per share from the public offering price.
The selling shareholders and our executive officers and directors have
agreed, for a period of 90 days after the date of this prospectus, not to issue,
sell, offer or agree to sell, grant any option to purchase, pledge, make any
short sale, establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Securities Exchange Act or otherwise dispose of any
shares of Innotrac common stock or any securities convertible, exchangeable or
exercisable for such shares without the prior written consent of Bear, Stearns &
Co. Inc. Innotrac has entered into a similar agreement, except that, during the
90-day lock-up period, we may (1) issue common stock pursuant to the exercise of
currently outstanding stock options under our Stock Option and Incentive Award
Plan and (2) grant options under this plan that do not vest and are not
exercisable during the lock-up period.
In connection with the offering, the underwriters may purchase and sell
shares of common stock in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the underwriters selling a greater number of
shares than they are required to purchase in the offering. Stabilizing
transactions consist of certain bids or
49
<PAGE> 53
purchases made to prevent or retard a decline in the market price of the common
stock while the offering is in progress.
The underwriters also may impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the underwriters' representatives have
repurchased shares sold by or for the account of the penalized underwriter in
stabilizing or short covering transactions. These activities may stabilize,
maintain or otherwise affect the market price of the common stock. As a result,
the price of the common stock may be higher than the price that otherwise might
exist in the open market. If these activities are commenced, the underwriters
may discontinue them at any time. These transactions may be effected on the
Nasdaq National Market, in the over-the-counter market or otherwise.
In connection with this offering, certain underwriters and selling group
members (if any) who are qualified market-makers on the Nasdaq National Market
may engage in passive market making transactions in the common stock on the
Nasdaq National Market. Any market-making activities will be conducted in
accordance with Rule 103 of Regulation M under the Securities Exchange Act and
will occur on the business day prior to the pricing of the offering before the
commencement of offers or sales of the common stock. Passive market-makers must
comply with applicable volume and price limitations and must be identified as
passive market-makers. In general, a passive market-maker must display its bid
at a price not in excess of the highest independent bid for the security. If all
independent bids are lowered below the passive market-makers' bid, however, the
passive market-maker must lower its bid when certain purchase limits are
exceeded.
Innotrac estimates that its share of the total expenses of the offering,
excluding underwriting discounts and commissions, will be approximately
$500,000.
Innotrac and the selling shareholders have agreed to indemnify the
underwriters against certain liabilities, including liabilities under the
federal securities laws, or to contribute to payments which the underwriters are
required to make as a result of such liabilities.
50
<PAGE> 54
LEGAL MATTERS
Some legal matters with respect to the validity of the shares of common
stock offered hereby will be passed upon for Innotrac by Kilpatrick Stockton
LLP, Atlanta, Georgia. Some legal matters in connection with this offering will
be passed upon for the underwriters by Troutman Sanders LLP, Atlanta, Georgia.
EXPERTS
Innotrac's financial statements and schedules at December 31, 1996, 1997
and 1998, included in this prospectus and elsewhere in the registration
statement have been audited by Arthur Andersen LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon such reports and upon the authority of said
firms as experts in accounting and auditing.
ADDITIONAL INFORMATION
This prospectus is part of a registration statement on Form S-1 Innotrac
has filed with the SEC covering the shares of common stock Innotrac and the
selling shareholders are offering.
We file annual, quarterly, and current reports, proxy statements, and other
information with the SEC. You may read and copy any materials we file with the
SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. For information on the operation of the Public Reference Room, call
the SEC at 1-800-SEC-0330. You can also obtain reports, proxy and information
statements, and other information regarding issuers that file electronically
with the SEC from the SEC's internet site. The address of that site is
http://www.sec.gov.
51
<PAGE> 55
[THIS PAGE INTENTIONALLY LEFT BLANK]
<PAGE> 56
INDEX TO THE FINANCIAL STATEMENTS
OF INNOTRAC CORPORATION
<TABLE>
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1997 and 1998
and March 31, 1999 (Unaudited)............................ F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1997 and 1998 and the Three Months
Ended March 31, 1998 and 1999 (Unaudited)................. F-4
Consolidated Statements of Partners', Members' and
Shareholders' Equity for the Years Ended December 31,
1996, 1997 and 1998....................................... F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1996, 1997 and 1998 and the Three Months
Ended March 31, 1998 and 1999 (Unaudited)................. F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
F-1
<PAGE> 57
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, 1996, 1997 and 1998. 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, 1996, 1997 and
1998 in conformity with generally accepted accounting principles.
Arthur Andersen LLP
Atlanta, Georgia
January 31, 1999
F-2
<PAGE> 58
INNOTRAC CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- MARCH 31,
1997 1998 1999
------- ---------- -----------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ 554 $ 3,379 $ 274
Accounts receivable, net (Note 3)......................... 20,081 44,354 73,013
Inventories............................................... 2,936 14,381 19,834
Deferred tax assets (Note 6).............................. 386 2,866 2,845
Prepaid expenses and other current assets................. 373 1,436 1,871
------- ------- --------
Total current assets.............................. 24,330 66,416 97,837
------- ------- --------
Property and equipment:
Rental equipment.......................................... 10,433 6,891 6,289
Computer, machinery and transportation equipment.......... 1,558 1,390 1,614
Furniture, fixtures and leasehold improvements............ 720 4,949 5,547
------- ------- --------
12,711 13,230 13,450
Less accumulated depreciation and amortization............ 5,102 5,767 6,226
------- ------- --------
7,609 7,463 7,224
------- ------- --------
Other assets, net........................................... 558 113 105
------- ------- --------
Total assets...................................... $32,497 $73,992 $105,166
======= ======= ========
LIABILITIES AND PARTNERS', MEMBERS', AND SHAREHOLDERS' EQUITY
Current liabilities:
Current portion of long-term debt (Note 4)................ $ 738 $ 68 $ 68
Line of credit (Note 4)................................... 8,545 15,736 31,619
Accounts payable.......................................... 4,766 9,387 23,265
Distributions payable (Note 2)............................ 1,007 70 70
Accrued expenses.......................................... 7,435 12,336 10,813
Other..................................................... 318 1,966 1,622
------- ------- --------
Total current liabilities......................... 22,809 39,563 67,457
------- ------- --------
Noncurrent liabilities:
Subordinated debt (Note 4)................................ 3,500 -- --
Long-term debt (Note 4)................................... 404 7 7
Deferred tax liabilities (Note 6)......................... 40 106 88
Other..................................................... -- 22 34
------- ------- --------
Total noncurrent liabilities...................... 3,944 135 129
------- ------- --------
Total liabilities................................. 26,753 39,698 67,586
------- ------- --------
Commitments and contingencies (Note 5)......................
Redeemable capital stock (Note 7)........................... 917 -- --
------- ------- --------
Partners', members' and shareholders' equity (Note 8):
Partners' capital......................................... 1,759 -- --
Members' deficit.......................................... (490) -- --
Common stock.............................................. 5 900 900
Additional paid-in capital................................ 14 24,838 24,838
Retained earnings......................................... 3,539 8,556 11,842
------- ------- --------
Total partners', members' and shareholders'
equity.......................................... 4,827 34,294 37,580
------- ------- --------
Total liabilities and partners', members' and
shareholders' equity............................ $32,497 $73,992 $105,166
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-3
<PAGE> 59
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
---------------------------- -----------------
1996 1997 1998 1998 1999
------- ------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
Revenues, net................................... $71,297 $87,978 $139,673 $22,565 $67,320
Cost of revenues................................ 55,519 67,986 108,785 16,412 58,717
------- ------- -------- ------- -------
Gross profit.......................... 15,778 19,992 30,888 6,153 8,603
------- ------- -------- ------- -------
Operating expenses:
Selling, general and administrative
expenses................................... 10,391 12,572 15,642 3,428 2,440
Depreciation and amortization................. 429 631 943 138 379
------- ------- -------- ------- -------
Total operating expenses.............. 10,820 13,203 16,585 3,566 2,819
------- ------- -------- ------- -------
Operating income................................ 4,958 6,789 14,303 2,587 5,784
------- ------- -------- ------- -------
Other (income) expense:
Interest expense.............................. 1,457 1,788 956 315 373
Other......................................... 94 118 35 6 (20)
------- ------- -------- ------- -------
Total other expense................... 1,551 1,906 991 321 353
------- ------- -------- ------- -------
Income before income taxes...................... 3,407 4,883 13,312 2,266 5,431
Income tax (provision) benefit.................. (212) 77 (3,743) 61 (2,145)
------- ------- -------- ------- -------
Net income............................ $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286
======= ======= ======== ======= =======
Unaudited pro forma data:
Pro forma net income.......................... $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286
======= ======= ======== ======= =======
Pro forma net income per share -- basic....... $ 0.32 $ 0.46 $ 1.01 $ 0.21 $ 0.37
======= ======= ======== ======= =======
Pro forma net income per share -- diluted..... $ 0.32 $ 0.46 $ 1.00 $ 0.21 $ 0.36
======= ======= ======== ======= =======
Weighted average common shares outstanding
Basic......................................... 6,500 6,500 8,096 6,500 9,000
Diluted....................................... 6,500 6,500 8,155 6,500 9,127
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-4
<PAGE> 60
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF PARTNERS', MEMBERS'
AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED
CAPITAL DEFICIT STOCK CAPITAL EARNINGS TOTAL
--------- -------- ------ ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1995............... $ 1,108 $ -- $ 5 $ 14 $ 2,068 $ 3,195
Member contributions..................... -- 2 -- -- -- 2
Net income............................... 1,323 (39) -- -- 1,911 3,195
Distributions to shareholders, members
and partners........................... (529) (235) -- -- (977) (1,741)
Accreted dividends on redeemable capital
stock.................................. -- -- -- -- (111) (111)
------- ----- ---- ------- ------- -------
BALANCE, DECEMBER 31, 1996............... 1,902 (272) 5 14 2,891 4,540
Net income (loss)........................ 3,541 (233) -- -- 1,652 4,960
Distributions to shareholders, members
and partners........................... (3,684) 15 -- -- (917) (4,586)
Accreted dividends on redeemable capital
stock.................................. -- -- -- -- (87) (87)
------- ----- ---- ------- ------- -------
BALANCE, DECEMBER 31, 1997............... 1,759 (490) 5 14 3,539 4,827
Distributions to shareholders, members
and partners........................... (4,836) (209) -- -- (4,747) (9,792)
Merger of companies...................... (461) 288 645 (1,667) 1,195 --
Record deferred taxes associated with
merger................................. -- -- -- -- 3,016 3,016
Proceeds from sale of common stock,
net.................................... -- -- 250 26,491 -- 26,741
Net income (loss)........................ 3,538 411 -- -- 5,620 9,569
Accreted dividends on redeemable capital
stock.................................. -- -- -- -- (67) (67)
------- ----- ---- ------- ------- -------
BALANCE, DECEMBER 31, 1998............... $ -- $ -- $900 $24,838 $ 8,556 $34,294
======= ===== ==== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-5
<PAGE> 61
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------- ------------------
1996 1997 1998 1998 1999
------- -------- -------- ------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income.................................. $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization............ 429 631 943 138 379
Depreciation -- rental equipment......... 3,005 3,711 2,900 829 536
Loss on disposal of rental equipment..... 2,538 4,479 2,158 542 220
Subordinated debt accretion.............. 164 -- -- -- --
Deferred income taxes.................... (107) (537) 602 33 3
Decrease (increase) in accounts
receivable............................. (6,753) 5,379 (24,273) (5,966) (28,659)
Decrease (increase) in inventories....... (7,683) 7,085 (11,445) (378) (5,453)
Decrease in prepaid expenses and other
assets................................. (327) (485) (734) 128 (443)
(Decrease) increase in accounts
payable................................ 3,611 (8,960) 4,621 4,362 13,878
(Decrease) increase in accrued
expenses............................... 2,016 2,619 6,571 284 (1,855)
Other.................................... (468) (369) (1,670) -- --
------- -------- -------- ------- --------
Net cash provided by (used in)
operating activities.............. 88 18,882 (9,088) 2,299 (18,108)
------- -------- -------- ------- --------
Cash flows from investing activities:
Accrued equipment purchases................. (272) (1,595) -- -- --
Purchases of property and equipment......... (7,700) (5,342) (5,739) (1,807) (880)
------- -------- -------- ------- --------
Net cash used in investing
activities........................ (7,972) (6,937) (5,739) (1,807) (880)
------- -------- -------- ------- --------
Cash flows from financing activities:
Net (repayments) borrowings under lines of
credit................................... 13,169 (8,685) 7,191 370 15,883
Proceeds from long-term debt................ 2,096 -- -- -- --
Repayment of long-term debt................. (328) (702) (1,067) (172) --
Repayment of subordinated debt.............. (1,000) -- (3,500) -- --
Loan commitment fees........................ (200) (125) -- -- --
Proceeds from members' contributions........ 2 -- -- -- --
Proceeds from initial public offering,
net...................................... -- -- 26,741 -- --
Redemption of redeemable capital stock...... -- -- (984) (388) --
Distributions to shareholders, members and
partners................................. (3,890) (3,884) (10,729) (263) --
------- -------- -------- ------- --------
Net cash (used in) provided by
financing activities.............. 9,849 (13,396) 17,652 (453) 15,883
------- -------- -------- ------- --------
Net increase (decrease) in cash and cash
equivalents................................. 1,965 (1,451) 2,825 39 (3,105)
Cash and cash equivalents, beginning of
period...................................... 40 2,005 554 554 3,379
------- -------- -------- ------- --------
Cash and cash equivalents, end of period...... $ 2,005 $ 554 $ 3,379 $ 593 $ 274
======= ======== ======== ======= ========
Supplemental cash flow disclosures:
Cash paid for interest...................... $ 1,207 $ 1,788 $ 1,006 $ 366 $ 325
======= ======== ======== ======= ========
Cash paid for income taxes, net of refunds
received................................. $ 892 $ 86 $ 1,493 $ 380 $ 2,486
======= ======== ======== ======= ========
Non cash transactions:
Accreted dividends on redeemable capital
stock.................................... $ 111 $ 87 $ 67 $ 17 $ --
======= ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated statements.
F-6
<PAGE> 62
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.
Quarterly Information
The accompanying condensed financial statements have been prepared without
audit pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations; however, management believes that the disclosures herein are
adequate to make the information presented not misleading.
In the opinion of management, the accompanying condensed financial
statements contain all adjustments (consisting of only normal recurring
adjustments) necessary to present fairly the Company's financial position as of
March 31, 1999 and the results of operations and cash flows for the three months
ended March 31, 1998 and 1999. The results of operations for the three months
ended March 31, 1998 and 1999 are not necessarily indicative of the operating
results for the full years.
F-7
<PAGE> 63
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 82%, 85% and 59% of
total revenues for the years ended December 31, 1996, 1997 and 1998,
respectively. If this agreement were terminated, it could have a material
adverse affect on the future operating results and liquidity of the Companies
(Note 5).
Cash and Cash Equivalents
The Companies consider all short-term, highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories, consisting primarily of telecommunications equipment, are
stated at the lower of cost or market, with cost determined by the first-in,
first-out method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is determined using
straight-line methods over the following estimated useful lives:
<TABLE>
<S> <C>
Rental equipment............................................ 3-4 years
Computers................................................... 3 years
Machinery and transportation equipment...................... 5-7 years
Furniture and fixtures...................................... 7 years
</TABLE>
Leasehold improvements are amortized using the straight-line method over
the shorter of the service lives of the improvements or the remaining term of
the lease.
F-8
<PAGE> 64
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 $2,538,000, $4,479,000 and $2,158,000 for the years
ended December 31, 1996, 1997 and 1998 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, 1996, 1997 and 1998,
distributions of approximately $1,741,000, $4,586,000 and $2,292,000,
respectively, were recorded, of which approximately $1,007,000 and $70,000 were
accrued and unpaid as of December 31, 1997 and 1998, 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.
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).
F-9
<PAGE> 65
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Statements 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, 1997 and 1998:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<S> <C> <C>
Billed receivables.......................................... $15,812 $32,081
Unbilled installment receivables............................ 9,976 17,208
------- -------
Total receivables................................. 25,788 49,289
Less allowances............................................. (5,707) (4,935)
------- -------
$20,081 $44,354
======= =======
</TABLE>
Management believes that the allowances for doubtful accounts and returns
reduce the gross accounts receivable to net amounts that will be collected.
F-10
<PAGE> 66
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. FINANCING OBLIGATIONS
Financing obligations as of December 31, 1997 and 1998 consisted of the
following:
<TABLE>
<CAPTION>
1997 1998
------- -------
(IN THOUSANDS)
<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 (8.5% and 7.75%
at December 31, 1997 and 1998, 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..................................... $ 8,545 $15,736
Subordinated note payable to the limited partner of
Providers, L.P., due April 1999; interest payable monthly
at a variable rate of prime plus 8% (16.5% as of December
31, 1997) and a fixed rate of 14% as of December 31, 1996;
secured by accounts receivable, inventories, rental
equipment and the personal guarantee of the sole
shareholder of the general partner of Providers, L.P.;
subordinated to the line of credit; note was paid in full
in May 1998............................................... 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 was paid in full in May 1998......................... 1,056 --
Other....................................................... 86 75
------- -------
13,187 15,811
Current portion............................................. 9,283 15,804
------- -------
$ 3,904 $ 7
======= =======
</TABLE>
Scheduled maturities of financing obligations are as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
1999........................................................ 15,804
2000........................................................ 7
-------
Total............................................. $15,811
=======
</TABLE>
The weighted average interest rate on the revolving line of credit
agreement was 8.6% and 7.6% for the years ending December 31, 1997 and 1998,
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 the expiration date extended to May 1, 2000. Subsequent to March
31, 1999, the revolving credit agreement was increased from $35,000,000 to
$40,000,000 and the expiration date extended to June 1, 2002.
F-11
<PAGE> 67
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:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<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 $770,000,
$1,121,000 and $1,231,000 during the years ended December 31, 1996, 1997 and
1998, 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 is a party.
6. INCOME TAXES
Details of the income tax (provision) benefit for the years ended December
31, 1996, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Current..................................................... $(319) $(460) $(3,141)
Deferred.................................................... 107 537 (602)
----- ----- -------
$(212) $ 77 $(3,743)
===== ===== =======
</TABLE>
F-12
<PAGE> 68
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes reflect the net effect of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Companies' deferred tax assets and liabilities as of December
31, 1997 and 1998 are as follows:
<TABLE>
<CAPTION>
1997 1998
----- ------
(IN THOUSANDS)
<S> <C> <C>
Noncurrent deferred tax (liabilities) assets:
Property, plant, equipment basis differences.............. $ 43 $ (114)
Conversion from cash to accrual taxpayer method -- long
term................................................... (83) --
Other..................................................... -- 8
----- ------
(40) (106)
----- ------
Current deferred tax assets (liabilities):
Reserves for uncollectable accounts....................... 524 2,372
Reserve for returns and equipment losses.................. 0 526
Conversion from cash to accrual taxpayer
method -- current...................................... (143) (36)
Other..................................................... 5 4
----- ------
386 2,866
----- ------
Net deferred tax asset............................ $ 346 $2,760
===== ======
</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 converted 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,
1996, 1997 and 1998 is as follows:
<TABLE>
<CAPTION>
1996 1997 1998
----- ----- -----
<S> <C> <C> <C>
Federal statutory rate...................................... 34.0% 34.0% 35.0%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit................ 3.6 1.4 6.0
Income taxable directly to shareholders, partners and
members (Note 2)....................................... (31.8) (37.9) (13.3)
Other....................................................... 0.4 0.9 0.5
----- ----- -----
6.2% (1.6)% 28.2%
===== ===== =====
</TABLE>
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
F-13
<PAGE> 69
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
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, 1996, 1997 and
1998 were not material.
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
F-14
<PAGE> 70
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 initial 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:
<TABLE>
<CAPTION>
SHARES WEIGHTED AVERAGE PRICE
------ ----------------------
(IN THOUSANDS)
<S> <C> <C>
Outstanding at December 31, 1996........................... -- $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.
The total value of options granted during 1997 and 1998 was computed as
approximately $2,172,000 and $3,013,000 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,
-----------------------
1997 1998
---- ----
<S> <C> <C>
Net income Pro forma
Pro forma................................................. $3,003 $8,186
Pro forma adjusted for the Impact of SFAS 123............. $2,686 $7,402
Diluted net income per share
Pro forma................................................. $ 0.46 $ 1.00
Pro forma adjusted for the Impact of SFAS 123............. $ 0.41 $ 0.91
</TABLE>
F-15
<PAGE> 71
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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>
1997 1998
--------- ---------
<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......................................... 106.0% 86.0%
</TABLE>
F-16
<PAGE> 72
- ------------------------------------------------------
- ------------------------------------------------------
Prospective investors may rely only on the information contained in this
prospectus. Neither Innotrac, the selling shareholders nor any underwriter has
authorized anyone to provide prospective investors with different or additional
information. This prospectus is not an offer to sell nor is it seeking an offer
to buy these securities in any jurisdiction where the offer or sale is not
permitted. The information contained in this prospectus is correct only as of
the date of this prospectus, regardless of the time of the delivery of this
prospectus or any sale of these securities.
No action is being taken in any jurisdiction outside the United States to
permit a public offering of the common stock or possession or distribution of
this prospectus in any such jurisdiction. Persons who come into possession of
this prospectus in jurisdictions outside the United States and Canada are
required to inform themselves about and to observe the restrictions of that
jurisdiction related to this offering and the distribution of this prospectus.
---------------------------------
TABLE OF CONTENTS
---------------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................. 1
Risk Factors....................... 5
Forward-Looking Statements Are Not
Guarantees....................... 14
Use of Proceeds.................... 15
Dividend Policy.................... 15
Price Range of Common Stock........ 16
Capitalization..................... 17
Selected Financial Data............ 18
Management's Discussion and
Analysis of Financial Condition
and Results of Operations........ 20
Business........................... 28
Management......................... 37
Principal and Selling
Shareholders..................... 41
Related Party Transactions......... 43
Shares Eligible for Future Sale.... 44
Description of Capital Stock....... 46
Underwriting....................... 49
Legal Matters...................... 51
Experts............................ 51
Additional Information............. 51
Index to Financial Statements...... F-1
</TABLE>
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
2,500,000 SHARES
(INNOTRAC LOGO)
INNOTRAC
CORPORATION
COMMON STOCK
------------------------------------------
PRELIMINARY PROSPECTUS
------------------------------------------
BEAR, STEARNS & CO. INC.
THE ROBINSON-HUMPHREY COMPANY
J.C. BRADFORD & CO.
