-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UmXs9e2AlfhxkfTFyeEkd8JFDhWI8AB+mp1x05hgdfAWpaCkl+UWfQCgu2F+wE5t jyigxLVxy0VLc4LUjXnbdg== 0000931763-98-000235.txt : 19980212 0000931763-98-000235.hdr.sgml : 19980212 ACCESSION NUMBER: 0000931763-98-000235 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980211 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOTRAC CORP CENTRAL INDEX KEY: 0001051114 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 581592285 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-42373 FILM NUMBER: 98530190 BUSINESS ADDRESS: STREET 1: 1828 MECA WAY CITY: NORCROSS STATE: GA ZIP: 30093 BUSINESS PHONE: 7707172000 MAIL ADDRESS: STREET 1: 1828 MECA WAY CITY: NORCROSS STATE: GA ZIP: 30093 S-1/A 1 AMENDMENT #1 TO FORM S-1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 11, 1998 REGISTRATION NO. 333-42373 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- INNOTRAC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- GEORGIA 7389 58-1592285 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) 1828 MECA WAY NORCROSS, GEORGIA 30093 (770) 717-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) SCOTT D. DORFMAN CHIEF EXECUTIVE OFFICER 1828 MECA WAY NORCROSS, GEORGIA 30093 (770) 717-2000 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- COPIES TO: DAVID A. STOCKTON, ESQ. GLENN W. STURM, ESQ. KILPATRICK STOCKTON LLP NELSON MULLINS RILEY & SCARBOROUGH, 1100 PEACHTREE STREET, N.E., SUITE L.L.P. 2800 999 PEACHTREE STREET, N.E., SUITE ATLANTA, GEORGIA 30309 1400 (404) 815-6500 ATLANTA, GEORGIA 30309 (404) 815-6555 (FAX) (404) 817-6000 (404) 817-6050 (FAX) --------------- Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act of 1933, check the following box. [_] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED FEBRUARY 11, 1998 PROSPECTUS 2,500,000 SHARES [LOGO] INNOTRAC CORPORATION COMMON STOCK All of the shares of common stock (the "Common Stock") offered hereby are being sold by Innotrac Corporation (the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price of the Common Stock will be between $12.00 and $14.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Common Stock has been approved for quotation on The Nasdaq Stock Market's National Market ("Nasdaq National Market") under the symbol "INOC." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON- TRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO PUBLIC DISCOUNT(1) COMPANY(2) - -------------------------------------------------------------------------------- Per Share.................................... $ $ $ - -------------------------------------------------------------------------------- Total(3)..................................... $ $ $
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (1) The Company has agreed to indemnify the Underwriters against certain liabilities, including liabilities under the Securities Act of 1933, as amended. See "Underwriting." (2) Before deducting expenses payable by the Company estimated to be $750,000. (3) The Company has granted the Underwriters a 30-day over-allotment option to purchase up to 375,000 additional shares of Common Stock on the same terms and conditions as set forth above. If all such shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discount will be $ and the total Proceeds to Company will be $ . See "Underwriting." ----------- The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part, and to withdraw, cancel or modify the offer without notice. It is expected that certificates for the shares of Common Stock will be available for delivery on or about , 1998. ----------- J.C.Bradford&Co. Wheat First Union , 1998 GATE - ---- TITLE: Marketing Support Services GRAPHIC: Fibre optic cable bundle SUPPORTING TEXT: ADVANCED TECHNOLOGY Investments in advanced technology, including sophisticated computer integration, telephone systems and software, deliver fast, easy access to service and information. GRAPHIC: Account services team meeting SUPPORTING TEXT: MARKETING AND MANAGEMENT SUPPORT SERVICES Account services team operates as an extension of the client's internal marketing department. GRAPHIC: Customer service representative talking on telephone SUPPORTING TEXT: ORDER PROCESSING AND CUSTOMER SERVICE Representatives are trained to understand each client's products, services and technology. From the moment they answer the phone with the client's greeting, they operate as a seamless extension of the client company. GRAPHIC: View of the company's call center SUPPORTING TEXT: TELESERVICES Advanced technology, combined with personal service in multiple languages, means that making inquiries, placing orders, or getting technical support is both efficient and professional for our client's customers. GRAPHIC: View of company's warehouse SUPPORTING TEXT: INVENTORY MANAGEMENT SERVICES Automated inventory management tracks client materials to assure accurate stock counts and provide the client with detailed management information. GRAPHIC: Example of products distributed by the company SUPPORTING TEXT: PRODUCT PARTNERSHIPS Innotrac works in partnership with clients by purchasing inventory and products that support its clients' services and programs. GRAPHIC: View of company's shipping department SUPPORTING TEXT: DISTRIBUTION AND FULFILLMENT Dedicated account teams assure that each client's orders are entered, picked, packed and shipped efficiently and accurately. [COLOR PICTURES AND CAPTIONS TO BE PROVIDED BY COMPANY] [inside front cover graphics] GRAPHIC: The Company's name with stylized design. In the last decade, quality customer relationships have become an important determinant of long-term success. SUPPORTING TEXT: At Innotrac, the future looks bright. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 PROSPECTUS SUMMARY The following summary is qualified in its entirety by reference to, and should be read in conjunction with, the more detailed information and financial statements, including the notes thereto, appearing elsewhere in this Prospectus. Prior to the Offering, the business of Innotrac was conducted through the Company and eight affiliated companies (the "Affiliated Companies") as an integrated business unit. Simultaneously with, and as a condition to, the Offering, each of the Affiliated Companies will be either merged or consolidated with the Company (the "Consolidation"). See "The Consolidation." All share numbers in this Prospectus reflect a 70.58823-for-one stock split effected on December 12, 1997. Unless the context otherwise requires, all references herein to the "Company" or "Innotrac" shall mean Innotrac Corporation and the Affiliated Companies taken as a whole, and assume that the Consolidation has been consummated. Unless otherwise indicated, the information in this Prospectus does not give effect to the Underwriters' over-allotment option. THE COMPANY Innotrac is a full-service provider of customized, technology-based marketing support services primarily to large corporations. The Company's marketing support services include product and literature distribution, computerized inventory and database management and customer-initiated ("inbound") teleservices. With the goal of providing turnkey marketing support solutions, Innotrac works with its clients on a consultative basis to create customized programs through which it can most efficiently match its service offerings with its clients' needs. Innotrac's flexible marketing support solutions range from small, specialty projects to larger integrated fulfillment, teleservicing and database tracking programs. The Company has a broad range of clients including BellSouth Telecommunications, Inc. ("BellSouth"), Home Depot U.S.A., Inc. ("Home Depot"), National Automotive Parts Association ("NAPA"), Pacific Bell ("Pacific Bell"), Siemens Energy & Automation Inc. ("Siemens E&A"), Turner Broadcasting System, Inc. and US West Communications Services, Inc. ("US West"). Since its formation in 1984, the Company has expanded its business and facilities to offer distribution and management services and inbound teleservices in response to the needs of clients in a variety of industries and to capitalize on market opportunities. In 1987, the Company began providing marketing support services to BellSouth. In 1991, these services were expanded to include fulfillment services related to Caller ID telecommunications equipment. This program provides for Innotrac to (i) sell or rent to BellSouth customers Caller ID hardware, phone sets and other equipment (branded with BellSouth's logo), (ii) ship ("fulfill") customers' orders, (iii) track inventory levels and sales and marketing data regarding such items and (iv) maintain teleservicing operations to handle customer service and technical support for Caller ID units and other products. In conjunction with this program, in 1993 Innotrac pioneered a billing option (the "billing options program") to allow customers to pay for the equipment through their phone bills, on an interest free installment basis. The addition of the billing options program was well received in the marketplace, and, as a result, the fulfillment services for BellSouth have been the primary force behind the Company's rapid sales growth. Innotrac has continued to capitalize on its fulfillment expertise in the telecommunications sector, as evidenced by its additional contractual arrangements with Pacific Bell and US West. The Company has positioned itself to capitalize on the trend towards outsourcing of marketing support services. The revenues generated from its telecommunications marketing support programs have enabled the Company to develop the infrastructure necessary to offer additional and more advanced services to its customers. The Company believes it will achieve future growth by targeting large companies in a variety of industries with numerous and/or geographically diverse subsidiary or affiliate operations, extensive marketing needs or complex point-of-distribution requirements. Companies are increasingly focusing on their primary businesses and turning to outside service companies to perform marketing support functions. By outsourcing these functions, companies seek to (i) replace fixed warehouse, information technology and labor costs with variable costs, (ii) improve their reaction to business 3 cycles, (iii) improve customer service and technical support, (iv) manage capacity to meet fluctuations in demand for products and customer service, (v) create economies of scale by sharing the costs of advanced telecommunications and fulfillment systems, and (vi) reduce working capital needs. As the trend toward outsourcing continues, the Company believes that businesses will increasingly seek to reduce the number of vendors they utilize and may prefer single-source providers of integrated, customized marketing support services. The Company believes that its "one-stop" approach, combined with its use of advanced technology, provides a competitive advantage in attracting and retaining clients on a long-term basis. BUSINESS STRATEGY The Company's strategy is to take advantage of market trends towards outsourcing by leveraging its core expertise, reputation for quality and timely service and strong client relationships. The following are the key elements of this strategy: LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand its customer base in the telecommunications industry by leveraging the expertise it has developed and the results it has achieved through long- standing relationships with several clients in the industry. The Company is also seeking to expand the level of marketing support services provided to existing telecommunications clients by cross-selling its other services to such clients. BROADEN CUSTOMER BASE BY DEVELOPING SALES INFRASTRUCTURE. The Company has experienced rapid revenue growth since 1993 without a significant sales infrastructure. The Company intends to use a portion of the net proceeds of the Offering to develop a national sales force for its services, to form relationships with independent sales agencies and to develop sales and marketing materials to highlight the wide array of services offered by the Company. By developing this infrastructure, the Company intends to broaden its customer base and diversify its sources of revenues. CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a commitment to the use of advanced technology and intends to continue to upgrade and enhance its computer hardware and software applications to enable it to continue to provide flexible and powerful services to its clients. The Company believes that the use of advanced technology provides a competitive advantage and results in greater capacity and reduced labor costs. The Company also believes that continued technological advances, particularly those utilizing the Internet, will provide new opportunities for the Company to tailor its services to meet each client's needs. The Company intends to address the labor- intensive nature of fulfillment services by developing more efficient automated systems that distribute literature via electronic media directly to the customer. The Company also plans to expand its Internet-related capabilities for (i) automated inventory management, (ii) access to order and database information and (iii) virtual warehousing of literature so that such materials no longer need to be maintained in physical form in the Company's warehouses. EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored, value-added solutions that achieve each client's intended marketing results. The Company devotes considerable resources to assessing and understanding a client's industry, products, services, processes and culture, then works with the client to design programs to reduce the costs and investment required to deliver the client's marketing support programs. The Company believes that this consultative partnership approach encourages long-term client relationships, as evidenced by the fact that the Company has serviced its 10 largest clients for an average of six years and its five oldest clients for an average of 11 years. The Company believes that this approach also creates substantial opportunities to expand relationships with existing clients by cross-selling the full range of its services. SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take advantage of the fragmented nature of the marketing support services industry by selectively acquiring complementary companies that extend its presence into new geographic markets or industries, expand its client base, add new product or service applications or provide substantial operating synergies. The Company believes that there are a variety of such potential acquisition opportunities. 4 THE OFFERING Common Stock offered by the Company..................... 2,500,000 shares Common Stock to be outstanding after the Offering.................... 9,000,000 shares(1) Use of Proceeds............. To pay certain distributions in connection with the Consolidation, repay certain indebtedness of the Company, including indebtedness to a shareholder, and for general corporate purposes, including for working capital and potential acquisitions. See "Use of Proceeds" and "Certain Transactions." Proposed Nasdaq National Market symbol............... INOC - -------- (1) Excludes 383,000 shares of Common Stock issuable upon exercise of stock options outstanding under the Company's Stock Option and Incentive Award Plan (the "Stock Option Plan"). See "Management." RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should consider carefully a number of factors that could affect the Company's business, results of operations and financial condition. See "Risk Factors" beginning on page 8 for a discussion of such factors. ---------------- The Company was incorporated in Georgia on August 19, 1984 under the name Video Catalog Operations, Inc. On September 5, 1985, the name was changed to Innotrac Corporation. The Company's principal executive offices are located at 1828 Meca Way, Norcross, Georgia, where its telephone number is (770) 717-2000. 5 SUMMARY FINANCIAL DATA The summary historical and pro forma financial data set forth below should be read in conjunction with "The Consolidation," "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto and the other financial data contained elsewhere in this Prospectus. The pro forma statement of operations data for the year ended December 31, 1997 and the pro forma balance sheet data at December 31, 1997 give effect to the Consolidation and the Offering as well as the use of the net proceeds of the Offering, as if the transactions had occurred at January 1, 1997 (for the statement of operations) and December 31, 1997 (for the balance sheet). The pro forma financial information does not purport to represent what the Company's consolidated results of operations would have been if these transactions had in fact occurred on these dates, nor does it purport to indicate the future consolidated financial position or consolidated results of future operations of the Company. The pro forma adjustments are based on currently available information and certain assumptions that management believes to be reasonable.
YEARS ENDED DECEMBER 31, ------------------------------------------ PRO FORMA CONSOLIDATED AS ADJUSTED 1993 1994 1995 1996 1997 1997(1) ------ ------- ------- ------- ------- ------------ (IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------------------ Revenues, net........... $5,586 $17,380 $44,886 $71,297 $87,978 $87,978 Cost of revenues........ 3,495 11,274 30,658 55,520 67,986 67,986 ------ ------- ------- ------- ------- ------- Gross profit............ 2,091 6,106 14,228 15,777 19,992 19,992 ------ ------- ------- ------- ------- ------- Operating expenses: Selling, general and administrative expenses.............. 1,538 2,289 6,510 10,391 12,572 12,572 Depreciation and amortization.......... 157 214 293 429 631 631 ------ ------- ------- ------- ------- ------- Total operating expenses.............. 1,695 2,503 6,803 10,820 13,203 13,203 ------ ------- ------- ------- ------- ------- Operating income........ 396 3,603 7,425 4,957 6,789 6,789 ------ ------- ------- ------- ------- ------- Other (income) expense: Interest expense....... 123 622 1,090 1,456 1,788 46 Other.................. (6) 67 (73) 94 118 118 ------ ------- ------- ------- ------- ------- Total other expense.... 117 689 1,017 1,550 1,906 164 ------ ------- ------- ------- ------- ------- Income before income taxes.................. 279 2,914 6,408 3,407 4,883 6,625 Income tax benefit (provision)............ (30) (356) (793) (211) 77 (2,717) ------ ------- ------- ------- ------- ------- Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,960 $ 3,908 ====== ======= ======= ======= ======= ======= Weighted average shares................. 9,103(2) Net income per share.... $ 0.43(3) =======
6
AS OF DECEMBER 31, ------------------------------------------- PRO FORMA 1997 CONSOLIDATED 1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4) ------ ------- ------- ------- ---------- -------------- Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,521 $26,639 Property and equipment, net.................... 1,465 5,059 9,099 10,939 7,609 7,609 Total assets............ 3,457 13,548 30,414 49,037 32,496 45,342 Long term obligations... 708 4,278 4,729 4,779 3,944 343 Shareholders' equity(5).............. 409 1,624 3,195 4,540 4,827 30,938
- -------- (1) Pro forma adjustments include (i) the elimination of interest expense related to the line of credit, the term loan and subordinated debt borrowings assumed to be repaid with the proceeds of the Offering, (ii) an income tax provision to reflect the pro forma tax effects as if the Company were taxed as a C corporation and (iii) the tax effect of the interest expense adjustment. (2) Adjusted to reflect the Consolidation, the Offering (assuming the shares were outstanding for the entire period) and the exercise of all options outstanding under the Stock Option Plan (using the "treasury stock" method and assuming the shares were outstanding for the entire period). (3) Excludes the dividend accretion on redeemable capital stock of a subsidiary of approximately $87,000, or $(0.01) per share. (4) Assumes an increase to working capital equal to the aggregate estimated net proceeds less repayment of borrowings under the line of credit facility, the term loan, the subordinated debt, and the redeemable capital stock of a subsidiary. Reflects the recording of deferred tax assets and liabilities associated with the change in tax status to a C corporation of certain of the entities that are parties to the Consolidation and distribution of $6.4 million of undistributed earnings of certain of the entities that are parties to the Consolidation. See "The Consolidation" and "Use of Proceeds." (5) Includes capital stock, partners' capital, members' deficit and retained earnings. 7 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating an investment in the Common Stock offered hereby. This Prospectus contains certain forward-looking statements (as such term is defined in the Securities Act of 1933, as amended (the "Securities Act")) concerning the Company's operations, performance and financial condition, including, in particular, the likelihood of the Company's success in developing and expanding its business. These statements are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties, many of which are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those set forth below. RELIANCE ON A SMALL NUMBER OF MAJOR CLIENTS As a result of the Company's focus on developing long-term relationships with large corporations, a significant portion of the Company's revenues are derived from a relatively small number of clients. The Company's three largest clients, BellSouth, Pacific Bell and US West, accounted for an aggregate of 90% of the Company's 1996 net revenues and an aggregate of 95% of such revenues for 1997, of which BellSouth accounted for 82% and 85%, respectively. Although the Company has written agreements with all of its telecommunications clients, they generally are terminable upon certain events after the giving of notice and failure to cure and the lapse of 30 to 90 days. In addition, the Company's agreement with BellSouth may be terminated for any reason upon two years' notice. Moreover, the Company's contracts do not assure the Company a specific level of revenues and they generally do not designate the Company as the client's exclusive service provider. Further, the Company does not have written agreements with many clients. There can be no assurance that the Company will be able to retain any of its largest clients, or that the Company will be able to replace such clients with others that generate a comparable amount of revenues or profits. Further, except in the product-based marketing support and fulfillment services it performs for BellSouth and Pacific Bell, the Company does not believe that it is the sole or primary source for most of the services rendered to its clients. The loss of one or more of its largest clients could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "Business--General." RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES In connection with certain of its fulfillment services, the Company purchases Caller ID and other telecommunications equipment from third party vendors and, therefore, assumes the risks of inventory obsolescence, damage to leased units, theft and creditworthiness of purchasers. The ability of the Company to receive payment for sales or rentals of such equipment is dependent on the transmittal of correct customer invoices and remittance on a timely basis by BellSouth and Pacific Bell. If the Company is unable to manage these risks, it could have a material adverse effect on the Company's business, results of operations and financial condition. The credit risk assumed by the Company is particularly significant because of the large number of customers, each of which owes a relatively small amount. The Company's allowance for bad debt was approximately $5.7 million at December 31, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--General." RELIANCE ON TELECOMMUNICATIONS INDUSTRY Caller ID is a relatively recent offering by telecommunications companies and there can be no assurance that it will gain or sustain wide acceptance in the marketplace. In addition, the provision of Caller ID services by telecommunications companies is regulated at both the federal and state level. Such regulations may have the effect of delaying the offering or market acceptance of Caller ID service in a market of one of the Company's clients. See "Business--Government Regulation." 8 The Company is also dependent on the level of resources (financial and otherwise) expended by its clients to promote Caller ID service. There can be no assurance that the Company's telecommunications clients will sufficiently promote, or continue to promote, Caller ID service in their areas. Furthermore, there can be no assurance that the Company's telecommunications clients will achieve their estimated "market penetration" (the percentage of consumer telephone lines capable of receiving Caller ID services that actually receive such services) goals, upon which the Company, in part, plans its operations. In addition, at some time in the future, peak market penetration for Caller ID service may be achieved by the Company's clients or Caller ID service or equipment may be replaced by a different service or hardware. The occurrence of any of these factors could have a material adverse effect on the Company's business, results of operations and financial condition. ABILITY TO CONTINUE AND MANAGE GROWTH Innotrac has recently experienced significant growth in its operations. The Company's success will depend upon its ability to initiate, develop and maintain existing and new client relationships; respond to competitive developments; develop its sales infrastructure; attract, train, motivate and retain management and other personnel; and maintain the high quality of its services. In addition, the Company recently entered into a long-term lease for a new facility, which will increase lease expenses by approximately $400,000 per year. The Company's continued rapid growth can be expected to place a significant strain on the Company's management, operations, employees and resources. There can be no assurance that the Company will be able to maintain or accelerate its current growth, effectively manage its expanding operations or achieve planned growth on a timely or profitable basis. If the Company is unable to manage its growth effectively, its business, results of operations and financial condition could be materially adversely affected. See "Business." IMPACT OF TREND TOWARD OUTSOURCING The Company believes that outsourcing by businesses of an increasing number of services not directly related to their core competencies has increased significantly in the past several years. There can be no assurance that this trend will continue or not be reversed or that corporations will not decide to bring previously outsourced functions in-house. Particularly during general economic downturns, continued outsourcing of services could result in layoffs of employees, and businesses may bring in-house previously outsourced functions to avoid or delay layoffs of employees. An adverse development with respect to the trend toward outsourcing could have a material adverse effect on the business, results of operations and financial condition of the Company. See "Business--Strategy." DEPENDENCE ON LABOR FORCE The Company's success is largely dependent on its ability to recruit, hire, train and retain qualified employees. The Company's industry is very labor- intensive and has experienced high personnel turnover. A significant increase in the Company's employee turnover rate could increase the Company's recruiting and training costs and decrease operating effectiveness and productivity. Also, the addition of significant new clients or the implementation of new large-scale marketing support programs may require the Company to recruit, hire and train qualified personnel at an accelerated rate. Some of the Company's operations, particularly its technical support and customer service, require specially trained personnel. There can be no assurance that the Company will be able to continue to hire, train and retain sufficient qualified personnel to adequately staff new marketing support programs. Because a significant portion of the Company's operating expenses are related to labor costs, an increase in wages, costs of employee benefits or employment taxes could have a material adverse effect on the Company's business, results of operations or financial condition. In addition, the Company's facilities are located in an area with a relatively low unemployment rate, potentially making it more difficult and costly to hire and train qualified personnel. The inability of the Company to recruit, hire, train and retain qualified employees could have a material adverse effect on the Company's business, results of operations or financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview." RISKS OF BUSINESS INTERRUPTION; NEW FACILITY The Company's operations are dependent upon its ability to protect its distribution facilities, call center, computer and telecommunications equipment and software systems against damage from fire, power loss, 9 telecommunications interruption or failure, natural disaster and other similar events. In the third quarter of 1998, the Company expects to move its corporate offices and four distribution facilities into a new facility. In the event the Company experiences a temporary or permanent interruption of its business, through casualty, operating malfunction, as a result of the move or otherwise, the Company's business, results of operations or financial condition could be materially adversely affected. The Company's property and business interruption insurance may not adequately compensate the Company for all losses that it may incur. RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW SOFTWARE The Company's business is highly dependent on its computer and telecommunications equipment and software systems. The Company intends to use a portion of the net proceeds of the Offering to upgrade certain computer hardware and software, and, as a result, will convert certain existing programs to the new system. There can be no assurance that the Company can effectively or efficiently convert its programs to the new system. In addition, the Company's failure to maintain its technological capabilities or to respond effectively to technological changes could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's future success also will be highly dependent upon its ability to enhance existing services and develop applications to focus on its clients' needs and introduce new services and products to respond to changing technological developments. There can be no assurance that the Company can select, invest in and develop new and enhanced technology on a timely basis in the future in order to meet clients' needs and to maintain its own competitiveness, and the Company's failure to do so could have a material adverse effect on the Company's business, results of operations and financial condition. See "Business--Technology." COMPETITION The markets in which the Company competes are highly competitive. The Company expects competition to persist and intensify in the future. The Company's competitors include the in-house operations of the Company's current and potential clients, small firms offering specific services and large marketing support services firms. A number of competitors have or may develop financial and other resources greater than those of the Company. There can be no assurance that additional competitors with greater name recognition and resources than the Company will not enter the Company's markets. Because the in-house operations of the Company's existing or potential clients are significant competitors of the Company, the Company's performance and growth could be negatively impacted if its existing clients decide to provide, in- house, services that currently are outsourced or if potential clients retain or increase their in-house capabilities. Further, a decision by a large client to consolidate its outsourced services with a company other than Innotrac would have a material adverse effect on the Company. In addition, competitive pressures from current or future competitors could result in significant price erosion, which could have a material adverse effect upon the Company's business, financial condition and results of operations. See "Business-- Competition." FLUCTUATIONS IN OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY RESULTS The Company's operating results have fluctuated in the past and will fluctuate in the future based on many factors. These factors include, among other things, fluctuations in the general economy, increased competition, changes in operating expenses, expenses related to acquisitions and the potential adverse effect of acquisitions. Due to these and any unforeseen factors, it is likely that in some future quarter the Company's operating results will be below the expectations of public market analysts and investors. In such an event, the price of the Common Stock would likely be materially adversely affected. In view of the Company's recent significant growth, the Company believes that period-to-period comparisons of its financial results are not necessarily meaningful and should not be relied upon as an indication of future performance. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." DEPENDENCE ON KEY PERSONNEL The Company's operations depend in large part on the abilities and continuing efforts of its executive officers and senior management. In order to support its growth the Company will be required to effectively recruit, develop and retain additional qualified management personnel. There can be no assurance that the 10 Company will be able to (i) retain the services of its executive officers and key management, with whom the Company has no employment agreements or (ii) recruit, develop and retain additional qualified management personnel. The Company does not maintain key man life insurance on any of its executive officers, although two of the parties to the Consolidation maintain such policies in the aggregate amount of $4.5 million on the life of Scott D. Dorfman, the beneficiaries of which are one of the parties to the Consolidation and the father of Scott D. Dorfman, respectively, the proceeds of which would be used to repay debt owed to them by the Company. After the Consolidation, the Company intends that one of the policies, in the amount of $3.5 million, will be converted to name the Company as beneficiary. The business and prospects of the Company could be materially adversely affected if these persons do not continue in their key roles and the Company is unable to attract and retain qualified replacements. See "Management." YEAR 2000 COMPLIANCE The Company is discussing with its suppliers, clients, financial institutions and others the possibility of any interface difficulties relating to Year 2000 compliance that may affect the Company. To date, no significant concerns have been identified; however, there can be no assurance that there will not be any Year 2000-related operating problems or expenses that will arise with the Company's computer systems and software or in connection with the Company's interface with the computer systems and software of its suppliers, clients, financial institutions and others. Because such third- party systems or software may not be Year 2000 compliant, the Company could be required to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, results of operations and financial condition. COMPLIANCE WITH GOVERNMENT REGULATION Because the Company's current teleservicing business consists primarily of responding to inbound telephone calls, as opposed to outbound calls, it is not highly regulated. However, in connection with the limited amount of outbound telemarketing services that it provides, the Company is required to comply with the Federal Communications Commission's rules under the Federal Telephone Consumer Protection Act of 1991 and the Federal Trade Commission's regulations under the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both of which govern telephone solicitation. If the Company expands its outbound telemarketing services, such rules and regulations would apply to a larger percentage of the Company's business. Furthermore, there may be additional federal and state legislation, or changes in regulatory implementation, that limit the activity of the Company or its clients in the future or significantly increase the costs of compliance. Additionally, the Company could be responsible for its failure to comply with regulations applicable to its clients. The adoption of unfavorable federal or state legislation or regulations affecting Caller ID service could have a material adverse effect upon the Company's business, financial condition and results of operations. See "--Risks Associated with Product-Based Marketing Support Services" and "Business--Government Regulation." CONTROL BY MANAGEMENT; USE OF PROCEEDS TO BENEFIT MANAGEMENT Following the Offering, Scott D. Dorfman, the Company's Chairman, President and Chief Executive Officer, will beneficially own approximately 68% of the outstanding Common Stock (approximately 66% if the Underwriters' over- allotment option is exercised in full). See "Principal Shareholders." As a result, Mr. Dorfman would control the Company's Board of Directors and, therefore, the business, policies and affairs of the Company. Such voting concentration may also have the effect of discouraging, delaying or preventing a change in control of the Company. A portion of the net proceeds of the Offering will be used to make distributions to Mr. Dorfman, his children and a shareholder of the Company of accumulated earnings of two of the entities that are parties to the Consolidation and an amount to pay taxes on the 1997 and 1998 earnings of certain Affiliated Companies, to repay certain indebtedness to a shareholder of the Company and to repay certain indebtedness which is guaranteed by Mr. Dorfman. See "Use of Proceeds" and "Certain Transactions." DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS One component of the Company's strategy is to pursue strategic acquisitions of companies that have services, products, technologies, industry specializations or geographic coverage that extend or complement the 11 Company's existing business. There can be no assurance that the Company will be able to successfully identify, acquire on favorable terms or integrate such companies. If any acquisition is completed, there can be no assurance that such acquisition will enhance the Company's business, results of operations or financial condition. The Company may in the future face increased competition for acquisition candidates, which may inhibit the Company's ability to consummate suitable acquisitions on terms favorable to the Company. A portion of the Company's capital resources and proceeds of this Offering could be used for acquisitions. The Company may require additional debt or equity financing for future acquisitions, which financing may not be available on terms favorable to the Company, if at all. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Articles of Incorporation and Bylaws may make a change in control of the Company more difficult to effect, even if a change in control were in the shareholders' interests. Provisions in the Company's Articles of Incorporation allow the Board to determine the terms of preferred stock that may be issued by the Company without approval of the holders of the Common Stock. The ability of the Company to issue preferred stock in such manner could enable the Board to prevent changes in management and control of the Company. The Articles also provide for three classes of directors as nearly equal in size as possible. Each class holds office until the third annual meeting following election except that the initial terms expire in 1998, 1999 and 2000. This provision may have an anti-takeover effect because a third party would be unable to acquire immediate control of the entire Board. In addition, the Company's Board of Directors has adopted a Rights Agreement (as defined herein) pursuant to which holders of Common Stock will be entitled to purchase a fraction of a share of the Company's Series A Participating Cumulative Preferred Stock if a third party acquires beneficial ownership of 15% or more of the Common Stock and will be entitled to purchase the stock of a Principal Party (as defined in the Rights Agreement) at a discount upon the occurrence of certain triggering events. These provisions of the Company's Articles of Incorporation, Bylaws and the Rights Agreement could have the effect of discouraging tender offers or other transactions that would result in shareholders receiving a premium over the market price for the Common Stock. See "Description of Capital Stock." ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF MARKET PRICE Prior to the Offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or continue after the Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock has been determined by negotiation between the Company, J.C. Bradford & Co. and Wheat First Securities, Inc. as representatives (the "Representatives") of the several underwriters (the "Underwriters"), and may bear no relationship to the market price for the Common Stock after the Offering. See "Underwriting." From time to time after the Offering, there may be significant volatility in the market price of the Common Stock. Quarterly operating results of the Company, changes in earnings estimates by analysts, changes in general conditions in the economy or the financial markets, or other developments affecting the Company or its industry or competitors could cause the market price of the Common Stock to fluctuate substantially. In addition, recently the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. Therefore, the Company cannot predict the market price for the Common Stock subsequent to the Offering. IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will experience an immediate and substantial dilution of $9.49 per share in the net tangible book value of their shares of Common Stock immediately following the Offering. Current shareholders will receive a material increase in the book value of their shares. If the Company issues additional Common Stock in the future, including shares that may be issued in connection with acquisitions, purchasers of Common Stock in the Offering may experience further dilution in net tangible book value per share of the Common Stock. See "Dilution." 12 SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following the Offering could adversely affect the market price for the Common Stock. Upon consummation of the Offering, the Company will have a total of 9,000,000 shares of Common Stock outstanding (9,375,000 if the Underwriters' over-allotment option is exercised in full). Of these shares, the 2,500,000 shares offered hereby (2,875,000 if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restrictions under the Securities Act. All of the remaining shares are "restricted securities" as that term is defined by Rule 144 promulgated under the Securities Act and will be eligible for sale in compliance with Rule 144 volume and other requirements. The number of outstanding shares of Common Stock available for sale in the public market will be limited by lock-up agreements under which the Company, its officers, directors and shareholders have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of J.C. Bradford & Co., on behalf of the Underwriters, and applicable restrictions under the Securities Act. The Company intends to register for issuance or resale the 800,000 shares of Common Stock reserved for issuance under the Stock Option Plan on a registration statement on Form S-8. Following the Offering, sales of substantial amounts of Common Stock in the public market, pursuant to Rule 144 or otherwise, or even the potential of such sales, could adversely affect the prevailing market price of the Common Stock or impair the Company's ability to raise additional capital through equity issuances. See "Management--Stock Option Plan," "Shares Eligible for Future Sale" and "Underwriting." POLICY TO PAY NO DIVIDENDS The Company presently intends to retain its earnings to finance its growth and expansion and for general corporate purposes. Consequently, it does not anticipate paying any cash dividends in the foreseeable future. In addition, the Company's financing agreements contain limitations on the payment of cash dividends and other distributions of assets. See "Dividend Policy." 13 THE CONSOLIDATION Prior to the Offering, the business of the Company, a C corporation for tax purposes, was conducted through the Company and the Affiliated Companies, including three corporations that had elected S corporation tax status, one limited partnership, two limited liability companies and three C corporations. Ninety percent or more of the equity of each of the Affiliated Companies was owned by Scott D. Dorfman, the Chairman, President and Chief Executive Officer of the Company, his family and affiliated entities. The Consolidation will be effected simultaneously with, and as a condition to, the Offering. In conjunction with the Consolidation, the Company performed a valuation of the Affiliated Companies prior to the Offering, which was based on, among other things, historical and projected revenue and net income streams of the various entities that are parties to the Consolidation. As a result of the valuation, the 6,500,000 shares to be outstanding after the Consolidation (without giving effect to the Offering) will be distributed to the owners of the Affiliated Companies based on each Affiliated Company's value relative to the whole as follows, assuming an initial public offering price of $13.00 per share:
ENTITY SHARES ------ ------ HomeTel Providers Partners, L.P.................................. 3,538,462 HomeTel Systems, Inc............................................. 1,200,805 Innotrac Corporation............................................. 1,080,000 SellTel #1, Inc.................................................. 286,105 RenTel #1, Inc................................................... 187,448 SellTel #2, L.L.C................................................ 147,985 RenTel #2, L.L.C................................................. 49,328 IELC, Inc........................................................ 9,867 --------- Total.......................................................... 6,500,000 =========
Such amounts exclude the minority interests of two entities that are parties to the Consolidation. HomeTel Providers Partners, L.P. ("Providers L.P.") is the acquiring entity for accounting purposes and its balance sheet will carry over at historical cost. Since the other entities are wholly-owned by either the majority shareholder of Providers L.P., Scott D. Dorfman, or his wife or children, those entities are considered to be under common control, and the balance sheets of such entities will also carry over at historical cost. In connection with the Consolidation, two of the affiliated entities that are parties to the Consolidation will make certain distributions to their principals, Mr. Dorfman, his children and ITC Service Company ("ITC"), a shareholder of the Company, reflecting a portion of accumulated earnings and an amount equal to the estimated tax payments to be made by such principals with respect to such entities' estimated income for 1997 and 1998. See "Use of Proceeds," "Certain Transactions" and Note 10 of the financial statements. 14 USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share are estimated to be approximately $29.5 million (approximately $34.1 million if the Underwriters' over-allotment option is exercised in full) after deduction of the underwriting discount and estimated Offering expenses payable by the Company. The Company intends to use approximately $6.4 million of the net proceeds of the Offering to distribute a portion of the earnings of two of the entities that are parties to the Consolidation to the equity holders thereof, including Mr. Dorfman, his children and ITC. In addition, the Company intends to repay indebtedness with certain of the net proceeds of the Offering as follows: (i) approximately $12.0 million to repay indebtedness under its line of credit facility, (ii) approximately $1.0 million to repay a term loan and (iii) $3.5 million to repay indebtedness to ITC. Such indebtedness currently bears interest per annum at rates equal to (i) at the Company's option, LIBOR plus 225 basis points (8.25%) or the lender's prime rate (8.5%), (ii) 8.95% per annum and (iii) the prime rate plus 8.0% (16.5%), respectively, and, if not repaid, will mature in November, July and April 1999, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Approximately $390,000 of such indebtedness under the line of credit will be incurred to fund the redemption of the equity interests of Mr. Dorfman's father in one of the entities that is a party to the Consolidation. The remainder of the net proceeds is expected to be used for general corporate purposes, including (i) approximately $1.0 million to develop the Company's sales infrastructure, which entails hiring new sales personnel, forming relationships with independent sales organizations and developing sales and marketing materials, (ii) approximately $1.0 million to upgrade the Company's computer software, (iii) approximately $500,000 to purchase computer hardware for the Company's call center, (iv) approximately $1.5 million for equipment and fixtures for the Company's new distribution facility and corporate headquarters expected to be completed in the third quarter of 1998, and (v) for general working capital needs. The Company may from time to time consider possible acquisitions of related businesses and the use of net proceeds from the Offering to finance such acquisitions. The Company does not have any present agreements or commitments for, and is not presently engaged in active negotiations with respect to, any particular prospects. Pending application of the net proceeds as described above, the Company will invest the net proceeds in short-term, interest-bearing investment grade or government securities. DIVIDEND POLICY Innotrac has never paid any cash dividends on its Common Stock. The Company currently intends to retain its future earnings, if any, to finance the growth, development, and expansion of the Company's business and, accordingly, does not currently intend to declare or pay any dividends on the Common Stock for the foreseeable future. The declaration, payment and amount of future dividends, if any, will be subject to the discretion of the Company's Board of Directors and will depend upon the future earnings, results of operations, financial condition and capital requirements of the Company, among other factors. In addition, the Company's revolving credit agreement with a bank prohibits the payment of cash dividends and other distributions of assets in excess of 40% of the Company's net income. See "The Consolidation" for a description of distributions to equity holders, including shareholders of the Company, made by affiliated companies that are parties to the Consolidation. 15 DILUTION At December 31, 1997, the combined net tangible book value of the Company was approximately $4.8 million, or $0.74 per share. After giving effect to the exercise of 95,000 presently exercisable options, the distribution of $6.4 million by two of the entities that are parties to the Consolidation, and the Consolidation, as if they had occurred at December 31, 1997, the pro forma net tangible book value per share before the Offering would have been approximately $2.5 million, or $0.38 per share. Net tangible book value per share represents the amount of the Company's shareholders' equity less intangible assets, divided by the number of shares of Common Stock outstanding, including presently exercisable options. Dilution per share to new investors represents the difference between the price per share of Common Stock in the Offering and the pro forma net tangible book value per share of Common Stock immediately after completion of the Offering. After giving effect to the presently exercisable options, the distribution of $6.4 million, the Consolidation and the sale of 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share and after deducting the underwriting discount and estimated Offering expenses payable by the Company, the pro forma net tangible book value of the Company would have been approximately $31.9 million, or $3.51 per share. This represents an immediate increase in pro forma net tangible book value of $3.13 per share to existing shareholders and an immediate dilution of $9.49 per share to new investors purchasing the shares of Common Stock in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share.............. $13.00 Historical net tangible book value per share................. $0.74 Effect of currently exercisable options...................... 0.15 Proposed shareholder distribution per share.................. (0.97) Pro forma tax effect of Consolidation........................ 0.46 ----- Pro forma net tangible book value per share before the Offering.................................................... 0.38 Increase in net tangible book value per share attributable to new investors............................................... 3.13 ----- Pro forma net tangible book value after the Offering......... 3.51 ------ Dilution per share to new investors.......................... $ 9.49 ======
The following table sets forth, on a pro forma basis to give effect to the Consolidation as of December 31, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing shareholders and the new investors, assuming the sale of 2,500,000 shares of Common Stock at an assumed initial public offering price of $13.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE ----------------- ------------------- PRICE NUMBER PERCENT AMOUNT PERCENT PER SHARE --------- ------- ----------- ------- --------- Existing shareholders(1)....... 6,500,000 72% $ 22,000 0% $ 0.00 New investors.................. 2,500,000 28 32,500,000 100 $13.00 --------- --- ----------- --- Total........................ 9,000,000 100% $32,522,000 100% ========= === =========== ===
- -------- (1) Does not include 383,000 shares of Common Stock reserved for issuance pursuant to stock options granted under the Company's Stock Option Plan, of which options for 55,000 and 40,000 shares are presently exercisable at $9.10 per share and $13.00 per share, respectively. 16 CAPITALIZATION The following table sets forth, as of December 31, 1997, (i) the actual combined capitalization of the Company and (ii) the pro forma consolidated capitalization of the Company giving effect to the Consolidation and to the application of the net proceeds from the Offering at an assumed initial public offering price of $13.00 per share. The data set forth below should be read in conjunction with "The Consolidation," "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto and the other financial data included elsewhere in this Prospectus.
DECEMBER 31, 1997 --------------------- PRO FORMA CONSOLIDATED ACTUAL AS ADJUSTED ------- ------------ (IN THOUSANDS) Indebtedness: Line-of-credit facility................................ $ 8,545 $ -- Long term debt(1)...................................... 1,141 27 Subordinated debt...................................... 3,500 -- Redeemable capital stock(2)............................ 917 527 ------- ------- Total indebtedness................................... 14,103 554 ------- ------- Shareholders' equity: Partners' capital...................................... 1,759 -- Members' deficit....................................... (490) -- Preferred Stock, $0.10 par value, 10,000,000 shares authorized; none issued and outstanding............... -- -- Common Stock, $0.10 par value; 50,000,000 shares authorized, 6,500,000 shares issued and outstanding, 9,000,000 shares issued and outstanding as adjusted(3)........................................... 5 900 Additional paid-in capital(3).......................... 14 25,646 Retained earnings...................................... 3,539 4,392 ------- ------- Total shareholders' equity........................... 4,827 30,938 ------- ------- Total capitalization............................... $18,930 $31,492 ======= =======
- -------- (1) Includes current portion of related indebtedness. (2) Represents redeemable capital stock of a subsidiary to be repurchased in the fourth quarter of 1998. See "Certain Transactions." (3) Excludes 383,000 shares of Common Stock reserved for issuance pursuant to stock options granted under the Stock Option Plan. 17 SELECTED FINANCIAL DATA The following table sets forth selected financial data for the Company. The selected historical statements of operations data for each of the years ended December 31, 1995, 1996 and 1997 and the selected historical balance sheet data for the periods then ended have been derived from the combined financial statements that have been audited by Arthur Andersen LLP, independent public accountants. The pro forma statement of operations data for the year ended December 31, 1997 and the pro forma balance sheet data at December 31, 1997 give effect to the Consolidation and the Offering as well as the use of the net proceeds from the Offering as if the transactions had occurred at January 1, 1997 (for the statement of operations) and December 31, 1997 (for the balance sheet). The pro forma financial information does not purport to represent what the Company's consolidated results of operations would have been if these transactions had in fact occurred on these dates, nor does it purport to indicate the future consolidated financial position or consolidated results of future operations of the Company. The pro forma adjustments are based on currently available information and certain assumptions that management believes to be reasonable. The selected financial data should be read in conjunction with "The Consolidation," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto and other financial data included elsewhere in this Prospectus.