, 1999
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE> 73
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Set forth below is an estimate of the approximate amount of the fees and
expenses (other than the underwriting discounts) payable by the Registrant in
connection with the issuance and distribution of the shares of common stock in
this offering.
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 14,037
NASD Filing Fees............................................ 5,568
Nasdaq National Market Filing Fees.......................... 17,500
Blue Sky Fees and Expenses.................................. 5,000
Printing Expenses........................................... 100,000
Legal Fees and Expenses..................................... 125,000
Accounting Fees and Expenses................................ 75,000
Miscellaneous............................................... 157,895
--------
Total............................................. $500,000
========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant's Amended and Restated Articles of Incorporation provide
that a director shall not be personally liable to the Registrant or its
shareholders for monetary damages for breach of the duty of care or any other
duty owed to the Registrant as a director to the fullest extent permitted by
Georgia law. Under such law, corporations cannot limit the liability of a
director (a) for any appropriation, in violation of his duties, of any business
opportunity of the Registrant; (b) for acts or omissions which involve
intentional misconduct or a knowing violation of law; (c) for unlawful corporate
distributions or (d) for any transactions from which the director receives an
improper benefit.
Under Article VII of the Registrant's Amended and Restated Bylaws, the
Registrant is required to indemnify its directors and officers to the fullest
extent permitted by Georgia law. The Georgia Business Corporation Code provides
that a corporation may indemnify its directors, officers and agents against
judgments, fines, penalties, amounts paid in settlement and expenses, including
attorneys' fees, resulting from various types of legal actions or proceedings if
the actions of the party being indemnified meet the standards of conduct
specified therein. Determinations concerning whether the applicable standard of
conduct has been met with respect to directors can be made by (a) a majority of
the disinterested directors; (b) a majority of a committee of disinterested
directors; (c) independent legal counsel or (d) an affirmative vote of a
majority of shares held by the disinterested stockholders. No indemnification
may be made to or on behalf of a corporate director (i) in connection with a
proceeding by or in right of the Registrant, except for reasonable expenses
incurred in connection with the proceeding if it is determined that the
director's conduct met the applicable standard (ii) in connection with any other
proceeding in which said person was adjudged liable on the basis that personal
benefit was improperly received by him.
The Registrant has entered into Indemnification Agreements with certain of
its directors and officers (the "Indemnified Parties"). Under the terms of the
Indemnification Agreements, the Registrant is required to indemnify the
Indemnified Parties against certain liabilities arising out of their service for
the Registrant. The Indemnification Agreements require the Registrant (i) to
indemnify each Indemnified Party to the fullest extent permitted by law; and
(ii) to advance certain expenses incurred by an Indemnified Party. The
Indemnification Agreements provide limitations on the Indemnified Party's rights
to indemnification in certain circumstances.
II-1
<PAGE> 74
The Registrant's directors and officers are insured against losses arising
from any claim against them as such for wrongful acts or omissions, subject to
certain limitations.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On May 6, 1998, the following persons or entities were issued the following
number of shares of common stock of the Registrant in consideration of each
person's or entity's equity interests in one of the eight companies that were
consolidated into Innotrac in connection with its initial public offering. Such
shares were issued in a private placement made pursuant to Section 4(2) of the
Securities Act of 1933. The Registrant has not issued any other shares since May
1996.
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
- ---- ----------------
<S> <C>
Scott D. Dorfman............................................ 4,971,964
ITC Service Company......................................... 383,333
Susan Mary Trotochaud....................................... 415
Custodianship for Bradley H. Dorfman........................ 21,428
Custodianship for Brent M. Dorfman.......................... 21,428
Custodianship for Jesse E. Dorfman.......................... 21,428
</TABLE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
1.1 -- Form of Underwriting Agreement between the Representatives
of the Several Underwriters, the Registrant, Scott D.
Dorfman and ITC Service Company
3.1 -- Amended and Restated Articles of Incorporation of the
Registrant, as amended (incorporated by reference to Exhibit
3.1 to the Registrant'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 Registrant
4.1 -- Form of Common Stock Certificate of the Registrant
(incorporated by reference to Exhibit 4.1 to the
Registrant'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 Registrant's Amendment
No. 1 to Registration Statement on Form S-1 (Commission File
No. 333-42373), filed with the Commission on February 11,
1998)
5.1 -- Opinion of Kilpatrick Stockton LLP
10.1 -- Acquisition Agreement by and among the Registrant, SellTel
#1, Inc., RenTel #1, Inc., IELC, Inc., HomeTel Systems,
Inc., HomeTel Providers Inc., RenTel #2, L.L.C., SellTel #2,
L.L.C., HomeTel Providers Partners, L.P., ITC Service
Company, Scott D. Dorfman, Susan Mary Trotochaud, as
Custodian For Bradley H. Dorfman, Brent M. Dorfman and Jesse
E. Dorfman, and Susan Mary Trotochaud, dated December 15,
1997 (incorporated by reference to Exhibit 10.1 to the
Registrant'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 Registrant's Registration
Statement on Form S-1 (Commission File No. 333-42373), filed
with the Commission on December 16, 1997)+
</TABLE>
II-2
<PAGE> 75
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
(b) -- Amendment No. 1 to Stock Option and Incentive Award Plan
(incorporated by reference to Exhibit 10.2(b) to the
Registrant'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 Registrant, HomeTel Systems Inc., IELC, Inc.,
RenTel #1, Inc., RenTel #2, L.L.C., SellTel #1, Inc.,
SellTel #2, L.L.C., HomeTel Providers Partners, L.P. and
SouthTrust Bank, N.A., dated December 5, 1997 (incorporated
by reference to Exhibit 10.3 to the Registrant'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 Registrant, effective
November 1, 1998 (incorporated by reference to Exhibit 10.4
to the Registrant's Annual Report on Form 10-K for the year
ended December 31, 1998 (Commission File No. 000-23741),
filed with the Commission on March 26, 1999)
10.5 (a) -- Form of Indemnification Agreements entered into as of
December 11, 1997, by and between the Registrant and each of
Messrs. Scott D. Dorfman, David L. Ellin, Larry C. Hanger,
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 Registrant's Registration Statement on Form S-1
(Commission File No. 333-42373), filed with the Commission
on December 16, 1997)+
(b) -- Form of Indemnification Agreements by and between the
Registrant and each of Stephen J. Walden and Will
Hendrick**+
10.6 -- Lease, dated June 16, 1999, between Lockheed Martin
Corporation and the Registrant**
10.7 -- Lease, dated April 1, 1996, by and between Weeks Realty,
L.P. and the Registrant (incorporated by reference to
Exhibit 10.7 to the Registrant'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 Registrant (incorporated by
reference to Exhibit 10.8 to the Registrant's Amendment No.
1 to Registration Statement on Form S-1 (Commission File No.
333-42373), filed with the Commission on February 11, 1998)
(b) -- First Amendment to Lease Agreement, dated May 8, 1998, by
and between Weeks Development Partnership and the
Registrant**
10.9 -- Split Dollar Life Insurance Agreement, dated July 10, 1997,
by and between the Registrant, Bruce V. Benator, as Trustee
of The Scott David Dorfman Family Trust #2, and Scott David
Dorfman (incorporated by reference to Exhibit 10.9 to the
Registrant'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 Registrant'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 Registrant and Wachovia Bank, N.A. (incorporated
by reference to Exhibit 10.11 to the Registrant's Amendment
No. 1 to Registration Statement on Form S-1 (Commission File
No. 333-42373), filed with the Commission on February 11,
1998)+
</TABLE>
II-3
<PAGE> 76
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
10.12 -- Shareholders' Agreement by and among SellTel #1, Inc.,
Arnold Dorfman, Scott Dorfman and the Registrant, dated
February 13, 1998 (incorporated by reference to Exhibit
10.12 to the Registrant'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
Registrant'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 (a) -- Amended and Restated Loan and Security Agreement between the
Registrant and SouthTrust Bank, N.A., dated January 25, 1999
(incorporated by reference to Exhibit 10.14 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission File No. 000-23741), filed
with the Commission on March 26, 1999)
(b) -- First Amendment to Amended and Restated Loan and Security
Agreement by and between the Registrant and SouthTrust Bank,
N.A., dated April 29, 1999**
10.15 -- 1999 Senior Executive Incentive Compensation Plan
(incorporated by reference to Exhibit 10.15 to the
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1998 (Commission File No. 000-23741), filed
with the Commission on March 26, 1999)+
10.16 -- Aircraft Lease by and between SD Holdings, Inc. and the
Registrant, dated February 19, 1998 (incorporated by
reference to Exhibit 10.16 to the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1998
(Commission File No. 000-23741), filed with the Commission
on March 26, 1999)
10.17 (a) -- Contract by and between Market Reps, Inc. and the
Registrant, dated June 26, 1998
(b) -- Letter Amendment to Contract by and between Market Reps,
Inc. and the Registrant, dated August 10, 1998
23.1 -- Consent of Kilpatrick Stockton LLP (included in Exhibit 5.1)
23.2 -- Consent of Arthur Andersen LLP
24.1 -- Power of Attorney (included on signature page)**
</TABLE>
- ---------------
** Previously filed.
+ Management contract or compensatory plan or arrangement required to be filed
as an exhibit.
(b) Financial Statement Schedules
Report of Independent Public Accountants as to Schedules
Schedule II -- Valuation and Qualifying Accounts
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes to provide the underwriters at
the closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit, or proceeding) is asserted by
such director, officer or controlling person in connection with the securities
being registered, the Registrant will, unless in the opinion of its counsel the
matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such
II-4
<PAGE> 77
indemnification by it is against public policy as expressed in the Securities
Act, and will be governed by the final adjudication of such issue.
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of Prospectus filed as part
of this Registration Statement in reliance upon Rule 430A and contained in
a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of Prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
II-5
<PAGE> 78
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 2 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized in the City of
Duluth, State of Georgia, on the 21st day of July 1999.
INNOTRAC CORPORATION
By: /s/ Scott D. Dorfman
------------------------------------
Scott D. Dorfman
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 2 to the Registration Statement has been signed by the following persons on
the 21st day of July 1999, in the capacities indicated.
<TABLE>
<CAPTION>
SIGNATURE POSITION
--------- --------
<C> <S>
* Chairman, President and Chief Executive
- ----------------------------------------------------- Officer (Principal Executive Officer)
Scott D. Dorfman
/s/ David L. Ellin Senior Vice President and Chief Operating
- ----------------------------------------------------- Officer and Director
David L. Ellin
* Senior Vice President-Business Development and
- ----------------------------------------------------- Director
Larry C. Hanger
* Senior Vice President, Secretary, and Chief
- ----------------------------------------------------- Financial Officer (Principal Financial and
John H. Nichols, III Accounting Officer)
* Director
- -----------------------------------------------------
Bruce V. Benator
* Director
- -----------------------------------------------------
Martin J. Blank
* Director
- -----------------------------------------------------
William H. Scott, III
*By: /s/ David L. Ellin
-----------------------------------------------
as attorney-in-fact
</TABLE>
II-6
<PAGE> 79
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 Registration
Statement 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
II-7
<PAGE> 80
INNOTRAC CORPORATION
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
BALANCE AT CHARGED TO BALANCE AT
BEGINNING CHARGED TO OTHER END OF
DESCRIPTION OF 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
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
</TABLE>
S-1
<PAGE> 81
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
<C> <C> <S>
1.1 -- Form of Underwriting, Agreement between the Representatives
of the Several Underwriters the Registrant, Scott D. Dorfman
and ITC Service Company
3.2 -- Amended and Restated By-laws of the Registrant
5.1 -- Opinion of Kilpatrick Stockton LLP
10.17 (a) -- Contract by and between Market Reps, Inc. and the
Registrant, dated June 26, 1998
(b) -- Letter Amendment to Contract by and between Market Reps,
Inc. and the Registrant, dated August 10, 1998
23.1 -- Consent of Kilpatrick Stockton LLP (included in Exhibit 5.1)
23.2 -- Consent of Arthur Andersen LLP
</TABLE>
<PAGE> 1
2,500,000 Common Shares
INNOTRAC CORPORATION
UNDERWRITING AGREEMENT
JULY ___, 1999
BEAR, STEARNS & CO. INC.
THE ROBINSON-HUMPHREY COMPANY, LLC
J.C. BRADFORD & CO.
as Representatives of the
several Underwriters named in
Schedule I attached hereto
c/o Bear, Stearns & Co. Inc.
245 Park Avenue
New York, N.Y. 10167
Ladies and Gentlemen:
Innotrac Corporation, a corporation organized and existing under the
laws of the State of Georgia (the "Company"), and the selling shareholders
listed on Schedule II hereto (the "Selling Shareholders"), severally propose,
subject to the terms and conditions stated herein, to issue and sell to the
several underwriters named in Schedule I hereto (the "Underwriters") an
aggregate of 2,500,000 shares (the "Firm Shares") of its common stock, par
value $.10 per share (the "Common Stock"). The Firm Shares consist of 2,100,000
shares to be issued and sold by the Company and 400,000 shares to be sold by
the Selling Shareholders. The Company and the Selling Shareholders also
propose, for the sole purpose of covering over-allotments in connection with
the sale of the Firm Shares, at the option of the Underwriters and subject to
the terms and conditions stated herein, to sell up to an additional 375,000
shares (the "Additional Shares") of Common Stock. The Firm Shares and any
Additional Shares purchased by the Underwriters are
<PAGE> 2
referred to herein as the "Shares." The Shares are more fully described in the
Registration Statement referred to below.
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Underwriters that:
(a) The Company has filed with the Securities and Exchange
Commission (the "Commission") a registration statement, and amendments
thereto, on Form S-1 (No. 333-79929), for the registration of the
Shares under the Securities Act of 1933, as amended (the "Act"). Such
registration statement, including the prospectus, financial statements
and schedules, exhibits and all other documents filed as a part
thereof, as amended at the time of effectiveness of the registration
statement, including any information deemed to be a part thereof as of
the time of effectiveness pursuant to paragraph (b) of Rule 430A or
Rule 434 of the Rules and Regulations of the Commission under the Act
(the "Regulations"), is herein called the "Registration Statement,"
and the prospectus, in the form first filed with the Commission
pursuant to Rule 424(b) of the Regulations, or filed as part of the
Registration Statement at the time of effectiveness if no Rule 424(b)
or Rule 434 filing is required, is herein called the "Prospectus." The
term "preliminary prospectus" as used herein means a preliminary
prospectus as described in Rule 430 of the Regulations.
(b) At the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations,
when any supplement to or amendment of the Prospectus is filed with
the Commission and at the Closing Date and the Additional Closing
Date, if any (as hereinafter respectively defined), the Registration
Statement and the Prospectus and any amendments thereof and
supplements thereto complied or will comply in all material respects
with the applicable provisions of the Act and the Regulations and do
not or will not contain an untrue statement of a material fact and do
not or will not omit to state any material fact required to be stated
therein or necessary in order to make the statements therein (i) in
the case of the Registration Statement, not misleading and (ii) in the
case of the Prospectus, in light of the circumstances under which they
were made, not misleading. When any related preliminary prospectus was
first filed with the Commission (whether filed as part of the
registration statement for the registration of the Shares or any
amendment thereto or pursuant to Rule 424(a) of the Regulations) and
when any amendment thereof or supplement thereto was first filed with
the Commission, such preliminary prospectus and any amendments thereof
and supplements thereto complied in all material respects with the
applicable provisions of the Act and the Regulations and did not
contain an untrue statement of a material fact and did not omit to
-2-
<PAGE> 3
state any material fact required to be stated therein or necessary in
order to make the statements therein in light of the circumstances
under which they were made not misleading. No representation and
warranty is made in this subsection (b), however, with respect to any
information contained in or omitted from the Registration Statement or
the Prospectus or any related preliminary prospectus or any amendment
thereof or supplement thereto in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through the Representatives as herein stated expressly for
use in connection with the preparation thereof. If Rule 434 is used,
the Company will comply with the requirements of Rule 434.
(c) Arthur Andersen LLP, who have certified the financial
statements and supporting schedules included in the Registration
Statement, are independent public accountants as required by the Act
and the Regulations.
(d) Subsequent to the respective dates as of which
information is given in the Registration Statement and the Prospectus,
except as disclosed in the Registration Statement and the Prospectus,
there has been no material adverse change or any development involving
a prospective material adverse change in the business, prospects,
properties, operations, condition (financial or other) or results of
operations of the Company, whether or not arising from transactions in
the ordinary course of business (the effect of each such change or
development being referred to as a "Material Adverse Effect"), and
since the date of the latest balance sheet presented in the
Registration Statement and the Prospectus, the Company has not
incurred or undertaken any liabilities or obligations, direct or
contingent, which are material to the Company, except for liabilities
or obligations which are disclosed in the Registration Statement and
the Prospectus.
(e) This Agreement and the transactions contemplated herein
have been duly and validly authorized by the Company and this
Agreement has been duly and validly executed and delivered by the
Company.
(f) The execution, delivery, and performance of this
Agreement and the consummation of the transactions contemplated hereby
do not (i) conflict with or result in a breach of any of the terms and
provisions of, or constitute a default (or an event which with notice
or lapse of time, or both, would constitute a default) under, or
result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to,
any agreement, instrument, franchise, license or permit to which the
Company is a party or by which it or its properties or assets may be
bound or (ii) violate or conflict with any provision of the articles
of incorporation or bylaws of the Company, or (iii) violate or
conflict with any judgment, decree, order, statute, rule or
-3-
<PAGE> 4
regulation of any court or any public, governmental or regulatory
agency or body having jurisdiction over the Company or any of its
properties or assets except, as to clauses (i) and (iii) above, for
such conflicts, violations, breaches, defaults, liens, charges or
encumbrances which, singly or in the aggregate, would not have a
Material Adverse Effect. No consent, approval, authorization, order,
registration, filing, qualification, license or permit of or with any
court or any public, governmental or regulatory agency or body having
jurisdiction over the Company or its properties or assets is required
for the execution, delivery and performance of this Agreement or the
consummation of the transactions contemplated hereby by the Company,
including the issuance, sale and delivery of the Shares to be issued,
sold and delivered by the Company hereunder, except the registration
under the Act of the Shares and such consents, approvals,
authorizations, orders, registrations, filings, qualifications,
licenses and permits as may be required under state securities or Blue
Sky laws in connection with the purchase and distribution of the
Shares by the Underwriters.
(g) All of the outstanding shares of Common Stock are duly
and validly authorized and issued, fully paid and nonassessable and
were not issued and are not now in violation of or subject to any
preemptive rights. The Shares, when issued, delivered and sold in
accordance with this Agreement, will be duly and validly issued and
outstanding, fully paid and nonassessable, and will not have been
issued in violation of or be subject to any preemptive rights. The
Company had, at March 31, 1999, an authorized and outstanding
capitalization as set forth in the Registration Statement and the
Prospectus. The Common Stock, the Firm Shares and the Additional
Shares conform in all material respects to the descriptions thereof
contained in the Registration Statement and the Prospectus. All offers
and sales of securities of the Company have been at all relevant times
duly registered under or exempt from the registration requirements of
the Act and were duly registered under or exempt from the registration
requirements of all applicable state securities or Blue Sky laws.
Except as set forth in the Prospectus and except for options issued
under the Company's stock option plan, the Company does not have
outstanding, and at the Closing Date and, if later, the Additional
Closing Date, will not have outstanding, any options to purchase, or
any rights or warrants to subscribe for, or any securities or
obligations convertible into, or any contracts or commitments to issue
or sell any shares of Common Stock or any such warrants, convertible
securities or obligations. The description of the Company's stock
option, stock bonus and other stock plans or arrangements, and the
options or other rights granted thereunder, set forth in the
Prospectus accurately and fairly presents the information required to
be shown with respect to such plans, arrangements, options and rights.
(h) The Company has been duly organized and is validly
existing as a corporation in good standing under the laws of the State
of Georgia. The Company is
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<PAGE> 5
duly qualified and in good standing as a foreign corporation in each
jurisdiction in which the character or location of its properties
(owned, leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures to be so
qualified or in good standing which will not, in the aggregate, have a
Material Adverse Effect. The Company has all requisite power and
authority, and all necessary consents, approvals, authorizations,
orders, registrations, qualifications, licenses and permits of and
from all public, regulatory or governmental agencies and bodies,
necessary to own, lease and operate its properties and conduct its
business as now being conducted and as described in the Registration
Statement and the Prospectus, except as would not result in a Material
Adverse Effect, and no such consent, approval, authorization, order,
registration, qualification, license or permit contains a material
restriction not adequately disclosed in the Registration Statement and
the Prospectus. The Company has not received any written notice of any
proceedings relating to the revocation or modification of any such
consent, approval, authorization, order, registration, qualification,
license or permit which, singly or in the aggregate, if the subject of
an unfavorable decision, would have a Material Adverse Effect.
(i) Except as described in the Prospectus, there is no
litigation or governmental proceeding to which the Company is a party
or to which any property of the Company is subject or which is pending
or, to the knowledge of the Company, threatened against the Company
which might have a Material Adverse Effect or which is required to be
disclosed in the Registration Statement and the Prospectus.
(j) The Company maintains a system of internal accounting
controls sufficient to assure that: (i) all material transactions are
executed in accordance with management's general or specific
authorization; (ii) transactions are recorded as necessary to permit
preparation of the Company's consolidated financial statements in
conformity in all material respects with generally accepted accounting
principles consistently applied and to maintain accountability for
assets; and (iii) assets are properly accounted for and safeguarded
against errors or loss from unauthorized use. Neither the Company,
nor, to the knowledge of the Company, any employee or agent of the
Company, has made any payment of funds of the Company or received or
retained any funds in violation of any law, rule or regulation, the
receipt or payment of which could have a Material Adverse Effect.
(k) There are no outstanding loans, advances (except normal
advances for business expenses in the ordinary course of business) or
guarantees of indebtedness by the Company to or for the benefit of any
of the officers or directors of the Company (who are listed on
Schedule III hereto) or any of the members of the families of any of
them, except as disclosed in the Registration Statement and the
Prospectus.
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<PAGE> 6
(l) Neither the Company nor any of its officers or directors
(who are listed on Schedule III hereto) has taken, nor will the
Company or, to the Company's knowledge, any of its officers or
directors (who are listed on Schedule III hereto), take, directly or
indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares.
(m) The financial statements, including the notes thereto,
and supporting schedules included in the Registration Statement and
the Prospectus present fairly the financial position of the Company as
of the dates indicated and the results of its operations for the
periods specified; except as otherwise stated in the Registration
Statement, said financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis; and the supporting schedules included in the Registration
Statement present fairly the information required to be stated
therein; and, except as disclosed therein, the pro forma financial
information included in the Registration Statement and the Prospectus
has been prepared in accordance with the Commission's rules and
guidelines with respect to pro forma financial statements, and the
assumptions used in the preparation thereof are, in the Company's
opinion, reasonable. The selected financial data for the Company set
forth in the Prospectus have been prepared on a basis consistent with
the financial statements of the Company. No other financial statements
of the Company or any other entity are required by the Act or the
Rules and Regulations to be included in the Registration Statement or
the Prospectus.
(n) The Company has good and marketable title to all
properties and assets described in the Registration Statement and
Prospectus as owned by it, free and clear of all liens, charges,
encumbrances or restrictions, except such as are described in the
Prospectus or are not material to the business of the Company. The
Company has valid, subsisting and enforceable leases for the
properties described in the Prospectus as leased by it (the "Leased
Properties") subject only to the rights of any mortgagee, lienholder,
or other person or entity which has an interest in the Leased
Properties that is or may become superior to the interest of the
Company or the landlord of such Leased Properties. The Company has no
notice or knowledge of any material claim of any sort which has been,
or may be, asserted by anyone adverse to the Company's rights as
lessee or sublessee under any lease or sublease described above, or
affecting or questioning the Company's rights to the continued
possession of the leased or subleased premises under any such lease or
sublease in conflict with the terms thereof. The Company owns or
leases all such properties as are necessary to its operations as now
conducted.
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<PAGE> 7
(o) The Company maintains insurance with insurers of
recognized financial responsibility against such losses and risks and
in such amounts as management believes is appropriate to the business
of the Company and all such policies are in full force and effect. The
Company has no reason to believe that it will not be able to renew its
existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to
continue its business at a cost that would not have a Material Adverse
Effect.
(p) Except as described in the Registration Statement and the
Prospectus, there is no factual basis for any action, suit or other
proceeding involving the Company or any of its material assets for any
failure of the Company to comply with any requirements of federal,
state or local regulation relating to air, water, solid waste
management, hazardous or toxic substances, or the protection of health
or the environment. To the best of the Company's knowledge, there has
not been a release of any "hazardous substances in a reportable
quantity," as those terms are defined in the Comprehensive
Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601
et seq. ("CERCLA"), by the Company on or at properties leased by the
Company. The Company has not received notice or request of information
under Section 104 of CERCLA or comparable state laws regarding an
investigation evaluating whether any remedial action is needed to
respond to a release or threatened release of any hazardous substance
at properties leased by the Company.
(q) All documents or contracts required to be filed as
exhibits to the Registration Statement to which the Company is a party
have been filed as exhibits to the Registration Statement and have
been duly authorized, executed and delivered by the Company,
constitute valid and binding agreements of the Company and are
enforceable against the Company in accordance with the terms thereof,
except where the lack of authorization, execution, delivery or
enforceability of any such contract would not have a Material Adverse
Effect.
(r) Except as described in the Prospectus, no holder of
securities of the Company has any rights to the registration of
securities of the Company because of the filing of the Registration
Statement or otherwise in connection with the sale of the Shares
contemplated hereby.
(s) The Company is not, and upon consummation of the
transactions contemplated hereby will not be, subject to registration
as an "investment company" under the Investment Company Act of 1940,
as amended.
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<PAGE> 8
(t) No labor dispute with the employees of the Company exists
or, to the Company's knowledge, is threatened or imminent that would
have a Material Adverse Effect.
(u) The Company owns or possesses, or can acquire on
reasonable terms, all material trademarks, service marks, trade names,
licenses, copyrights and proprietary or other confidential information
currently employed by it in connection with its business, and the
Company has not received any notice of infringement of any asserted
rights of any third party with respect to the foregoing which, singly
or in the aggregate, if the subject of an unfavorable decision, would
have a Material Adverse Effect.
(v) The Company has filed all foreign, federal, state and
local tax returns that are required to be filed or has requested
extensions thereof (except in any case in which the failure so to file
would not have a Material Adverse Effect) and has paid all taxes
required to be paid by it and any other assessment, fine or penalty
levied against it, to the extent that any of the foregoing is due and
payable, except for any such assessment, fine or penalty that is
currently being contested in good faith or as described in or
contemplated by the Prospectus, and except in any case in which the
failure so to pay would not have a Material Adverse Effect.
(w) The Company owns no shares of stock or any other equity
securities of any corporation and has no subsidiaries as defined by
Regulation S-X. The Company has no equity interest in any firm,
partnership, association or other entity, except as described in or
contemplated by the Prospectus.
(x) No event has occurred that will, with notice or the
passage of time or both, (i) conflict with or result in a breach of
any of the terms and provisions of, or constitute a default (or an
event which with notice or lapse of time, or both, would constitute a
default) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company
pursuant to any agreement, instrument, franchise, license or permit to
which the Company is a party or by which the Company or its properties
may be bound, except for such conflicts, breaches or defaults which
would not have a Material Adverse Effect or (ii) conflict with any
provision of the articles of incorporation or bylaws of the Company or
(iii) conflict with or violate any judgment, decree, order, statute,
rule or regulation of any court or any public, governmental or
regulatory agency or body having jurisdiction over the Company or any
of its properties or assets, except for such conflicts or violations
which would not have a Material Adverse Effect.
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<PAGE> 9
(y) The Shares have been approved for listing on the National
Association of Securities Dealers Automated Quotation National Market
System (the "Nasdaq National Market").
(z) The description of the Company's Year 2000 readiness set
forth under the heading "Year 2000 Compliance" in the "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" section of the Prospectus is accurate and complete in all
material respects.
(aa) Each certificate signed by any officer of the Company
and delivered to the Representatives or counsel for the Underwriters
shall be deemed to be a representation and warranty by the Company,
and not by such officer in an individual capacity, to each Underwriter
as to the matters covered thereby.
1A. Representations and Warranties of the Selling Shareholders. Each
Selling Shareholder, severally and not jointly, represents and warrants to the
Underwriters that:
(a) At the date hereof, such Selling Shareholder has, and at
the time of delivery thereof hereunder, such Selling Shareholder will
have (i) sole legal and beneficial ownership of the Shares to be sold
by such Selling Shareholder hereunder, free and clear of any claims,
liens, encumbrances or security interests and (ii) full legal right,
power and authority to sell, transfer and deliver the Shares to be
sold by such Selling Shareholder to the Underwriters hereunder and to
make the representations, warranties and agreements made by such
Selling Shareholder herein. Upon delivery of and payment for the
Shares to be sold by the Selling Shareholder hereunder, such Selling
Shareholder will deliver sole legal and beneficial ownership thereof,
free and clear of any claims, liens, encumbrances or security
interests.
(b) On the Closing Date and on the Additional Closing Date,
if any, all stock transfer and other taxes (other than income taxes)
which are required to be paid in connection with the sale and transfer
of the Shares to be sold by such Selling Shareholder to the several
Underwriters hereunder will have been fully paid or provided for and
all laws imposing such taxes will have been complied with in all
material respects.
(c) The execution, delivery, and performance of this
Agreement and the Custody Agreement (as hereinafter defined) and the
consummation of the transactions contemplated hereby and thereby do
not and will not, with notice or the passage of time or both, (i)
conflict with or result in a breach of any of the terms and provisions
of, or constitute a default (or an event which with notice or lapse of
time, or both, would constitute a default) under, or result in the
creation or imposition
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<PAGE> 10
of any lien, charge or encumbrance upon any property or assets of such
Selling Shareholder pursuant to, any agreement, instrument, franchise,
license or permit to which such Selling Shareholder is a party or by
which such Selling Shareholder's properties or assets may be bound or
(ii) violate or conflict with any provision of the articles of
incorporation or bylaws of such Selling Shareholder, as applicable, or
any judgment, decree, order, statute, rule or regulation of any court
or any public, governmental or regulatory agency or body having
jurisdiction over such Selling Shareholder or any of such properties
or assets. No consent, approval, authorization, order, registration,
filing, qualification, license or permit of or with any court or any
public, governmental or regulatory agency or body having jurisdiction
over such Selling Shareholder or any of such properties or assets is
required for the execution, delivery and performance of this Agreement
or the Custody Agreement by such Selling Shareholder or the
consummation of the transactions contemplated hereby and thereby,
including the sale and delivery of the Shares to be sold and delivered
by such Selling Shareholder hereunder, except the registration under
the Act of the Shares and such consents, approvals, authorizations,
orders, registrations, filings, qualifications, licenses and permits
as may be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares by the
Underwriters.
(d) The sale of the Shares proposed to be sold by the Selling
Shareholder is not prompted by such Selling Shareholder's knowledge of
any material nonpublic information regarding the Company.
(e) At the time of the effectiveness of the Registration
Statement or the effectiveness of any post-effective amendment to the
Registration Statement, when the Prospectus is first filed with the
Commission pursuant to Rule 424(b) or Rule 434 of the Regulations,
when any supplement to or amendment of the Prospectus is filed with
the Commission and at the Closing Date and the Additional Closing
Date, if any, all information with respect to such Selling Shareholder
contained in the Registration Statement and the Prospectus and any
amendments thereof and supplements thereto in reliance upon and in
conformity with information relating to such Selling Shareholder
furnished to the Company by or on behalf of such Selling Shareholder
expressly for use therein complied or will comply in all material
respects with the applicable provisions of the Act and the
Regulations. The Registration Statement and the Prospectus and any
amendments thereof and supplements thereto contain and will contain
all statements with respect to such Selling Shareholder required to be
stated therein in accordance with the Act and the Regulations, and do
not or will not contain an untrue statement of a material fact and do
not or will not omit to state any material fact regarding such Selling
Shareholder required to be stated therein or necessary in order to
make the statements therein (i) in the case of the Registration
Statement, not misleading and (ii) in the case of
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<PAGE> 11
the Prospectus, in light of the circumstances under which they were
made, not misleading. When any related preliminary prospectus was
first filed with the Commission (whether filed as part of the
registration statement for the registration of the Shares or any
amendment thereto or pursuant to Rule 424(a) of the Regulations) and
when any amendment thereof or supplement thereto was first filed with
the Commission, all information with respect to such Selling
Shareholder contained in such preliminary prospectus and any
amendments thereof and supplements thereto complied in all material
respects with the applicable provisions of the Act and the Regulations
and did not contain an untrue statement of a material fact regarding
such Selling Shareholder and did not omit to state any material fact
regarding such Selling Shareholder required to be stated therein or
necessary in order to make the statements therein in light of the
circumstances under which they were made not misleading.
(f) Other than as permitted by the Act and the Regulations,
such Selling Shareholder has not distributed and will not distribute
any preliminary prospectus, the Prospectus or any other offering
material in connection with the offering or sale of the Shares. Such
Selling Shareholder has not taken and will not take, directly or
indirectly, any action designed to cause or result in, or which
constitutes or which might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares.
(g) Such Selling Shareholder has full right, power and
authority to enter into this Agreement and the Custody Agreement. All
authorizations and consents necessary for the execution and delivery
by such Selling Shareholder of this Agreement and the Custody
Agreement and the performance of the transactions contemplated hereby
and thereby have been obtained. Each of this Agreement and the Custody
Agreement has been duly authorized, executed and delivered by or on
behalf of such Selling Shareholder and constitutes a valid and binding
agreement of such Selling Shareholder and is enforceable against such
Selling Shareholder in accordance with its terms, except, in the case
of enforceability, as limited by applicable bankruptcy, insolvency,
reorganization, moratorium or other laws now or hereafter in effect
relating to the availability of remedies and by general principles of
equity and except as rights to indemnity and contribution may be
limited by federal or state securities laws or the public policy
underlying such laws.
(h) Each Selling Shareholder has duly executed and delivered
in the form heretofore furnished to the Representatives a custody
agreement ("Custody Agreement") with Reliance Trust Company, Atlanta,
Georgia as the custodian ("Custodian").
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<PAGE> 12
(i) Each certificate signed by such Selling Shareholder and
delivered to the Representatives or counsel for the Underwriters shall
be deemed to be a representation and warranty by such Selling
Shareholder to each Underwriter as to the matters covered thereby.
2. Purchase, Sale and Delivery of the Shares.
(a) On the basis of the representations, warranties,
covenants and agreements herein contained, but subject to the terms
and conditions herein set forth, the Company agrees to sell to the
Underwriters 2,100,000 Firm Shares, each Selling Shareholder agrees to
sell to the Underwriters the number of Firm Shares set forth opposite
such Selling Shareholder's name in Schedule II hereto, and the
Underwriters, severally and not jointly, agree to purchase from the
Company and each of the Selling Shareholders, at a purchase price per
share of $__________, the number of Firm Shares set forth opposite the
respective names of the Underwriters in Schedule I hereto plus any
additional number of Shares which such Underwriter may become
obligated to purchase pursuant to the provisions of Section 9 hereof.
(b) Payment of the purchase price for, and delivery of
certificates for, the Firm Shares shall be made at the offices of
Troutman Sanders LLP ("Underwriters' Counsel"), Atlanta, Georgia, or
at such other place as shall be agreed upon by the Representatives and
the Company, at 10:00 A.M. on the third or fourth business day (as
permitted under Rule 15c6-1 under the Securities Exchange Act of 1934,
as amended (the "Exchange Act") (unless postponed in accordance with
the provisions of Section 9 hereof) following the date of the
effectiveness of the Registration Statement (or, if the Company has
elected to rely upon Rule 430A of the Regulations, the third or fourth
business day (as permitted under Rule 15c6-1 under the Exchange Act)
after the determination of the initial public offering price of the
Shares), or such other time not later than ten business days after
such date as shall be agreed upon by the Representatives and the
Company (such time and date of payment and delivery being herein
called the "Closing Date"). Payment shall be made to the Company and
each of the Selling Shareholders by wire transfer in same day funds,
against delivery to the Representatives for the respective accounts of
the Underwriters of certificates for the Firm Shares to be purchased
by them. Certificates for the Firm Shares shall be registered in such
name or names and in such authorized denominations as the
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<PAGE> 13
Representatives may request in writing at least two full business days
prior to the Closing Date. The Company and each of the Selling
Shareholders will permit the Representatives to examine and package
such certificates for delivery at least one full business day prior to
the Closing Date.
(c) In addition, the Company hereby grants to the
Underwriters the option to purchase up to 100,000 Additional Shares,
and each of the Selling Shareholders hereby grants to the Underwriters
the option to purchase up to the number of Additional Shares set forth
opposite such Selling Shareholder's name in Schedule II hereto, at the
same purchase price per share to be paid by the Underwriters to the
Company and the Selling Shareholders for the Firm Shares as set forth
in this Section 2, for the sole purpose of covering over-allotments in
the sale of Firm Shares by the Underwriters. This option may be
exercised at any time, in whole or in part, on or before the thirtieth
day following the date of the Prospectus, by written notice by the
Representatives to the Company. Such notice shall set forth the
aggregate number of Additional Shares as to which the option is being
exercised and the date and time, as reasonably determined by the
Representatives, when the Additional Shares are to be delivered (such
date and time being herein sometimes referred to as the "Additional
Closing Date"); provided, however, that the Additional Closing Date
shall not be earlier than the Closing Date or earlier than the second
full business day after the date on which the option shall have been
exercised nor later than the eighth full business day after the date
on which the option shall have been exercised (unless such time and
date are postponed in accordance with the provisions of Section 9
hereof). Certificates for the Additional Shares shall be registered in
such name or names and in such authorized denominations as the
Representatives may request in writing at least two full business days
prior to the Additional Closing Date. The Company and each of the
Selling Shareholders will permit the Representatives to examine and
package such certificates for delivery at least one full business day
prior to the Additional Closing Date.
The number of Additional Shares to be sold to each
Underwriter shall be the number which bears the same ratio to the
aggregate number of Additional Shares being purchased as the number of
Firm Shares set forth opposite the name of such Underwriter in
Schedule I hereto (or such number increased as set forth in Section 9
hereof) bears to 2,500,000, subject, however, to such adjustments to
eliminate any fractional shares as the Representatives in their sole
discretion shall make.
Payment for the Additional Shares shall be made by wire
transfer in same day funds, at the offices of Underwriters' Counsel,
or such other location as may be mutually acceptable, upon delivery of
the certificates for the Additional Shares to the Representatives for
the respective accounts of the Underwriters.
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<PAGE> 14
3. Offering. Upon the authorization by the Representatives of the
release of the Firm Shares, the Underwriters propose to offer the Shares for
sale to the public upon the terms set forth in the Prospectus.
4. Covenants of the Company and the Selling Shareholders. The Company
and the Selling Shareholders, severally and not jointly, covenant and agree
with the Underwriters that:
(a) If the Registration Statement has not yet been declared
effective, the Company will use its best efforts to cause the
Registration Statement and any amendments thereto to become effective
as promptly as possible, and if Rule 430A is used or the filing of the
Prospectus is otherwise required under Rule 424(b) or Rule 434, the
Company will file the Prospectus (properly completed if Rule 430A has
been used) pursuant to Rule 424(b) or Rule 434 within the prescribed
time period and will provide evidence satisfactory to the
Representatives of such timely filing. If the Company elects to rely
on Rule 434, the Company will prepare and file a term sheet that
complies with the requirements of Rule 434.
The Company will notify the Representatives immediately (and,
if requested by the Representatives, will confirm such notice in
writing) (i) when the Registration Statement and any amendments
thereto become effective, (ii) of any request by the Commission for
any amendment of or supplement to the Registration Statement or the
Prospectus or for any additional information, (iii) of the mailing or
the delivery to the Commission for filing of any amendment of or
supplement to the Registration Statement or the Prospectus, (iv) of
the issuance by the Commission of any stop order suspending the
effectiveness of the Registration Statement or any post-effective
amendment thereto or of the initiation, or the threatening, of any
proceedings therefor, (v) of the receipt of any comments from the
Commission, and (vi) of the receipt by the Company of any notification
with respect to the suspension of the qualification of the Shares for
sale in any jurisdiction or the initiation or threatening of any
proceeding for that purpose. If the Commission shall propose or enter
a stop order at any time, the Company will make every reasonable
effort to prevent the issuance of any such stop order and, if issued,
to obtain the lifting of such order as soon as possible. The Company
will not file any amendment to the Registration Statement or any
amendment of or supplement to the Prospectus (including the prospectus
required to be filed pursuant to Rule 424(b) or Rule 434) that differs
from the prospectus on file at the time of the effectiveness of the
Registration Statement before or after the effective date of the
Registration Statement to which the Representatives shall reasonably
object in writing after being timely furnished in advance a copy
thereof.
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<PAGE> 15
(b) If at any time when a prospectus relating to the Shares
is required to be delivered under the Act any event shall have
occurred as a result of which the Prospectus as then amended or
supplemented would, in the judgment of the Underwriters or the
Company, include an untrue statement of a material fact or omit to
state any material fact required to be stated therein or necessary to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, or if it shall be necessary at
any time to amend or supplement the Prospectus or Registration
Statement to comply with the Act or the Regulations, the Company will
notify the Representatives promptly and prepare and file with the
Commission an appropriate amendment or supplement (in form and
substance satisfactory to the Representatives) which will correct such
statement or omission and will use its best efforts to have any
amendment to the Registration Statement declared effective as soon as
possible.
(c) The Company will promptly deliver to the Representatives
three signed copies of the Registration Statement, including exhibits,
and all amendments thereto, and the Company will promptly deliver to
each of the Underwriters such number of copies of any preliminary
prospectus, the Prospectus, the Registration Statement, and all
amendments of and supplements to such documents, if any, as the
Representatives may reasonably request.
(d) The Company will endeavor in good faith, in cooperation
with the Representatives, at or prior to the time of effectiveness of
the Registration Statement, to qualify the Shares for offering and
sale under the securities laws relating to the offering or sale of the
Shares of such jurisdictions as the Representatives may designate and
to maintain such qualification in effect for so long as required for
the distribution thereof; except that in no event shall the Company be
obligated in connection therewith to qualify as a foreign corporation
or to execute a general consent to service of process.
(e) The Company will make generally available (within the
meaning of Section 11(a) of the Act) to its security holders and to
the Representatives as soon as practicable, but not later than 45 days
after the end of its fiscal quarter in which the first anniversary
date of the effective date of the Registration Statement occurs, an
earning statement (in form complying with the provisions of Rule 158
of the Regulations) covering a period of at least twelve consecutive
months beginning after the effective date of the Registration
Statement.
(f) During the period of 90 days from the date of the
Prospectus, the Company and the Selling Shareholders will not, without
the prior written consent of Bear, Stearns & Co. Inc. issue, sell,
offer or agree to sell, grant any option for the sale of, or otherwise
dispose of, directly or indirectly, any Common Stock (or any
securities
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<PAGE> 16
convertible into, exercisable for or exchangeable for Common Stock),
and the Company will obtain the undertaking of each of its officers,
directors, and such shareholders as have been heretofore designated by
the Representatives and listed on Schedule III hereto not to engage in
any of the aforementioned transactions on their own behalf, other than
the Company's and the Selling Shareholders' sale of Shares hereunder,
and (i) the issuance of Common Stock by the Company upon the exercise
of options granted pursuant to the Company's Stock Option and
Incentive Award Plan (the "Plan") that are outstanding as of the date
of this Underwriting Agreement; (ii) the grant by the Company of stock
options pursuant to the Plan, consistent with past practices, so long
as such stock options do not vest and are not exercisable during the
aforementioned period of 90 days; and (iii) bona fide gifts made in
accordance with and subject to the further provisions of Section 6(h)
hereof.
(g) During a period of three years from the effective date of
the Registration Statement, the Company will furnish to the
Representatives copies of (i) all reports to its shareholders; and
(ii) all reports, financial statements and proxy or information
statements filed by the Company with the Commission or any national
securities exchange.
(h) The Company will apply the proceeds from the sale of the
Shares as set forth under "Use of Proceeds" in the Prospectus.
(i) The Company will use its best efforts to cause the Shares
to be listed for inclusion in the Nasdaq National Market.
(j) Neither the Company, nor any of its officers or
directors, nor the Selling Shareholders, will take, directly or
indirectly, any action designed to cause or result in, or which
constitutes or might reasonably be expected to constitute, the
stabilization or manipulation of the price of the shares of Common
Stock to facilitate the sale or resale of the Shares.
(k) The Company, during the period when the Prospectus is
required to be delivered under the Act or the Exchange Act, will file
all documents required to be filed with the Commission pursuant to
Sections 13, 14 or 15 of the Exchange Act within the time periods
required by the Exchange Act and the rules and regulations thereunder.