PRO FORMA YEARS ENDED DECEMBER 31, CONSOLIDATED ------------------------------------------ AS ADJUSTED 1993 1994 1995 1996 1997 1997(1) ------ ------- ------- ------- ------- ------------ (IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------------------ Revenues, net........... $5,586 $17,380 $44,886 $71,297 $87,978 $87,978 Cost of revenues........ 3,495 11,274 30,658 55,520 67,986 67,986 ------ ------- ------- ------- ------- ------- Gross profit............ 2,091 6,106 14,228 15,777 19,992 19,992 ------ ------- ------- ------- ------- ------- Operating expenses: Selling, general and administrative expenses.............. 1,538 2,289 6,510 10,391 12,572 12,572 Depreciation and amortization.......... 157 214 293 429 631 631 ------ ------- ------- ------- ------- ------- Total operating expenses.............. 1,695 2,503 6,803 10,820 13,203 13,203 ------ ------- ------- ------- ------- ------- Operating income........ 396 3,603 7,425 4,957 6,789 6,789 ------ ------- ------- ------- ------- ------- Other (income) expense: Interest expense....... 123 622 1,090 1,456 1,788 46 Other.................. (6) 67 (73) 94 118 118 ------ ------- ------- ------- ------- ------- Total other expense.... 117 689 1,017 1,550 1,906 164 ------ ------- ------- ------- ------- ------- Income before income taxes.................. 279 2,914 6,408 3,407 4,883 6,625 Income tax benefit (provision)............ (30) (356) (793) (211) 77 (2,717) ------ ------- ------- ------- ------- ------- Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,960 $ 3,908 ====== ======= ======= ======= ======= ======= Weighted average shares................. 9,103(2) Net income per share.... $ 0.43(3) =======
AS OF DECEMBER 31, ------------------------------------------- PRO FORMA 1997 CONSOLIDATED 1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4) ------ ------- ------- ------- ---------- -------------- Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,521 $26,639 Property and equipment, net.................... 1,465 5,059 9,099 10,939 7,609 7,609 Total assets............ 3,457 13,548 30,414 49,037 32,496 45,342 Long-term obligations... 708 4,278 4,729 4,779 3,944 343 Shareholders' equity(5).............. 409 1,624 3,195 4,540 4,827 30,938
18 - -------- (1) Pro forma adjustments include (i) the elimination of interest expense on the line of credit, the term loan and subordinated debt borrowings assumed to be repaid with the proceeds of the Offering, (ii) an income tax provision to reflect the pro forma tax effects as if the Company were taxed as a C corporation and (iii) the tax effect of the interest expense adjustment. (2) Adjusted to reflect the Consolidation, the Offering (assuming the shares were outstanding for the entire period) and the exercise of all options outstanding under the Stock Option Plan (using the "treasury stock" method and assuming the shares were outstanding for the entire period). (3) Excludes the dividend accretion on redeemable capital stock of a subsidiary of approximately $87,000, or $(0.01) per share. (4) Assumes an increase to working capital equal to the aggregate estimated net proceeds less repayment of borrowings under the line-of-credit facility, the term loan the subordinated debt and the redeemable capital stock of a subsidiary. Reflects the recording of deferred tax assets and liabilities associated with the change in tax status to a C corporation of certain of the entities as a result of the Consolidation, and distribution of $6.4 million of a portion of undistributed earnings of certain of the entities that are parties to the Consolidation. See "The Consolidation" and "Use of Proceeds." (5) Includes capital stock, partners' capital, members' deficit and retained earnings. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this Prospectus. OVERVIEW Since its formation in 1984, the Company has expanded its business and facilities to offer distribution and management services, and inbound teleservices in response to the needs of clients in a variety of industries and to capitalize on market opportunities. In 1987, the Company began providing marketing support services to BellSouth. In 1991, the Company initiated a fulfillment program to sell or rent to BellSouth customers Caller ID hardware, phone sets and other equipment, and in 1993, began billing the charges on customers' telephone bills. As part of this program, Innotrac acquires the Caller ID and other telecommunications equipment from third party manufacturers, thereby assuming inventory and credit risk. Upon receipt of an order, the Company ships the product, tracks inventory levels and sales and marketing data and maintains teleservicing operations to handle customer service and technical support. At a customer's option, the Company sells a Caller ID unit generally in four to six installments or rents it for an open-ended term. If a rental customer chooses to purchase a Caller ID unit, the customer must return the old unit (which is refurbished and rented again by the Company) and purchase a new one. The Company's margins on installment sales and rentals of Caller ID units are similar. Rentals accounted for 19.3% of the Company's net revenues in 1997 compared to 21.3% in 1996 and sales accounted for 77.2% of the Company's net revenues in 1997 as compared to 72.6% in 1996. To leverage its experience and infrastructure investment related to the BellSouth marketing support program, in June 1996 the Company entered into an agreement with Pacific Bell to sell Pacific Bell's Caller ID equipment. The Company also provides marketing support services to US West and seeks other telecommunications companies for whom it can provide similar marketing support services. The Company has experienced significant growth in revenue in recent years primarily due to the growth in Caller ID market penetration and service improvements by the Company with respect to product-based marketing support services. Industry sources indicate that at the end of 1995 BellSouth's Caller ID penetration was approximately 13%. BellSouth indicates that through the end of December 1997 its Caller ID penetration had increased to approximately 29%. In 1993 the Company began billing on the telephone bill and in mid-1995, changed the method of selling BellSouth equipment from taking referrals in the Company's call center from BellSouth representatives to having a BellSouth representative negotiate sales on behalf of the Company and send order information to the Company by electronic data interchange ("EDI"). This change in process increased sales and decreased order processing time. Also, in January 1997 the Company implemented an interactive voice response ("IVR") system to handle some of the BellSouth customer service calls, which generally reduced response time and lowered operating costs. Services provided to BellSouth and its customers accounted for 85% and 82% of the Company's 1997 and 1996 net revenues, respectively. Management believes that growth in revenues from Caller ID marketing support services will remain constant for the next several years as market penetration increases and new Caller ID services that require enhanced equipment are introduced. Sales are expected to level-off as penetration of the market matures. According to industry sources, market penetration of Caller ID services in the U.S. as of December 1, 1997 is approximately 18% and is expected to peak at approximately 75% by 2007. Management intends to offset the eventual maturity of its Caller ID business by diversifying its client base and expanding the scope of marketing support services it renders to its clients by cross-selling its other services to existing clients. The Company intends to use a portion of the net proceeds from the Offering to develop a sales infrastructure to aggressively promote its marketing support services. See "Use of Proceeds" and "Business--Business Strategy." Revenues are recognized on the accrual basis as services are provided to customers or as units are shipped or rentals are provided. An estimate of actual write-offs of unbilled installment receivables that will never be billed due to a failure to return the product, fraud or other reasons is netted against revenues. 20 The largest component of the Company's expenses is its cost of revenues, which includes the product costs of telecommunications equipment, depreciation on Caller ID rental equipment, the costs of labor associated with marketing support services for a particular client, telecommunications services costs, materials and freight charges, and directly allocable facilities costs. Most of these costs are variable in nature. A second component of the Company's expenses includes selling, general and administrative ("SG&A") expenses. This expense item is comprised of labor and other costs associated with marketing, financial, information technology support, human resources and administrative functions that are not allocable to specific client services, as well as bad debt expense. SG&A expenses tend to be fixed in nature, with the exception of bad debt, which is related to revenues. RESULTS OF OPERATIONS The following table sets forth summary operating data, expressed as a percentage of revenues, for the years ended December 31, 1995, 1996 and 1997. Operating results for any period are not necessarily indicative of results for any future period. The financial information provided below has been rounded in order to simplify its presentation. However, the percentages below are calculated using the detailed information contained in the financial statements, the notes thereto and the other financial data included elsewhere in this Prospectus.
YEARS ENDED DECEMBER 31, ------------------- 1995 1996 1997 ----- ----- ----- Revenues, net.............................................. 100.0% 100.0% 100.0% Cost of revenues........................................... 68.3 77.9 77.3 Gross profit............................................... 31.7 22.1 22.7 Selling, general and administrative expenses............... 14.5 14.6 14.3 Operating income........................................... 16.5 7.0 7.7 Interest expense........................................... 2.4 2.0 2.0 Income before income taxes................................. 14.3% 4.8% 5.6%
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996 Revenues. The Company's net revenues increased 23.4% to $88.0 million for the year ended December 31, 1997 from $71.3 million for the year ended December 31, 1996, primarily due to increased sales of Caller ID units to BellSouth and Pacific Bell customers. The growth was partially offset by a decrease in net revenues during the year ended December 31, 1997 compared to the prior year resulting from the conclusion of a fulfillment program performed by the Company in connection with the 1996 Olympic Games and an increase in the Company's reserve for returns and allowances from $3.5 million for the year ended December 31, 1996 to $6.3 million for the year ended December 31, 1997. In addition, the Company's sales to Pacific Bell customers during 1997 and 1996 were less than expected due to regulatory issues affecting Pacific Bell that delayed the rollout of Caller ID services by Pacific Bell and a low level of promotion of Caller ID services by Pacific Bell. See "Business--Government Regulation." Cost of Revenues. The Company's cost of revenues increased 22.5% to $68.0 million for the year ended December 31, 1997 compared to $55.5 million for the year ended December 31, 1996. This increase was due to increased revenue volume and a $1.6 million write-down (1.8% of revenues) on Caller ID equipment purchased for the start-up of the Pacific Bell program that could not be sold above their cost due to Pacific Bell's regulatory delays that resulted in product obsolescence issues. The increase in cost of revenues was also associated with the Company's new call center. Gross Profit. For the year ended December 31, 1997, the Company's gross profit was $20.0 million or 22.7% of revenues as compared to $15.8 million or 22.1% of revenues for the year ended December 31, 1996. The increase in gross margin was due to increased sales along with the impact of a price increase for Caller ID units with enhanced features. This was partially offset by the $1.6 million inventory writedown and the costs associated with the new call center, along with the impact of introductory promotional prices on certain Caller ID units which were lower than regular prices. 21 Selling, General and Administrative Expenses. SG&A expenses for the year ended December 31, 1997 were $12.6 million or 14.3% of revenues compared to $10.4 million or 14.6% of revenues for the year ended December 31, 1996. The decrease in SG&A expenses as a percentage of revenues was due to improved economies of scale. This was slightly offset by an increase in the Company's bad debt expense, most of which was associated with sales of Caller ID and other telecommunications equipment to BellSouth and Pacific Bell customers. Bad debt expense was $7.8 million for the year ended December 31, 1997 as compared to $5.8 million for the year ended December 31, 1996. The increase in bad debt expense and the allowance for doubtful accounts was primarily due to the Company's higher revenue volume and higher Caller ID market penetration, which the Company believes results in an increase in sales of Caller ID units to consumers having higher credit risks. The Company believes that higher credit risk customers result in larger write-offs for nonpayment due to increased chargebacks by telecommunications companies to suppliers of nonregulated services when customers do not pay for these services. Interest Expense. Interest expense increased to $1.8 million for the year ended December 31, 1997 from $1.5 million for the year ended December 31, 1996. The increase was primarily due to increased borrowings under the Company's line of credit to fund working capital, consisting primarily of accounts receivable and inventory necessary to support increases in revenues. This increase was slightly offset by lower interest on the Company's subordinated debt in 1997 compared to 1996 due to a repayment of such debt by the Company in September 1996. Income Taxes. The Company's effective tax rates for the years ended December 31, 1997 and 1996 were (1.6%) and 6.2%, respectively. The change from 1996 to 1997 was primarily the result of a higher level of income attributable to the pass-through entities involved in the Consolidation. As a result of the Consolidation, the Company expects its effective tax rate in future periods to increase to statutory levels. See "The Consolidation." YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. The Company's net revenues increased 58.8% to $71.3 million for the year ended December 31, 1996 from $44.9 million for the year ended December 31, 1995, primarily due to increased sales of Caller ID units to BellSouth customers. Cost of Revenues. The Company's cost of revenues increased 80.8% to $55.5 million for the year ended December 31, 1996 from $30.7 million for the year ended December 31, 1995, primarily due to increased revenue volume, as well as costs associated with the Company's new call center, which opened in June 1996. Gross Profit. The Company's gross profit for the year ended December 31, 1996 increased 11.2% to $15.8 million or 22.1% of revenues from $14.2 million or 31.7% of revenues for the year ended December 31, 1995. The decrease in gross margin was primarily due to costs associated with the call center that opened in June 1996, along with the impact of introductory promotional prices on certain Caller ID units sold during the last six months of 1996. Selling, General and Administrative Expenses. SG&A expenses for the year ended December 31, 1996 were $10.4 million or 14.6% of revenues compared to $6.5 million or 14.5% of revenues for the year ended December 31, 1995. The increase in the 1996 period over the 1995 period was primarily due to the fixed costs associated with the Company's new call center and an increase in the Company's bad debt expense. The bad debt expense, which was associated with sales of Caller ID and other telecommunications equipment, was $5.8 million for the year ended December 31, 1996, compared to $3.0 million for the year ended December 31, 1995. The increase in bad debt expense was primarily due to the Company's higher revenue volume and Caller ID market penetration, which the Company believes results in an increase in sales of Caller ID units to consumers having higher credit risks. 22 Interest Expense. Interest expense increased to $1.5 million for the year ended December 31, 1996 from $1.1 million for the year ended December 31, 1995. The increase was primarily due to additional borrowings in the 1996 period under the Company's line of credit to fund working capital, consisting primarily of accounts receivable and inventory required to support increased revenue. The increase was partially offset by lower interest on the Company's subordinated debt in the 1996 period compared to the 1995 period due to a repayment of such debt made by the Company in September 1996. Income Taxes. The Company's effective tax rates for the years ended December 31, 1996 and 1995 were 6.2% and 12.3%, respectively. This change was primarily the result of a higher level of income attributable to the pass-through entities involved in the Consolidation. See "The Consolidation." LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has funded its operations and capital expenditures primarily through cash flow from operations and borrowings from banks and shareholders. The Company had cash and cash equivalents of approximately $40,000, $2.0 million and $554,000 at December 31, 1995, December 31, 1996 and December 31, 1997, respectively. The Company maintains a $25.0 million revolving line of credit with a bank, maturing in November 1999, which was increased from $18.0 million in December 1997. Borrowings under the line of credit bear interest at the Company's option at the bank's prime rate, as adjusted from time to time, or LIBOR plus up to 225 basis points. At December 31, 1997, the interest rate was 8.5%. The Company also has a term loan with the same bank that matures in July 1999 and bears interest at 8.95% per annum. In addition, the Company has a subordinated note payable to a shareholder, which matures in April 1999 and bears interest at a particular bank's prime rate, as adjusted from time to time, plus 8.0% per annum. At December 31, 1997, the interest rate was 16.5%. At December 31, 1997, approximately $8.5 million, $1.1 million and $3.5 million were outstanding under the line of credit, the term loan and the subordinated note, respectively. The Company anticipates that all outstanding indebtedness under the line of credit, term loan and subordinated note will be repaid from the net proceeds of this Offering. The Company will be able to continue to draw on the line of credit from time to time. See "Use of Proceeds." As of December 31, 1997, the Company had entered into various operating leases in the ordinary course of business and an operating lease for a new distribution facility and corporate offices expected to be ready for occupancy in the third quarter of 1998. As a result of the new facility lease, rental expense will increase approximately $400,000 per year through 2008. In addition, the Company entered into an agreement with a related party to acquire from him by the end of 1998 all of his interest in a subsidiary of the Company and one entity involved in the Consolidation for an aggregate of $980,000. See "Certain Transactions." During the year ended December 31, 1997, the Company generated cash flow from operating activities of $18.9 million compared to $88,000 and $6.4 million for the same periods in 1996 and 1995, respectively. The increase in cash flow from operating activities in 1997 was due to lower working capital requirements resulting from decreased accounts receivable due to shorter installment periods and reduced inventory. The lower cash flow from operating activities for the year ended December 31, 1996 was due to lower net income and increased working capital requirements needed to support the expansion of the Company's Caller ID programs, along with the impact of the delay in the Pacific Bell Caller ID program. Net cash used in investing activities was $6.9 million for the year ended December 31, 1997 compared to $8.0 million for the year ended December 31, 1996. This decrease was primarily due to decreased purchases of telecommunications rental equipment. Net cash used in investing activities was $8.0 million for the year ended December 31, 1996 compared to $7.8 million for the year ended December 31, 1995. This increase was primarily due to increased purchases of telecommunications equipment and capital costs associated with the build-out and opening of the Company's call center. Net cash (used in) provided from financing activities was ($13.4 million) for the year ended December 31, 1997 compared to $9.8 million for the year ended December 31, 1996 and $588,000 for the year ended December 31, 1995. The use of cash for financing activities for the year ended December 31, 1997 reflects 23 repayments under the line of credit and term loan. The increase in cash provided by financing activities for the year ended December 31, 1996 was due to increased borrowings under the line of credit to fund increased accounts receivable and inventory, partially offset by repayments on the term loan and subordinated debt and distributions to equity holders of entities involved in the Consolidation. The Company estimates that its cash and financing needs through 1998 will be met by cash flows from operations, its line of credit facility, and the net proceeds from the Offering. However, any increases in the Company's growth rate, shortfalls in anticipated revenues, increases in anticipated expenses, or significant acquisitions could have a material adverse effect on the Company's liquidity and capital resources and would require the Company to raise additional capital from public or private equity or debt sources in order to finance operating losses, anticipated growth and contemplated capital expenditures. If such sources of financing are insufficient or unavailable, the Company will be required to modify its growth and operating plans in accordance with the extent of available funding. The Company may need to raise additional funds in order to take advantage of unanticipated opportunities, such as acquisitions of complementary businesses or the development of new products, or otherwise respond to unanticipated competitive pressures. There can be no assurance that the Company will be able to raise any such capital on terms acceptable to the Company or at all. YEAR 2000 COMPLIANCE The efficient operation of the Company's business is dependent in part on its computer software programs and operating systems. These programs and systems are used in inventory management, pricing, sales, shipping and financial reporting, as well as in various administrative functions. Recognizing the importance and need for an integrated information systems solution, the Company has developed an implementation plan for upgrading its systems architecture. This plan also addresses the functionality of its systems beyond December 31, 1999 ("Year 2000 compliance") as the majority of the internal information systems are being replaced with new systems, [which the systems vendor represents will be Year 2000 compliant and agrees to indemnify the Company from losses if the systems fail to properly function beyond such date]. The Company does not anticipate additional material expenditures for Year 2000 compliance issues. This new systems implementation is expected to be completed by December 31, 1998. The Company is discussing with its suppliers, clients, financial institutions and others the possibility of any interface difficulties relating to Year 2000 compliance that may affect the Company. To date, no significant concerns have been identified; however, there can be no assurance that there will not be any Year 2000-related operating problems or expenses that will arise with the Company's computer systems and software or in connection with the Company's interface with the computer systems and software of its suppliers, clients, financial institutions and others. Because such third-party systems or software may not be Year 2000 compliant, the Company could be required to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on the Company's business, results of operations and financial condition. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires companies that do not choose to account for stock-based compensation as prescribed by the statement to disclose the pro forma effects on earnings and earnings per share as if SFAS 123 had been adopted. The Company has chosen the disclosure method, but for all periods presented herein the Company did not have any stock option plans. Subsequent to September 30, 1997, the Company adopted the Stock Option Plan. Therefore, in subsequent periods the Company will have additional disclosures related to SFAS 123. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which redefines how entities compute earnings per share. SFAS 128 requires presentation of "basic earnings per share" and "diluted earnings per share," as defined. Primary earnings per share will be replaced by basic earnings per share which will be computed exclusively based on the weighted average number of common shares outstanding. This statement is effective for periods ending after December 15, 1997 and will require restatement of all prior period earnings per share data presented. The adoption of SFAS 128 is not expected to have a material impact on the Company's earnings per share data. 24 In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and presentation of comprehensive income and its components in a full set of general purpose financial statements. This statement is effective for periods beginning after December 15, 1997. The adoption of SFAS 130 is not expected to have an impact on the Company's financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement is effective for financial statements for periods beginning after December 15, 1997. The adoption of SFAS 131 is not expected to have a material impact on the Company's financial statements. 