(l) As promptly as practicable after the Selling Shareholders
are advised thereof, the Selling Shareholders will advise the
Representatives and, if requested by the Representatives, confirm such
advice in writing, (i) of receipt by the Selling Shareholders, or by
any representative of the Selling Shareholders, of any communication
from the Commission relating to the Registration Statement, the
Prospectus or any
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<PAGE> 17
preliminary prospectus, or any notice or order from the Commission
relating to the Company or the Selling Shareholders in connection with
the transactions contemplated hereby and (ii) of the happening of any
event, at any time prior to the date on which the distribution of the
Shares as contemplated herein and in the Prospectus has been
completed, that in the judgment of the Selling Shareholders makes any
statement made in the Registration Statement untrue or that requires
the making of any changes in the Registration Statement or the
Prospectus in order to make the statements therein, in light of the
circumstances in which they were made, not misleading.
(m) The Selling Shareholders will deliver to the Underwriters
prior to or on the Closing Date properly completed and executed United
States Treasury Department Forms W-9 (or other applicable form or
statement specified by the Treasury Department regulations in lieu
thereof).
5. Payment of Expenses. Whether or not the transactions contemplated
in this Agreement are consummated or this Agreement is terminated, the Company
hereby agrees to pay all costs and expenses incident to the performance of the
obligations of the Company and the Selling Shareholders hereunder, including
those in connection with (i) preparing, printing, duplicating, filing and
distributing the Registration Statement, as originally filed and all amendments
thereof (including all exhibits thereto), any preliminary prospectus, the
Prospectus and any amendments or supplements thereto (including, without
limitation, fees and expenses of the Company's and the Selling Shareholders'
accountants and counsel), reasonable expenses associated with the underwriting
documents (including this Agreement, the Agreement Among Underwriters, and the
Selling Agreement and all other documents related to the public offering of the
Shares (including those supplied to the Underwriters in quantities as
hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to
the Underwriters, including any transfer or other taxes payable thereon, (iii)
the qualification of the Shares under state or foreign securities or Blue Sky
laws, including the costs of printing and mailing a "Blue Sky Survey" and the
reasonable fees of counsel for the Underwriters and such counsel's
disbursements in relation thereto, (iv) listing of the Shares on the Nasdaq
Stock Market's National Market, (v) filing fees of the Commission and the
National Association of Securities Dealers, Inc., (vi) the cost of printing
certificates representing the Shares, and (vii) the cost and charges of any
transfer agent or registrar.
6. Conditions of Underwriters' Obligations. The obligations of the
Underwriters to purchase and pay for the Firm Shares and the Additional Shares,
as provided herein, shall be subject to the accuracy of the representations and
warranties of the Company and the Selling Shareholders herein contained, as of
the date hereof and as of the Closing Date (for purposes of this Section 6,
"Closing Date" shall refer to the Closing Date for the Firm Shares and any
Additional Closing Date, if different, for the Additional Shares), to the
absence from any
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<PAGE> 18
certificates, opinions, written statements or letters furnished to the
Representatives or to Underwriters' Counsel pursuant to this Section 6 of any
misstatement or omission, to the performance by the Company and the Selling
Shareholders of their respective obligations hereunder, and to the following
additional conditions:
(a) The Registration Statement shall have become effective
and all necessary foreign regulatory or stock exchange approval shall
have been received not later than 5:30 P.M., New York time, on the
date of this Agreement, or at such later time and date as shall have
been consented to in writing by the Representatives; if the Company
shall have elected to rely upon Rule 430A or Rule 434 of the
Regulations, the Prospectus shall have been filed with the Commission
in a timely fashion in accordance with Section 4(a) hereof; and, at or
prior to the Closing Date no stop order suspending the effectiveness
of the Registration Statement or any post-effective amendment thereof
shall have been issued and no proceedings therefor shall have been
initiated or threatened by the Commission.
(b) At the Closing Date the Representatives shall have
received the opinion of Kilpatrick Stockton LLP, counsel for the
Company and for Scott D. Dorfman (a Selling Shareholder listed on
Schedule II hereto), dated the Closing Date, addressed to the
Underwriters and in form and substance satisfactory to Underwriters'
Counsel, to the effect that:
(i) The Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Georgia. The Company is duly qualified and in good
standing as a foreign corporation in each jurisdiction in
which the character or location of its properties (owned,
leased or licensed) or the nature or conduct of its business
makes such qualification necessary, except for those failures
to be so qualified or in good standing which will not in the
aggregate have a Material Adverse Effect on the Company. The
Company has all requisite corporate authority to own, lease
and license its respective properties and conduct its
business as now being conducted and as described in the
Registration Statement and the Prospectus.
(ii) The authorized capital stock of the Company is
as set forth in the Registration Statement and the Prospectus
under the caption "Capitalization." All of the outstanding
shares of Common Stock are duly and validly authorized and
validly issued, fully paid and nonassessable and were not
issued in violation of, or subject to, any preemptive rights
arising by operation of law or under the Company's articles
of incorporation or bylaws or, to such counsel's knowledge,
any other contractual or similar rights. The Shares to be
delivered on the Closing
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<PAGE> 19
Date have been duly and validly authorized and, when issued
and delivered by the Company or the Selling Shareholders in
accordance with this Agreement, will be validly issued, fully
paid and nonassessable and will not have been issued in
violation of, or subject to, any preemptive rights arising by
operation of law or under the Company's articles of
incorporation or bylaws or, to such counsel's knowledge, any
other contractual or similar rights. The Common Stock, the
Firm Shares and the Additional Shares conform to the
description thereof contained in the Registration Statement
and the Prospectus.
(iii) The Common Stock currently outstanding is
listed, and the Shares to be sold under this Agreement to the
Underwriters are duly authorized for listing, on the Nasdaq
National Market.
(iv) Execution, delivery and performance by the
Company of this Agreement have been duly authorized by all
necessary corporate action on behalf of the Company, and such
counsel shall confirm to the Underwriters that the Agreement
has been duly executed and delivered on behalf of the
Company.
(v) There is no litigation or governmental or other
action, suit, proceeding or investigation before any court or
before or by any regulatory or governmental agency or body
pending or threatened against, or involving the properties or
business of, the Company which is required to be disclosed in
the Registration Statement and the Prospectus which is not so
disclosed therein (it being understood that such opinion is
limited to those matters handled on behalf of the Company by
such counsel and those matters identified and listed on an
officer's certificate provided to such counsel and furnished
with the opinion of such counsel).
(vi) The execution, delivery, and performance of
this Agreement and the consummation of the transactions
contemplated hereby by the Company (i) do not and will not,
with notice or the passage of time or both, conflict with or
result in the breach of any of the terms and provisions of,
constitute a default (or an event which, with notice or lapse
of time or both, would constitute a default) under, or result
in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company
pursuant to any agreement, instrument, franchise, license or
permit (known to such counsel) to which the Company is a
party or by which it or any of its properties or assets may
be subject and (ii) do not and will not, with notice or the
passage of time or both, violate or conflict with (A) any
provision of the articles of incorporation or bylaws of the
Company, (B) any of the Company's existing obligations under
any judgment,
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<PAGE> 20
decree or order of any court or any governmental or
regulatory agency or body having jurisdiction over the
Company or any of its properties or assets, or (C) any
statute, rule, regulation or other law which is known to such
counsel to be applicable to the Company where (as to clauses
(B) and (C)) such violation would reasonably be expected to
have a material adverse effect on the validity, performance
or enforceability of any of the terms of this Agreement
applicable to the Company. No consent, approval,
authorization, order, registration, filing, qualification,
license or permit of or with any court or any public,
governmental or regulatory agency or body having jurisdiction
over the Company or of any of its properties or assets is
required for the execution, delivery and performance of this
Agreement by the Company or the consummation of the
transactions contemplated hereby, except for (1) such as may
be required under state securities or Blue Sky laws in
connection with the purchase and distribution of the Shares
by the Underwriters (as to which such counsel need express no
opinion) and (2) such as may have been obtained under the Act
and the Regulations.
(vii) The Registration Statement and the Prospectus
and any amendments thereof or supplements thereto (other than
the financial statements and schedules and other financial
data included or incorporated by reference therein, as to
which no opinion need be rendered) comply as to form in all
material respects with the requirements of the Act and the
Regulations.
(viii) Based solely on telephone conversations
between such counsel and the Staff, the Registration
Statement has become effective under the Act, and, to the
best knowledge of such counsel, no stop order suspending the
effectiveness of the Registration Statement or any
post-effective amendment thereof has been issued under the
Act and no proceedings therefor have been initiated or
threatened by the Commission under the Act. All filings
required by Rule 424(b) of the Regulations have been made.
(ix) The statements made in the Registration
Statement and the Prospectus under the captions "Dividend
Policy," "Capitalization" and "Description of Capital Stock,"
to the extent that they constitute summaries of documents
referred to therein or matters of law or legal conclusions,
are accurate summaries in all material respects and fairly
present the information disclosed therein.
(x) The Company is not an "investment company" or a
company "controlled" by an "investment company" within the
meaning of the Investment Company Act of 1940, as amended.
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<PAGE> 21
(xi) Such counsel shall confirm to the Underwriters
that this Agreement and the Custody Agreement have been duly
executed and delivered by Scott D. Dorfman. Each constitutes a
valid and binding obligation of Scott D. Dorfman and, except
for the indemnification provisions thereof, as to which such
counsel need express no opinion, the Custody Agreement is
enforceable against Scott D. Dorfman in accordance with its
terms.
(xii) The execution, delivery, and performance of
this Agreement and the Custody Agreement by Scott D. Dorfman
(i) do not and will not, with notice or the passage of time or
both, result in a breach of any of the terms and provisions
of, constitute a default (or an event which, with notice or
the passage of time or both, would constitute a default)
under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of Scott D.
Dorfman pursuant to any agreement, instrument, franchise,
license or permit to which Scott D. Dorfman is a party or by
which any of his properties or assets may be bound, where such
default or breach would reasonably be expected to have a
material adverse effect on the ability of Scott D. Dorfman to
perform his obligations under the Agreement or to impose any
liability upon any one or more of the Underwriters and (ii) do
not and will not, with notice or the passage of time or both,
violate (A) any of Scott D. Dorfman's existing obligations
under any judgment, decree or order of any court or any
governmental or regulatory agency or body having jurisdiction
over Scott D. Dorfman or any of his properties or assets, or
(B) any statute, rule, regulation or other law which is known
to such counsel to be applicable to Scott D. Dorfman where
such violation would reasonably be expected to have a material
adverse effect on the validity, performance or enforceability
of any of the terms of this Agreement or the Custody
Agreement applicable to Scott D. Dorfman. No consent,
approval, authorization, order, registration, filing,
qualification, license or permit of or with any court or any
governmental or regulatory agency or body having jurisdiction
over Scott D. Dorfman or any of his properties or assets is
legally required for the execution, delivery and performance
of this Agreement or the Custody Agreement by Scott D.
Dorfman, except for (1) such as may be required under state
securities or Blue Sky laws in connection with the purchase
and distribution of the Shares by the Underwriters (as to
which such counsel need express no opinion), and (2) such as
may be required under the Act and the Regulations.
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<PAGE> 22
(xiii) Scott D. Dorfman has good and valid title to
all of the Shares to be sold by him pursuant to this Agreement
and owns such Shares free of all restrictions on transfer,
liens, encumbrances, security interests, equities and claims
whatsoever other than pursuant to the Custody Agreement and
the Underwriting Agreement and other than any such restriction
on transfer, lien, encumbrance, equity or claim created by an
Underwriter or resulting from any actions taken by an
Underwriter. Upon delivery of, and payment for, the Shares to
be sold by Scott D. Dorfman pursuant to this Agreement, Scott
D. Dorfman will deliver sole legal and beneficial ownership
thereof, free and clear of any claims, liens, encumbrances or
security interests. In rendering such opinion, such counsel
may assume that the Underwriters are purchasing such Shares in
good faith, for value and without notice of any defect in
title of any, or adverse claims against any, of the Shares
being purchased from Scott D. Dorfman.
In addition, such opinion shall also contain a statement that
such counsel has participated in conferences with officers and
representatives of the Company, representatives of the independent
public accountants for the Company and representatives of the
Underwriters at which the contents of the Registration Statement and
the Prospectus and related matters were discussed, and no facts have
come to the attention of such counsel that cause such counsel to
believe that either the Registration Statement at the time it became
effective (including the information deemed to be part of the
Registration Statement at the time of effectiveness pursuant to Rule
430A(b) or Rule 434, if applicable), or any amendment thereof made
prior to the Closing Date as of the date of such amendment, contained
an untrue statement of a material fact or omitted to state any
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus as of its
date (or any amendment thereof or supplement thereto made prior to the
Closing Date as of the date of such amendment or supplement) and as of
the Closing Date contained or contains an untrue statement of a
material fact or omitted or omits to state any material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading
(it being understood that in each case such counsel need express no
belief or opinion with respect to the financial statements, schedules
and other financial data included or incorporated by reference
therein).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws other than the laws of the
United States and jurisdictions in which they are admitted, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to Underwriters' Counsel) of other counsel
reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws; and (B) as to matters of fact, to
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<PAGE> 23
the extent they deem proper, on certificates of responsible officers
of the Company and certificates or other written statements of
officers of departments of various jurisdictions having custody of
documents respecting the corporate existence or good standing of the
Company, provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel. The opinion of such
counsel for the Company and for Scott D. Dorfman shall state that the
opinion of any such other counsel is in form satisfactory to such
counsel and, in their opinion, you and they are justified in relying
thereon.
(c) At the Closing Date, the Representatives shall have
received the opinion of Kimberley E. Thompson, Esq., General Counsel
of ITC Service Company (a Selling Shareholder listed on Schedule II
hereto), dated the Closing Date, addressed to the Underwriters and in
form and substance satisfactory to Underwriters' Counsel, to the
effect that:
(i) ITC Service Company has been duly organized and
is validly existing as a corporation in good standing under
the laws of its jurisdiction of incorporation. ITC Service
Company has the requisite corporate power and authority to
enter into this Agreement and the Custody Agreement and to
sell, assign, transfer, and deliver the Shares to be sold by
it thereunder in the manner provided therein.
(ii) Such counsel shall confirm to the Underwriters
that this Agreement and the Custody Agreement have been duly
authorized, executed and delivered by ITC Service Company.
Each constitutes a valid and binding obligation of ITC Service
Company and, except for the indemnification provisions
thereof, as to which such counsel need express no opinion, the
Custody Agreement is enforceable against ITC Service Company
in accordance with its terms.
(iii) The execution, delivery, and performance of
this Agreement and the Custody Agreement by ITC Service
Company (i) do not and will not, with notice or the passage of
time or both, result in a breach of any of the terms and
provisions of, constitute a default (or an event which, with
notice or the passage of time or both, would constitute a
default) under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of ITC
Service Company pursuant to any agreement, instrument,
franchise, license or permit to which ITC Service Company is a
party or by which any of its properties or assets may be
bound, where such default or breach would reasonably be
expected to have a material adverse effect on the ability of
ITC Service Company to perform its obligations under the
Agreement
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<PAGE> 24
or to impose any liability upon any one or more of the
Underwriters and (ii) do not and will not, with notice or the
passage of time or both, violate (A) any provision of the
articles of incorporation or bylaws of ITC Service Company or
any of ITC Service Company's existing obligations under any
judgment, decree or order of any court or any governmental or
regulatory agency or body having jurisdiction over ITC Service
Company or any of its properties or assets, or (B) any
statute, rule, regulation or other law which is known to such
counsel to be applicable to ITC Service Company where such
violation would reasonably be expected to have a material
adverse effect on the validity, performance or enforceability
of any of the terms of this Agreement or the Custody Agreement
applicable to ITC Service Company. No consent, approval,
authorization, order, registration, filing, qualification,
license or permit of or with any court or any governmental or
regulatory agency or body having jurisdiction over ITC Service
Company or any of his or its properties or assets is legally
required for the execution, delivery and performance of this
Agreement or the Custody Agreement by ITC Service Company,
except for (1) such as may be required under state securities
or Blue Sky laws in connection with the purchase and
distribution of the Shares by the Underwriters (as to which
such counsel need express no opinion), (2) such as may be
required under the Act and the Regulations, and (3) such as
may be required by the NASD.
(iv) ITC Service Company has good and valid title to
all of the Shares to be sold by ITC Service Company pursuant
to this Agreement and owns such Shares free of all
restrictions on transfer, liens, encumbrances, security
interests, equities and claims whatsoever other than pursuant
to the Custody Agreement and the Underwriting Agreement and
other than any such restriction on transfer, lien,
encumbrance, equity or claim created by an Underwriter or
resulting from any actions taken by an Underwriter. Upon
delivery of, and payment for, the Shares to be sold by ITC
Service Company pursuant to this Agreement, ITC Service
Company will deliver good and valid title thereto, free and
clear of any claims, liens, encumbrances or security
interests. In rendering such opinion, such counsel may assume
that the Underwriters are purchasing such Shares in good
faith, for value and without notice of any defect in title of
any, or adverse claims against any, of the Shares being
purchased from ITC Service Company.
In rendering such opinion, such counsel may also
rely (A) as to matters involving the application of laws
other than the laws of the United States and jurisdictions in
which they are admitted, to the extent such counsel deems
proper and to the extent specified in such opinion, if at
all, upon an opinion or opinions
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<PAGE> 25
(in form and substance reasonably satisfactory to
Underwriters' Counsel) of other counsel reasonably acceptable
to Underwriters' Counsel, familiar with the applicable laws;
and (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of ITC
Service Company and certificates or other written statements
of officers of departments of various jurisdictions having
custody of documents respecting the corporate existence or
good standing of ITC Service Company and its subsidiaries,
provided that copies of any such statements or certificates
shall be delivered to Underwriters' Counsel. The opinion of
such counsel for ITC Service Company shall state that the
opinion of any such other counsel is in form satisfactory to
such counsel and, in their opinion, you and they are
justified in relying thereon.
(d) All proceedings taken in connection with the sale of the
Firm Shares and the Additional Shares as herein contemplated shall be
satisfactory in form and substance to the Representatives and to
Underwriters' Counsel, and the Underwriters shall have received from
said Underwriters' Counsel a favorable opinion, dated as of the
Closing Date with respect to the issuance and sale of the Shares, the
Registration Statement and the Prospectus and such other related
matters as the Representatives may reasonably require, and the Company
and the Selling Shareholders shall have furnished to Underwriters'
Counsel such documents as they request for the purpose of enabling
them to pass upon such matters.
(e) (i) At the Closing Date, the Representatives shall have
received a certificate signed on behalf of the Company by the Chief
Executive Officer and Chief Financial Officer of the Company, dated
the Closing Date to the effect that (A) the condition set forth in
subsection (a) of this Section 6 has been satisfied, (B) as of the
date hereof and as of the Closing Date the representations and
warranties of the Company set forth in Section 1 hereof are accurate,
(C) as of the Closing Date, the obligations of the Company to be
performed hereunder on or prior thereto have been duly performed, and
(D) subsequent to the respective dates as of which information is
given in the Registration Statement and the Prospectus, the Company
has not sustained any material loss or interference with its business
or properties from fire, flood, hurricane, accident or other calamity,
whether or not covered by insurance, or from any labor dispute or any
legal or governmental proceeding, and there has not been any change,
or any development involving a change, which had or will have a
Material Adverse Effect, except in each case as described in or
contemplated by the Prospectus.
(ii) At the Closing Date, the Representatives shall
have received a certificate of the Selling Shareholders dated the
Closing Date to the effect that (i) as of the date hereof and as of
the Closing Date the representations and warranties of such
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<PAGE> 26
Selling Shareholders set forth in Section 1A above are accurate and
(ii) as of the Closing Date, the obligations of such Selling
Shareholders to be performed hereunder on or prior thereto have been
duly performed.
(f) At the time this Agreement is executed and at the Closing
Date, the Representatives shall have received a letter from Arthur
Andersen LLP, independent public accountants for the Company, dated,
respectively, as of the date of this Agreement and as of the Closing
Date, addressed to the Underwriters and in form and substance
satisfactory to the Representatives, to the effect that:
(i) they are independent certified public
accountants with respect to the Company within the meaning of
the Act and the Regulations and stating that the answer to
Item 10 of the Registration Statement is correct insofar as
it relates to them;
(ii) stating that, in their opinion, the financial
statements and schedules of the Company included in the
Registration Statement and the Prospectus and covered by
their opinion therein comply as to form in all material
respects with the applicable accounting requirements of the
Act and the applicable published rules and regulations of the
Commission thereunder;
(iii) on the basis of procedures consisting of a
reading of the latest available unaudited interim
consolidated financial statements of the Company, a reading
of the minutes of meetings and consents of the shareholders
and board of directors of the Company and the committees of
such board subsequent to December 31, 1998, inquiries of
officers and other employees of the Company who have
responsibility for financial and accounting matters of the
Company with respect to transactions and events subsequent to
December 31, 1998 and other specified procedures and
inquiries to a date not more than five days prior to the date
of such letter, nothing has come to their attention that
would cause them to believe that: (A) the unaudited
consolidated financial statements and schedules of the
Company presented in the Registration Statement and the
Prospectus do not comply as to form in all material respects
with the applicable accounting requirements of the Act, and,
if applicable, the Exchange Act and the applicable published
rules and regulations of the Commission thereunder or that
such unaudited consolidated financial statements are not
fairly presented in conformity with generally accepted
accounting principles applied on a basis substantially
consistent with that of the audited consolidated financial
statements included in the Registration Statement and the
Prospectus; (B) with respect to the period subsequent to
March 31, 1999 there were, as of the date of the most recent
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<PAGE> 27
available monthly consolidated financial statements of the
Company, if any, and as of a specified date not more than
five days prior to the date of such letter, any changes in
the capital stock or other debt or indebtedness of the
Company or any decrease in the total assets or shareholders'
equity of the Company, in each case as compared with the
amounts shown in the most recent balance sheet presented in
the Registration Statement and the Prospectus, except for
changes or decreases which the Registration Statement and the
Prospectus disclose have occurred or may occur or which are
set forth in such letter; or (C) that during the period from
April 1, 1999 to the date of the most recent available
monthly consolidated financial statements of the Company, if
any, and to a specified date not more than five days prior to
the date of such letter, there was any decrease, as compared
with the corresponding period in the prior fiscal year, in
total revenues, or total or per share net income, except for
decreases which the Registration Statement and the Prospectus
disclose have occurred or may occur or which are set forth in
such letter;
(iv) nothing has come to their attention that would
cause them to believe that the pro forma financial
information included in the Registration Statement does not
comply in all material respects with the applicable
accounting requirements of Rule 11-02 of Regulation S-X or
that the pro forma adjustments have not been properly applied
to the historical amounts in the compilation of such
financial information; and
(v) stating that they have compared specific dollar
amounts, numbers of shares, percentages of revenues and
earnings, and other financial information pertaining to the
Company set forth in the Registration Statement and the
Prospectus, which have been specified by the Representatives
prior to the date of this Agreement, to the extent that such
amounts, numbers, percentages, and information may be derived
from the general accounting and financial records of the
Company or from schedules furnished by the Company, and
excluding any questions requiring an interpretation by legal
counsel, with the results obtained from the application of
specified readings, inquiries, and other appropriate
procedures specified by the Representatives set forth in such
letter, and found them to be in agreement.
(g) Prior to the Closing Date, the Company and the Selling
Shareholders shall have furnished to the Representatives such further
information, certificates and documents as the Representatives may
reasonably request.
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<PAGE> 28
(h) The Representatives shall have received from the
Company's directors, officers and shareholders as have been heretofore
designated by the Representatives and listed on Schedule III hereto an
agreement to the effect that such person will not, directly or
indirectly, without the Representatives' prior written consent, offer,
sell, offer or agree to sell, grant any option to purchase or
otherwise dispose (or announce any offer, sale, grant of an option to
purchase or other disposition) of any shares of Common Stock (or any
securities convertible into, exercisable for or exchangeable or
exercisable for shares of Common Stock) for a period of 90 days after
the date of the Prospectus, other than the Company's and the Selling
Shareholders' sale of Shares hereunder and other than transfers of
securities by bona fide gift, provided that any such transferee shall
have agreed in writing to be bound by the restrictions set forth in
such agreement and shall have certified to Bear, Stearns & Co. Inc.
that such transferee has been in compliance with such restrictions
from the original date of this Agreement.
(i) At the Closing Date, the Shares shall have been approved
for listing on the Nasdaq National Market.
If any of the conditions specified in this Section 6 shall not have
been fulfilled when and as required by this Agreement, or if any of the
certificates, opinions, written statements or letters furnished to the
Representatives or to Underwriters' Counsel pursuant to this Section 6 shall
not be in all material respects reasonably satisfactory in form and substance
to the Representatives and to Underwriters' Counsel, all obligations of the
Underwriters hereunder may be canceled by the Representatives at, or at any
time prior to, the Closing Date and the obligations of the Underwriters to
purchase the Additional Shares may be canceled by the Representatives at, or at
any time prior to, the Additional Closing Date. Notice of such cancellation
shall be given to the Company and the Selling Shareholders in writing, or by
telephone, telex or telegraph, confirmed in writing.
7. Indemnification.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act, against any and all losses, liabilities, claims, damages
and expenses whatsoever as incurred (including but not limited to
attorneys' fees and any and all expenses whatsoever incurred in
investigating, preparing or defending against any litigation,
commenced or threatened, or any claim whatsoever, and any and all
amounts paid in settlement of any claim or litigation), joint or
several, to which they or any of them may become subject under the
Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon:
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<PAGE> 29
(i) any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for
the registration of the Shares under the Act, as originally
filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or
(ii) the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, or
(iii) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or
referred to in any losses, liabilities, claims, damages or
expenses arising out of or based upon matters covered by
clause (i) and (ii) above (provided that the Company shall not
be liable under this clause (iii) to the extent it is finally
judicially determined in a court of competent jurisdiction
that such losses, liabilities, claims, damages or expenses
resulted directly from any such acts or failures to act
undertaken or omitted to be taken by such Underwriter through
its gross negligence or willful misconduct);
provided, however, that the Company will not be liable in any such case to the
extent but only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or alleged
untrue statement or omission or alleged omission made in the Registration
Statement, any preliminary prospectus or the Prospectus in reliance upon and in
conformity with written information furnished to the Company by or on behalf of
any Underwriter through the Representatives expressly for use in the
Registration Statement, any preliminary prospectus or the Prospectus; and
provided, further, that this indemnity agreement with respect to any preliminary
prospectus shall not inure to the benefit of any Underwriter from whom the
person asserting any such losses, liabilities, claims, damages or expenses
purchased Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any such amendments or supplements thereto) was not sent or given by or on
behalf of such Underwriter to such person, if such is required by law, at or
prior to the written confirmation of the sale of such Shares to such person and
if the Prospectus (as so amended or supplemented) would have corrected the
defect giving rise to such loss, liability, claim, damage or expense. This
indemnity agreement will be in addition to, and shall not in any way impair or
otherwise limit, any liability which the Company may otherwise have, including
but not limited to liabilities under this Agreement and under applicable
securities laws.
-29-
<PAGE> 30
(b) ITC Service Company, in its capacity as a Selling
Shareholder, agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any
and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any such
claim or litigation), joint or several, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for
the registration of the Shares under the Act, as originally
filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or
(ii) the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading, or
(iii) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or
referred to in any losses, liabilities, claims, damages or
expenses arising out of or based upon matters covered by
clause (i) and (ii) above (provided that ITC Service Company
shall not be liable under this clause (iii) to the extent it
is finally judicially determined in a court of competent
jurisdiction that such losses, liabilities, claims, damages or
expenses resulted directly from any such acts or failures to
act undertaken or omitted to be taken by such Underwriter
through its gross negligence or willful misconduct);
provided, however, that ITC Service Company in each case will be liable
only to the extent that any such loss, liability, claim, damage or
expense arises out of or is based upon any such untrue statement or
alleged untrue statement or omission or alleged omission made therein
in reliance upon and in conformity with written information furnished
to the Company by or on behalf of ITC Service Company expressly for use
in the Registration Statement, any preliminary prospectus or the
Prospectus; and provided
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<PAGE> 31
further, however, that in no case shall ITC Service Company, in its
capacity as a Selling Shareholder, be liable or responsible for
indemnification pursuant to this Section 7(b) for any amount in excess
of an amount equal to the net proceeds received by ITC Service Company
from the sale of its Shares pursuant to this Agreement. This indemnity
agreement will be in addition to, and shall not in any way impair or
otherwise limit, any liability which ITC Service Company may otherwise
have, including but not limited to liabilities under this Agreement and
under applicable securities laws. The Underwriters acknowledge that the
statements set forth under the captions "Principal and Selling
Shareholders" and "Related Party Transactions" in the Prospectus
constitute the only information furnished in writing to the Company by
or on behalf of ITC Service Company, in its capacity as a Selling
Shareholder, expressly for use in the registration statement relating
to the Shares as originally filed or in any amendment thereof, any
related preliminary prospectus or the Prospectus or in any amendment
thereof or supplement thereto, as the case may be.
(c) Scott D. Dorfman, in his capacity as a Selling
Shareholder, agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of
Section 15 of the Act or Section 20(a) of the Exchange Act, against any
and all losses, liabilities, claims, damages and expenses whatsoever as
incurred (including but not limited to attorneys' fees and any and all
expenses whatsoever incurred in investigating, preparing or defending
against any litigation, commenced or threatened, or any claim
whatsoever, and any and all amounts paid in settlement of any such
claim or litigation), joint or several, to which they or any of them
may become subject under the Act, the Exchange Act or otherwise,
insofar as such losses, liabilities, claims, damages or expenses (or
actions in respect thereof) arise out of or are based upon:
(i) any untrue statement or alleged untrue statement
of a material fact contained in the registration statement for
the registration of the Shares under the Act, as originally
filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any supplement thereto or
amendment thereof, or
(ii) the omission or alleged omission to state therein
a material fact required to be stated therein or necessary to
make the statements therein not misleading, or
(iii) any act or failure to act or any alleged act or
failure to act by any Underwriter in connection with, or
relating in any manner to, the Shares or the offering
contemplated hereby, and which is included as part of or
referred to
-31-
<PAGE> 32
in any losses, liabilities, claims, damages or expenses
arising out of or based upon matters covered by clause (i) and
(ii) above (provided that Scott D. Dorfman shall not be liable
under this clause (iii) to the extent it is finally judicially
determined in a court of competent jurisdiction that such
losses, liabilities, claims, damages or expenses resulted
directly from any such acts or failures to act undertaken or
omitted to be taken by such Underwriter through its gross
negligence or willful misconduct);
provided, however, that Scott D. Dorfman, in his capacity as a Selling
Shareholder, in each case will be liable in such capacity only to the
extent that any such loss, liability, claim, damage or expense arises
out of or is based upon any such untrue statement or alleged untrue
statement or omission or alleged omission made therein in reliance upon
and in conformity with written information furnished to the Company by
or on behalf of Scott D. Dorfman, in his capacity as a Selling
Shareholder, expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus; and provided further,
however, that in no case shall Scott D. Dorfman, in his capacity as a
Selling Shareholder, be liable or responsible for indemnification
pursuant to this Section 7(c) for any amount in excess of an amount
equal to the net proceeds received by Scott D. Dorfman from the sale of
his Shares pursuant to this Agreement. This indemnity agreement will be
in addition to, and shall not in any way impair or otherwise limit, any
liability which Scott D. Dorfman may otherwise have, including but not
limited to liabilities under this Agreement and under applicable
securities laws. The Underwriters acknowledge that the statements set
forth under the captions "Management," "Principal and Selling
Shareholders" and "Related Party Transactions" in the Prospectus
constitute the only information furnished in writing to the Company by
or on behalf of Scott D. Dorfman, regarding his capacity as a Selling
Shareholder, expressly for use in the registration statement relating
to the Shares as originally filed or in any amendment thereof, any
related preliminary prospectus or the Prospectus or in any amendment
thereof or supplement thereto, as the case may be.
(d) Each Underwriter severally, and not jointly, agrees to
indemnify and hold harmless the Company, each of the directors of the
Company, each of the officers of the Company who shall have signed the
Registration Statement, the Selling Shareholders and each other person,
if any, who controls the Company or the Selling Shareholders within the
meaning of Section 15 of the Act or Section 20(a) of the Exchange Act,
against any and all losses, liabilities, claims, damages and expenses
whatsoever as incurred (including but not limited to attorneys' fees
and any and all expenses whatsoever incurred in investigating,
preparing or defending against any litigation, commenced or threatened,
or any claim whatsoever, and any and all amounts paid in settlement of
any such claim or litigation), joint or several, to which they or any
of them may become subject under the
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<PAGE> 33
Act, the Exchange Act or otherwise, insofar as such losses,
liabilities, claims, damages or expenses (or actions in respect
thereof) arise out of or are based upon any untrue statement or alleged
untrue statement of a material fact contained in the registration
statement for the registration of the Shares under the Act, as
originally filed or any amendment thereof, or any related preliminary
prospectus or the Prospectus, or in any amendment thereof or supplement
thereto, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, in each
case to the extent, but only to the extent, that any such loss,
liability, claim, damage or expense arises out of or is based upon any
such untrue statement or alleged untrue statement or omission or
alleged omission made therein in reliance upon and in conformity with
written information furnished to the Company by or on behalf of any
Underwriter through the Representatives expressly for use therein;
provided, however, that in no case shall any Underwriter be liable or
responsible for any amount in excess of the underwriting discount
applicable to the Shares purchased by such Underwriter hereunder. This
indemnity will be in addition to, and shall not in any way impair or
otherwise limit, any liability which any Underwriter may otherwise
have, including but not limited to liabilities under this Agreement and
under applicable securities laws. The Company and the Selling
Shareholders acknowledge that the statements set forth in the last
paragraph of the cover page, and in the seventh, eighth and ninth
paragraphs under the caption "Underwriting" in the Prospectus
constitute the only information furnished in writing to the Company by
or on behalf of any Underwriter through the Representatives expressly
for use in the registration statement relating to the Shares as
originally filed or in any amendment thereof, any related preliminary
prospectus or the Prospectus or in any amendment thereof or supplement
thereto, as the case may be.
(e) Promptly after receipt by an indemnified party under
subsection (a), (b), (c) or (d) above of notice of the commencement of
any action, such indemnified party shall, if a claim in respect thereof
is to be made against the indemnifying party under such subsection,
notify each party against whom indemnification is to be sought in
writing of the commencement thereof (but the failure so to notify an
indemnifying party shall not relieve it from any liability which it may
have under this Section 7). In case any such action is brought against
any indemnified party, and it notifies an indemnifying party of the
commencement thereof, the indemnifying party will be entitled to
participate therein, and to the extent it may elect by written notice
delivered to the indemnified party promptly after receiving the
aforesaid notice from such indemnified party, to assume the defense
thereof with counsel satisfactory to such indemnified party.
Notwithstanding the foregoing, the indemnified party or parties shall
have the right to employ its or their own counsel in any such case, but
the fees and expenses of such counsel shall be at the expense of such
indemnified party or parties unless (i) the employment of such counsel
-33-
<PAGE> 34
shall have been authorized in writing by one of the indemnifying
parties in connection with the defense of such action, (ii) the
indemnifying parties shall not have employed counsel to have charge of
the defense of such action within a reasonable time after notice of
commencement of the action, or (iii) such indemnified party or parties
shall have reasonably concluded that there may be defenses available to
it or them which are different from or additional to those available to
one or all of the indemnifying parties (in which case the indemnifying
parties shall not have the right to direct the defense of such action
on behalf of the indemnified party or parties), in any of which events
such fees and expenses shall be borne by the indemnifying parties.
Anything in this subsection to the contrary notwithstanding, an
indemnifying party shall not be liable for any settlement of any claim
or action effected without its written consent; provided, however, that
such consent was not unreasonably withheld. Notwithstanding any other
provision of this Section 7(e), if at any time an indemnified party
shall have requested an indemnifying party to reimburse the indemnified
party for fees and expenses of counsel, such indemnifying party agrees
that it shall be liable for any settlement effected without its written
consent if (i) such settlement is entered into more than 45 days after
receipt by such indemnifying party of the aforesaid request, (ii) such
indemnifying party shall have received notice of the terms of such
settlement at least 30 days prior to such settlement being entered
into, and (iii) such indemnifying party shall not have reimbursed such
indemnified party in accordance with such request prior to the date of
such settlement. No indemnifying party shall, without the prior written
consent of each indemnified party, settle or compromise or consent to
entry of any judgment in any pending or threatened claim, action or
proceeding relating to the matters contemplated by this Section 7
(whether or not any indemnifying party is a party thereto), unless such
settlement, compromise or consent includes an unconditional release of
each indemnified party from all liability arising or that may arise out
of such claim, action or proceeding.
8. Contribution. In order to provide for contribution in circumstances
in which the indemnification provided for in Section 7 hereof is for any reason
held to be unavailable from any indemnifying party or is insufficient to hold
harmless a party indemnified thereunder, the Company and the Selling
Shareholders, on the one hand, and the Underwriters, on the other hand, shall
contribute to the aggregate losses, claims, damages, liabilities and expenses of
the nature contemplated by such indemnification provision (including any
investigation, legal and other expenses incurred in connection with, and any
amount paid in settlement of, any such action, suit or proceeding or any claims
asserted, but after deducting in the case of losses, claims, damages,
liabilities and expenses suffered by the Company any contribution received by
the Company from persons, other than the Underwriters, who may also be liable
for contribution, including persons who control the Company within the meaning
of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the
Company who signed the Registration Statement and directors of the Company) as
incurred to which the Company, one or more of the
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<PAGE> 35
Selling Shareholders and one or more of the Underwriters may be subject, in such
proportions as is appropriate to reflect the relative benefits received by the
Company and the Selling Shareholders, on the one hand, and the Underwriters, on
the other hand, from the offering of the Shares or, if such allocation is not
permitted by applicable law or indemnification is not available as a result of
the indemnifying party not having received notice as provided in Section 7
hereof, in such proportion as is appropriate to reflect not only the relative
benefits referred to above but also the relative fault of the Company and the
Selling Shareholders, on the one hand, and the Underwriters, on the other hand,
in connection with the statements or omissions which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative benefits received by the Company and the
Selling Shareholders, on the one hand, and the Underwriters, on the other hand,
shall be deemed to be in the same proportion as (x) the total proceeds from the
offering (net of underwriting discounts and commissions but before deducting
expenses) received by the Company and the Selling Shareholders and (y) the
underwriting discounts and commissions received by the Underwriters,
respectively, in each case as set forth in the table on the cover page of the
Prospectus. The relative fault of the Company and the Selling Shareholders, on
the one hand, and of the Underwriters, on the other hand, shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company, the Selling Shareholders or the
Underwriters and the parties' relative intent, knowledge, access to information
and opportunity to correct or prevent such statement or omission. The Company,
the Selling Shareholders and the Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 8 were determined by pro
rata allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above. Notwithstanding the provisions of
this Section 8, (i) in no case shall any Underwriter be liable or responsible
for any amount in excess of the underwriting discount applicable to the Shares
purchased by such Underwriter hereunder, and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. Notwithstanding the provisions of this Section 8 and the
preceding sentence, no Underwriter shall be required to contribute any amount in
excess of the amount by which the total price at which the Shares underwritten
by it and distributed to the public were offered to the public exceeds the
amount of any damages that such Underwriter has otherwise been required to pay
by reason of such untrue or alleged untrue statement or omission or alleged
omission. For purposes of this Section 8, each person, if any, who controls an
Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the
Exchange Act shall have the same rights to contribution as such Underwriter, and
each person, if any, who controls the Company or any Selling Shareholder within
the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each
officer of the Company who shall have signed the Registration Statement and each
director of the Company shall have the same rights to
-35-
<PAGE> 36
contribution as the Company or the Selling Shareholders, as the case may be,
subject in each case to clauses (i) and (ii) of this Section 8. Any party
entitled to contribution will, promptly after receipt of notice of commencement
of any action, suit or proceeding against such party in respect of which a claim
for contribution may be made against another party or parties, notify each party
or parties from whom contribution may be sought, but the omission to so notify
such party or parties shall not relieve the party or parties from whom
contribution may be sought from any obligation it or they may have under this
Section 8 or otherwise. No party shall be liable for contribution with respect
to any action or claim settled without its consent; provided, however, that such
consent was not unreasonably withheld. The liability of each Selling Shareholder
under this Section 8 shall be limited to an amount equal to the total net
proceeds received by the Selling Shareholder from the sale of its Shares
pursuant to this Agreement.
9. Default by an Underwriter.
(a) If any Underwriter or Underwriters shall default in its or
their obligation to purchase Firm Shares or Additional Shares
hereunder, and if the Firm Shares or Additional Shares with respect to
which such default relates do not (after giving effect to arrangements,
if any, made by the Representatives pursuant to subsection (b) below)
exceed in the aggregate 10% of the number of Firm Shares or Additional
Shares, the number of Firm Shares or Additional Shares to which the
default relates shall be purchased by the non-defaulting Underwriters
in proportion to the respective proportions which the numbers of Firm
Shares set forth opposite their respective names in Schedule I hereto
bear to the aggregate number of Firm Shares set forth opposite the
names of the non-defaulting Underwriters.
(b) In the event that such default relates to more than 10% of
the Firm Shares or Additional Shares, as the case may be, the
Representatives may in their discretion arrange for themselves or for
another party or parties (including any non-defaulting Underwriter or
Underwriters who so agree) to purchase such Firm Shares or Additional
Shares, as the case may be, to which such default relates on the terms
contained herein. In the event that within five calendar days after
such a default the Representatives do not arrange for the purchase of
the Firm Shares or Additional Shares, as the case may be, to which such
default relates as provided in this Section 9(b), this Agreement or, in
the case of a default with respect to the Additional Shares, the
obligations of the Underwriters to purchase and of the Company and the
Selling Shareholders to sell the Additional Shares shall thereupon
terminate, without liability on the part of the Company or the Selling
Shareholders with respect thereto (except in each case as provided in
Section 5, 7(a), 7(b), 7(c) and 8 hereof) or the Underwriters, but
nothing in this Agreement shall relieve a defaulting Underwriter or
Underwriters of its or their liability, if any, to the other
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<PAGE> 37
Underwriters, the Company and the Selling Shareholders for damages
occasioned by its or their default hereunder.
(c) In the event that the Firm Shares or Additional Shares to
which the default relates are to be purchased by the non-defaulting
Underwriters, or are to be purchased by another party or parties as
aforesaid, the Representatives or the Company shall have the right to
postpone the Closing Date or Additional Closing Date, as the case may
be, for a period, not exceeding five business days, in order to effect
whatever changes may thereby be made necessary in the Registration
Statement or the Prospectus or in any other documents and arrangements,
and the Company agrees to file promptly any amendment or supplement to
the Registration Statement or the Prospectus which, in the opinion of
Underwriters' Counsel, may thereby be made necessary or advisable. The
term "Underwriter" as used in this Agreement shall include any party
substituted under this Section 9 with like effect as if it had
originally been a party to this Agreement with respect to such Firm
Shares and Additional Shares.
10. Survival of Representations and Agreements. All representations and
warranties, covenants and agreements of the Underwriters, the Selling
Shareholders and the Company contained in this Agreement, including the
agreements contained in Section 5, the indemnity agreements contained in Section
7 and the contribution agreements contained in Section 8, shall remain operative
and in full force and effect regardless of any investigation made by or on
behalf of any Underwriter or any controlling person thereof, by or on behalf of
any Selling Shareholder, or by or on behalf of the Company, any of its officers
and directors or any controlling person thereof, and shall survive delivery of
and payment for the Shares to and by the Underwriters. The representations
contained in Sections 1 and 1A and the agreements contained in Sections 5, 7, 8
and 11(d) hereof shall survive the termination of this Agreement, including
termination pursuant to Section 9 or 11 hereof.
-37-
<PAGE> 38
11. Effective Date of Agreement; Termination.
(a) This Agreement shall become effective upon the later to
occur of (i) receipt by the Representatives and the Company of
notification of the effectiveness of the Registration Statement or (ii)
the execution of this Agreement. If the purchase price per Share has
not been agreed upon prior to 5:00 P.M., New York time, on the fifth
full business day after the Registration Statement shall have become
effective, this Agreement shall thereupon terminate without liability
to the Company, the Selling Shareholders or the Underwriters except as
herein expressly provided. Until this Agreement becomes effective as
aforesaid, it may be terminated by the Company by notifying the
Representatives or by the Representatives notifying the Company and the
Selling Shareholders. Notwithstanding the foregoing, the provisions of
this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times
be in full force and effect.