25 BUSINESS GENERAL Innotrac is a full-service provider of customized, technology-based marketing support services primarily to large corporations. The Company's marketing support services include product and literature distribution, computerized inventory and database management and customer-initiated ("inbound") teleservices. With the goal of providing turnkey marketing support solutions, Innotrac works with its clients on a consultative basis to create customized programs through which it can most efficiently match its service offerings with its clients' needs. Innotrac's flexible marketing support solutions range from small, specialty projects to larger integrated fulfillment, teleservicing and database tracking programs. The Company has a broad range of clients including BellSouth, Home Depot, NAPA, Pacific Bell, Siemens E&A, Turner Broadcasting System, Inc. and US West. Since its formation in 1984, the Company has expanded its business and facilities to offer distribution and management services and inbound teleservices in response to the needs of clients in a variety of industries and to capitalize on market opportunities. In 1987, the Company began providing marketing support services to BellSouth. In 1991, these services were expanded to include fulfillment services related to Caller ID telecommunications equipment. This program provides for Innotrac to (i) sell or rent to BellSouth customers Caller ID hardware, phone sets and other equipment (branded with BellSouth's logo), (ii) ship ("fulfill") customers' orders, (iii) track inventory levels and sales and marketing data regarding such items and (iv) maintain teleservicing operations to handle customer service and technical support for Caller ID units and other products. In conjunction with this program, in 1993 Innotrac pioneered a billing option (the "billing options program") to allow customers to pay for the equipment through their phone bills on an interest free installment basis. The addition of the billing options program was well received in the marketplace, and, as a result, the fulfillment services for BellSouth have been the primary force behind the Company's rapid sales growth. Innotrac has continued to capitalize on its fulfillment expertise in the telecommunications sector, as evidenced by its additional contractual arrangements with Pacific Bell and US West. The Company has positioned itself to capitalize on the trend towards outsourcing of marketing support services. The revenues generated from its telecommunications marketing support programs have enabled the Company to develop the infrastructure necessary to offer additional and more advanced services to its customers. The Company believes it will achieve future growth by targeting large companies in a variety of industries with numerous and/or geographically diverse subsidiary or affiliate operations, extensive marketing needs or complex point-of-distribution requirements. Companies are increasingly focusing on their primary businesses and turning to outside service companies to perform marketing support functions. By outsourcing these functions, companies seek to (i) replace fixed warehouse, information technology and labor costs with variable costs, (ii) improve their reaction to business cycles, (iii) improve customer service and technical support, (iv) manage capacity to meet fluctuations in demand for products and customer service, (v) create economies of scale by sharing the costs of advanced telecommunications and fulfillment systems, and (vi) reduce working capital needs. As the trend toward outsourcing continues, the Company believes that businesses will increasingly seek to reduce the number of vendors they utilize and may prefer single-source providers of integrated, customized marketing support services. The Company believes that its "one-stop" approach, combined with its use of advanced technology, provides a competitive advantage in attracting and retaining clients on a long-term basis. BUSINESS STRATEGY The Company's strategy is to take advantage of market trends towards outsourcing by leveraging its core expertise, reputation for quality and timely service and strong client relationships. The following are the key elements of this strategy: LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand its customer base in the telecommunications industry by leveraging the expertise it has developed and the results it has achieved 26 through long-standing relationships with several clients in the industry. The Company is also seeking to expand the level of marketing support services provided to existing telecommunications clients by cross-selling its other services to such clients. BROADEN CUSTOMER BASE BY DEVELOPING SALES INFRASTRUCTURE. The Company has experienced rapid revenue growth since 1993 without a significant sales infrastructure. The Company intends to use a portion of the net proceeds of the Offering to develop a national sales force for its services, to form relationships with independent sales agencies and to develop sales and marketing materials to highlight the wide array of services offered by the Company. By developing this infrastructure, the Company intends to broaden its customer base and diversify its sources of revenues. CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a commitment to the use of advanced technology and intends to continue to upgrade and enhance its computer hardware and software applications to enable it to continue to provide flexible and powerful services to its clients. The Company believes that the use of advanced technology provides a competitive advantage and results in greater capacity and reduced labor costs. The Company also believes that continued technological advances, particularly those utilizing the Internet, will provide new opportunities for the Company to tailor its services to meet each client's needs. The Company intends to address the labor-intensive nature of fulfillment services by developing more efficient automated systems that distribute literature via electronic media directly to the customer. The Company also plans to expand its Internet- related capabilities for (i) automated inventory management, (ii) access to order and database information and (iii) virtual warehousing of literature so that such materials no longer need to be maintained in physical form in the Company's warehouses. EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored, value-added solutions that achieve each client's intended marketing results. The Company devotes considerable resources to assessing and understanding a client's industry, products, services, processes and culture, then works with the client to design programs to reduce the costs and investment required to deliver the client's marketing support programs. The Company believes that this consultative partnership approach encourages long-term client relationships, as evidenced by the fact that the Company has serviced its 10 largest clients for an average of six years and its five oldest clients for an average of 11 years. The Company believes that this approach also creates substantial opportunities to expand relationships with existing clients by cross-selling the full range of its services. SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take advantage of the fragmented nature of the marketing support services industry by selectively acquiring complementary companies that extend its presence into new geographic markets or industries, expand its client base, add new product or service applications or provide substantial operating synergies. The Company believes that there are a variety of such potential acquisition opportunities. CLIENTS The flexibility of its services allows the Company to attract clients in a broad range of industries. Innotrac targets companies that have developed a large customer base, numerous and/or geographically diverse subsidiary or affiliate operations, extensive marketing needs, or complex point-of- distribution requirements. Companies with these characteristics tend to need customer support, product or literature distribution, inventory warehousing and management, or tracking and reporting capabilities. Although a company may elect to perform these functions in-house, it will require the development of expensive, labor intensive infrastructures, which may divert a company's focus from its core competencies. Outsourcing these functions to a company such as Innotrac may result in a lower cost and higher quality level than such companies can achieve on an in-house basis. The following are some examples of the Company's clients and the marketing support services the Company performs for them: 27 SIEMENS ENERGY AND AUTOMATION Starting with the provision of marketing support services for just one business unit in 1986, Innotrac currently provides marketing support services for more than 20 business units of Siemens E&A. One component of these services is the storage of technical literature, product catalogs and brochures. Siemens E&A sales offices, dealers and distributors may order, via telephone, fax or Innotrac's Internet gateway, various types of literature stored in the Company's distribution facilities. Innotrac processes the order, packs and ships the product using the least expensive carrier for the time frame requested. Innotrac provides Siemens E&A with detailed inventory management and charge back reports to allow Siemens E&A to allocate costs appropriately to each business unit. Innotrac also distributes literature and information from Siemens E&A's corporate office to its sales offices, dealers and distributors. Siemens E&A frequently provides various other projects that require Innotrac to assemble, collate, print and distribute information contained in various databases maintained by Innotrac. HOME DEPOT Home Depot purchases in-store signage from various vendors and warehouses the inventory in one of Innotrac's distribution facilities. For new store openings, promotions or replacement, Home Depot orders signs from Innotrac to ship to one or several of its stores in the United States and Canada. Innotrac does not own the inventory, but manages it and provides cost and inventory reports directly to Home Depot. As requested, Innotrac may assemble special signs or products for distribution to Home Depot stores. In addition, Innotrac provides Home Depot with cost accounting for each store's usage of signs so that Home Depot can allocate those costs directly to the appropriate stores. The Company invoices Home Depot monthly for order processing, consultative account services, fulfillment and other expenses (such as freight and supplies). BELLSOUTH Since 1987, the Company has provided many marketing support services for BellSouth, including the Caller ID display unit distribution program, which began in 1991. A transaction generally begins when a customer calls BellSouth and speaks with one of over 4,000 BellSouth service representatives to obtain Caller ID service. On behalf of Innotrac, the representative may offer to sell or rent to the customer one of several models of Caller ID and telephone products that can be paid for through the customer's phone bill, on an interest free installment basis. If the representative makes the sale, the order is sent via EDI to Innotrac. Occasionally, if more detailed information is required, the customer's call is transferred directly to Innotrac. Innotrac generally ships the order the next day and electronically submits monthly to BellSouth the appropriate charges to be included on the customer's telephone bill. Innotrac also provides the BellSouth customer with order status, billing information and technical product support through its call center by IVR or representative. Innotrac does not charge BellSouth for its services but instead derives its fees from the difference in the price of the Caller ID display unit charged to the customer and the wholesale cost of the product. The Company has also been selected by BellSouth to sell telephone network services such as voice mail and upgraded Caller ID service, starting in March 1998. When one of Innotrac's thousands of daily customer service calls for BellSouth is received, Innotrac's computer system will be able to determine if the customer's telephone system can support the enhanced services. If the customer and its existing system meet certain parameters, the Innotrac representative will be prompted by the computer to offer the new features. Innotrac will be paid by BellSouth on a per sale basis under this program, and the program is expected to require minimal additional cost to Innotrac. MARKETING SUPPORT SERVICES Innotrac designs flexible marketing support solutions that range from small, specialty projects to large integrated fulfillment, teleservicing and database tracking project from among the following service options: 28 DISTRIBUTION SERVICES TRADITIONAL PRODUCT AND LITERATURE FULFILLMENT. Innotrac is committed to making its clients' products and services available to its customers on a timely and accurate basis. Innotrac personnel process, pack and ship from the Company's warehouses product orders and requests for promotional, technical and educational literature, signage and point of sale materials for clients. Clients may order such inventory by e-mail, through customized Internet applications, EDI, telephone or facsimile. The Company ships orders so that the product or literature reaches the client or its customer as it is needed ("just-in-time"). Additional fulfillment services offered by the Company include (i) customized product assembly, (ii) kit assembly, (iii) binder collation, (iv) manifest delivery service systems, (v) shrink wrapping, (vi) weight verification of materials and (vii) preparing, addressing, coordinating, sorting and mailing materials. The Company streamlines and customizes the fulfillment procedures for each client based upon the product and literature request, and the tracking, reporting and inventory controls necessary to implement the marketing support program. VIRTUAL DISTRIBUTION. Innotrac can provide literature and publishing fulfillment services through advanced delivery systems, such as fax-on-demand, print-on-demand and virtual warehousing, which management believes will be the industry norm in the near future. Management believes these services will speed the delivery of important documents to a client or a client's customer at a much lower cost than traditional literature fulfillment, and that increasing advances in facsimile and printer technology will enable the quality of documents provided through these services to equal or surpass current quality. With fax-on-demand, a client or a client's customer calls a toll-free number to reach the Company's call center. Using the IVR system, the caller then searches for a particular publication from a menu of choices, or from a catalog of publications already in his or her possession, and instructs the system to deliver such publication. The desired literature or marketing materials are then quickly faxed to the customer. Print-on-demand solutions enable customers to cost-effectively produce and distribute small or large volumes of a document on short notice. As part of this service, the client supplies the Company with either an electronic file containing the document or a hard copy of the document, in black and white or in color, which the Company converts to an electronic file and stores in its computer system. The client or the client's customer can then use its own computer system or telephone to place a print order, including production amount and distribution method and location. The Company then completes the print and distribution process, thereby avoiding the costs of maintaining a warehouse for storage of the documents and personnel to pick and pack the documents for shipment. Virtual warehousing solutions take the print-on-demand program to a more efficient level of operation. With these services, the client provides Innotrac with copies of its technical, educational or marketing literature for transfer onto Innotrac's computer system. The Company then stores and organizes the materials on a customized system designed to facilitate the client's retrieval needs. Instead of placing orders with Innotrac to print and ship literature requirements (as in print-on-demand), utilizing virtual warehousing, the client can print the materials directly to its printers or its customer's printers, thereby reducing warehousing, labor and shipping costs. Other components of the Company's virtual distribution services include broadcast fax and broadcast e-mail, which enable an Innotrac client to send literature to a database of fax numbers or e-mail addresses. These services allow a client to communicate with customers or sales personnel quickly, efficiently and cost effectively. MANAGEMENT SERVICES INVENTORY MANAGEMENT. An integral part of Innotrac's marketing support services is the on-line tracking and control of a client's inventory. The Company provides automated inventory management to assure real-time stock counts of a client's products, sales, educational and technical literature, signage and other items. These inventory management systems allow Innotrac and the client to maintain consistent and timely reorder 29 levels and supply capabilities and also allow the client to assess quickly (i) current stock balances, (ii) year-to-date receipts, (iii) monthly and yearly usage, (iv) reorder levels, (v) pricing information and (vi) dollar value of inventory. The Company offers this information to the client on a real-time basis via direct dial-up, through its Internet gateway, or through EDI. Inventory management data is also utilized in the Company's reporting services. See "--Management Services--Reporting." Innotrac also utilizes bar coding equipment in its inventory management systems, which improves the efficiency of stock management and selection. DATABASE MANAGEMENT. Innotrac can manage a client's databases independently or in conjunction with other marketing support programs. Independent database management begins with the client providing Innotrac with the information to establish the database, which the Company then customizes, manages, uses to provide reports to the client, and updates based upon information supplied by the client. In addition, Innotrac's integrated marketing support programs generate information about customers, demographics, recurring technical problems and other matters. Innotrac compiles this information into customized databases that evolve in conjunction with its on- going marketing support and customer service programs. This data is a source of valuable information to Innotrac and its clients in evaluating ongoing programs and planning and designing future programs. REPORTING. Innotrac provides reporting to support most of its services, such as inventory analysis, program results and detailed order processing information. Innotrac has developed flexible technologies and reporting procedures that effectively convert raw data gathered during the course of a marketing support program into useful, customized reports upon which clients and Innotrac can base strategic decisions and more effectively respond to customer needs and inquiries. For example, information obtained during a customer telephone call is captured by the Company's database marketing and management systems and is then incorporated into broader reports. These reports also are used by Innotrac to ensure high quality performance. On-line functions allow clients to monitor their programs in real-time to obtain comprehensive trend analyses and modify program parameters as necessary. Innotrac provides clients with customized reports in printed form, via the Internet, electronic mail, computer-to-computer transmission, disk and magnetic tape. Innotrac also provides cost-center based accounting reports for clients who utilize Innotrac's services for subsidiary and intra-company fulfillment transactions. LEAD MANAGEMENT. The Company offers lead management services as a means for clients to identify, communicate with and sell their products to new customers. For example, clients often place advertisements in magazines and newspapers with toll-free numbers for prospective customers to call to receive more information. Innotrac can answer these requests for information, establish a database of prospective customers, send information, questionnaires or surveys to the prospective customers (which helps to further screen the prospective customer for a possible sales contact by Innotrac's client), and, once properly screened, Innotrac can issue a sales lead to the appropriate sales representative of the client. During this process, the Company tracks, analyzes and provides full reporting to the client so that modifications or alterations in the program can be made at any time. PAYMENT PROCESSING. Innotrac manages client programs in which the Company distributes invoices on behalf of its clients and collects, tracks and reports for its clients amounts due to them. In addition, the Company provides services for clients in connection with credit card, coupon and rebate processing. INBOUND TELESERVICES PRODUCT ORDERS. The Company's representatives in its call center process orders with respect to items such as Caller ID display units and phone sets, literature, signage, point-of-purchase materials, promotional items (caps, shirts, pens, etc.) and video and audio tapes. Inbound teleservices are generally commenced by a toll-free call from a client's customer that is received by the Company, identified and routed to an Innotrac service representative, who generally answers using the client's name. Orders for Caller ID and other telecommunication products also occur as a result of an Innotrac service representative offering products in connection with a customer service or technical support call. To properly handle the call, Innotrac's automated call distributors and 30 digital switches identify each inbound call by the toll-free number dialed and immediately route the call to an Innotrac representative trained for that client's program and possessing the language capabilities to deal with the customer. In some cases teleservices are offered by IVR systems, which allow customers to route their calls by selecting from a menu of offerings, and text to speech systems, which allow the IVR system to "read" specific, real-time data from the client's databases and convert it into speech based on cues from a caller. Such systems, which the Company expects increasingly to utilize in the future, generally reduce personnel and physical plant expenses associated with a call center and expand the operating capabilities of the center. Whether a customer's call is answered by a representative or one of the Company's automated systems, the customer's needs are generally resolved with a single call. The information and results of the call are then communicated to appropriate personnel for order or additional processing and fulfillment or, if Innotrac does not manage the client's inventory, the Company transmits the customer's request directly to the client. Once an order is received, Innotrac's automated systems allow representatives to track and update the disposition of the order at any time through receipt by the customer. TECHNICAL SUPPORT; CUSTOMER SERVICE. Innotrac service representatives resolve complaints, diagnose and resolve product or service problems, and answer technical questions for its client's customers. Technical support inquiries are generally driven by a customer's purchase of a product or by a customer's need for ongoing assistance. Customers of Innotrac's clients dial a support number and are either connected with a trained Innotrac representative or an IVR system. Innotrac's service representatives receiving a call can enter customer information into the Company's call-tracking system, listen to a question, and quickly access a proprietary network database via computer to answer a customer's question. The IVR system attempts to resolve support issues by guiding the customer through a series of interactive questions. If automatic resolution by IVR cannot solve the problem, the call can be routed to one of Innotrac's service representatives who is specially trained in the applicable product. A senior representative is available to provide additional assistance for complex or unique customer questions. As additional product information becomes available over the course of the program, the Company promptly integrates such information into its database, thereby ensuring that IVR and representatives' answers are based upon the latest product information. Frequently asked questions can also be integrated into IVR systems to bypass representatives. DEALER LOCATOR. Dealer locator services are offered both by IVR and customer service representatives. Customers of Innotrac's clients, such as NAPA, call a toll-free number to locate the closest dealer, store or distributor office. By using the customer's zip code, Innotrac's software will search the client database and offer the customer the address, phone number and directions to the nearest location. TECHNOLOGY Innotrac's use of advanced technology enables it to design and efficiently deliver services for each client's marketing support needs. The Company's information technology group ("IT Group") has developed the Company's database marketing support and management systems, which utilize a UNIX-based open architecture comprised of multiple networked computers and anchored by a Hewlett-Packard HP9000 K420 multiprocessing system. The Company plans to utilize a portion of the net proceeds of the Offering to install an Oracle database system and specialized order processing and inventory management applications software, which features a 4GL (4th Generation Language) technology that will allow for quick and efficient changes to programs, systems and reports. This system will standardize the Company's computer services and allow for even greater flexibility and capacity. See "Use of Proceeds." The open architecture of the Company's computer system permits the Company to seamlessly interact with many different types of client systems. The IT Group uses this platform to design and implement application software for each client's program, allowing clients to review their programs' progress on-line to obtain real-time comprehensive trend analysis, inventory levels and order status and to instantly alter certain program parameters. As the needs of a client evolve, the IT Group works with the client to modify the program on an ongoing basis. Information can also be exchanged via EDI, Internet access and direct-dial applications. The Company believes 31 that its technology platform is and will be among the most advanced in the industry and provides the Company with the resources to continue to offer leading edge services to current and new clients. The Company believes that the integrity of client information is adequately protected by its data security system and its off-site disaster back-up storage facilities. The Company's call center utilizes a sophisticated Rockwell Spectrum Automatic Call Distributor ("ACD") switch to handle the Company's call management functions. This ACD system has the capacity to handle 2,400 teleservice representatives simultaneously, and is currently supporting over 200 representatives simultaneously. Additionally, the ACD system is integrated with software designed to enable management to automatically schedule teleservices representatives based on call length and call volume data compiled by the ACD system. PERSONNEL AND TRAINING Innotrac's success in recruiting, hiring and training large numbers of skilled employees and obtaining large numbers of hourly employees during peak periods for distribution and teleservice operations is critical to the Company's ability to provide high quality marketing support services. Teleservice representatives and fulfillment personnel receive feedback on their performance on a regular basis and, as appropriate, are recognized for superior performance or given additional training. To maintain good employee relations and to minimize employee turnover, the Company offers competitive pay, hires primarily full-time employees who are eligible to receive a full range of employee benefits, and provides employees with clear, visible career paths. As of December 1, 1997, the Company had 535 employees, of which approximately 85% were full-time and 15% were part-time. Management believes that the demographics surrounding its facilities, and its reputation, stability, compensation and benefit plans should allow the Company to continue to attract and retain qualified employees. The Company considers its employee relations to be good. FACILITIES Innotrac's headquarters are located in 63,000 square feet of leased space in Norcross, Georgia. The Company's corporate offices occupy 20,000 square feet of this facility and the remaining 43,000 square feet is distribution space. The Company leases an additional 16,000 square feet of space adjacent to its corporate offices and operates another distribution center in Norcross with 42,000 square feet of space. The Company is combining its corporate offices and distribution facilities into a 250,000 square foot facility, which is within two miles of its call center. Construction on this facility has commenced, and the Company expects to move into this new facility in the third quarter of 1998. The new site also includes approximately 3.5 acres that will be available for the Company's expansion requirements. The Company has entered into a lease for the new facility with a term of 10 years and two five year renewal options. The lease provides for an option to purchase the facility prior to occupancy, at the end of the first five years of the term or at the end of the first 10 years of the term. The Company has not yet determined whether to exercise such purchase option. Innotrac provides teleservices through its call center located in Duluth, Georgia, which opened in June 1996. The call center is currently configured with 325 workstations and has room to expand to approximately 700 workstations. It also contains approximately 18,000 square feet of distribution space. It currently operates from 8:00 a.m. until midnight Monday through Friday and from 9:00 a.m. to 8:00 p.m. on Saturday. The Company believes that its facilities, after the move to the new corporate offices and distribution facilities, will be adequate for its needs for the foreseeable future. COMPETITION Innotrac competes on the basis of quality, reliability of service, efficiency, technical superiority, speed, flexibility and price in tailoring services to client needs. Management believes its comprehensive and integrated services differentiate it from many of its competitors who may only be able to provide one or a few of the 32 services that Innotrac provides. The Company continuously explores new outsourcing service opportunities, typically in circumstances where clients are experiencing inefficiencies in non-core areas of their businesses and management believes it can develop a superior outsourced solution to such inefficiency on a cost-effective basis. The Company primarily competes with the in-house operations of its current and potential clients and also competes with certain companies that provide similar services on an outsourced basis, many of whom have greater resources than the Company. GOVERNMENT REGULATION The Caller ID services offered by the Company's telecommunications clients are subject to various federal and state regulations. The legality of Caller ID has been challenged in cases decided under the Electronic Communications Privacy Act (the "ECPA") and several state statutes. In March 1994, a Federal Communications Commission ("FCC") report preempted certain state regulation of interstate calling party number parameter ("CPN") based services, the technology underlying Caller ID. This report requires certain common carriers to transmit CPN and its associated privacy indicator (which allows telephone callers to block the display of their phone numbers on Caller ID display units) on an interstate call to connecting carriers without charge (the "Free Passage" rule). In connection with this report, the Department of Justice issued a memorandum which concluded that the installation or use of interstate Caller ID service is not prohibited by any federal wiretap statute and that, in general, the FCC has authority to preempt state laws that the FCC finds would hinder federal communications policy on Caller ID services. Court decisions since the FCC issued its March 1994 report have consistently held that Caller ID does not violate any state or federal wiretap statute. In May 1995, the FCC narrowed its March 1994 preemption of state public utilities blocking regulations by permitting subscribers to choose per-line blocking or per-call blocking on interstate calls, provided that all carriers were required to adopt a uniform method of overriding blocking on any particular call. At the same time, the FCC specifically preempted a California Public Utilities Commission ("CPUC") per-line blocking default policy, which required that all emergency service organizations and subscribers with nonpublished numbers, who failed to communicate their choice between per-call blocking and per-line blocking, be served with a per-line blocking. The FCC's revised rules and regulations also require carriers to explain to their subscribers that their telephone numbers may be transmitted to the called party and that there is a privacy mechanism (i.e., the "blocking" feature) available on interstate calls, and explain how the mechanism can be activated. The CPUC, seeking to protect the caller's privacy, has ruled that a carrier can offer Caller ID or transmit CPN to interconnecting carriers only upon CPUC approval of its customer notification and education plan. The CPUC has approved the education plan of Pacific Bell, whose Caller ID market includes California. Telephone sales practices are regulated at both the federal and state level and primarily relate to outbound teleservices, which Innotrac generally does not provide. To the extent that Innotrac offers outbound teleservices, such operations are regulated by the rules of the FCC under the Federal Telephone Consumer Protection Act of 1991 (the "TCPA"), the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") and various state regulations regarding telephone solicitations. The Company believes that it is in compliance with the TCPA, the TCFAPA and the FCC rules thereunder and the various state regulations and that it would operate in compliance with those rules and regulations if it were to engage in more substantial outbound teleservice operations in the future. The Company works closely with its clients and their advisors to ensure that the Company and the client are in compliance with such regulations. The Company cannot predict whether the status of the regulation of Caller ID services will change and what effect, if any, such change would have on the Company or its industry. INTELLECTUAL PROPERTY The Company has used the service mark "Innotrac" since 1985 and has filed applications for federal registration of this service mark in multiple classes. The "innotrac.com" domain name has been a registered 33 domain name since 1995. Due to the possible use of identical or phonetically similar service marks by other companies in different businesses, there can be no assurance that the United States Patent and Trademark Office will grant the Company's registration of its service mark, or that such service mark will not be challenged by other users. The Company does not believe that it owns or utilizes any other service marks that are material to its business. The Company's operations, however, frequently incorporate proprietary and confidential information. In accordance with industry practice, the Company relies upon a combination of contract provisions and trade secret laws to protect the proprietary technology it uses and to deter misappropriation of its proprietary rights and trade secrets. LEGAL PROCEEDINGS The Company may be involved from time to time in litigation arising in the normal course of business. The Company is not a party to any material legal proceeding. 34 MANAGEMENT EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES The executive officers, directors and key employees of the Company are as follows:
DIRECTOR TERM NAME AGE POSITION EXPIRES ---- --- -------- ------------- Executive Officers and Directors: Scott D. Dorfman(1)(3)......... 40 President, Chief Executive Officer 2000 and Chairman of the Board David L. Ellin(1)...... 39 Senior Vice President, Chief 2000 Operating Officer, Secretary and Director Donald L. Colter, Jr. .................. 37 Vice President--Operations Larry C. Hanger........ 42 Vice President--Business Development 1998 and Director John H. Nichols, III... 43 Vice President and Chief Financial Officer Bruce V. Benator(1)(2)......... 40 Director 1998 Martin J. Blank(2)(3).. 50 Director 1999 Campbell B. Lanier, III(2)................ 47 Director 1999 William H. Scott, III(3)................ 50 Director 1999 Key Employees: Nancy C. Bergeron...... 46 Director of Marketing Robert C. Covington, III................... 41 Director of Information Technology Robert Jackson, Jr. ... 46 Director of Fulfillment Operations Melissa B. Ohlson...... 33 Director of Human Resources Robert W. Seitz........ 51 Director of Client Services J. Mark Tobin.......... 39 Director of Call Center Operations
- -------- (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee Mr. Dorfman is the founder of Innotrac and has served as President, Chief Executive Officer and Chairman of the Board of the Company since its inception in 1984. Prior to founding the Company, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc. ("Paymaster"), an equipment distributor, where he developed and managed Paymaster's mail order catalog and developed proprietary software to track and analyze marketing programs. Prior to his employment with Paymaster, Mr. Dorfman co-founded and served as President of Features Mail Order Catalog, where he gained experience in distribution, tracking and inventory control. Mr. Ellin joined Innotrac in 1986, was appointed Secretary of the Company in December 1997 and has served as Senior Vice President and Chief Operating Officer of the Company since November 1997. He served as the Company's Vice President from 1988 to November 1997. From 1984 to 1986, Mr. Ellin was employed by the Atlanta branch of WHERE Magazine, where he managed the sales and production departments. From 1980 to 1984, Mr. Ellin was employed by Paymaster, where he was responsible for Paymaster's sales and collections. Mr. Colter joined Innotrac in 1995 and has served as Vice President- Operations since November 1997. He served as the Company's Chief Financial Officer from 1995 to November 1997. Prior to joining Innotrac, Mr. Colter was from 1993 to 1995 the corporate controller of Gay & Taylor/Thomas Howell Group, an international insurance adjusting company. From 1991 to 1993, Mr. Colter was corporate controller of Outdoor 35 West, Inc., an outdoor advertising company. Mr. Colter is a certified public accountant and has over 15 years of experience in the financial and accounting industry. Mr. Hanger joined Innotrac in 1994, and has served as Vice President- Business Development since November 1997. He served as the Company's Department Manager of Business Development from 1994 to November 1997, and was responsible for the management of the telecommunication equipment marketing and service business. From 1979 to 1994, Mr. Hanger served as Project Manager- Third Party Marketing at BellSouth, where he managed the marketing program for BellSouth's network services and was involved in implementing the billing options program for BellSouth with Innotrac. Mr. Nichols joined Innotrac in November 1997 as Vice President and Chief Financial Officer. From 1993 until November 1997 he served as Vice President and Chief Financial Officer for Storehouse, Inc., a furniture retailer. From 1982 until 1993, Mr. Nichols was employed by Contel Corporation and GTE Corporation in various senior financial management positions in both the telephone and cellular telephone business units. Mr. Nichols is a certified public accountant. Mr. Benator is a partner of Williams Benator and Libby, LLP, certified public accountants. He has been affiliated with the firm since 1984 and is the firm's Director of Accounting and Auditing Services. He has been associated with the Company since its inception, serving as a financial advisor and its outside accountant. From 1979 to 1984, Mr. Benator was employed by Ernst & Young, LLP. Mr. Blank has been a director since December 1997 and is a co-founder of Automobile Protection Corporation ("APCO"), a publicly held corporation engaged in the marketing of extended vehicle service contracts and warranty programs. Mr. Blank has served as Secretary and Director of APCO since its inception in 1984 and as Chairman of the Board and Chief Operating Officer since 1988. Mr. Blank's experiences prior to co-founding APCO include the practice of law and the representation of and financial management for professional athletes. Mr. Blank is admitted to the bar in the States of Georgia and California. Mr. Lanier has been a director since December 1997 and is Chairman of the Board and Chief Executive Officer of ITC Holding Company, Inc. ("ITC Holding"), the parent company of ITC. He has served as a director of ITC Holding since its inception in 1989. In addition, Mr. Lanier is an officer and director of several ITC Holding subsidiaries. He also is a director of KNOLOGY Holdings, Inc. ("KNOLOGY"), a broadband telecommunications services company currently operating in Alabama, Florida and Georgia (formerly known as CyberNet Holding, Inc.); MindSpring Enterprises, Inc., an Internet service provider; National Vision Associates, Ltd., a full service optical retailer; K&G Men's Center, Inc., a discount retailer of men's clothing; Vice Chairman of the Board of AvData Systems, Inc. ("AvData"), a company providing data communications networks; Chairman of the Board of Powertel, Inc. (formerly InterCel, Inc.) ("Powertel"), a wireless telecommunications services company operating in the southeastern United States, and Chairman of the Board of ITC DeltaCom, Inc. ("ITC DeltaCom") a full service telecommunications provider to business customers in the southeastern United States. He has served as a Managing Director of South Atlantic Private Equity Fund IV, Limited Partnership since 1997. Mr. Scott has been a director since December 1997 and has served as President and Chief Operating Officer of ITC Holding since 1991. He has been a director of ITC Holding since 1989. From 1989 to 1991, he served as Executive Vice President of ITC Holding. Mr. Scott is a director of Powertel, AvData, KNOLOGY, ITC DeltaCom and MindSpring. Ms. Bergeron joined Innotrac in April 1997 as Director of Marketing. From 1994 to 1996, Ms. Bergeron was Director of Marketing of Chemtronics, Inc., a chemical manufacturer, and from 1992 until 1994 she served as Director of Communications of Diversified Products, a home fitness equipment manufacturer. Mr. Covington joined Innotrac in 1995 as Director of Information Technology. From February 1995 to October 1995, Mr. Covington was a Technical Services Manager at Alexander Howden North America, Inc., an 36 insurance broker, where he managed the company's information technology services. From 1985 to 1994, Mr. Covington was the Director of MIS Operations at Digital Communications Associates, Inc., a computer hardware and software manufacturer. Mr. Jackson joined Innotrac in June 1997 as Director of Fulfillment Operations. Prior to joining Innotrac, Mr. Jackson was from 1996 to 1997 a Manufacturing Team Leader and Quality Engineer at Prestolite Wire Corporation. From 1995 to 1996, Mr. Jackson was a Strategic Business Unit Manager at Heatcraft Refrigeration and from 1993 to 1995 he engaged in independent consulting with Total Quality Management. From 1976 to 1993, Mr. Jackson served in various management roles at Digital Equipment Corporation. Ms. Ohlson joined Innotrac in 1994 as Director of Human Resources. Prior to joining Innotrac, Ms. Ohlson was from May to October 1994 engaged on a short- term assignment as a human resource generalist with GEC Marconi Avionics, Inc. From 1992 to May 1994, Ms. Ohlson was the Personnel Director at Star Manufacturing, Inc. Mr. Seitz joined Innotrac in December 1997 as Director of Client Services. Prior to joining Innotrac, Mr. Seitz was from 1996 until November 1997 a Principal and Senior Consultant at Weisser, Fitzpatrick & Greene Marketing. From 1995 until 1996, Mr. Seitz was Manager of Market Development and Communications at Boehringer Mannheim Corporation. From 1992 until 1995, Mr. Seitz was a Principal and Senior Consultant at Winston, Greene Assoc. and from 1991 to 1992, he was Corporate Manager of Marketing Communications at Coulter Corporation. Mr. Seitz also has 15 years of marketing communications experience at Baxter Healthcare Corporation. Mr. Tobin joined Innotrac in June 1997 as Director of Call Center Operations. Prior to joining Innotrac, Mr. Tobin was from 1996 to April 1997 engaged in independent consulting in the telemarketing field. From 1995 to 1996, Mr. Tobin was the Call Center Director at ICT Global Enterprises, Inc., a telemarketing company. From 1985 to 1995, Mr. Tobin served as Area Manager- Financial Management at SBC Communications, a telecommunications company. BOARD COMMITTEES The Company's Board of Directors has established three committees, an Audit Committee, a Compensation Committee and an Executive Committee. The Audit Committee presently consists of three independent directors and is responsible for reviewing and monitoring the Company's financial reports and accounting practices. The Audit Committee is also responsible for reviewing related party transactions and potential conflicts of interest involving officers, directors, employees or affiliates of the Company. The Compensation Committee presently consists of three directors (including two independent directors) and is responsible for determining the compensation of the Company's directors and officers. The Compensation Committee is also authorized to make specific grants under the Company's Stock Option Plan. The Executive Committee presently consists of three directors (including the President, Chief Executive Officer and Chairman, the Senior Vice President, Chief Operating Officer and Secretary, and one independent director) and is authorized to consider any matter that may be brought before a meeting of the full Board of Directors, subject to restrictions under Georgia law. EXECUTIVE COMPENSATION The following table sets forth certain information regarding the annual compensation for services in all capacities to the Company for the year ended December 31, 1997 with respect to the Company's Chairman, President and Chief Executive Officer and each of the Company's two other executive officers who earned more than $100,000 in salary and bonus during such fiscal year (the "Named Executive Officers"): 37 SUMMARY COMPENSATION TABLE
ANNUAL LONG-TERM COMPENSATION COMPENSATION ------------ ------------ SECURITIES UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION SALARY OPTIONS COMPENSATION - --------------------------- ------------ ------------ ------------ Scott D. Dorfman....................... $226,180 -- $8,686(1) President, Chief Executive Officer and Chairman David L. Ellin......................... 197,692 155,000 -- Senior Vice President, Chief Operating Officer, Secretary and Director Larry C. Hanger........................ 114,343 25,000 -- Vice President--Business Development and Director
- -------- (1) Represents the full dollar amount of premiums paid by the Company with respect to split-dollar life insurance on the life of Mr. Dorfman. The following table sets forth certain information regarding the options granted to the Named Executive Officers during the fiscal year ended December 31, 1997. OPTION GRANTS IN LAST FISCAL YEAR
POTENTIAL INDIVIDUAL GRANTS REALIZABLE VALUE AT ------------------------------------------------------ ASSUMED RATES OF PERCENT OF STOCK PRICE NUMBER OF TOTAL OPTIONS APPRECIATION FOR SECURITIES GRANTED TO EXERCISE OR OPTION TERMS UNDERLYING EMPLOYEES IN BASE EXPIRATION ------------------- NAME OPTION GRANTED(#) FISCAL YEAR PRICE($/SH) DATE 5%($) 10%($) - ---- ----------------- ------------- ----------- ---------- -------- ---------- Scott D. Dorfman........ -- -- -- -- -- -- David L. Ellin.......... 100,000(1) 27.55% $9.10 11/24/07 $572,294 $2,360,305 55,000(2) 15.15 9.10 11/24/07 314,762 1,298,168 Larry C. Hanger......... 25,000(1) 6.89 9.10 11/24/07 143,073 590,076
- -------- (1) The option becomes exercisable with respect to 50% of the underlying shares on November 24, 1999; with respect to an additional 25% of the underlying shares on November 24, 2000; and with respect to the remaining 25% of the underlying shares on November 24, 2001. (2) The option is immediately exercisable. None of the Named Executive Officers exercised any options during the fiscal year ended December 31, 1997. The following table sets forth certain information regarding the value at fiscal year end of unexercised options held by the Named Executive Officers. FISCAL YEAR-END OPTION VALUES
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN- UNDERLYING UNEXERCISED THE-MONEY OPTIONS AT FY- OPTIONS AT FY-END END NAME EXERCISABLE/UNEXERCISABLE EXERCISABLE/UNEXERCISABLE - ---- ------------------------- ------------------------- Scott D. Dorfman............ -- -- David L. Ellin.............. 0/100,000 N/A/$0(1) 55,000/0 $0(1)/N/A Larry C. Hanger............. 0/25,000 N/A/$0(1)
- -------- (1) Exercise price is equal to fair market value at fiscal year end. 38 None of the Company's executive officers or key personnel has an employment agreement with the Company. DIRECTORS COMPENSATION The Company pays its outside directors an annual fee of $10,000, and additional fees of $250 and $100, respectively, for each Board meeting and committee meeting attended. The Company reimburses all directors for their travel and other expenses incurred in connection with attending Board or committee meetings. In addition, on December 11, 1997, the Company granted options to purchase 20,000 shares of Common Stock to Mr. Benator at a price of $9.10. The Company has granted each outside director options to purchase 10,000 shares of Common Stock at the initial public offering price, effective as of the date of this Prospectus. STOCK OPTION PLAN In November 1997, the Company adopted the Stock Option Plan to provide key employees, officers, directors, contractors and consultants an opportunity to own Common Stock of the Company and to provide incentives for such persons to promote the financial success of the Company. Awards under the Stock Option Plan may be structured in a variety of ways, including as "incentive stock options" as defined in Section 422 of the Internal Revenue Code, as amended ("IRC"), non-qualified stock options, restricted stock awards and stock appreciation rights ("SARs"). Incentive stock options may be granted only to full-time employees (including officers) of the Company, including its subsidiaries. Non-qualified options, restricted stock awards, SARs and other permitted forms of awards may be granted to any person employed by or performing services for the Company, including directors, contractors and consultants. The Stock Option Plan provides for the issuance of options and awards for up to 800,000 shares of Common Stock. Incentive stock options are also subject to certain limitations prescribed by the IRC, including the requirement that such options may not be granted to employees who own more than 10% of the combined voting power of all classes of voting stock of the Company, unless the option price is at least 110% of the fair market value of the Common Stock subject to the option, may be exercised for no more than five years from the grant date. The Board of Directors of the Company (or the Compensation Committee) otherwise generally has discretion to set the terms and conditions of options and other awards, including the term, exercise price and vesting conditions, if any, to select the persons who receive such grants and awards, and to interpret and administer the Stock Option Plan. As of the date of this Prospectus, options to purchase an aggregate of 383,000 shares of Common Stock have been granted under the Stock Option Plan, including options for 155,000 and 25,000 shares of Common Stock issued to Messrs. Ellin and Hanger, respectively, having an exercise price of $9.10 per share, which is based on the fair market value of the Common Stock on the date of grant, as determined by the Board. 39 PRINCIPAL SHAREHOLDERS The table below sets forth certain information regarding the beneficial ownership of the Common Stock, as of the date of this Prospectus and giving effect to the Consolidation and to the Offering, by (i) each person known to the Company to be the beneficial owner of more than 5% of the outstanding shares of Common Stock, (ii) each director of the Company, (iii) each Named Executive Officer and (iv) all directors and executive officers of the Company as a group. Unless otherwise indicated, each of the shareholders listed below has sole voting and investment power with respect to the shares beneficially owned.
PERCENTAGE BENEFICIALLY OWNED NUMBER OF SHARES ------------------------------ BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING - ---------------- --------------------- --------------- -------------- Scott D. Dorfman(2)...... 6,146,154(3) 94.6% 68.3% ITC Service Company(4)... 353,846(5) 5.4 3.9 David L. Ellin........... 87,500(6) 1.3 * Larry C. Hanger.......... -- -- -- Bruce V. Benator......... 10,000(7) * * Martin J. Blank.......... 10,000(7) * * Campbell B. Lanier, III.. 363,846(7)(8) 5.4 3.9 William H. Scott, III.... 363,846(7)(8) 5.4 3.9 All directors and executive officers as a group (9 persons)....... 6,595,000 100.0% 72.4%
- -------- * Denotes less than 1% (1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares that such person or group has the right to acquire within 60 days after the date of this Prospectus or with respect to which such person has or shares voting or investment power. For purposes of computing the percentages of outstanding shares held by each person or group of persons, shares which such person or group has the right to acquire within 60 days after such date are deemed to be outstanding for purposes of computing the percentage for such person or group but are not deemed to be outstanding for the purpose of computing the percentage of any other person or group. Options for 95,000 shares granted under the Company's Stock Option Plan are exercisable within 60 days from the date of this Prospectus. (2) Mr. Dorfman's address is 1828 Meca Way, Norcross, Georgia 30093. (3) Includes an aggregate of 160,060 shares owned by Mr. Dorfman's wife individually and as custodian and trusts for the benefit of his children and 32,500 shares subject to presently exercisable purchase options granted to Mr. Ellin. (4) ITC's and Messrs. Lanier's and Scott's address is 1239 O.G. Skinner Drive, West Point, Georgia 31833. (5) ITC is entitled to receive shares of Common Stock in the Consolidation equal to 10% (ITC's current ownership percentage of Providers L.P.) of $46.0 million (the estimated aggregate value of Providers L.P.) divided by the initial public offering price. The other equity holders of the combining entities will own the remainder of the 6,500,000 shares that will be outstanding after the Consolidation. This formula is expected to result in 353,846 shares being issued to ITC, assuming an initial public offering price of $13.00. (6) Consists of 32,500 shares subject to presently exercisable options to purchase such shares from Mr. Dorfman and 55,000 shares subject to presently exercisable options from the Company. (7) Includes presently exercisable options for 10,000 shares of Common Stock. (8) Consists of the shares owned of record by ITC, with respect to which Messrs. Lanier and Scott, as principal shareholders and officers of such entity, may be deemed the beneficial owner. Messrs. Lanier and Scott disclaim beneficial ownership of such shares. 40 CERTAIN TRANSACTIONS Scott D. Dorfman, President, Chief Executive Officer, Chairman of the Board, and majority shareholder of the Company, has guaranteed the Company's obligations under its credit facility with a bank, which consists of a $25,000,000 revolving line of credit and a $2,000,000 term loan, and the subordinated note in the principal amount of $3.5 million payable to ITC described below. The bank guarantee will terminate upon the completion of the Offering, and the subordinated note will be repaid with a portion of the proceeds from the Offering. In connection with the Consolidation, Mr. Dorfman, together with his children, and ITC, will receive distributions of $6.0 million and $400,000, respectively, from two pass-through entities that are parties to the Consolidation, which distributions represent a portion of these entities' accumulated earnings. In addition, each of the entities will reimburse Mr. Dorfman and ITC for estimated tax payments with respect to their earnings for 1997 and 1998. Two directors of the Company, Messrs. Lanier and Scott, are officers, directors and principal shareholders of ITC. See "Use of Proceeds." As a result of the Consolidation, and as consideration for their respective interests in the affiliated entities that are parties to the Consolidation, shares of Common Stock of the Company will be owned as follows: Mr. Dorfman-- 6,146,154 shares (including 493 shares owned by his wife, and 159,567 shares held in custodianship for his children) and ITC--353,846 shares, assuming an initial public offering price of $13.00. ITC is entitled to receive shares of Common Stock in the Consolidation equal to 10% of $46.0 million divided by the initial public offering price. See "The Consolidation" for a discussion regarding the determination of the number of shares to be issued in the Consolidation. Prior to the closing of the Offering, the Company intends to redeem for approximately $390,000 from Arnold Dorfman, the father of Scott D. Dorfman, all of his shares in one of the entities that is a party to the Consolidation. In December 1998, the Company intends to redeem for approximately $590,000 from Arnold Dorfman all of his shares in a second affiliated entity that is a party to the Consolidation. These amounts represent the scheduled redemption values under the terms of agreements reached between the parties in 1993. See Note 7 of the financial statements. ITC is a creditor of the Company with respect to a certain subordinated note in the principal amount of $3.5 million. The note bears interest at the prime rate plus 8.0% per annum and matures in April 1999. Upon the completion of the Offering, the Company intends to repay such note, plus accrued interest, in full. See "Use of Proceeds." From January 1, 1996 through October 1, 1997, the Company paid $145,914 in fees to Williams Benator & Libby, LLP, certified public accountants, for accounting and consulting services. Bruce V. Benator, a director of the Company, is a partner of Williams Benator & Libby, LLP. After consummation of the Offering, it is expected that Williams Benator & Libby, LLP will continue to provide accounting and consulting services for the Company. On December 11, 1997, the Board of Directors adopted a policy that any transactions between the Company and any of its officers, directors, or principal shareholders or affiliates must be on terms no less favorable than those that could be obtained from unaffiliated parties in comparable situations and must be approved by the Audit Committee of the Board of Directors. 41 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 9,000,000 shares of Common Stock (9,375,000 shares if the Underwriters' over-allotment option is exercised in full). Of such shares, the 2,500,000 shares sold in the Offering (2,875,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restrictions or further registration under the Securities Act, unless acquired by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144"), in which case these shares will be subject to the resale limitations of Rule 144. The outstanding shares of Common Stock not sold in the Offering were issued and sold by the Company in a private transaction in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and are restricted securities under Rule 144. These shares may not be sold unless they are registered under the Securities Act or are sold pursuant to an applicable exemption from registration, including the exemption pursuant to Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the Offering, a person who has beneficially owned any such shares for at least one year, which will occur on the first anniversary of the Consolidation, including "affiliates" of the Company, would be entitled to sell in broker's transactions or to market makers within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of Common Stock (estimated to be 90,000 shares after completion of this Offering, or 93,750 shares if the Underwriters' over- allotment option is exercised in full) or the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. A person (or persons whose shares are aggregated) who is not an "affiliate" of the Company at any time during the 90 days preceding a sale, and who has beneficially owned such shares for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the availability of current public information, volume limitations, manner of sale provisions, or notice requirements. The above is a summary of Rule 144 and is not intended to be a complete description thereof. The Company, its officers and directors, and all shareholders of the Company have agreed that they will enter into lock-up agreements generally providing that they will not, directly or indirectly, offer, pledge, sell, contract to sell, or otherwise dispose of or grant any options or other rights with respect to, any shares of Common Stock or any securities that are convertible into or exchangeable or exercisable for Common Stock owned by them for a period of 180 days after the date of this Prospectus, without the prior written consent of J.C. Bradford & Co. on behalf of Underwriters. If a shareholder should request J.C. Bradford & Co. to waive the 180 day lock-up period, J.C. Bradford & Co., consistent with past practice with regard to other issuing companies, would take into consideration the number of shares as to which such request relates, the identity of the requesting shareholder, the relative demand for additional shares of Common Stock in the market, the period of time since the completion of the Offering and the average trading volume and price performance of the Common Stock during such period. See "Underwriting." Prior to the Offering, there has been no market for the Common Stock and no prediction can be made as to the effect, if any, that sales of Common Stock by existing shareholders in reliance upon Rule 144 or otherwise will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price. Such sales may also make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that it deems appropriate. 