(b) The Representatives shall have the right to terminate this
Agreement at any time prior to the Closing Date or the obligations of
the Underwriters to purchase the Additional Shares at any time prior to
the Additional Closing Date, as the case may be, if (A) any domestic or
international event or act or occurrence has materially disrupted, or
in the opinion of the Representatives will in the immediate future
materially disrupt, the market for the Company's securities or
securities in general; or (B) if trading in the Shares on the Nasdaq
National Market shall have been suspended or materially limited; or (C)
if trading on the New York or American Stock Exchanges or the Nasdaq
National Market shall have been suspended, or minimum or maximum prices
for trading shall have been fixed, or maximum ranges for prices for
securities shall have been required, on the New York or American Stock
Exchanges or the Nasdaq National Market by the New York or American
Stock Exchanges or the Nasdaq Stock Market or by order of the
Commission or any other governmental authority having jurisdiction; or
(D) if a banking moratorium has been declared by a state or federal
authority or if any new restriction materially adversely affecting the
distribution of the Firm Shares or the Additional Shares, as the case
may be, shall have become effective; or (E) (i) if the United States
becomes engaged in hostilities or there is an escalation of hostilities
involving the United States or there is a declaration of a national
emergency or war by the United States or (ii) if there shall have been
such change in political, financial or economic conditions, if the
effect of any such event in (i) or (ii) as in the judgment of the
Representatives makes it impracticable or inadvisable to proceed with
the offering, sale and delivery of the Firm Shares or the Additional
Shares, as the case may be, on the terms contemplated by the
Prospectus.
(c) Any notice of termination pursuant to this Section 11
shall be by telephone, telex, or telegraph, confirmed in writing by
letter.
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<PAGE> 39
(d) If this Agreement shall be terminated pursuant to any of
the provisions hereof (otherwise than pursuant to (i) notification by
the Representatives as provided in Section 11(a) hereof or (ii) Section
9(b) or 11(b) hereof), or if the sale of the Shares provided for herein
is not consummated because any condition to the obligations of the
Underwriters set forth herein is not satisfied or because of any
refusal, inability or failure on the part of the Company or the Selling
Shareholders to perform any agreement herein or comply with any
provision hereof, the Company will, subject to demand by the
Representatives, reimburse the Underwriters for all out-of-pocket
expenses (including the fees and expenses of their counsel), incurred
by the Underwriters in connection herewith.
12. Notices. All communications hereunder, except as may be otherwise
specifically provided herein, shall be in writing and, if sent to any
Underwriter, shall be mailed, delivered, or telexed, telecopied or telegraphed
and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245
Park Avenue, New York, N.Y. 10167, Attention: Equity Syndicate; if sent to the
Company or Scott D. Dorfman, shall be mailed, delivered, or telegraphed or
telecopied and confirmed in writing to the Company, Innotrac Corporation, 6655
Sugarloaf Parkway, Duluth, Georgia 30097, Attention: Chief Executive Officer;
and if sent to ITC Service Company, shall be mailed, delivered or telegraphed or
telecopied and confirmed in writing to ITC Service Company, 1239 O.G. Skinner
Drive, West Point, Georgia 31833, Attention: Kimberley E. Thompson Esq. These
addresses may be changed by notice to the other parties.
13. Parties. This Agreement shall inure solely to the benefit of, and
shall be binding upon, the Underwriters, the Selling Shareholder and the Company
and the controlling persons, directors, officers, employees and agents referred
to in Sections 7 and 8, and their respective successors and assigns, and no
other person shall have or be construed to have any legal or equitable right,
remedy or claim under or in respect of or by virtue of this Agreement or any
provision herein contained. The term "successors and assigns" shall not include
a purchaser, in its capacity as such, of Shares from any of the Underwriters.
14. Governing Law. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, but without regard to
principles of conflicts of law.
15. Miscellaneous. The Representatives represent and warrant that they
have been authorized by the several Underwriters to enter into this Agreement on
their behalf and to act for them in the manner provided in this Agreement.
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<PAGE> 40
If the foregoing correctly sets forth the understanding among the
Representatives, the Selling Shareholders and the Company, please so indicate in
the space provided below for that purpose, whereupon this letter shall
constitute a binding agreement among the parties hereto.
Very truly yours,
INNOTRAC CORPORATION
By:
---------------------------------
Name:
----------------------------
Title:
---------------------------
ITC SERVICE COMPANY, a Selling Shareholder
By:
---------------------------------
Name:
----------------------------
Title:
---------------------------
SCOTT D. DORFMAN, a Selling Shareholder
By:
---------------------------------
Scott D. Dorfman
Accepted as of the date first above written:
BEAR, STEARNS & CO. INC.
By: Bear, Stearns & Co. Inc.
By:
-----------------------------------------
Name:
------------------------------
Title:
-----------------------------
On behalf of themselves and the other Underwriters
named in Schedule 1 hereto
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<PAGE> 41
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Name of Underwriter to be Purchased
- ------------------- ---------------
<S> <C>
Bear, Stearns & Co. Inc.
The Robinson-Humphrey Company, LLC
J.C. Bradford & Co.
</TABLE>
<PAGE> 42
SCHEDULE II
<TABLE>
<CAPTION>
Selling Shareholder Firm Shares Additional Shares
- ------------------- ----------- -----------------
<S> <C> <C>
Scott D. Dorfman 300,000 200,000
ITC Service Company 100,000 75,000
</TABLE>
<PAGE> 43
SCHEDULE III
(Persons subject to Lock-Up Agreements)
<TABLE>
<CAPTION>
Name Position(s)
- ---- -----------
<S> <C>
Scott D. Dorfman Selling Shareholder, officer, director
ITC Service Company Selling Shareholder
David L. Ellin Officer, director
Larry C. Hanger Officer, director
John H. Nichols, III Officer
Don L. Colter, Jr. Officer
Stephen J. Walden Officer
Will Hendrick Officer
Bruce V. Benator Director
Martin J. Blank Director
William H. Scott, III Director
</TABLE>
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EXHIBIT 3.2
AMENDED AND RESTATED BY-LAWS
OF
INNNOTRAC CORPORATION
ARTICLE I
OFFICES
SECTION 1 Registered Office. The registered office shall be in the State of
Georgia, County of Gwinnett.
SECTION 2 Other Offices. The corporation may also have offices at such other
places both inside and outside the State of Georgia as the board of directors
may from time to time determine and the business of the corporation may require
or make desirable.
ARTICLE II
SHAREHOLDERS MEETINGS
SECTION 1 Annual Meetings. The annual meeting of the shareholders of the
corporation shall be held at the principal office of the corporation or at such
other place inside or outside the United States as may be determined by the
board of directors, on such date and at such time as may be determined by the
board of directors, for the purpose of electing directors and transacting such
other business as may properly be brought before the meeting.
SECTION 2 Special Meetings. Special meetings of the shareholders shall be
held at the principal office of the corporation or at such other place inside
or outside the United States as may be designated in the notice of said
meetings, upon call of the chairman of the board of directors or the president
and shall be called by the president or the secretary when so directed by the
board of directors or at the request in writing of shareholders owning at least
25% of the issued and outstanding capital stock of the corporation entitled to
vote thereat. Any such request shall state the purposes for which the meeting
is to be called.
SECTION 3 Notice of Meetings. Written notice of every meeting of
shareholders, stating the place, date and hour of the meetings, shall be given
in a manner permitted by applicable law to each shareholder of record entitled
to vote at such meeting not less than 10 nor more than 60 days before the date
of the meeting. Attendance of a shareholder at a meeting of
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shareholders shall constitute a waiver of notice of such meeting and of all
objections to the place or time of meeting, or the manner in which it has been
called or convened, except when a shareholder attends a meeting solely for the
purpose of stating, at the beginning of the meeting, any such objection to the
transaction of any business. Notice need not be given to any shareholder who
signs a waiver of notice, in person or by proxy, either before or after the
meeting.
SECTION 4 Quorum. At all meetings of shareholders, any Voting Group (as
defined below) entitled to vote on a matter may take action on the matter only
if a quorum of that Voting Group exists at the meeting, and if a quorum exists,
the Voting Group may take action on the matter notwithstanding the absence of a
quorum of any other Voting Group that may be entitled to vote separately on the
matter. Unless the articles of incorporation, these by-laws or the Code
provides otherwise, the presence (in person or by proxy) of shares representing
a majority of votes entitled to be cast on a matter by a Voting Group shall
constitute a quorum of the Voting Group with regard to that matter. Once a
share is present at any meeting other than solely to object to holding the
meeting or transacting business at the meeting, the share shall be deemed
present for quorum purposes for the remainder of the meeting and for any
adjournments of that meeting, unless a new record date for the adjourned
meeting is or must be set pursuant to Article V, Section 4 of these by-laws. If
a quorum is not present at any meeting of the shareholders, the holders of a
majority of the shares present (in person or represented by proxy) and entitled
to vote thereat may adjourn the meeting from time to time, without notice other
than announcement at the meeting, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
the original meeting.
SECTION 5 Voting. Unless otherwise provided by law, the articles of
incorporation, or board resolutions setting forth the preferences and other
rights, restrictions or limitations of any class or series of preferred stock,
each outstanding share, regardless of class or series, shall be entitled to one
vote on each matter voted on at a shareholders meeting, and each class or
series of the corporation's shares entitled to vote generally on a matter shall
for that purpose be considered a single voting group (a "Voting Group"). Unless
the articles of incorporation, these by-laws, a resolution of the board of
directors or applicable law require a different vote, action on a matter
presented for consideration at a meeting where a quorum is present, shall be
approved as follows: (a) directors shall be elected by a plurality of the votes
cast by the shares entitled to vote in the election at a meeting at which a
quorum is present; and (b) all other matters shall be approved if the votes
cast within the applicable Voting Group favoring the action exceed the votes
cast opposing the action, unless the articles of incorporation, a provision of
these by-laws that has been adopted pursuant to Section 14-2-1021 of the Code
(or any successor provision), or applicable law requires a greater number of
affirmative votes. If either the articles of incorporation or the Code requires
separate voting by two or more Voting Groups on a matter, action on that matter
is taken only when voted upon by each such Voting Group separately. A
shareholder may vote his shares in person or
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by proxy. A shareholder may appoint a proxy to vote or otherwise act for him by
signing an appointment form. An appointment of a proxy is valid for eleven
months unless a shorter or longer period is expressly provided in the
appointment form.
SECTION 6 Consent of Shareholders. Any action required or permitted to be
taken at any meeting of the shareholders may be taken without a meeting if all
of the shareholders consent thereto in writing, setting forth the action so
taken. Such consent shall have the same force and effect as a unanimous vote of
shareholders.
SECTION 7 List of Shareholders; Inspection of Records.
(a) The corporation shall keep at its registered office or
principal place of business, or at the office of its transfer agent or
registrar, a record of its shareholders, giving their names and addresses and
the number, class and series, if any, of the shares held by each.
(b) Shareholders are entitled to inspect the corporate records as
and to the extent provided by the Code; provided, however, that only
shareholders owning more than two percent (2%) of the outstanding shares of any
class of the corporation's stock shall be entitled to inspect (1) the minutes
from any board, board committee or shareholders meeting (including any records
of action taken thereby without a meeting); (2) the accounting records of the
corporation; or (3) any record of the shareholders.
ARTICLE III
DIRECTORS
SECTION 1 Powers. Except as otherwise provided by any legal agreement among
shareholders, the property, affairs and business of the corporation shall be
managed and directed by its board of directors, which may exercise all powers
of the corporation and do all lawful acts and things which are not by law, by
any legal agreement among shareholders, by the articles of incorporation or by
these by-laws directed or required to be exercised or done by the shareholders.
SECTION 2 Number, Election, and Term. The board of directors shall consist
of the number and shall be elected in the manner and serve the term as set
forth in the Amended and Restated Articles of Incorporation. Except as provided
in this Article with respect to filling vacancies on the board, the directors
shall be elected by the shareholders as provided in Article II, and each
director elected shall hold office until his successor is elected and qualified
or until his earlier resignation, removal from office, or death. Directors
shall be natural persons who have attained the age of 21 years, but need not be
residents of the State
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of Georgia or shareholders of the corporation. The board, from time to time,
may designate persons to act as advisory directors.
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SECTION 3 Nominations.
(a) If any shareholder intends to nominate or cause to be
nominated any candidate for election to the board of directors (other than any
candidate to be sponsored by and proposed at the instance of the management),
such shareholder shall notify the president by first class registered mail sent
not less than 14 nor more than 50 days before the scheduled meeting of the
shareholders at which directors will be elected. However, if less than 21 days
notice of the meeting is given to shareholders, such nomination shall be
delivered or mailed to the president not later than the close of the seventh
day following the date on which the notice of the shareholders' meeting was
mailed. Such notification shall contain the following information with respect
to each nominee, to the extent known to the shareholder giving such
notification:
(1) Name, address and principal present occupation;
(2) To the knowledge of the shareholder who proposed to make such
nomination, the total number of shares that may be voted for such proposed
nominee;
(3) The names and address of the shareholders who propose to make
such nomination, and the number of shares of the corporation owned by each of
such shareholders; and
(4) The following additional information with respect to each
nominee: age, past employment, education, beneficial ownership of shares in the
corporation, past and present financial standing, criminal history (including
any convictions, indictments or settlements thereof), involvement in any past
or pending litigation or administrative proceedings (including threatened
involvement), relationship to and agreements (whether or not in writing) with
the shareholder(s) (and their relatives, subsidiaries and affiliates) intending
to make such nomination, past and present relationships or dealings with the
corporation or any of its subsidiaries, affiliates, directors, officers or
agents, plans or ideas for managing the affairs of the corporation (including,
without limitation, any termination of employees, any sales of corporate
assets, any proposed merger, business combination or recapitalization involving
the corporation, and any proposed dissolution or liquidation of the
corporation), and all additional information relating to such person that would
be required to be disclosed, or otherwise required, pursuant to Sections 13 or
14 of the Securities Exchange Act of 1934, as amended, and the rules and
regulations promulgated thereunder (the "Exchange Act"), in connection with any
acquisition of shares by such nominee or in connection with the solicitation of
proxies by such nominee for his election as a director, regardless of the
applicability of such provisions of the Exchange Act. (b) Any nominations not
in accordance with the provisions of this Section may be disregarded by the
chairman of the meeting, and upon instruction by the chairman, votes cast for
each such nominee shall be disregarded. In the event, however, that a person
should be nominated by more than one
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shareholder, and if one such nomination complies with the provisions of this
Section, such nomination shall be honored, and all shares voted for such
nominee shall be counted.
SECTION 4 Vacancies.
(a) Subject to subsections 4(b) vacancies, including vacancies
resulting from any increase in the number of directors and vacancies resulting
from removal from office by the shareholders, may be filled only by the board
of directors or by a majority of the directors then in office (if the directors
remaining in office constitute less than a quorum), and a director so chosen
shall hold office until the expiration of the term and until his successor is
duly elected and qualified, unless sooner displaced; provided, however, that if
there are no directors in office, then vacancies shall be filled through
election by the shareholders.
(b) If any vacant office described in subsection 4(a) was held by
a director elected by a particular Voting Group, only the remaining directors
elected by that Voting Group shall be entitled to fill the vacancy; provided,
however, that if the vacant office was held by a director elected by a
particular Voting Group and there is no remaining director elected by that
Voting Group, the other remaining directors or director (elected by another
Voting Group or Groups) may fill the vacancy.
SECTION 5 Meetings and Notice. The board of directors of the corporation may
hold meetings, both regular and special, either inside or outside the State of
Georgia. Regular meetings of the board of directors may be held without notice
at such time and place as shall from time to time be determined by resolution
of the board. Special meetings of the board may be called by the chairman of
the board or president or by any two directors upon one days notice given in a
manner permitted by law. Such notice shall state a reasonable time, date and
place of meeting, but the purpose need not be stated therein. A director may
waive any notice required by the Code, the articles of incorporation, or these
by-laws before or after the date and time of the matter to which the notice
related, by a written waiver signed by the director and delivered to the
corporation for inclusion in the minutes or filing with the corporate records.
Attendance of a director at a meeting shall constitute a waiver of notice of
such meeting and waiver of all objections to the place and time of the meeting,
or the manner in which it has been called or convened except when the director
states, at the beginning of the meeting, any such objection or objections to
the transaction of business.
SECTION 6 Quorum. At all meetings of the board of directors, a majority of
directors shall constitute a quorum for the transaction of business, and the
act of a majority of the directors present at any meeting at which there is a
quorum shall be the act of the board, except as may be otherwise specifically
provided by law, by the articles of incorporation, or by these by-laws. If a
quorum shall not be present at any meeting of the board, the directors present
thereat may adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present.
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SECTION 7 Conference Telephone Meeting. Unless the articles of incorporation
or these by-laws otherwise provide, members of the board of directors, or any
committee designated by the board, may participate in a meeting of the board or
committee by means of conference telephone or similar communications equipment
whereby all persons participating in the meeting can hear each other.
Participation in the meeting shall constitute presence in person.
SECTION 8 Consent of Directors. Unless otherwise restricted by the articles
of incorporation or these by-laws, any action required or permitted to be taken
at any meeting of the board of directors or of any committee thereof may be
taken without a meeting, if all members of the board or committee, as the case
may be, consent thereto in writing, setting forth the action so taken, and the
writing or writings are filed with the minutes of the proceedings of the board
or committee. Such consent shall have the same force and effect as a unanimous
vote of the board.
SECTION 9 Committees. The board of directors may, by resolution passed by a
majority of the whole board, designate from among its members one or more
committees, each committee to consist of two or more directors. The board may
designate one or more directors as alternate members of any committee, who may
replace any absent member at any meeting of such committee. Any such committee,
to the extent provided in the resolution, shall have and may exercise all of
the authority of the board of directors in the management of the business and
affairs of the corporation except as limited by law. Such committee or
committees shall have such name or names as may be determined from time to time
by resolution adopted by the board of directors. A majority of each committee
may determine its action and may fix the time and places of its meetings,
unless otherwise provided by the board of directors. Each committee shall keep
regular minutes of its meetings and report the same to the board of directors
when required.
SECTION 10 Removal of Directors. At any shareholders' meeting with respect to
which notice of such purpose has been given, any director may be removed from
office, only for cause, by the vote of shareholders representing a majority of
the issued and outstanding capital stock entitled to vote for the election of
directors, provided that a director elected by a Voting Group may only be
removed for cause by the vote of shareholders representing a majority of the
issued and outstanding capital stock of the Voting Group that elected the
particular director, and his successor may be elected at the same or any
subsequent meeting of shareholders; provided that to the extent any vacancy
created by such removal is not filled by such an election within 60 days after
such removal, the remaining directors shall, by majority vote, fill any such
vacancy.
SECTION 11 Compensation of Directors. Directors shall be entitled to such
reasonable compensation for their services as directors or members of any
committee of the board as shall be fixed from time to time by resolution
adopted by the board, and shall also be entitled
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to reimbursement for any reasonable expenses incurred in attending any meeting
of the board or any such committee.
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ARTICLE IV
OFFICERS
SECTION 1 Number. The officers of the corporation shall be chosen by the
board of directors and shall be a president and a treasurer. The board of
directors may also choose a chairman of the board, one or more vice-presidents,
a secretary, assistant secretaries and assistant treasurers. The board of
directors may appoint such other officers and agents as it shall deem necessary
who shall hold their offices for such terms and shall exercise such powers and
perform such duties as shall be determined from time to time by the board.
SECTION 2 Compensation. The salaries of all officers and agents of the
corporation shall be fixed by the board of directors or a committee or officer
appointed by the board.
SECTION 3 Term of Office. Unless otherwise provided by resolution of the
board of directors, the principal officers shall be chosen annually by the
board at the first meeting of the board following the annual meeting of
shareholders of the corporation, or as soon thereafter as is conveniently
possible. Subordinate officers may be elected from time to time. Each officer
shall serve until his successor shall have been chosen and qualified, or until
his death, resignation or removal.
SECTION 4 Removal. Any officer may be removed from office at any time, with
or without cause, by the board of directors whenever in its judgment the best
interest of the corporation will be served thereby, or if appointed at the
authorization of the board of directors, by a senior officer at any time, with
or without cause, whenever in the officer's judgment the best interest of the
corporation will be served thereby.
SECTION 5 Vacancies. Any vacancy in an office resulting from any cause may
be filled by the board of directors.
SECTION 6 Powers and Duties. Except as hereinafter provided, the officers of
the corporation shall each have such powers and duties as generally pertain to
their respective offices, as well as such powers and duties as from time to
time may be conferred by the board of directors.
(a) Chairman of the Board. The chairman of the board (if there be
one) shall preside at and serve as chairman of meetings of the stockholders and
of the board of directors. The chairman of the board shall perform other duties
and have other authority as may from time to time be delegated by the board of
directors.
(b) Chief Executive Officer. The chief executive officer shall be
charged with the general and active management of the corporation, shall see
that all orders and
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resolutions of the board of directors are carried into effect, shall have the
authority to select and appoint employees and agents of the corporation, and
shall, in the absence or disability of the chairman of the board, perform the
duties and exercise the powers of the chairman of the board. The chief
executive officer shall also be responsible for the development, establishment,
and implementation of the policy and strategic initiatives for the corporation.
The chief executive officer shall perform any other duties and have any other
authority as may be delegated from time to time by the board of directors, and
shall be subject to the limitations fixed from time to time by the board of
directors.
(c) President. If there shall be no separate chief executive
officer of the corporation, then the president shall be the chief executive
officer of the corporation, with the duties and authority provided in Section 6
(b). The president shall otherwise be the chief operating officer of the
corporation and shall, consistent with the authority otherwise conferred upon
the chief executive officer in Section 6 (b), have responsibility for the
conduct and general supervision of the business operations of the corporation,
including without limitation responsibility for the direction, supervision, and
coordination of the activities of all operating subsidiaries and other business
units of the corporation. The president shall perform such other duties and
have such other authority as may from time to time be delegated by the board of
directors. In the absence or disability of the chief executive officer, the
president shall perform the duties and exercise the powers of the chief
executive officer.
(d) Vice President. The vice president (if there be one) shall, in
the absence or disability of the president, perform the duties and exercise the
powers of the president, whether the duties and powers are specified in these
by-laws or otherwise. If the corporation has more than one vice president, the
one designated by the board of directors shall act in the event of the absence
or disability of the president. Vice presidents shall perform any other duties
and have any other authority as from time to time may be delegated by the board
of directors, the chief executive officer, or the president.
(e) Secretary. The secretary shall attend all meetings of the
board of directors and all meetings of the shareholders and record all the
proceedings of the meetings of the corporation and of the board of directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He shall give, or cause to be given, notice
of all meetings of the shareholders and special meetings of the board of
directors, and shall perform such other duties as may be prescribed by the
board of directors or president, under whose supervision he shall be. He shall
have custody of the corporate seal of the corporation and he, or an assistant
secretary, shall have authority to affix the same to any instrument requiring
it and when so affixed, it may be attested by his signature or by the signature
of such assistant secretary. The board of directors may give general authority
to any other officer to affix the seal of the corporation and to attest the
affixing by his signature.
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(f) Assistant Secretary. The assistant secretary or if there be
more than one, the assistant secretaries in the order determined by the board
of directors (or if there be no such determination, then in the order of their
election), shall, in the absence of the secretary or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
secretary and shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
(g) Treasurer. The treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the corporation in such depositories as may be designated by the board of
directors. He shall disburse the funds of the corporation as may be ordered by
the board of directors, taking proper vouchers for such disbursements, and
shall render to the president and the board of directors, at its regular
meetings, or when the board of directors so requires, an account of all his
transactions as treasurer and of the financial condition of the corporation. If
required by the board of directors, he shall give the corporation a bond (which
shall be renewed every six years) in such sum and with such surety or sureties
as shall be satisfactory to the board of directors for the faithful performance
of the duties of his office and for the restoration to the corporation, in case
of his death, resignation, retirement or removal from office, of all books,
papers, vouchers, money and other property of whatever kind in his possession
or under this control belonging to the corporation.
(h) Assistant Treasurer. The assistant treasurer, or if there
shall be more than one, the assistant treasurers in the order determined by the
board of directors (or if there be no such determination, then in the order of
their election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
board of directors may from time to time prescribe.
SECTION 7 Signatures. The signature of any officer, employee or agent upon
any document of the corporation may be made by facsimile or machine signature
under such limitations and circumstances as the board of directors or any
appropriate committee of the board of directors may provide from time to time.
SECTION 8 Voting Securities of Corporation. Unless otherwise ordered by the
board of directors, the chairman shall have full power and authority on behalf
of the corporation to attend and to act and vote at any meetings of security
holders of corporations in which the corporation may hold securities, and at
such meetings shall possess and may exercise any and all rights and powers
incident to the ownership of such securities which the corporation might have
possessed and exercised if it had been present. The board of directors by
resolution from time to time may confer like powers upon any other person or
persons.
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ARTICLE V
CERTIFICATE
SECTION 1 Form of Certificate. Every holder of fully-paid stock in the
corporation shall be entitled to have a certificate in such form as the board
of directors may from time to time prescribe.
SECTION 2 Lost Certificates. The board of directors may direct that a new
certificate be issued in place of any certificate theretofore issued by the
corporation and alleged to have been lost, stolen or destroyed, upon the making
of an affidavit of that fact by the person claiming the certificate of stock to
be lost, stolen or destroyed. When authorizing such issue of a new certificate,
the board of directors may, in its discretion and as a condition precedent to
the issuance thereof, require the owner of such lost, stolen or destroyed
certificate, or his legal representative, to advertise the same in such manner
as it shall require and/or to give the corporation a bond in such sum as it may
direct as indemnity against any claim that may be made against the corporation
with respect to the certificate alleged to have been lost, stolen or destroyed.
SECTION 3 Transfers.
(a) Transfers of shares of the capital stock of the corporation
shall be made only on the books of the corporation by the registered holder
thereof, or by his duly authorized attorney, or with a transfer clerk or
transfer agent appointed as provided in Section 5 of this Article, and on
surrender of the certificate or certificates for such shares properly endorsed
and the payment of all taxes thereon.
(b) The corporation shall be entitled to recognize the exclusive
right of a person registered on its books as the owner of shares to receive
dividends, and to vote as such owner, and for all other purposes, and shall not
be bound to recognize any equitable or other claim to or interest in such share
or shares on the part of any other person, whether or not it shall have express
or other notice thereof, except as otherwise provided by law.
(c) Shares of capital stock may be transferred by delivery of the
certificates therefor, accompanied either by an assignment in writing on the
back of the certificates or by separate written power of attorney to sell,
assign and transfer the same, signed by the record holder thereof, or by his
duly authorized attorney-in-fact, but no transfer shall affect the right of the
corporation to pay any dividend upon the stock to the holder of record as the
holder in fact thereof for all purposes, and no transfer shall be valid, except
between the parties thereto, until such transfer shall have been made upon the
books of the corporation as herein provided.
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(d) The board may, from time to time, make such additional rules
and regulations as it may deem expedient, not inconsistent with these by-laws
or the articles of incorporation, concerning the issue, transfer and
registration of certificates for shares of the capital stock of the
corporation.
SECTION 4 Record Date. In order that the corporation may determine the
shareholders entitled to notice of or to vote at any meeting of shareholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting, or entitled to receive payment of any dividend or other
distribution or allotment of any rights, or entitled to exercise any rights in
respect of any change, conversion or exchange of stock or for the purpose of
any other lawful action, the board of directors may fix, in advance, a record
date, which shall not be more than 70 days and, in case of a meeting of
shareholders, not less than 10 days prior to the date on which the particular
action requiring such determination of stockholders is to be taken. If no
record date is fixed for the determination of shareholders entitled to notice
of and to vote at any meeting of shareholders, the record date shall be at the
close of business on the day next preceding the day on which the notice is
given, or, if notice is waived, at the close of business on the day next
preceding the day on which the meeting is held. If no record date is fixed for
other purposes, the record date shall be at the close of business on the day
next preceding the day on which the board of directors adopts the resolution
relating thereto. A determination of shareholders of record entitled to notice
of or to vote at a meeting of shareholders shall apply to any adjournment of
the meeting unless the board of directors shall fix a new record date for the
adjourned meeting.
SECTION 5 Transfer Agent and Registrar. The board of directors may appoint
one or more transfer agents or one or more transfer clerks and one or more
registrars, and may require all certificates of stock to bear the signature or
signatures of any of them.
ARTICLE VI
GENERAL PROVISIONS
SECTION 1 Distributions. Distributions upon the capital stock of the
corporation, subject to the provisions of the articles of incorporation, if
any, may be declared by the board of directors at any regular or special
meetings, pursuant to law. Distributions may be paid in cash, in property, or
in shares of the corporation's capital stock, subject to the provisions of the
articles of incorporation. Before payment of any distribution, there may be set
aside out of any funds of the corporation available for distributions such sum
or sums as the directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
distributions, or for repairing or maintaining any property of the corporation,
or for such other purpose as the directors shall think conducive to the
interest
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of the corporation, and the directors may modify or abolish any such reserve in
the manner in which it was created.
SECTION 2 Fiscal Year. The fiscal year of the corporation shall be fixed by
resolution of the board of directors
SECTION 3 Seal. The corporate seal shall have inscribed thereon the name of
the corporation, the year of its organization and the words "Corporate Seal"
and "Georgia". The seal may be used by causing it or a facsimile thereof to be
impressed or affixed or reproduced or otherwise. In the event it is
inconvenient to use such a seal at any time, the signature of the corporation
followed by the word "Seal" enclosed in parentheses shall be deemed the seal of
the corporation.
ARTICLE VII
INDEMNIFICATION OF DIRECTORS AND OFFICERS
SECTION 1 Indemnification of Directors and Officers. Corporation shall
indemnify and hold harmless any person (an "Indemnified Person") who is or was
a party, or is threatened to be made a party, to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action or suit by or in the right of the
corporation) by reason of the fact that he is or was a director or officer of
the corporation, against expenses (including, but not limited to, attorneys'
fees and disbursements, court costs and expert witness fees), and against any
judgments, fines, and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful;
provided, in any case, that no indemnification shall be made in respect of
expenses, judgments, fines and amounts paid in settlement attributable to
circumstances as to which, under applicable provisions of the Code as in effect
from time to time, such indemnification may not be authorized by action of the
board of directors, the shareholders or otherwise. The termination of any
action, suit, or proceeding by judgment, order, settlement, conviction, or upon
a plea of nolo contendere or its equivalent, is not, of itself, determinative
that the director did not meet the standards of conduct set forth in this
Article.
SECTION 2 Indemnification of Directors and Officers for Derivative Actions.
The corporation shall indemnify and hold harmless any Indemnified Person who is
or was a party, or is threatened to be made a party, to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal,
administrative or investigative, by or in the right of the corporation, by
reason of the fact that he is or was a director or officer of the
14
<PAGE> 15
corporation, against expenses (including, but not limited to, attorneys' fees
and disbursements, court costs and expert witness fees) actually and reasonably
incurred by him in connection with such action, suit or proceeding, if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation. No indemnification shall be made
pursuant to this Section for any claim, issue or matter as to which an
Indemnified Person shall have been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to the
corporation, or for amounts paid in settlement to the corporation, unless and
only to the extent that the court in which such action or suit was brought or
other court of competent jurisdiction shall determine upon application that
such person is fairly and reasonably entitled to indemnity for such expenses
which the court shall deem proper.
SECTION 3 Indemnification of Employees and Agents. The board of directors
shall have the power to cause the corporation to provide to any person who is
or was an employee or agent of the corporation all or any part of the right to
indemnification and other rights of the type provided under Sections 1, 2, 6
and 12 of this Article (subject to the conditions, limitations, obligations and
other provisions specified herein), upon a resolution to that effect
identifying such employee or agent (by position or name) and specifying the
particular rights provided, which may be different for each employee or agent
identified. Each employee or agent of the corporation so identified shall be an
"Indemnified Person" for purposes of the provisions of this Article.
SECTION 4 Subsidiaries and Other Organizations. The board of directors shall
have the power to cause the corporation to provide to any person who is or was
a director, officer, employee or agent of the corporation or who also is or was
a director, officer, trustee, partner, employee or agent of a Subsidiary (as
defined below), or is or was serving at the corporation's request in such a
position with any other organization, all or any part of the right to
indemnification and other rights of the type provided under Sections 1, 2, 6
and 12 of this Article (subject to the conditions, limitations, obligations and
other provisions specified herein), with respect to service by such person in
such position with a Subsidiary or other organization, upon a resolution
identifying such person, the Subsidiary or other organization involved (by name
or other classification), and the particular rights provided, which may be
different for each person so identified. Each person so identified shall be an
"Indemnified Person" for purposes of the provisions of this Article. As used in
this Article, "Subsidiary" shall mean (i) another corporation, joint venture,
trust, partnership or unincorporated business association more than 20% of the
voting capital stock or other voting equity interest of which was, at or after
the time of the circumstances giving rise to such action, suit or proceeding,
owned, directly or indirectly, by the corporation; or (ii) a nonprofit
corporation that receives its principal financial support from the corporation
or its Subsidiaries.
SECTION 5 Determination. Notwithstanding any judgment, order, settlement,
conviction or plea in any action, suit or proceeding of the kind referred to in
Sections 1 and 2 of this Article, an Indemnified Person shall be entitled to
indemnification as provided in such
15
<PAGE> 16
Sections 1 and 2 if a determination that such Indemnified Person is entitled to
such indemnification shall be made (i) by the board of directors by a majority
vote of a quorum consisting of directors who are not at the time parties to the
proceeding; or (ii) if a quorum cannot be obtained under (i) above, by majority
vote of a committee duly designated by the board of directors (in which
designation interested directors may participate), consisting solely of two or
more directors who are not at the time parties to the proceeding; (iii) in a
written opinion by special legal counsel selected as required by Section
14-2-855(b)(3) of the Code or any successor provision; or (iv) by the share
holders, but shares owned by or voted under the control of directors who are at
the time parties to the proceeding may not be voted on the determination. To
the extent that an Indemnified Person has been successful on the merits or
otherwise in defense of any action, suit or proceeding of the kind referred to
in Sections 1 and 2 of this Article, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection therewith.
SECTION 6 Advances. Expenses (including, but not limited to, attorneys'
fees and disbursements, court costs, and expert witness fees) incurred by an
Indemnified Person in defending any action, suit or proceeding of the kind
described in Sections 1 and 2 hereof (or in Section 4 hereof if applicable to
such Indemnified Person) shall be paid by the corporation in advance of the
final disposition of such action, suit or proceeding as set forth herein. The
corporation shall promptly pay the amount of such expenses to the Indemnified
Person, but in no event later than ten days following the Indemnified Person's
delivery to the corporation of a written request for an advance pursuant to
this Section, together with a reasonable accounting of such expenses; provided,
however, that the Indemnified Person shall furnish the corporation a written
affirmation of his good faith belief that he has met the standard of conduct
set forth in the Code and a written undertaking and agreement, executed
personally or on his behalf, to repay to the corporation any advances made
pursuant to this Section if it shall be ultimately determined that the
Indemnified Person is not entitled to be indemnified by the corporation for
such amounts. The corporation shall make the advances contemplated by this
Section regardless of the Indemnified Person's financial ability to make
repayment. Any advances and undertakings to repay pursuant to this Section
shall be unsecured and interest-free.
SECTION 7 Non-Exclusivity. Subject to any applicable limitation imposed by
the Code or the Articles of Incorporation, the indemnification and advancement
of expenses provided by or granted pursuant to this Article shall not be
exclusive of any other rights to which a person seeking indemnification or
advancement of expenses may be entitled under any by-law, resolution or
agreement specifically or in general terms approved or ratified by the
affirmative vote of holders of a majority of the shares entitled to be cast
thereon.
SECTION 8 Insurance. The corporation shall have the power to purchase and
maintain insurance on behalf of any person who is or was a director, officer,
employee or agent of the
16
<PAGE> 17
corporation, or who, while a director, officer, employee, or agent of the
corporation, is or was serving as a director, officer, trustee, general
partner, employee or agent of a Subsidiary or, at the request of the
corporation, of any other organization, against any liability asserted against
him and incurred by him in any such capacity, or arising out of his status as
such, whether or not the corporation would have the power to indemnify him
against such liability under the provisions of this Article.
SECTION 9 Notice. If any expenses or other amounts are paid by way of
indemnification, otherwise than by court order or action by the shareholders or
by an insurance carrier pursuant to insurance maintained by the corporation,
the corporation shall, not later than the next annual meeting of shareholders,
unless such meeting is held within three months from the date of such payment,
and in any event within 15 months from the date of such payment, send by first
class mail to its shareholders of record at the time entitled to vote for the
election of directors a statement specifying the persons paid, the amount paid
and the nature and status at the time of such payment of the litigation or
threatened litigation.
SECTION 10 Security. The corporation may designate certain of its assets as
collateral, provide self-insurance or otherwise secure its obligations under
this Article, or under any indemnification agreement or plan of indemnification
adopted and entered into in accordance with the provisions of this Article, as
the board of directors deems appropriate.
SECTION 11 Amendment. Any amendment to this Article that limits or otherwise
adversely affects the right of indemnification, advancement of expenses, or
other rights of any Indemnified Person hereunder shall, as to such Indemnified
Person, apply only to claims, actions, suits or proceedings based on actions,
events or omissions (collectively, "Post Amendment Events") occurring after
such amendment and after delivery of notice of such amendment to the
Indemnified Person so affected. Any Indemnified Person shall, as to any claim,
action, suit or proceeding based on actions, events or omissions occurring
prior to the date of receipt of such notice, be entitled to the right of
indemnification, advancement of expenses and other rights under this Article to
the same extent as if such provisions had continued as part of the by-laws of
the corporation without such amendment. This Section cannot be altered, amended
or repealed in a manner effective as to any Indemnified Person (except as to
Post Amendment Events) without the prior written consent of such Indemnified
Person.
SECTION 12 Agreements. In addition to the rights provided in this Article,
the corporation shall have the power, upon authorization by the board of
directors, to enter into an agreement or agreements providing to any person who
is or was a director, officer, employee or agent of the corporation
indemnification rights substantially similar to, or greater than, those
provided in this Article.
SECTION 13 Continuing Benefits. The indemnification and advancement of
expenses provided by or granted pursuant to this Article shall, unless
otherwise provided when
17
<PAGE> 18
authorized or ratified, continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the benefit of the
heirs, executors and administrators of such a person.
SECTION 14 Successors. For purposes of this Article, the terms "the
corporation" or "this corporation" shall include any corporation, joint
venture, trust, partnership or unincorporated business association that is the
successor to all or substantially all of the business or assets of this
corporation, as a result of merger, consolidation, sale, liquidation or
otherwise, and any such successor shall be liable to the persons indemnified
under this Article on the same terms and conditions and to the same extent as
this corporation.
SECTION 15 Severability. Each of the sections of this Article, and each of
the clauses set forth herein, shall be deemed separate and independent, and
should any part of any such section or clause be declared invalid or
unenforceable by any court of competent jurisdiction, such invalidity or
unenforceability shall in no way render invalid or unenforceable any other part
thereof or any other separate section or clause of this Article that is not
declared invalid or unenforceable.
SECTION 16 Additional Indemnification. In addition to the specific
indemnification rights set forth herein, the corporation shall indemnify each
of its directors and officers to the full extent permitted by action of the
board of directors without shareholder approval under the Code or other laws of
the State of Georgia as in effect from time to time.
SECTION 17 Mandatory Indemnification. Except to the extent limited by the
Articles of Incorporation, to the extent that a director has been successful,
on the merits or otherwise, in the defense of any proceeding to which he was a
party, or in defense of any claim, issue, or matter therein, because he is or
was a director of the corporation, the corporation shall indemnify the director
against reasonable expenses incurred by him in connection therewith.
SECTION 18 Shareholder Approved Indemnification. If authorized by the
Articles of Incorporation or a By-law, contract, or resolution approved or
ratified by the shareholders by a majority of the votes entitled to be cast, a
corporation may indemnify or obligate itself to indemnify a director made party
to a proceeding including a proceeding brought by or in the right of the
corporation. The corporation shall not indemnify a director under this Section
18 for any liability incurred in a proceeding in which the director is adjudged
liable to the corporation or is subjected to injunctive relief in favor of the
corporation: (1) for any appropriate, in violation of his duties, of any
business opportunity of the corporation; (2) for acts or omissions which
involve intentional misconduct or a knowing violation of law; (3) for an
unlawful distribution as set out in the Code; or (4) for any transaction from
which he received improper personal benefit.
18
<PAGE> 19
ARTICLE VIII
AMENDMENTS
The board of directors shall have power to alter, amend or repeal the
by-laws or adopt new by-laws by majority vote of all of the directors, but any
by-laws adopted by the board of directors may be altered, amended or repealed
and new by-laws adopted, by the shareholders by majority vote of all of the
shares having voting power.
19
<PAGE> 1
EXHIBIT 5.1
OPINION OF KILPATRICK STOCKTON LLP
Innotrac Corporation
6655 Sugarloaf Parkway
Duluth, Georgia 30097-4916
RE: INNOTRAC CORPORATION
REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-79929)
Gentlemen:
At your request, we have examined the Registration Statement on Form S-1
File No. 333-79929, as amended (the "Registration Statement") filed by
Innotrac Corporation (the "Company"), a Georgia corporation, with the Securities
and Exchange Commission with respect to the registration under the Securities
Act of 1933, as amended, of 2,875,000 shares of Common Stock, par value $0.10
per share, of the Company (the "Common Stock"), including 2,200,000 shares to be
sold by the Company and 675,000 shares to be sold by the selling shareholders
named in the Registration Statement (the "Selling Shareholders") to the
underwriters named in the Registration Statement (the "Underwriters") for resale
by them to the public.
As your counsel, and in connection with the preparation of the Registration
Statement, we have examined the originals or copies of such documents, corporate
records, certificates of public officials and officers of the Company, and other
instruments related to the authorization and issuance of the Common Stock as we
deemed relevant or necessary for the opinion expressed herein. Based upon the
foregoing, it is our opinion that:
1. The shares of Common Stock to be issued and sold by the Company to
the Underwriters will be, upon issuance, sale and delivery in the manner
and under the terms and conditions described in the Registration Statement,
legally issued, fully paid and nonassessable.
2. The shares of Common Stock to be sold by the Selling Shareholders
as described in the Registration Statement are legally issued, fully paid
and nonassessable.
We hereby consent to the use of this opinion as an exhibit to the
Registration Statement and further consent to the use of our name in the "Legal
Matters" section of the Registration Statement, including the Prospectus
constituting a part thereof, and any amendments thereto.
Yours truly,
KILPATRICK STOCKTON LLP
By: /s/ Jan M. Davidson
------------------------------------
Jan M. Davidson,
A Partner
<PAGE> 1
Exhibit 10.17(a)
This Contract ("Contract") is entered into by and between Innotrac Corporation
("Innotrac"), a Georgia corporation, with offices at 1828 Meca Way, Norcross, GA
30093 and Market Reps, Inc. ("MR"), a Massachusetts corporation, with offices at
1506 Providence Highway, Norwood, MA 02062. MR is under contract to SouthWestern
Bell telephone Company ("SWBT") to provide certain products and services.
Innotrac will be a subcontractor to MR to provide certain services outlined
herein.
1. SCOPE
This Contract governs the purchase and fulfillment of orders for caller
identification products and other telephone products described on Exhibit A
(collectively, the "Product" or "Products") and the provisioning of the services
described herein (the "Services") to MR and/or SWBT by Innotrac. Innotrac agrees
to provide Products and Services in accordance with the terms, conditions, and
specifications stated herein, including those contained in Appendixes A, B, C, D
and E attached hereto and by this reference made a part hereof. Products
purchased by SWBT customers will be provided to SWBT's customers by SWBT's sales
representatives who will transmit the SWBT customer orders ("Order" or "Orders")
to Innotrac via electronic data interchange ("EDI") according to the terms in
Appendix C, or by facsimile transmission when EDI is not operational. Innotrac
will be responsible for the provision of Products. Except as may be otherwise
provided herein, this Contract does not guarantee or obligate MR or SWBT to
place with Innotrac a minimum number of Orders. Innotrac shall provide Products
and Services on an as ordered basis.
2. TERM OF CONTRACT
This Contract will become effective June 1, 1998 and will continue until
November 1, 2001 and thereafter on a month-to-month basis unless sooner
terminated as provided in the termination clause. By written mutual agreement
between MR and Innotrac this Contract may be extended for an additional agreed
upon number of years without any increase in price. Unless otherwise agreed
hereunder, all Services to be provided hereunder will cease upon termination of
this Contract.
3. CUSTOMER SERVICE SUPPORT
Innotrac agrees to provide after sale support to SWBT's customers which shall
include but not be limited to responding to all technical, operational, warranty
and post-warranty questions and problems through Innotrac's customer support
center ("CSC"). Innotrac shall provide after sales support to all Products
supplied by Innotrac under the terms of MR and SWBT contract
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 2
#967806 (copy attached) (the "SWBT Contract"). Innotrac shall provide a toll
free telephone number for SWBT customers to call for this support. This number
shall be provided in the Customer Owner Manual provided with each Product.