42 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.10 par value per share, and 10,000,000 shares of preferred stock, $0.10 par value per share (the "Preferred Stock"), having such rights and privileges as the Board of Directors may from time to time determine. Giving effect to the Consolidation, 6,500,000 shares of Common Stock and no shares of Preferred Stock will be issued and outstanding immediately prior to the Offering. The following summary of the Company's capital stock does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Articles of Incorporation (the "Articles of Incorporation") and the Amended and Restated Bylaws (the "Bylaws") of the Company that are included as exhibits to the Registration Statement of which this Prospectus forms a part, and the applicable provisions of the Georgia Business Corporation Code. COMMON STOCK Holders of Common Stock are entitled to one vote per share on any issue submitted to a vote of the shareholders and do not have cumulative voting rights in the election of directors. Accordingly, the holders of a majority of the outstanding shares of Common Stock voting in an election of directors can elect all of the directors then standing for election, if they choose to do so. All shares of Common Stock are entitled to share equally in such dividends as the Board of Directors of the Company may, in its discretion, declare out of sources legally available therefor. See "Dividend Policy." Upon dissolution, liquidation, or winding up of the Company, holders of Common Stock are entitled to receive on a ratable basis, after payment or provision for payment of all debts and liabilities of the Company and any preferential amount due with respect to outstanding shares of Preferred Stock, all assets of the Company available for distribution, in cash or in kind. Holders of shares of Common Stock do not have preemptive or other subscription rights, conversion or redemption rights, or any rights to share in any sinking fund. All currently outstanding shares of Common Stock are, and the shares offered hereby (when sold in the manner contemplated by this Prospectus) will be, fully paid and nonassessable. PREFERRED STOCK Pursuant to the Company's Articles of Incorporation, the Board of Directors, from time to time, may authorize the issuance of shares of Preferred Stock in one or more series, may establish the number of shares to be included in any such series, and may fix the designations, powers, preferences and rights (including voting rights) of the shares of each such series and any qualifications, limitations, or restrictions thereon. No shareholder authorization is required for the issuance of shares of Preferred Stock unless imposed by then applicable law. Shares of Preferred Stock may be issued for any general corporate purposes, including acquisitions. The Board of Directors may issue one or more series of Preferred Stock with rights more favorable with regard to dividends and liquidation than the rights of holders of Common Stock. Any such series of Preferred Stock also could be used for the purpose of preventing a hostile takeover of the Company that is considered to be desirable by the holders of the Common Stock, could otherwise adversely affect the voting power of the holders of Common Stock, and could serve to perpetuate the Board of Directors' control of the Company under certain circumstances. Other than the issuance of the series of Preferred Stock previously authorized by the Board of Directors in connection with the Shareholder Rights Plan, described below, no transaction is now contemplated that would result in the issuance of any such shares of Preferred Stock. CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS Staggered Board of Directors; Removal; Filling Vacancies. The Articles of Incorporation provide that the Board of Directors will consist of between five and eleven directors. The Board currently consists of seven directors, four of whom are not employees of the Company. The Board of Directors is divided into three classes of directors serving staggered three-year terms. The classification of directors has the effect of making it more difficult for shareholders to change the composition of the Board of Directors. The Company believes, however, 43 that the longer time required to elect a majority of a classified Board of Directors will help to ensure the continuity and stability of the Company's management and policies. The classification provisions could also have the effect of discouraging a third party from accumulating large blocks of the Company's stock or attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its shareholders. Accordingly, shareholders could be deprived of certain opportunities to sell their shares of Common Stock at a higher market price than might otherwise be the case. See "Risk Factors--Certain Anti-Takeover Provisions." The shareholders will be entitled to vote on the election or removal of directors, with each share entitled to one vote. The Bylaws provide that, unless the Board of Directors otherwise determines, any vacancies will be filled by the affirmative vote of a majority of the remaining directors, even if less than a quorum. A director may be removed only with cause by the vote of the holders of a majority of the shares entitled to vote for the election of directors at a meeting of the shareholders called for the purpose of removing such director. A vacancy resulting from an increase in the number of directors may be filled by action of the Board of Directors. Shareholder Rights Plan. On December 11, 1997, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock of the Company, effective January 1, 1998. Each Right entitles the registered holder to purchase from the Company one one-hundredth (1/100) of a share of Series A Participating Cumulative Preferred Stock, par value $0.10 per share (the "Preferred Shares"), of the Company at a price of $60.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustments to the exercise price and the number of Preferred Shares issuable upon exercise from time to time to prevent dilution. The Rights are not exercisable until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 15% or more of the outstanding Common Stock or (ii) 10 business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding shares of Common Stock (the earlier of such dates being called the "Distribution Date"). In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power is sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of shares of Common Stock having a market value of two times the exercise price of the Right. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100.00 per share but will be entitled to an aggregate payment of 100 times the payment made per share of Common Stock. Each Preferred Share will have 100 votes, voting together with the shares of Common Stock. Finally, in the event of any merger, consolidation or other transaction in which shares of Common Stock are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. Prior to the Distribution Date, the Rights may not be detached or transferred separately from the Common Stock. The Rights will expire on January 1, 2008 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below. At any time prior to the acquisition by a person or group of affiliated or associated 44 persons of beneficial ownership of 15% or more of the outstanding Common Stock, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (the "Redemption Price"). Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. A more detailed description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Reliance Trust Company as Rights Agent (the "Rights Agent"). Ability to Consider Other Constituencies. The Articles of Incorporation permit the Board of Directors, in determining what is believed to be in the best interest of the Company, to consider the interests of the employees, customers, suppliers and creditors of the Company, the communities in which offices or other establishments of the Company are located and all other factors the directors consider pertinent, in addition to considering the effects of any actions on the Company and its shareholders. Pursuant to this provision, the Board of Directors may consider numerous judgmental or subjective factors affecting a proposal, including certain non-financial matters, and on the basis of these considerations may oppose a business combination or other transaction which, viewed exclusively from a financial perspective, might be attractive to some, or even a majority, of the Company's shareholders. INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS The Company's Bylaws provide for indemnification of directors to the fullest extent permitted by Georgia law. The Articles of Incorporation, to the extent permitted by Georgia law, eliminate or limit the personal liability of directors to the Company and its shareholders for monetary damages for certain breaches of fiduciary duty and the duty of care. Such indemnification may be available for liabilities arising in connection with this Offering. Insofar as limitation of liability or indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Pursuant to its Bylaws, the Company may also indemnify its officers, employees, agents and other persons to the fullest extent permitted by Georgia law. The Company's Bylaws obligate the Company, under certain circumstances, to advance expenses to its directors and officers in defending an action, suit or proceeding for which indemnification may be sought. The Company has entered into Indemnification Agreements with its directors and executive officers. The Company's Bylaws also provide that the Company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or who, while a director, officer, employee or agent, is or was serving as a director, officer, trustee, general partner, employee or agent of one of the Company's subsidiaries or, at the request of the Company, of any other organization, against any liability asserted against such person or incurred by such person in any such capacity, where the Company would have the power to indemnify such person against such liability under Georgia law. The Company intends to purchase and maintain insurance on behalf of all of its directors and executive officers. OTHER MATTERS The Common Stock has been approved for quotation on The Nasdaq National Market under the symbol "INOC." The transfer agent and registrar for the Company's Common Stock is Reliance Trust Company, Atlanta, Georgia. 45 UNDERWRITING Pursuant to the Underwriting Agreement, and subject to the terms and conditions thereof, the Underwriters named below, acting through J.C. Bradford & Co. and Wheat First Union, a division of Wheat First Securities, Inc., as representatives of the several underwriters (the "Representatives"), have severally agreed to purchase from the Company the number of shares of Common Stock set forth below opposite their respective names:
NAME OF UNDERWRITERS NUMBER OF SHARES -------------------- ---------------- J.C. Bradford & Co. ........................................... Wheat First Securities, Inc. .................................. --------- Total........................................................ 2,500,000 =========
In the Underwriting Agreement, the Underwriters have agreed, subject to the terms and conditions set forth therein, to purchase all shares of Common Stock offered hereby, if any of such shares are purchased. The Company has been advised by the Representatives that the Underwriters propose initially to offer the shares of Common Stock to the public at the initial public offering price set forth on the cover page of this Prospectus and to certain dealers at such price less a concession not in excess of $ per share. The Underwriters may allow, and such dealers may reallow, a concession not in excess of $ per share to certain other dealers. After the initial public offering, the public offering price and such concessions may be changed. The Representatives have informed the Company that the Underwriters do not intend to confirm sales to accounts over which they exercise discretionary authority. The Offering of the shares of Common Stock is made for delivery when, as and if accepted by the Underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offer without notice. The Underwriters reserve the right to reject any offer for the purchase of shares. The Company has granted the Underwriters an option, exercisable not later than 30 days from the date of this Prospectus, to purchase up to 375,000 additional shares of Common Stock to cover over-allotments, if any. To the extent that the Underwriters exercise such option, each of them will have a firm commitment to purchase approximately the same percentage thereof which the number of shares of Common Stock to be purchased by it shown in the table above bears to the total number of shares in such table, and the Company will be obligated, pursuant to the option, to sell such shares to the Underwriters. The Underwriters may exercise such option only to cover over-allotments made in connection with the sale of the 2,500,000 shares of Common Stock offered hereby. If purchased, the Underwriters will sell such additional shares on the same terms as those on which the 2,500,000 shares are being offered. Prior to the Offering, there has been no public market for the Common Stock. The initial public offering price has been determined by negotiation between the Company and the Representatives. In determining such price, consideration was given to, among other things, the financial and operating history and trends of the Company, the experience of its management, the position of the Company in its industry, the Company's prospects and the Company's financial results. In addition, consideration was given to the status of the securities markets, market conditions for new offerings of securities and the prices of similar securities of comparable companies. The Company, its executive officers and directors and all of its shareholders have agreed with the Representatives not to offer, sell or otherwise dispose of any shares of Common Stock, any securities exercisable for or convertible into Common Stock or any options to acquire Common Stock owned by them prior to the expiration of 180 days from the date of this Prospectus, without the prior written consent of J.C. Bradford & Co., except that the Company may issue shares in connection with the exercise of stock options granted or to be granted under the Company's Stock Option Plan. See "Shares Eligible for Future Sale." 46 The Underwriting Agreement provides that the Company will indemnify the Underwriters and controlling persons, if any, against certain civil liabilities, including liabilities under the Securities Act, or will contribute to payments that the Underwriters or any such controlling persons may be required to make in respect thereof. In connection with the Offering, the Underwriters and other persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of Common Stock. Specifically, the Underwriters may over-allot in connection with the Offering, creating a short position in Common Stock for their own account. To cover over-allotments or to stabilize the price of Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. The Underwriters may also impose a penalty bid whereby they may reclaim selling concessions allowed to an underwriter or a dealer for distributing Common Stock in the Offering, if the Underwriters repurchase previously distributed Common Stock in transactions to cover their short position, in stabilization transactions or otherwise. Finally, the Underwriters may bid for, and purchase, shares of Common Stock in market making transactions. These activities may stabilize or maintain the market price of Common Stock above market levels that may otherwise prevail. The Underwriters are not required to engage in these activities and may end any of these activities at any time. LEGAL MATTERS Certain legal matters with respect to the validity of the shares of Common Stock offered hereby will be passed upon for the Company by Kilpatrick Stockton LLP, Atlanta, Georgia. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia. EXPERTS The financial statements of the Company at December 31, 1995, 1996 and 1997 included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon such reports and upon the authority of said firms as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, including the exhibits thereto. Statements contained in this Prospectus concerning the contents of any contract or any other document are not necessarily complete. With respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matters involved, and each statement shall be deemed qualified in its entirety by such reference to the copy of the applicable document filed with the Commission. A copy of the Registration Statement, including the exhibits thereto, may be inspected without charge at the Public Reference section of the commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement and the exhibits and schedules thereto can be obtained from the Public Reference Section of the Commission upon payment of prescribed fees. The Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of that site is http://www.sec.gov. 47 Prior to filing the Registration Statement of which this Prospectus is a part, the Company was not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon effectiveness of the Registration Statement, the Company will become subject to the informational and periodic reporting requirements of the Exchange Act, and in accordance therewith, will file periodic reports, proxy statements, and other information with the Commission. Such periodic reports, proxy statements, and other information will be available for inspection and copying at the public reference facilities and other regional offices referred to above. The Company intends to register the securities offered by the Registration Statement under the Exchange Act simultaneously with the effectiveness of the Registration Statement and to furnish its shareholders with annual reports containing audited financial statements and such other reports as may be required from time to time by law or the Nasdaq National Market. 48 INDEX TO THE FINANCIAL STATEMENTS OF INNOTRAC CORPORATION COMBINED FINANCIAL STATEMENTS Report of Independent Public Accountants.................................. F-2 Combined Balance Sheets as of December 31, 1997 and 1996.................. F-3 Combined Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995............................................................ F-4 Combined Statements of Partners', Members' and Shareholders' Equity for the Years Ended December 31, 1997, 1996 and 1995......................... F-5 Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995............................................................ F-6 Notes to Combined Financial Statements.................................... F-7 Unaudited Pro Forma Financial Data........................................ F-19 Unaudited Consolidated Pro Forma Statement of Operations for the Year Ended December 31, 1997.................................................. F-20 Unaudited Consolidated Pro Forma Balance Sheet as of December 31, 1997.... F-21
F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To: Innotrac Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P.: We have audited the accompanying combined balance sheets of INNOTRAC CORPORATION (a Georgia corporation), IELC, INC. (a Georgia corporation), RENTEL #1, INC. (a Georgia corporation), SELLTEL #1, INC. (a Georgia corporation), HOMETEL SYSTEMS, INC. (a Georgia corporation), HOMETEL PROVIDERS, INC. (a Georgia corporation), RENTEL #2, LLC (a Georgia limited liability company), SELLTEL #2, LLC (a Georgia limited liability company) and HOMETEL PROVIDERS PARTNERS, L.P. (a Georgia limited partnership) (collectively referred to as the "Companies") as of December 31, 1997 and 1996 and the related combined statements of operations, partners', members' and shareholders' equity and cash flows for the years ended December 31, 1997, 1996 and 1995. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Innotrac Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. as of December 31, 1997 and 1996 and the results of their operations and their cash flows for the years ended December 31, 1997, 1996 and 1995 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Atlanta, Georgia January 26, 1998 F-2 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTEL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. COMBINED BALANCE SHEETS AS OF DECEMBER 31, 1997 AND 1996
ASSETS 1997 1996 ------ ----------- ----------- Current assets: Cash and cash equivalents............................. $ 553,746 $ 2,004,746 Accounts receivable, net (Note 3)..................... 20,081,229 25,460,016 Inventories........................................... 2,935,611 10,020,635 Deferred tax assets (Note 6).......................... 386,000 15,000 Prepaid expenses and other current assets............. 372,605 344,951 ----------- ----------- Total current assets.................................. 24,329,191 37,845,348 ----------- ----------- Property and equipment: Rental equipment...................................... 10,432,645 13,005,802 Computer, machinery and transportation equipment...... 1,557,765 1,368,471 Furniture, fixtures and leasehold improvements........ 720,097 732,182 ----------- ----------- 12,710,507 15,106,455 Less accumulated depreciation and amortization........ 5,101,992 4,167,937 ----------- ----------- 7,608,515 10,938,518 ----------- ----------- Other assets, net of amortization of $126,736 and $160,255 as of December 31, 1997 and 1996, respectively.......................................... 557,537 252,656 ----------- ----------- Total assets.......................................... $32,495,243 $49,036,522 =========== ===========
PRO FORMA EQUITY AT DECEMBER 31, 1997 1997 1996 ----------- ------------ ----------- LIABILITIES AND PARTNERS', MEMBERS', AND SHAREHOLDERS' EQUITY (NOTE 11) Current liabilities: Current portion of long-term debt (Note 4)............................. $ 737,687 $ 787,523 Line of credit (Note 4)............... 8,545,200 17,230,621 Accounts payable...................... 4,765,772 15,420,211 Distributions payable (Note 2)........ 1,007,395 300,229 Accrued expenses...................... 7,433,611 5,083,672 Other................................. 318,088 65,173 ----------- ----------- Total current liabilities............. 22,807,753 38,887,429 ----------- ----------- Noncurrent liabilities: Subordinated debt (Note 4)............ 3,500,000 3,500,000 Long-term debt (Note 4)............... 403,779 1,060,720 Deferred tax liabilities (Note 6)..... 40,000 206,000 Other................................. 0 12,300 ----------- ----------- Total noncurrent liabilities.......... 3,943,779 4,779,020 ----------- ----------- Total liabilities..................... 26,751,532 43,666,449 ----------- ----------- Commitments and contingencies (Note 5).................................... Redeemable capital stock (Note 7)...... 916,949 830,033 ----------- ----------- Partners', members' and shareholders' equity (Note 8): Partners' capital..................... 1,758,896 (2,241,104) 1,902,038 Members' deficit...................... (489,701) (489,701) (272,381) Common stock.......................... 4,590 4,590 4,590 Additional paid-in capital............ 14,370 14,370 14,370 Retained earnings..................... 3,538,607 1,138,607 2,891,423 ----------- ---------- ----------- Total partners', members' and shareholders' equity................. 4,826,762 (1,573,238) 4,540,040 ----------- ---------- ----------- Total liabilities and partners', members' and shareholders' equity.... $32,495,243 $49,036,522 =========== ===========
The accompanying notes are an integral part of these combined balance sheets. F-3 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTEL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. COMBINED STATEMENTS OF OPERATIONS
YEAR ENDED DECEMBER 31, ------------------------------------- 1997 1996 1995 ----------- ----------- ----------- Revenues, net........................... $87,978,487 $71,297,170 $44,886,334 Cost of revenues........................ 67,986,434 55,519,503 30,658,112 ----------- ----------- ----------- Gross profit........................ 19,992,053 15,777,667 14,228,222 ----------- ----------- ----------- Operating expenses: Selling, general and administrative expenses............................. 12,571,947 10,390,817 6,510,069 Depreciation and amortization......... 630,824 429,170 292,609 ----------- ----------- ----------- Total operating expenses............ 13,202,771 10,819,987 6,802,678 ----------- ----------- ----------- Operating income........................ 6,789,282 4,957,680 7,425,544 ----------- ----------- ----------- Other (income) expense: Interest expense...................... 1,788,003 1,456,508 1,089,853 Other................................. 118,341 94,367 (72,645) ----------- ----------- ----------- Total other expense................. 1,906,344 1,550,875 1,017,208 ----------- ----------- ----------- Income before income taxes.............. 4,882,938 3,406,805 6,408,336 Income tax provision.................... 76,700 (211,494) (793,629) ----------- ----------- ----------- Net income.......................... $ 4,959,638 $ 3,195,311 $ 5,614,707 =========== =========== =========== Unaudited Pro Forma Data (Note 11): Income tax provision................... $(2,716,917) =========== Net income............................. $ 3,908,024 =========== Net income per share................... $ 0.43 ===========
The accompanying notes are an integral part of these combined statements. F-4 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTEL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. COMBINED STATEMENTS OF PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED CAPITAL DEFICIT STOCK CAPITAL EARNINGS TOTAL ----------- --------- ------ ------- ---------- ----------- BALANCE, DECEMBER 31, 1994...................... $ 406,275 $ 0 $4,590 $14,370 $1,199,057 $ 1,624,292 Net income................. 2,032,545 0 0 0 3,582,162 5,614,707 Distributions to shareholders, members and partners.................. (1,331,028) 0 0 0 (2,607,242) (3,938,270) Accreted dividends on redeemable capital stock.. 0 0 0 0 (105,608) (105,608) ----------- --------- ------ ------- ---------- ----------- BALANCE, DECEMBER 31, 1995...................... 1,107,792 0 4,590 14,370 2,068,369 3,195,121 Member contributions....... 0 2,000 0 0 0 2,000 Net income (loss)............. 1,323,246 (39,381) 0 0 1,911,446 3,195,311 Distributions to shareholders, members and partners.................. (529,000) (235,000) 0 0 (977,000) (1,741,000) Accreted dividends on redeemable capital stock.. 0 0 0 0 (111,392) (111,392) ----------- --------- ------ ------- ---------- ----------- BALANCE, DECEMBER 31, 1996...................... 1,902,038 (272,381) 4,590 14,370 2,891,423 4,540,040 Net income (loss).......... 3,540,858 (232,320) 0 0 1,651,100 4,959,638 Distributions to shareholders, members and partners.................. (3,684,000) 15,000 0 0 (917,000) (4,586,000) Accreted dividends on redeemable capital stock.. 0 0 0 0 (86,916) (86,916) ----------- --------- ------ ------- ---------- ----------- BALANCE, DECEMBER 31, 1997...................... $ 1,758,896 $(489,701) $4,590 $14,370 $3,538,607 $ 4,826,762 =========== ========= ====== ======= ========== ===========
The accompanying notes are an integral part of these combined statements. F-5 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTEL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. COMBINED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, -------------------------------------- 1997 1996 1995 ----------- ----------- ------------ Cash flows from operating activities: Net income............................ $ 4,959,638 $ 3,195,311 $ 5,614,707 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization......... 630,824 429,170 292,609 Depreciation--rental equipment........ 3,711,330 3,004,699 1,763,028 Loss on disposal of rental equipment.. 4,478,785 2,538,129 1,755,956 Subordinated debt accretion........... 0 163,781 179,776 Deferred income taxes................. (537,000) (107,000) 227,000 Decrease (increase) in accounts receivable........................... 5,378,787 (6,753,077) (12,594,156) Decrease (increase) in inventories.... 7,085,024 (7,683,173) (1,092,926) Increase (decrease) in prepaid expenses and other assets............ (484,466) (327,074) 44,466 (Decrease) increase in accounts payable.............................. (8,959,441) 3,610,642 8,814,933 Increase in accrued expenses.......... 2,249,939 2,484,253 1,397,043 Other................................. 368,845 (468,149) 12,119 ----------- ----------- ------------ Net cash provided by (used in) operating activities................ 18,882,265 87,512 6,414,555 ----------- ----------- ------------ Cash flows from investing activities: Accrued equipment purchases........... (1,595,000) (272,000) 0 Purchases of property and equipment... (5,342,233) (7,699,769) (7,812,510) ----------- ----------- ------------ Net cash used in investing activities.......................... (6,937,233) (7,971,769) (7,812,510) ----------- ----------- ------------ Cash flows from financing activities: Net (repayments) borrowings under lines of credit...................... (8,685,421) 13,168,781 3,164,848 Proceeds from long-term debt.......... 0 2,096,000 0 Repayment of long-term debt........... (702,027) (327,766) (397,401) Repayment of subordinated debt........ 0 (1,000,000) 0 Loan commitment fees.................. (125,000) (200,000) 0 Proceeds from members' contributions.. 0 2,000 0 Distributions to shareholders, members and partners......................... (3,883,584) (3,890,244) (2,179,797) ----------- ----------- ------------ Net cash (used in) provided by financing activities................ (13,396,032) 9,848,771 587,650 ----------- ----------- ------------ Net (decrease) increase in cash and cash equivalents...................... (1,451,000) 1,964,514 (810,305) Cash and cash equivalents, beginning of period................................ 2,004,746 40,232 850,537 ----------- ----------- ------------ Cash and cash equivalents, end of period................................ $ 553,746 $ 2,004,746 $ 40,232 =========== =========== ============ Supplemental cash flow disclosures: Cash paid for interest................ $ 1,787,975 $ 1,207,483 $ 846,010 =========== =========== ============ Cash paid for income taxes, net of refunds received..................... $ 84,675 $ 891,552 $ 523,134 =========== =========== ============ Non cash transactions: Accreted dividends on Redeemable Capital Stock........................ $ 86,916 $ 111,392 $ 105,608 =========== =========== ============