Ongoing support via telephone will be available to SWBT's customers from
Innotrac at no charge. SWBT or SWBT's customers will call 1-888-880-8504 for
such support.
Innotrac's hours of operation for the CSC will be 8:00 a.m. to 8:00 p.m. CST,
Monday through Friday, and 8:00 a.m. to 4:00 p.m. CST, Saturday, excluding the
following holidays: New Year's Day, President's Day, Memorial Day, Independence
Day, Labor Day, Columbus Day, Thanksgiving Day, Friday after Thanksgiving, and
Christmas Day. The customer support described herein shall be in addition to
Innotrac's obligations as set forth in paragraphs 5 and 23.
4. PURCHASE OF PRODUCT
(a) While this Contract is in effect (and with respect to Thomson Consumer
Electronics for a period of one year thereafter), Innotrac hereby specifically
warrants and represents to MR that Innotrac shall not within the SWBT Territory
(defined below), without the prior written authorization of MR: (i) place SWBT
customer orders for any telecommunications products with or through any vendor,
manufacturer or other; or (ii) secure, purchase or otherwise acquire any
materials, supplies, equipment or Products to be delivered and/or provided to
SWBT customers in the SWBT Territory, including but not limited to the Products
described in Appendix A hereto as it may be amended from time to time by MR and
Innotrac (the "Restricted Activities"). In the event that Innotrac engages in
any Restricted Activities, such shall be deemed to be a material breach of this
Contract and shall entitle MR to immediately terminate this Contract without any
prior notice requirement and without any right to cure on the part of Innotrac.
Innotrac shall further, subsequent to such termination, be fully and completely
responsible for, liable to and shall provide to MR, SWBT and/or SWBT's
customers, all services and/or obligations of this Contract arising prior to the
date of termination including but not limited to the indemnification or warranty
provisions of this Contract, the obligation to provide Services pursuant to this
Contract with respect to all Product shipped prior to such termination.
(b) Notwithstanding subsection (a) above, Innotrac is hereby permitted to engage
in Restricted Activities and otherwise provide fulfillment services, and
Innotrac shall not be restricted or limited in any way from engaging in
Restricted Activities or otherwise providing any fulfillment services to or on
behalf of any person or entity outside the SWBT Territory.
(c) Notwithstanding subsection (a) above, Innotrac is hereby permitted also to
engage in Restricted Activities and otherwise provide fulfillment services
within the SWBT Territory, and Innotrac shall not be restricted or limited in
any way from engaging in Restricted Activities or otherwise providing any
fulfillment services within the SWBT Territory, to or on behalf of any
manufacturer, vendor, distributor, product representative or other that is
working with SWBT in connection with specific telecommunications-related
products (i.e., particular makes, models, serial numbers) that are not available
through MR (by the expiration of the 10 day period described immediately below);
provided, however, before Innotrac undertakes to engage in such activities,
Innotrac shall first provide to MR written notice that Innotrac has been
requested to engage in such activities and MR shall thereafter have 10 days from
the date of said notice in which to make available to Innotrac and SWBT the
identical products (i.e., same makes, models, serial numbers) at the same or
lower cost to Innotrac and SWBT, and if MR makes available to
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 3
Innotrac and SWBT the identical products at the same of lower cost to Innotrac
and SWBT and SWBT elects to use MR instead of the other manufacturer, vendor,
distributor, product representative or other, then Innotrac shall engage in the
Restricted Activities only through MR Innotrac agrees not to be the first party
to initiate proposals that Innotrac engage in such activities.
(d) MR agrees to use its best efforts to assist Innotrac in obtaining Products
from manufacturers in a timely manner. If Products are not made available to
Innotrac, then Innotrac shall be relieved of its duties to perform pursuant to
the time schedules set forth in this Contract to the extent that Innotrac's
performance is impossible or delayed. In the event that MR or manufacturers fail
to deliver timely to Innotrac the quantities of Products ordered by Innotrac,
then MR shall use its best efforts to locate and make available a SWBT-approved
substitute product of equal or better quality and each substitute product shall
be substituted for otherwise unavailable Product, but at the same or lower cost
than specified in Appendix A. Innotrac shall provide all Services with respect
to the substitute product. MR shall use its best efforts to assure that any
MR-designated manufacturer of Products delivers the Products to Innotrac in good
condition and that the Products function properly and are suited for their
intended purpose.
(e) While this Contract is in effect, MR shall not within the SWBT Territory,
without the prior written authorization of Innotrac, either directly or
indirectly: (i) sell, market, broker, distribute, represent or fulfill orders
from SWBT or SWBT customers for telecommunications products without involving
Innotrac as the fulfillment service provider; or (ii) authorize others to sell,
market, broker, distribute, represent or fulfill orders from SWBT or SWBT
customers for telecommunications products without involving Innotrac as the
fulfillment service provider; or (iii) retain any person or entity other than
Innotrac to perform fulfillment services.
(f) MR shall work in good faith with Innotrac to forecast the volume of expected
Orders and the quantities of Product needed to fulfill such Orders, and MR will
use its best efforts to cause SWBT to do the same.
(g) The term "SWBT Territory" shall mean the states of Texas, Missouri,
Arkansas, Kansas and Oklahoma.
5. SERVICES
Innotrac will provide the following Services:
(a) Product Stocking, including a minimum inventory to enable Innotrac to
deliver Product for thirty (30) days without reordering;
(b) Order Processing;
(c) Customer Service Support;
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 4
(d) In-warranty and Post-warranty support;
(e) Returns and credits.
6. TERMINATION
(a) Either party may terminate this Contract, without cause, only by giving the
other party at least 12 months advance written notice of such termination.
(b) Either party may terminate this Contract, with cause, if the other party has
failed to perform any material duty required of it by this Contract after giving
thirty (30) days written notice and right to cure; provided, however, that if
Innotrac commences efforts to cure any breach of its obligations to perform any
material duty required of it by this Contract within the thirty (30) day grace
period and such breach cannot be completely cured within said thirty (30) day
grace period, the cure/grace period herein shall be extended from day to day for
a period of up to thirty (30) additional days so long as Innotrac pursues
efforts with diligence to cure the breach.
(c) This Contract shall be terminated, with or without cause, upon the
termination by SWBT of the SWBT Contract.
(d) Upon any termination of this Contract or the expiration of this Contract, MR
shall use its best efforts to cause the manufacturer of Products to re-purchase
from Innotrac all Product inventory shipped to and received by Innotrac within
the prior 180 days at Innotrac's purchase price. Innotrac shall have the right
to sell or otherwise dispose of all Product not re-purchased.
7. PRICES
Innotrac will invoice for the Products and Services purchased hereunder as shown
in Appendix A. Those prices may be amended from time to time by written
agreement of MR and Innotrac.
8. TERMS OF PAYMENT
MR shall cause SWBT to pay Innotrac for the Products ordered by SWBT customers
and Services provided by Innotrac hereunder within thirty (30) days from the
date of Innotrac's invoices. All claims for monies due to or to become due from
SWBT will be subject to deductions by SWBT for any setoff or counterclaim for
monies due or to become due under this Contract or otherwise from Innotrac.
Notwithstanding that payment is expected to be made to Innotrac directly by
SWBT, MR shall remain jointly and severally liable to Innotrac for all amounts
due Innotrac pursuant to this Contract. SWBT shall have the option to receive
invoices from Innotrac weekly and apply a 0.75% discount for net seven (7) days
payment. SWBT will notify Innotrac in writing of its intent to exercise this
option.
9. LIMITATION OF LIABILITY
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 5
Neither party shall be responsible for any delay or failure in performance due
to fire, flood, explosion, war, labor dispute, embargo, government requirement,
regulatory agency requirement, failure or delay in transportation, failure by
manufacturers, vendors and suppliers to deliver supplies or equipment or correct
information, shortage of fuel or raw materials, civil or military authority, act
of god, or any other condition beyond the reasonable control of either party. IN
NO EVENT SHALL EITHER PARTY, OR THEIR PRINCIPALS, PARENT CORPORATIONS, OR
AFFILIATED COMPANIES, BE LIABLE FOR SPECIAL, CONSEQUENTIAL OR INDIRECT DAMAGES,
REGARDLESS OF THE NATURE OF LIABILITY (I.E., CONTRACT OR TORT), INCLUDING BUT
NOT LIMITED TO DAMAGES ARISING OUT OF THE TERMINATION OF ANY AGREEMENTS BETWEEN
PARTIES HERETO, OR EITHER OF THEM, AND ANY THIRD PARTIES.
10. INDEMNITIES
(a) MR shall indemnify and hold harmless, and cause SWBT to indemnify and hold
harmless, Innotrac from and against any and all claims, demands, actions, causes
of actions, losses, expenses and costs incurred by Innotrac as a result of or
relating to actions of or by MR and SWBT and their respective employees,
contractors and agents (not including Innotrac) which claims, demands, actions,
causes of actions, losses, expenses and costs arise out of or related to
contracts by MR and SWBT and their respective employees, contractors and
agents.(not including Innotrac) with SWBT customers.
(b) MR represents that it has, by virtue of the SWBT Contract, the right and
authority to (i) utilize the Insignia (defined below), and (ii) authorize
Innotrac to utilize the Insignia. In the event of any infringement or claim of
infringement of any patent, trademark, copyright, trade secret or other
proprietary interest arising out of or relating to the use of the Insignia or
the Services, MR shall indemnify and hold harmless Innotrac from any and all
actions, causes of action, demands, losses, damages, expenses or liabilities,
including costs and reasonable attorneys fees, that may result by reason of any
such infringement by or claim of infringement against Innotrac provided that
Innotrac has complied with the provisions of the SWBT Contract relating to the
manner in which the Insignia shall be handled.
(c) MR shall provide Innotrac with a letter of indemnification from Thomson
Consumer Electronics, in the form set forth in Appendix F, and MR shall
thereafter have no liability to Innotrac arising out of or relating to any
failure or delay by manufacturers of the Products to comply with their Product
warranties.
(d) To the extent not covered by Innotrac's insurance, MR shall indemnify and
hold harmless Innotrac from and against any and all claims, losses, demands,
costs, expenses, including but not limited to attorney fees expenses, actions,
actions and causes of actions and other losses as may be incurred by Innotrac
which claims, losses, demands, costs, expenses, including but not limited to
attorney fees expenses, actions, actions or causes of actions arise out of or
relate to defects in the Products.
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 6
(e) The foregoing indemnifications shall survive the termination, cancellation
or expiration of this Contract.
(f) Innotrac and MR shall both carry general liability and product defect
insurance with coverages in the minimum amounts set forth in Appendix E.
11. MANUALS/BROCHURES
Innotrac agrees to provide with each unit at no extra charge to SWBT customers
the Customer Owner's Manual that is supplied by the Product manufacturer(s).
12. ORDERS
SWBT will send Orders via EDI or, if EDI is not operational, then by facsimile
transmission. Innotrac's hours of operation will be from 8:00 a.m. to 5:00 p.m.
CST, Monday through Friday.
Orders will specify (a) a description of the Product, inclusive of any
numerical/alphabetical identification referenced in Appendix A, (b) the price
(c) the address to which the Product is to be shipped, and (d) the name and
telephone number of SWBT'S customer. Inquiries relating to SWBT'S customers'
orders should be directed initially to the SWBT sales representatives.
SWBT's customers will have the right to return the Product to Innotrac within
thirty (30) days of receipt of the Product. Innotrac agrees to issue
notification daily to SWBT, with a copy to MR, reflecting (i) the name and
telephone number of SWBT'S customer, (ii) the product returned, and (iii) the
reason for return. The notification will be forwarded to the address provided in
the Shipping and Billing clause.
Innotrac shall notify MR promptly upon learning of a lack of product to fill
SWBT orders. Innotrac may not substitute a product without MR's prior written
consent.
13. SHIPMENT OF ORDERS
Orders received by Innotrac by 1:00 p.m. CST will be shipped by Innotrac the
same day. Product will be shipped on a schedule to arrive at the destination
within 3 to 5 business days.
14. SHIPPING AND BILLING
Innotrac agrees to:
(i) ship Orders complete to SWBT's customers. Innotrac will ship
Product using the method and rate listed in Appendix A.
(ii) Ship to the destination designated in the Order.
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 7
(iii) Package, mark and label the Product in a standard format as
agreed to by the parties. Furnish adequate protective packaging at no additional
charge.
(iv) Enclose a complete shipping label with each shipment and, when
more than one package is shipped, clearly identify each package as part of the
same shipment.
(v) Render to SWBT, and a copy to MR, monthly invoices by SWBT'S market
areas in two formats: (i) duplicate paper copies containing summary billing
information (quantity and type of Product shipped, date shipped, price of the
Product, and transportation charge; and (ii) Basic Data Exchange Format diskette
containing detailed billing information plus SWBT's customer's telephone number
and name. Invoices to SWBT should be sent to: Manager-Product Management,
SouthWestern Bell Telephone Company, One Bell Center, Rm. 9-R-06, St. Louis,
Missouri 63101. Innotrac shall send a copy of Innotrac's monthly invoices to
SWBT market areas at the addresses shown in Appendix B attached hereto.
15. F.O.B.
The Products purchased hereunder will be shipped F.O.B. destination, freight
prepaid and added in accordance with the requirements of the Shipping and
Billing clause. Innotrac will be responsible for filing transportation claims.
Innotrac will promptly notify SWBT'S designated representative in the event the
Product is not delivered for whatever reason to SWBT'S customer.
Innotrac shall notify MR immediately upon learning of a lack of Product to fill
SWBT orders. Innotrac may not substitute a Product without written permission
from MR.
16. INSIGNIA
Products are expected to be delivered to Innotrac already bearing certain
trademarks, trade names, insignia, symbols, or decorative designs bearing the
SWBT mark or name (hereafter collectively called "Insignia") to the Products
furnished hereunder. If the products are delivered without the Insignia affixed,
then, upon SWBT's and MR's request, Innotrac will affix the Insignia at the cost
structure set forth in Appendix A. Such Insignia will not be affixed, used or
otherwise displayed on or in connection with the Product without SWBT'S and MR's
prior written approval. The manner in which such Insignia will be affixed must
be approved in writing by SWBT and MR
Innotrac agrees to remove all Insignia from the Product rejected or not
purchased by SWBT customers prior to any sale, use or disposition thereof by
Innotrac to any non-SWBT affiliated end users, manufacturers, vendors, or
distributors or others. Innotrac further agrees to defend, indemnify and hold
SWBT and MR harmless from any claim, loss, damage or expense (including
attorneys' fees and court costs) arising out of and/or relating to Innotrac's
failure to do so, provided SWBT gives Innotrac sufficient notice of any claim or
pending claim and allows Innotrac to defend such claim at Innotrac's sole cost
and expense with counsel satisfactory to
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 8
SWBT. This clause in no way alters or modifies Innotrac's obligations under the
Use of Information clause.
17. CUSTOMER PRODUCT REQUESTS
Any request to Innotrac by SWBT'S customers for additional Products or Services
to exchange or return will be referred by Innotrac to SWBT'S Service Center.
18. NOTICES
Any notice or demand which under the terms of this Contract or otherwise must or
may be given or made by Innotrac, or MR, will be in writing and given or made by
facsimile, telegram or similar communication or by certified or registered mall,
return receipt requested, addressed to the respective parties as shown:
(a) If to Innotrac:
Innotrac Corporation
1828 Meca Way
Norcross, GA 30093
Attn: Larry Hanger
With a copy to: David F. Cooper, Esq.
Kitchens Kelley Gaynes, P.C.
Building 11, Suite 900
3495 Piedmont Road
Atlanta, GA 30305
(b) If to MR:
Market Reps, Inc.
1506 Providence Highway, #28
Norwood, MA 02062
Attn: Chris White
With a copy to: Stanley Brooks, Esq.
Wellesley Law Associates
25 Walnut Street
Wellesley, MA 02181
The above addresses may be changed at any time by giving thirty (30) day's prior
written notice as above provided.
19. COMPLAINTS
Each party hereto agrees to notify the other party in cases where one party has
identified current or potential problems relating to Services or Products. Each
party agrees to accept and acknowledge such notices and if a problem does exist,
work with the other party on a reasonable resolution thereof. Monthly reporting
of the status of such open problems or complaints will be furnished by the
parties together with a proposed resolution and schedule thereon. Each party
agrees to use its best efforts to resolve all complaints within thirty (30) days
time period, and the parties will mutually agree on a course of action.
20. REPORTS
Innotrac agrees to provide reports on a monthly basis to MR by the 5th of each
month which will provide the following information:
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 9
(a) Number of defective Products returned to Innotrac, by model.
(b) Details on Products not delivered (wrong address, lost product,
undeliverable, refused by customer, and any other reasons).
(c) Call monitoring - total calls received, dropped calls, hang-ups,
average hold time, number to voice mail, number of escaped customers.
(d) Customer Support Center data and other information as agreed upon by
the parties or as reasonably requested by SWBT.
(e) Average delivery time per Product.
21. REPAIR PROCEDURES
SWBT's customers may contact Innotrac concerning any questions that may arise
concerning repair, and if required, Innotrac will specify any special packing of
the Product which might be necessary to provide adequate in-transit protection
from transportation damage.
22. THIRD-PARTY BENEFICIARIES
This Contract shall not provide any person not a party and signatory to this
Contract with any remedy, claim, liability, reimbursement, cause of action or
other right in excess of those expressly existing pursuant to this Contract
excepting SWBT.
23. WARRANTY
Innotrac and MR make no, and hereby expressly disclaim each to the other,
warranties, express or implied (including any warranties regarding
merchantability or fitness for a particular purpose), not expressly specified
herein respecting Products and Services. SWBT's customers will be provided with
a statement of limited warranty given by the manufacturer which will be provided
by Innotrac with every unit. All Products are under a manufacturer's warranty
for one (1) year from the date of shipment, but with respect to said
manufacturer's warranty, Innotrac shall be responsible only for assisting in the
provision of warranty support. Within the initial thirty (30) day warranty
period, a defective or unwanted Product may be returned to Innotrac for
replacement or credit as applicable with risk of in-transit loss and damage
borne and transportation charges paid by Innotrac. After the initial thirty (30)
day period, if a Product is defective, the customer must send the Product back
to Innotrac at the customer's cost for repair or replacement only.
24. CONFIDENTIALITY
Innotrac hereby acknowledges that certain confidential information and materials
of SWBT may or will be disclosed and made available to Innotrac solely by virtue
of the relationship created under this Contract, and solely to allow Innotrac to
perform its obligations under this Contract. Innotrac agrees that all such
confidential information shall be and remain the properly of SWBT, whether or
not prepared in whole or in part by SWBT, and whether or not disclosed to or
entrusted to the custody of Innotrac. The term "confidential information and
materials" shall
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 10
mean all information belonging to, used by or in the possession of SWBT relating
to its products, processes, technology, inventions, developments, business
strategies, manufacturers' suppliers, pricing, current and prospective
customers, marketing plans, customer lists, personal information as to same, and
other information that is not generally known or obtainable, and trade secrets
of every nature, kind and character; provided, however, this term shall not
include information and material that is in the public domain, or information or
material that is known to Innotrac by virtue of its own business activities
relating to the marketing, sale and provision of telecommunications-related
products, including but not limited to information relating to processes,
technology, inventions, developments, business strategies, manufacturers,
suppliers, pricing, current and prospective customers, marketing plans, customer
lists, personal information as to same, and other information that is not
generally known or obtainable, and trade secrets of every nature, kind and
character. Innotrac agrees that it shall not, during the term of this Contract
or hereafter, disclose, directly or indirectly, any confidential information or
materials, in whole or in part, to any person or entity, for any reason
whatsoever, unless previously authorized by MR and/or SWBT to do so, nor shall
it use the information for any purpose other than to perform this Contract. It
is expressly agreed and understood that Innotrac may make disclosures about this
Contract to its professional advisors and also make disclosures about this
Contract that Innotrac is obligated or feels compelled to make in an effort to
increase the price or value of its shares.
25. ACCEPTANCE - ENTIRE AGREEMENT
Upon acceptance, the terms contained in this Contract will constitute the entire
agreement between Innotrac and MR with regard to the subject matter hereof and
supersede all prior oral and written communications, agreements and
understandings of Innotrac and MR. THIS CONTRACT MAY NOT BE MODIFIED EXCEPT BY A
WRITTEN INSTRUMENT SIGNED ON BEHALF OF BOTH PARTIES BY THE REPRESENTATIVES WHO
SIGN THIS CONTRACT OR THEIR SUCCESSORS IN TITLE AND HAVING REQUISITE AUTHORITY.
If either representative is no longer employed by Innotrac/MR or has been
demoted, or if the approval level no longer exists, a manager at a level equal
to or exceeding the original level must execute revisions to this Contract. This
Contract may be executed in one (1) or more counterparts, all of which will
constitute one and the same instrument.
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 11
IN WITNESS WHEREOF, the foregoing contract has been executed by the parties
hereto, in duplicate, as of the dates set forth below.
INNOTRAC CORP. MARKET REPS, INC.
By: /s/ Larry Hanger By: /s/ Chris White
-------------------------------- --------------------------
Larry Hanger, Its Vice-President Chris White, Its President
Date: June 26, 1998 Date: June 26, 1998
RESTRICTED - PROPRIETARY INFORMATION
The information contained herein is for use by authorized
employees of the parties hereto only and is not for general
distribution within or outside their respective companies.
<PAGE> 1
EXHIBIT 10.17 (b)
[INNOTRAC LETTERHEAD]
[DATE]
Mr. Paul White
Market Reps, Inc.
55 Robinwood Road
P. O. Box 439
Onset, MA 02558
RE: Agreement between Market Reps, Inc., and Innotrac Corporation (the
"Contract")
Dear Paul:
This letter confirms Innotrac Corporation's agreement that the Contract shall be
and is hereby modified as follows:
1. Paragraph 4(a): The reference to Thomson Consumer Electronics
("Thomson") in this paragraph shall mean Thomson and its successors and/or
assigns.
2. Paragraph 4(b): The reference to Thomson in this paragraph shall mean
Thomson and its successors and/or assigns.
By signing below, please acknowledge the agreement of Market Reps, Inc. to this
modification of the Contract. I will then simply attach a copy of this letter
amendment to the Contract itself.
Best regards.
INNOTRAC CORPORATION
By: /s/ Larry Hanger
------------------------------------
Larry Hanger
Its Vice-President
AGREED TO:
MARKET REPS, INC.
By: /s/ Paul White
------------------------------------
Paul White
Its CEO
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports (and to all references to our firm) included in or made a part of this
registration statement.
/s/ Arthur Andersen LLP
Arthur Andersen LLP
Atlanta, Georgia
July 21, 1999