The accompanying notes are an integral part of these combined statements. F-6 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTEL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS 1. ORGANIZATION Innotrac Corporation ("Innotrac"), IELC, Inc., RenTel #1, Inc. ("RenTel"), SellTel #1, Inc. ("SellTel"), HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. ("Providers L.P.") are collectively referred to herein as the "Companies". Each of these entities provides various types of marketing support services. The Companies are all owned 100% by one shareholder or his immediate family except for RenTel, SellTel, and Providers L.P. (which each have a 10% minority interest owned by one party). The minority interests of RenTel and SellTel are owned by a related party of the shareholder. In conjunction with Innotrac's planned initial public offering (the "Offering"), the Companies will reorganize as one consolidated entity. See Note 11 for a description of the Companies' planned consolidation. Innotrac provides direct marketing services, including fulfillment, order processing, data processing and teleservices. IELC, Inc. ("IELC") provides employee-leasing services. RenTel rents caller identification display devices ("Caller I.D. units") and SellTel sells Caller I.D. units and other telecommunications equipment on an installment basis to consumers in Tennessee and South Carolina. RenTel #1, L.L.C. ("RenTel #2") rents Caller I.D. units and SellTel #1, L.L.C. ("SellTel #2") sells Caller I.D. units and other telecommunications equipment on an installment basis to consumers in California. HomeTel Systems, Inc. ("HomeTel") rents and sells various types of telecommunications equipment to consumers in the southeastern and western United States. HomeTel Providers, Inc. ("Providers Inc.") is the general partner of Providers, L.P. which rents and sells on an installment basis Caller I.D. units and other telecommunications equipment to consumers in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, and North Carolina. See Note 7 for a discussion of RenTel and SellTel debt and equity arrangements. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Combination The accompanying combined financial statements include the accounts of Innotrac, IELC, RenTel, SellTel, HomeTel, Providers Inc., RenTel #2, SellTel #2 and Providers, L.P. and are prepared on the accrual basis of accounting. Significant intercompany accounts and transactions have been eliminated in the combination. Combined financial statements are presented since the Companies have similar ownership and interrelated activities. The financial information included herein may not necessarily reflect the financial position, results of operations, or cash flows of the Companies in the future or what the financial position, results of operations, or cash flows of the Companies would have been if they were combined as a separate, stand-alone company during the periods presented. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the F-7 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Sources of Supplies In accordance with their agreements with certain telecommunications companies, the Companies primarily use two providers for the supply of telecommunications equipment. However, if these vendors were unable to meet the Companies' needs, management believes that other sources for this equipment exist on commensurate terms and that operating results would not be adversely affected. Concentration of Revenues Revenues earned under the Companies' agreement with a major telecommunications company to sell and rent certain telecommunications equipment to the customers of this company accounted for approximately 85%, 82% and 82% of total revenues for the years ended December 31, 1997, 1996 and 1995, respectively. If this agreement were terminated, it could have a material adverse affect on the future operating results and liquidity of the Companies (Note 5). Cash and Cash Equivalents The Companies consider all short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. Inventories Inventories, consisting primarily of telecommunications equipment, are stated at the lower of cost or market, with cost determined by the first-in, first-out method. Property and Equipment Property and equipment are stated at cost. Depreciation is determined using straight-line methods over the following estimated useful lives: Rental equipment................................................... 3-4 years Computers.......................................................... 3 years Machinery and transportation equipment............................. 5-7 years Furniture and fixtures............................................. 7 years
Leasehold improvements are amortized using the straight-line method over the shorter of the service lives of the improvements or the remaining term of the lease. Prior to January 1, 1996, depreciation for rental equipment was computed using the straight-line method over a four-year period. As a result of a review of its rental equipment, management decreased the useful lives of its rental equipment to three years. The effect of this change was not material to the results of operations. Rental equipment is written off at its net book value when it is no longer generating revenues or is not returned by the customer. Provisions are made for estimated equipment losses that have not yet been reported. F-8 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Equipment rental losses were approximately $4,479,000, $2,538,000 and $1,756,000 for the years ended December 31, 1997, 1996 and 1995 respectively, and are included in "Cost of revenues" on the accompanying statements of operations. Long-Lived Assets The Companies periodically review the values assigned to long-lived assets such as property and equipment to determine if any impairments are other than temporary. Management believes that the long-lived assets on the accompanying balance sheets are appropriately valued. Stock-based Compensation Plans The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted the disclosure option of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-based Compensation" ("SFAS 123"). SFAS 123 requires that companies which do not choose to account for stock-based compensation as prescribed by this statement, shall disclose the pro forma effects on earnings and earnings per share as if SFAS 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS 123. Income Taxes Innotrac, IELC and SellTel, as C corporations, utilize the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The shareholders of RenTel, Providers Inc. and HomeTel have elected to have the Companies treated as S corporations. The Internal Revenue Code of 1986, as amended (the "Code") and certain applicable state statutes provide that the income and expenses of an S corporation are not taxable separately to the corporation but rather accrue directly to the shareholders. Accordingly, no provisions for federal and certain state income taxes related to these entities have been made in the accompanying financial statements. The Code and certain applicable state statutes provide that the income and expenses of a partnership are not separately taxable to the partnership, but rather accrue directly to the partners. Accordingly, no provision for federal and certain state income taxes related to Providers, L.P. have been made in the accompanying financial statements. As limited liability companies, RenTel #2 and SellTel #2 are not subject to federal and state income taxes. The taxable income or loss of these entities are included in the federal and state income tax returns of their members. Accordingly, no provisions for income taxes have been reflected in the accompanying financial statements related to these entities. It is the policy of management to pay and accrue distributions primarily for income taxes that are required to be paid by the shareholders, members and partners due to the flow through of income of RenTel, RenTel #2, SellTel #2, HomeTel, Providers Inc., and Providers, L.P. During the years ended December 31, 1997, 1996 and 1995, distributions of approximately $4,586,000, $1,741,000 and $3,938,000, respectively, were recorded, of F-9 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) which approximately $1,007,000 and $300,000 were accrued and unpaid as of December 31, 1997 and 1996, respectively. Additionally, in conjunction with the reorganization (Note 11), management anticipates distributing approximately $6,400,000 of the undistributed earnings of approximately $9,000,000 to the owners of HomeTel and Providers, L.P. Revenue Recognition Revenues are recognized on the accrual basis as services are provided to customers or as units are shipped or rentals are provided. Allowances are made for estimated billings that are not collectible and for estimates of product returns (Note 3). Fair Value of Financial Instruments The carrying values of the Companies' financial instruments approximate their fair values. Advertising Costs The Companies expense all advertising costs as incurred. 3. ACCOUNTS RECEIVABLE The Companies' accounts receivable include amounts that are billed in installments over a five to twelve month period. Accounts receivable were composed of the following at December 31, 1997 and 1996:
1997 1996 ----------- ----------- Billed receivables................................. $15,812,276 $16,857,463 Unbilled installment receivables................... 9,976,198 12,844,916 ----------- ----------- Total receivables.................................. 25,788,474 29,702,379 Less allowances.................................... (5,707,245) (4,242,363) ----------- ----------- $20,081,229 $25,460,016 =========== ===========
Management believes that the allowances for doubtful accounts and returns reduce the gross accounts receivable to net amounts that will be collected. F-10 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 4. FINANCING OBLIGATIONS Financing obligations as of December 31, 1997 and 1996 consisted of the following:
1997 1996 ---------- ----------- Borrowings under revolving credit agreement (up to $25,000,000 individually or in aggregate, except as to Providers, L.P., which borrowings cannot exceed $12,000,000; the revolving advances owing by any one borrower cannot exceed an amount equal to the sum of 80% of the eligible accounts receivable plus 70% of the eligible installment receivables); interest payable monthly at rates equal to the prime rate (8.5% and 8.25% at December 31, 1997 and 1996, respectively), or at the Company's option, LIBOR plus a margin, expires on November 15, 1999, secured by all assets of the Companies and a personal guarantee of the sole shareholder of Innotrac...................... $8,545,200 $17,230,621 Subordinated note payable to the limited partner of Providers, L.P., due April 1999; interest payable monthly at a variable rate of prime plus 8% (16.5% as of December 31, 1997) and a fixed rate of 14% as of December 31, 1996; secured by accounts receivable, inventories, rental equipment and the personal guarantee of the sole shareholder of the general partner of Providers, L.P.; subordinated to the line of credit............................................. 3,500,000 3,500,000 Note payable, due in monthly installments of principal of $55,556, plus interest at 8.95%, through July 1999; secured by accounts receivable, inventories, equipment and the personal guarantee of Innotrac's sole shareholder........................................... 1,055,555 1,722,222 Other.................................................. 85,911 126,021 ---------- ----------- 13,186,666 22,578,864 Current portion........................................ 9,282,887 18,018,144 ---------- ----------- $3,903,779 $ 4,560,720 ========== ===========
Scheduled maturities of financing obligations are as follows: 1998............................................................. 9,282,887 1999............................................................. 3,903,779 ----------- Total.......................................................... $13,186,666 ===========
The revolving line of credit agreement and the term note contain various restrictive financial and change of ownership control covenants. The Companies were in compliance with all covenants as of December 31, 1997. F-11 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 5. COMMITMENTS AND CONTINGENCIES Operating Leases Innotrac leases office and warehouse space and equipment under various operating leases. The primary office and warehouse operating leases provide for escalating payments over the lease term. Innotrac recognizes rent expense on a straight-line basis over the lease term and accrues the differences each month between the amount expensed and the amount actually paid. Aggregate future minimum lease payments under noncancellable operating leases with original periods in excess of one year as of December 31, 1997 are as follows: 1998............................................................ $ 1,229,870 1999............................................................ 1,187,745 2000............................................................ 908,750 2001............................................................ 908,750 2002............................................................ 908,750 Thereafter...................................................... 4,998,125 ----------- Total minimum lease payments.................................... $10,141,990 ===========
Rent expense under all operating leases totaled approximately $1,121,000, $770,000 and $393,000 during the years ended December 31, 1997, 1996 and 1995, respectively. Marketing Support Agreement The Companies have entered into a six-year agreement, which expires in March 2000, with a major telecommunications company to sell and rent certain telecommunications equipment to the customers of this company. The telecommunications company has agreed to provide billing, collection and referral services for the Companies. This agreement can be terminated upon 24 months written notice; however, in the event of termination, the telecommunications company must continue to provide billing and collections services for existing customers for four years after the termination of the agreements. Legal Proceedings The Companies are subject to legal proceedings and claims that arise in the ordinary course of business. There are no material pending legal proceedings to which the Companies are a party. 6. INCOME TAXES Details of the income tax benefit (provision) for the years ended December 31, 1997, 1996 and 1995 are as follows:
1997 1996 1995 --------- --------- --------- Current..................................... $(460,300) $(318,494) $(566,629) Deferred.................................... 537,000 107,000 (227,000) --------- --------- --------- $ 76,700 $(211,494) $(793,629) ========= ========= =========
F-12 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Deferred income taxes reflect the net effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Companies' deferred tax assets and liabilities as of December 31, 1997 and 1996 are as follows:
1997 1996 --------- --------- Noncurrent deferred tax (liabilities) assets: Property, plant, equipment basis differences....... $ 43,000 $ 16,000 Conversion from cash to accrual taxpayer method-- long term......................................... (83,000) (227,000) Other.............................................. 0 5,000 --------- --------- (40,000) (206,000) --------- --------- Current deferred tax (liabilities) assets: Reserves for uncollectable accounts................ 524,000 131,000 Conversion from cash to accrual taxpayer method-- current........................................... (143,000) (143,000) Other.............................................. 5,000 27,000 --------- --------- 386,000 15,000 --------- --------- Net deferred tax asset (liability)................... $ 346,000 $(191,000) ========= =========
Innotrac converted from the cash basis to the accrual basis for income tax purposes effective August 1995, with the accumulated difference to be added back to taxable income over a four-year period. A reconciliation of the income tax (benefit) provision computed at statutory rates to the income tax provision for the years ended December 31, 1997, 1996 and 1995 is as follows:
1997 1996 1995 ----- ----- ----- Federal statutory rate............................... 34.0% 34.0% 34.0% Increase (reduction) in taxes resulting from: State income taxes, net of federal benefit......... 1.4 3.6 3.1 Income taxable directly to shareholders, partners and members (Notes 1 and 2)....................... (37.9) (31.8) (24.9) Other................................................ 0.9 0.4 0.1 ----- ----- ----- (1.6)% 6.2% 12.3% ===== ===== =====
7. REDEEMABLE CAPITAL STOCK In September 1993, the Companies obtained $1,000,000 of financing from a related party in the form of subordinated debt both in RenTel and SellTel. The subordinated debt required monthly payments of interest with principal maturing at 36 months. The subordinated debt was repaid in full in September 1996. Additionally, the related party received callable common stock representing 10% of the common stock in Rentel and SellTel. The terms of the callable common stock provide each of Rentel and SellTel the option to call the common stock at predetermined amounts on or before September 30, 1998 beginning in September 1996. If the Companies do not call the common stock interests, the Companies are obligated to issue the related party an additional 10% common stock interest to redeem the common stock. Due to the related party nature of the transaction, the Companies are accounting for the callable common stock as redeemable equity. F-13 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) The Companies allocated the capital raised between "Subordinated Debt" and "Redeemable Capital Stock" on the accompanying balance sheets at the respective fair market values based on discounted cash flow analyses (approximately $500,000 each to "Subordinated Debt" and "Redeemable Capital Stock") and then accreted to their redemption values over 36 months using the effective interest rate method (an approximate 30% return on both the subordinated debt and the callable common stock). The portion of the accretion attributable to Subordinated Debt is reflected as interest expense in the accompanying statements of operations. For the equity portion, the Companies have accreted through the recording of dividends to the estimated redemption amounts at each balance sheet date and reflected such redemption amounts as "Redeemable Capital Stock" on the accompanying balance sheets. These dividends represent a 16% effective rate through September 1996 (the first trigger date as defined) and 10% thereafter. In conjunction with the Offering (see Note 11), the Companies anticipate redeeming the RenTel shares prior to or on the effective date of the Offering for $390,000 and the SellTel shares for $590,000 subsequent to the effective date. 8. PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY Common stock and paid-in capital consisted of the following at December 31, 1997 and 1996:
COMMON PAID-IN STOCK CAPITAL ------ ------- Innotrac Corporation, $0.10 par value, 100,000 shares authorized, 15,300 shares issued and outstanding.......... $1,530 $13,470 IELC, Inc., no par value, 1,000 shares authorized, 10 shares issued and outstanding........................................... 100 0 RenTel #1, Inc., no par value, 1,000 shares authorized, 100 shares issued and outstanding........................................... 900 0 SellTel #1, Inc., no par value, 1,000 shares authorized, 100 shares issued and outstanding........................................... 900 0 HomeTel Systems, Inc., no par value, 10,000 shares authorized, 100 shares issued and outstanding............. 1,060 0 HomeTel Providers Inc., $0.10 par value, 10,000 shares authorized, 1,000 shares issued and outstanding........... 100 900 ------ ------- $4,590 $14,370 ====== =======
See Note 11 for a description of the Companies' plan of consolidation. 9. EMPLOYEE RETIREMENT PLAN Employees of Innotrac may participate in an employee retirement defined contribution plan. The plan covers all employees of the participating entities who have at least one year of service (six months if hired before January 1, 1997) and are 18 years of age. Participants may elect to defer 15% of compensation up to a maximum amount determined annually pursuant to IRS regulations. Innotrac has elected to provide matching employer contributions equal to 15% of contributions for less than five years of service, 25% of contributions for five to nine years of service, and 35% of contributions for over nine years of service. Total matching contributions made to the plan and charged to expense by Innotrac for the years ended December 31, 1997, 1996 and 1995 were not material. F-14 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 10. STOCK BASED COMPENSATION In November 1997, the Company adopted a stock option plan (the "Stock Option Plan") to provide key employees, officers, directors, contractors, and consultants an opportunity to own Common Stock of the Company and to provide incentives for such persons to promote the financial success of the Company. Awards under the Stock Option Plan may be structured in a variety of ways, including as "incentive stock options" as defined in Section 422 of the Internal Revenue Code, as amended (the "Code"), non-qualified stock options, restricted stock awards, and stock appreciation rights ("SARs"). Incentive stock options may be granted only to full-time employees (including officers) of the Company and its subsidiaries. Non-qualified options, restricted stock awards, SARs, and other permitted forms of awards may be granted to any person employed by or performing services for the Company, including directors, contractors, and consultants. The Stock Option Plan provides for the issuance of options to purchase up to an aggregate of 800,000 shares of Common Stock. Incentive stock options are also subject to certain limitations prescribed by the Code, including the requirement that such options may not be granted to employees who own more than 10% of the combined voting power of all classes of voting stock of the Company, unless the option price is at least 110% of the fair market value of the Common Stock subject to the option. The Board of Directors of the Company (or a committee designated by the Board) otherwise generally has discretion to set the terms and conditions of options and other awards, including the term, exercise price, and vesting conditions, if any; to select the persons who receive such grants and awards; and to interpret and administer the Stock Option Plan. As of December 31, 1997, stock options to purchase an aggregate of 343,000 shares at $9.10 per share of Common Stock have been granted under the Stock Option Plan. 55,000 of these options vested immediately at the date of grant; the remaining options vest 50%, 25% and 25% at two, three and four years, respectively, after the grant date and expire 10 years from the grant date. Additionally, the Company plans on granting 40,000 shares on the effective date of the Offering to four non-employee members of the Board of Directors at a price equal to the initial public offering price which will vest immediately upon grant. At December 31, 1997, all of the 343,000 options granted were outstanding with a weighted average contractual life of 9.9 years. 55,000 options were exercisable at December 31, 1997 at $9.10 per share. The Company has elected to account for its option plans under APB 25; however, the Company has computed for pro forma disclosure purposes the value of all options granted during 1997 using the Black-Scholes option-pricing model as prescribed by SFAS 123 using the following weighted average assumptions used for grants in 1997: Risk-free interest rate......................................... 5.3% Expected dividend yield......................................... 0% Expected lives.................................................. 2.7 Years Expected volatility............................................. 49%
The total value of options granted during 1997 was computed as approximately $2,172,000 which would be amortized on a pro forma basis over the four year vesting period of the options. If the Company had accounted for these plans in accordance with SFAS 123, the Company's net income and net income per share (see Note 11 F-15 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) for a discussion of pro forma earnings per share) for the year ended December 31, 1997 would have decreased by the following unaudited pro forma amounts:
PRO FORMA ADJUSTED FOR THE IMPACT OF PRO FORMA SFAS 123 ---------- ---------- Net income.......................................... $3,874,507 $3,666,972 Net income per share................................ $ 0.43 $ 0.40
11. SUBSEQUENT EVENTS Initial Public Offering In the first quarter of 1998, Innotrac is planning an initial public offering of common stock. Innotrac plans to issue 2,500,000 shares (2,875,000 if the underwriters overallotment is exercised in full) at an estimated initial public offering price of between $12.00 and $14.00 per share. There can be, however, no assurance that the Offering will be completed at a per share price within the estimated range or at all. There are significant potential risks associated with this Offering as well as Innotrac's ability to compete profitability in this industry including, but not limited to, the following: RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES In connection with certain of its fulfillment services, the Company purchases the Caller ID and other equipment from third party vendors and, therefore, assumes the risks of inventory obsolescence, damage to leased units, theft and creditworthiness of purchasers. The ability of the Company to receive payment for sales or rentals of such equipment is dependent on the transmittal of correct customer invoices and remittance on a timely basis by BellSouth and Pacific Bell. The occurrence of any of these events could have a material adverse effect on the Company's business, results of operations and financial condition. The credit risk assumed by the Company is particularly significant because of the large number of customers, each of which owes a relatively small amount. The Company's allowance for bad debt was approximately $5,707,000 at December 31, 1997. RELIANCE ON TELECOMMUNICATIONS INDUSTRY Caller ID is a relatively recent offering by telecommunications companies and there can be no assurance that it will gain or sustain wide acceptance in the marketplace. In addition, the provision of Caller ID services by telecommunications companies is regulated at both the federal and state level. Such regulations may have the effect of delaying the offering of Caller ID service in a market of one of the Company's clients. The Company is also dependent on the level of resources (financial and otherwise) expended by its clients to promote Caller ID service. There can be no assurance that the Company's telecommunications clients will sufficiently promote, or continue to promote, Caller ID service in their areas. Furthermore, there can be no assurance that the Company's telecommunications clients will achieve their estimated "market penetration" (the percentage of consumer telephone lines capable of receiving Caller ID services that actually receive such services) goals, upon which the Company, in part, plans its operations. In addition, at some time in the future, peak market penetration for Caller ID service may be achieved by the Company's F-16 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) clients or Caller ID service may be replaced by a different service or hardware. The occurrence of any of these factors could have a material adverse effect on the Company's business, results of operations and financial condition. RISKS OF BUSINESS INTERRUPTION; NEW FACILITY The Company's operations are dependent upon its ability to protect its distribution facilities, call center, computer and telecommunications equipment and software systems against damage from fire, power loss, telecommunications interruption or failure, natural disaster and other similar events. In the third quarter of 1998, the Company expects to move its corporate offices and four distribution facilities into a new facility. In the event the Company experiences a temporary or permanent interruption of its business, through casualty, operating malfunction, as a result of the move or otherwise, the Company's business, results of operations or financial condition could be materially adversely affected. The Company's property and business interruption insurance, may not adequately compensate the Company for all losses that it may incur. RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW SOFTWARE The Company's business is highly dependent on its computer and telecommunications equipment and software systems. The Company intends to use a portion of the net proceeds of the Offering to upgrade certain computer hardware and software, and, as a result, will convert certain existing programs to the new system. There can be no assurance that the Company can effectively or efficiently convert its programs to the new system. In addition, the Company's failure to maintain its technological capabilities or to respond effectively to technological changes could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's future success also will be highly dependent upon its ability to enhance existing services and develop applications to focus on its clients' needs and introduce new services and products to respond to changing technological developments. There can be no assurance that the Company can select, invest in and develop new and enhanced technology on a timely basis in the future in order to meet clients' needs and to maintain its own competitiveness, and the Company's failure to do so could have a material adverse effect on the Company's business, results of operations and financial condition. ABILITY TO CONTINUE AND MANAGE GROWTH Innotrac has recently experienced significant growth in its operations. The Company's success will depend upon its ability to initiate, develop and maintain existing and new client relationships; respond to competitive developments; develop its sales and marketing forces; attract, train, motivate and retain management and hourly personnel; and maintain the high quality of the services and products that it provides to its clients. In addition, the Company has entered into a long-term lease for a new facility, which will increase lease expenses by approximately $400,000 per year. The Company's continued rapid growth can be expected to place a significant strain on the Company's management, operations, employees and resources. There can be no assurance that the Company will be able to maintain or accelerate its current growth, effectively manage its expanding operations or achieve planned growth on a timely or profitable basis. If the Company is unable to manage its growth effectively, its business, results of operations and financial condition could be materially adversely affected. F-17 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) DEPENDENCE ON KEY PERSONNEL The Company's operations depend in large part on the abilities and continuing efforts of its executive officers and senior management. In order to support its growth the Company will be required to effectively recruit, develop and retain additional qualified management personnel. There can be no assurance that the Company will be able to (i) retain the services of its executive officers and key management, with whom the Company has no employment agreements or (ii) recruit, develop and retain additional qualified management personnel. The Company does not maintain key man life insurance on any of its executive officers, although two of the parties to the Consolidation maintain such policies in the aggregate amount of $4.5 million on the life of Scott D. Dorfman, the beneficiaries of which are one of the parties to the Consolidation and the father of Scott D. Dorfman, respectively, the proceeds of which would be used to repay debt owed to them by the Company. After the Consolidation the Company intends that one of the policies, in the amount of $3.5 million, will be converted to name the Company as beneficiary. The business and prospects of the Company could be adversely affected if these persons do not continue in their key roles and the Company is unable to attract and retain qualified replacements. Consolidation In conjunction with the proposed Offering, Innotrac plans to consolidate the eight affiliated entities (the "Consolidation") that had previously conducted the business of the Company as an integrated business unit. The Consolidation will be effected simultaneously with, and as a condition to, the Offering. Innotrac has authorized 50,000,000 shares of Common Stock, $0.10 par value, and 10,000,000 shares of Preferred Stock, $0.10 par value. After the Consolidation, there will be an aggregate of 6,500,000 shares outstanding. On December 12, 1997, Innotrac effected a 70.58823 -for- 1 stock split resulting in 1,080,000 shares outstanding. Additionally, in exchange for their previous ownership interests, 5,420,000 shares of $0.10 par value common stock will be issued to the remaining entity owners pari-passu based on their relative value to the consolidated group except for the minority stockholder of RenTel and SellTel, whose ownership interests will be repurchased as scheduled prior to or effective with the Offering and in the fourth quarter of 1998, respectively. As noted below, two of the entities will make certain distributions of undistributed accumulated earnings (approximately $6,400,000) to their principals in conjunction with the Consolidation. Pro Forma Shareholders' Equity The pro forma shareholders' equity at December 31, 1997 gives effect to the proposed distribution of undistributed accumulated earnings of HomeTel ($2,400,000) and Providers LP ($4,000,000) in conjunction with the Consolidation. Because Providers LP is a partnership, this distribution is reflected as a reduction in Partners' Capital, whereas HomeTel's is reflected as a reduction in Retained Earnings as it is a corporation. Pro Forma Statement of Operations The pro forma statement of operations for the year ended December 31, 1997 gives effect to the Consolidation and the Offering as if they occurred on January 1, 1997. In conjunction with the Consolidation, HomeTel Providers, Inc., Providers LP, RenTel, RenTel #2, and SellTel #2 will lose their non C- corporation status for tax purposes. Accordingly, the pro forma income taxes reflect income taxes applied to pro forma earnings which give effect to the elimination of interest expense on certain borrowings assumed to be repaid F-18 with the net proceeds of the Offering at statutory rates. Pro forma net income reflects the impact of the aforementioned adjustments and pro forma earnings per share reflects the shares issued in conjunction with the Consolidation and the stock split (aggregate 6,500,000), the Offering (2,500,000), and 102,900 weighted average shares granted under the Stock Option Plan within the 12 months prior to the effective date of the Offering using the treasury stock method as if all shares had been outstanding for the entire period. UNAUDITED PRO FORMA FINANCIAL DATA As discussed in Note 1 to the combined financial statements, the historical combined financial statements include the financial statements of Innotrac, IELC, RenTel #1, SellTel #1, HomeTel, Providers Inc., RenTel #2, SellTel #2 and Providers L.P. Effective simultaneously with the Offering, the Companies will be reorganized and consolidated. For accounting purposes, Providers, L.P. will be deemed to be the acquiring entity. See "The Consolidation." The pro forma adjustments to the statements of operations for the year ended December 31, 1997 reflect (i) the Consolidation and (ii) the Offering and the use of net proceeds thereof, as if each of such transactions had occurred on January 1, 1997. The pro forma adjustments to the balance sheet reflect (i) the Consolidation and (ii) the Offering and the use of net proceeds thereof, as if each of such transactions had occurred on December 31, 1997. The pro forma financial information does not purport to represent what the Company's consolidated results of operations would have been if these transactions had in fact occurred on these dates, nor does it purport to indicate the future consolidated financial position or consolidated results of future operations of Innotrac. The pro forma adjustments are based on currently available information and certain assumptions that management believes to be reasonable. F-19 UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA PRO FORMA COMBINED ADJUSTMENTS CONSOLIDATED ---------- ----------- ------------ Revenues net............................ $87,978 $ -- $87,978 Cost of revenues........................ 67,986 -- 67,986 ------- ------- ------- Gross profit............................ 19,992 -- 19,992 ------- ------- ------- Operating expenses: Selling, general and administrative expenses.............................. 12,572 -- 12,572 Depreciation and amortization.......... 631 -- 631 ------- ------- ------- Total operating expenses............ 13,203 -- 13,203 ------- ------- ------- Operating income........................ 6,789 -- 6,789 ------- ------- ------- Other (income) expense: Interest expense...................... 1,788 (1,742)(a) 46 Other................................. 118 -- 118 ------- ------- ------- Total other expense................. 1,906 (1,742) 164 ------- ------- ------- Income before income taxes.............. 4,883 1,742 6,625 Income tax benefit (provision).......... 77 (2,794)(b) (2,717) ------- ------- ------- Net income.............................. $ 4,960 $(1,052) $ 3,908 ======= ======= ======= Weighted average number of shares....... 2,500 (c) 6,603 (d) 9,103 Net income per share.................... $ 0.43 (e) =======
- -------- (a) Reflects the elimination of interest expense on the line of credit, bank note, and subordinated debt borrowings assumed to be repaid with the net proceeds of the Offering. (b) Reflects the tax effect of Systems, Providers Inc., Providers, L.P., RenTel, RenTel #2 and SellTel #2 losing their non-C corporation status in conjunction with the Consolidation as well as the tax effects of (a) above. (c) Reflects 2,500,000 shares being offered hereby. (d) Reflects 1,080,000 shares of Innotrac (after the stock split) and 5,420,000 shares of the Company issued in conjunction with the Consolidation plus 102,900 shares granted under the Stock Option Plan within the 12 months prior to the effective date of the initial public offering using the "treasury stock" method as if all shares had been outstanding for all periods. (e) Excludes the dividend accretion on redeemable capital stock of a subsidiary of approximately $87,000 or $(0.01) per share. F-20 UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 1997 (DOLLARS IN THOUSANDS)
PRO FORMA ADJUSTMENTS ----------------------- CONSOLIDATION PRO FORMA HISTORICAL AND CONSOLIDATED COMBINED DISTRIBUTION OFFERING AS ADJUSTED ---------- ------------- -------- ------------ Cash and cash equivalents.. $ 553 $ -- $ 4,186 (d) $ 4,739 Restricted cash............ 0 -- 5,339 (d) 5,339 Accounts receivable, net... 20,081 -- -- 20,081 Inventory.................. 2,936 -- -- 2,936 Prepaids and other......... 759 3,321 (c) -- 4,080 ------- ------- -------- ------- Total current assets... 24,329 3,321 9,525 37,175 ------- ------- -------- ------- Property and equipment, net....................... 7,609 -- -- 7,609 ------- ------- -------- ------- Other assets, net.......... 558 -- -- 558 ------- ------- -------- ------- Total assets........... $32,496 3,321 $ 9,525 $45,342 ======= ======= ======== ======= Accounts payable........... $ 4,766 $ -- $ -- $ 4,766 Accrued expenses........... 8,441 -- -- 8,441 Current portion of debt.... 738 -- (727)(d) 11 Line of credit............. 8,545 6,400 (a) (14,945)(d) 0 Other...................... 318 -- -- 318 ------- ------- -------- ------- Total current liabilities........... 22,808 6,400 (15,672) 13,536 ------- ------- -------- ------- Subordinated debt.......... 3,500 -- (3,500)(d) 0 Long-term debt............. 404 -- (388)(d) 16 Deferred income taxes...... 40 285 (c) -- 325 ------- ------- -------- ------- Total long-term liabilities........... 3,944 285 (3,888) 341 ------- ------- -------- ------- Total liabilities...... 26,752 6,685 (19,560) 13,877 ------- ------- -------- ------- Redeemable Capital Stock... 917 -- (390)(d) 527 ------- ------- -------- ------- Shareholders' equity: Partners' capital........ 1,759 (4,000)(a) -- 0 2,241 (b) -- Members' deficit......... (490) 490 (b) -- 0 Common stock............. 5 645 (b) 250 (d) 900 Additional paid-in capi- tal..................... 14 (3,593)(b) 29,225 (d) 25,646 Retained earnings........ 3,539 (2,400)(a) -- 4,392 217 (b) -- 3,036 (c) -- ------- ------- -------- ------- Total shareholders' equity................ 4,827 (3,364) 29,475 30,938 ------- ------- -------- ------- Total liabilities and shareholders' equity.. $32,496 $ 3,321 $ 9,525 $45,342 ======= ======= ======== =======
- -------- (a) Reflects a distribution of $6.4 million of the undistributed earnings of Systems and Providers L.P. (b) Reflects the Consolidation of the Company as described in "The Consolidation" including the reclassification of the portion of retained earnings attributable to the S corporations, and to additional paid-in- capital and the issuance of 5,420,000 shares of Common Stock as well as the 1,080,000 shares of Common Stock after the stock split. (c) Reflects the recording of deferred tax assets and liabilities associated with the change in tax status to C corporation of Systems, Providers Inc., Providers L.P., RenTel, RenTel #2, and SellTel #2 in conjunction with the Consolidation. See "The Consolidation" for discussion. (d) Reflects the issuance of 2,500,000 shares of common stock at an assumed offering price of $13.00 offered hereby and an increase in cash equal to the net proceeds less repayment of the borrowings under the line-of-credit facility ("LOC"), bank note, and the subordinated debt as well as the redemption of the redeemable capital stock of a subsidiary. Restricted cash represents the difference between borrowings under the LOC and the term note at December 31, 1997 and the anticipated amounts outstanding at closing. Remaining portion represents redeemable capital stock of a subsidiary (SellTel) to be redeemed in the fourth quarter of 1998. F-21 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PRO- SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY OF THE COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR- CUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF. ---------------- TABLE OF CONTENTS
PAGE ---- Prospectus Summary....................................................... 3 Risk Factors............................................................. 8 The Consolidation........................................................ 14 Use of Proceeds.......................................................... 15 Dividend Policy.......................................................... 15 Dilution................................................................. 16 Capitalization........................................................... 17 Selected Financial Data.................................................. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 20 Business................................................................. 26 Management............................................................... 35 Principal Shareholders................................................... 40 Certain Transactions..................................................... 41 Shares Eligible for Future Sale.......................................... 42 Description of Capital Stock............................................. 43 Underwriting............................................................. 46 Legal Matters............................................................ 47 Experts.................................................................. 47 Additional Information................................................... 47 Index to Financial Statements............................................ F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE- QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,500,000 SHARES [LOGO] INNOTRAC CORPORATION COMMON STOCK ---------------- PROSPECTUS ---------------- J.C.Bradford&Co. Wheat First Union , 1998 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of the fees and expenses (other than the underwriting discount) payable by the Registrant in connection with the issuance and distribution of the shares of Common Stock in the Offering. Securities and Exchange Commission Registration Fee.......... $ 11,873.75 NASD Filing Fees............................................. 4,525.00 Nasdaq National Market Filing Fees........................... 40,000.00 Blue Sky Fees and Expenses................................... 5,000.00 Printing and Engraving Expenses.............................. 135,000.00 Legal Fees and Expenses...................................... 250,000.00 Accounting Fees and Expenses................................. 165,000.00 Transfer Agent Fees and Expenses............................. 3,100.00 Miscellaneous................................................ 135,501.25 ----------- Total.................................................... $750,000.00 ===========
II-1 ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES The following persons or entities will be issued the following number of shares of Common Stock of the Registrant in the Consolidation as of the effective date of the Registration Statement in consideration of each person's or entity's equity interests in one of the eight companies involved in the Consolidation. Such shares will be issued in a private placement made pursuant to Section 4(2) of the Securities Act of 1933. The Registrant has not issued any other shares since December 1994.
NAME NO. SHARES CONSIDERATION - ---- ---------- --------------------------------------- Scott D. Dorfman 4,989,428 1,000 shares of HomeTel Providers, Inc. 95.5 shares of HomeTel Systems, Inc. 1,000 shares of IELC, Inc. 90 shares of RenTel #1, Inc. 990 shares of RenTel #2, L.L.C. 90 shares of SellTel #1, Inc. 990 shares of RenTel #2, L.L.C. ITC Service Company 353,846 10% limited partnership interest in HomeTel Providers Partners, L.P. Susan Mary Trotochaud 493 10 shares in RenTel #2, L.L.C. Custodianship for 25,411 1.5 shares of HomeTel Systems, Inc. Bradley H. Dorfman 50 shares of SellTel #2, L.L.C. Custodianship for Brent M. 25,411 1.5 shares of HomeTel Systems, Inc. Dorfman 50 shares of SellTel #2, L.L.C. Custodianship for Jesse E. 25,411 1.5 shares of HomeTel Systems, Inc. Dorfman 50 shares of SellTel #2, L.L.C.
II-2 ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1 Form of Underwriting Agreement between the Representatives of the Underwriters and the Registrant** 3.1 Amended and Restated Articles of Incorporation of the Registrant, as amended** 3.2 Amended and Restated By-laws of the Registrant* 4.1 Form of Common Stock Certificate of the Registrant** 4.2 Rights Agreement between Registrant and Reliance Trust Company as Rights Agent, dated as of December 31, 1997** 5 Opinion of Kilpatrick Stockton LLP** 10.1 Acquisition Agreement by and among the Registrant, SellTel #1, Inc., RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers Inc., Rentel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman And Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997* 10.2(a) Stock Option and Incentive Award Plan* (b) Amendment No. 1 to Stock Option and Incentive Award Plan** 10.3 Amended and Restated Loan and Security Agreement by and among the Registrant, HomeTel Systems Inc., IELC, Inc., RenTel #1, Inc., RenTel #2, L.L.C., SellTel #1, Inc., SellTel #2, L.L.C., HomeTel Providers Partners, L.P. and SouthTrust Bank, N.A., dated December 5, 1997* 10.4 Equipment Negotiation and Referral Agreement between BellSouth Telecommunications, Inc. and the Registrant, effective May 1, 1995*+ 10.5 Form of Indemnification Agreements entered into as of December 11, 1997, by and between the Registrant and each of Messrs. Scott D. Dorfman, David L. Ellin, Donald L. Colter, Jr., John H. Nichols III, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III and William H. Scott, III* 10.6 Loan and Security Agreement by and between HomeTel Providers Partners, L.P. and ITC Holding Company, Inc. dated as of April 11, 1994* 10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant* 10.8 Lease, dated December 8, 1997, by and between Weeks Development Partnership and the Registrant** 10.9 Split Dollar Life Insurance Agreement, dated July 10, 1997, by and between the Registrant, Bruce V. Benator, as Trustee of The Scott David Dorfman Family Trust #2, and Scott David Dorfman** 10.10 Innotrac Corporation Deferred Compensation Plan, effective as of October 16, 1997** 10.11 Grantor Trust Agreement dated October 16, 1997, by and between the Registrant and Wachovia Bank, N.A.** 23.1 Consent of Kilpatrick Stockton LLP, included in Exhibit 5** 23.2 Consent of Arthur Andersen LLP** 24 Power of attorney (on signature page)* 27 Financial Data Schedule**
- -------- * Previously filed ** Filed herewith + Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In accordance with Rule 406(b)(2), these confidential portions have been omitted from this exhibit and filed separately with the Commission. II-3 (B) FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation and Qualifying Accounts II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment to Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Atlanta, State of Georgia, on the 10th day of February, 1998. INNOTRAC CORPORATION /s/ Scott D. Dorfman By:__________________________________ SCOTT D. DORFMAN CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Act of 1933, this Amendment to Registration Statement has been signed by the following persons on the 10th day of February, 1998, in the capacities indicated. SIGNATURES POSITION /s/ Scott D. Dorfman Chairman, President and - ------------------------------------- Chief Executive Officer Scott D. Dorfman (Principal Executive Officer) * Senior Vice President, - ------------------------------------- Secretary, Chief Operating David L. Ellin Officer and Director * Vice President--Business - ------------------------------------- Development and Director Larry C. Hanger * Vice President and Chief - ------------------------------------- Financial Officer John H. Nichols, III (Principal Financial and Accounting Officer)
SIGNATURES POSITION * Director - ------------------------------------- Bruce V. Benator * Director - ------------------------------------- Martin J. Blank * Director - ------------------------------------- Campbell B. Lanier, III * Director - ------------------------------------- William H. Scott, III
*By: /s/ Scott D. Dorfman -------------------------------- as attorney-in-fact REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE We have audited, in accordance with generally accepted auditing standards, the combined financial statements of INNOTRAC CORPORATION (a Georgia corporation), IELC, INC. (a Georgia corporation), RENTEL #1, INC. (a Georgia corporation), SELLTEL #1, INC. (a Georgia corporation), HOMETEL SYSTEMS, INC. (a Georgia corporation), HOMETEL PROVIDERS, INC. (a Georgia corporation), RENTEL #2, LLC (a Georgia limited liability company), SELLTEL #2, LLC (a Georgia limited liability company) and HOMETEL PROVIDERS PARTNERS, L.P. (a Georgia limited partnership) included in this Registration Statement and have issued our report thereon dated January 26, 1998. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 16(b) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia January 26, 1998 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
ADDITIONS BALANCE ------------------ AT CHARGED CHARGED TO BEGINNING TO OTHER BALANCE AT END DESCRIPTION OF PERIOD INCOME ACCOUNTS DEDUCTIONS OF PERIOD ----------- --------- ------- ---------- ---------- -------------- Provision for uncollectible accounts 1997................... $4,141 $7,750 $0.00 $(6,833)(1) $5,058 1996................... $2,552 $5,841 $0.00 $(4,252)(1) $4,141 1995................... $575 $3,043 $0.00 $(1,066)(1) $2,552
- -------- Notes: (1) Represents write-off of accounts considered to be uncollectible, less recoveries of amounts previously written off.
ADDITIONS BALANCE ------------------ AT CHARGED CHARGED TO BEGINNING TO OTHER BALANCE AT END DESCRIPTION OF PERIOD INCOME ACCOUNTS DEDUCTIONS OF PERIOD ----------- --------- ------- ---------- ---------- -------------- Provision for returns and allowances 1997................... $101 $6,327 $0.00 $(5,779)(1) $649 1996................... $0 $3,536 $0.00 $(3,435)(1) $101 1995................... $0 $0 $0.00 $0 (1) $0
- -------- Notes: (1) Represents write-off of accounts considered to be uncollectible, less recoveries of amounts previously written off.
EXHIBIT NO. DESCRIPTION OF EXHIBIT ------- ---------------------- 1.1 Form of Underwriting Agreement between the Representatives of the Underwriters and the Registrant** 3.1 Amended and Restated Articles of Incorporation of the Registrant, as amended** 3.2 Amended and Restated By-laws of the Registrant* 4.1 Form of Common Stock Certificate of the Registrant** 4.2 Rights Agreement between Registrant and Reliance Trust Company as Rights Agent, dated as of December 31, 1997** 5 Opinion of Kilpatrick Stockton LLP** 10.1 Acquisition Agreement by and among the Registrant, SellTel #1, Inc., RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers Inc., Rentel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman And Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997* 10.2(a) Stock Option and Incentive Award Plan* (b) First Amendment to Stock Option and Incentive Award Plan** 10.3 Amended and Restated Loan and Security Agreement by and among the Registrant, HomeTel Systems Inc., IELC, Inc., RenTel #1, Inc., RenTel #2, L.L.C., SellTel #1, Inc., SellTel #2, L.L.C., HomeTel Providers Partners, L.P. and SouthTrust Bank, N.A., dated December 5, 1997* 10.4 Equipment Negotiation and Referral Agreement between BellSouth Telecommunications, Inc. and the Registrant, effective May 1, 1995*+ 10.5 Form of Indemnification Agreements entered into as of December 11, 1997, by and between the Registrant and each of Messrs. Scott D. Dorfman, David L. Ellin, Donald L. Colter, Jr., John H. Nichols III, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III and William H. Scott, III* 10.6 Loan and Security Agreement by and between HomeTel Providers Partners, L.P. and ITC Holding Company, Inc. dated as of April 11, 1994* 10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant* 10.8 Lease, dated December 8, 1997, by and between Weeks Development Partnership and the Registrant** 10.9 Split Dollar Life Insurance Agreement, dated July 10, 1997, by and between the Registrant, Bruce V. Benator, as Trustee of The Scott David Dorfman Family Trust #2, and Scott David Dorfman** 10.10 Innotrac Corporation Deferred Compensation Plan, effective as of October 16, 1997** 10.11 Grantor Trust Agreement, dated October 16, 1997, by and between the Registrant and Wachovia Bank, N.A.** 23.1 Consent of Kilpatrick Stockton LLP, included in Exhibit 5** 23.2 Consent of Arthur Andersen LLP** 24 Power of attorney (on signature page)* 27 Financial Data Schedule**
- -------- * Previously filed ** Filed herewith + Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In accordance with Rule 406(b)(2), these confidential portions have been omitted from this exhibit and filed separately with the Commission. EX-1.1 2 UNDERWRITING AGREEMENT EXHIBIT 1.1 INNOTRAC CORPORATION 2,500,000 Shares of Common Stock UNDERWRITING AGREEMENT , 1998 --------------- J.C. BRADFORD & CO. WHEAT FIRST SECURITIES, INC. As Representatives of the several Underwriters c/o J.C. Bradford & Co. J.C. Bradford Financial Center 330 Commerce Street Nashville, Tennessee 37201 Ladies and Gentlemen: Innotrac Corporation, a Georgia corporation (the "Company"), proposes to sell to the several underwriters named in Schedule I hereto (the "Underwriters"), for whom you are acting as the representatives (the "Representatives"), 2,500,000 shares (the "Firm Shares") of the Company's common stock, par value $0.10 per share (the "Common Stock"). The Company has also agreed to grant to you an option (the "Option") to purchase up to a total of 375,000 additional shares of Common Stock (the "Option Shares") on the terms and for the purposes set forth in Section 1(b) hereof. The Firm Shares and the Option Shares are hereinafter collectively referred to as the "Shares." The Company confirms its agreement with you as follows: 1. Agreement to Sell and Purchase; Public Offering. (a) On the basis of the representations, warranties and covenants herein contained, and subject to all the terms and conditions of this Underwriting Agreement (the "Agreement"), the Company agrees to sell to the Underwriters the Firm Shares, and each of the Underwriters, severally and not jointly, agrees to purchase at the purchase price of $_____ per share the number of Firm Shares set forth opposite such Underwriter's name in Schedule I hereto. (b) Subject to all the terms and conditions of this Agreement, the Company also grants the Underwriters the Option to purchase, severally and not jointly, up to 375,000 Option Shares from the Company, each at the same price per share as you shall pay for the Firm Shares. The Option may be exercised only to cover over-allotments in the sale of the Firm Shares and may be exercised in whole or in part at any time or from time to time on or before the 30th day after the date of the Prospectus (as defined below) upon written or telegraphic notice (the "Option Shares Notice") by you to the Company no later than 12:00 noon, Nashville, Tennessee time at least two and no more than ten business days before the date and time specified for closing in the Option Shares Notice (the "Option Closing Date") setting forth the aggregate number of Option Shares to be purchased. On the Option Closing Date, the Company will issue and sell to the Underwriters the number of Option Shares set forth in the Option Shares Notice, and unless otherwise adjusted by the Representatives, each of the Underwriters will purchase such percentage of the Option Shares as is equal to the percentage of Firm Shares that such Underwriter is purchasing. (c) After the Registration Statement becomes effective, upon the authorization by you of the release of the Shares, the several Underwriters propose to offer the Firm Shares and the Option Shares purchased by the Underwriters for sale initially at the price per share set forth in the Prospectus (the initial offering price) and upon the terms set forth therein. 2. Delivery and Payment. Delivery of the Firm Shares shall be made to you by or on behalf of the Company against payment of the purchase price by federal funds wire transfer payable in same day funds to the order of the Company at the offices of J.C. Bradford & Co., J.C. Bradford Financial Center, 330 Commerce Street, Nashville, Tennessee 37201, or at such other place as may be agreed upon by the Representatives and the Company, at 10:00 a.m., Nashville time, on the third full business day following the date of this Agreement (the "Closing Date"), or at such other time on such date, or at such other place, as may be agreed upon by the Company and the Representatives. To the extent the Option is exercised, delivery of the Option Shares against payment therefor (in the manner specified above) will take place at the offices specified above on the Option Closing Date (which, subject to the requirements set forth above for the Option Shares Notice, may be the Closing Date). Certificates evidencing the Shares shall be in definitive form and shall be registered in such names and in such denominations as you shall request not less than 48 hours prior to the Closing Date or the Option Closing Date, as the case may be, by written notice to the Company. For the purpose of expediting the checking and packaging of certificates for the Shares, the Company agrees to make such certificates available for inspection at least 24 hours prior to the Closing Date or the Option Closing Date, as the case may be, at a location to be designated by you, which may be in New York, New York, or elsewhere. If the Representatives so elect, delivery of the Shares may be made by credit through full fast transfer to the accounts designed by the Representatives at The Depository Trust Company. The cost of original issue tax stamps, if any, in connection with the issuance and delivery of the Shares by the Company to the Underwriters shall be borne by the Company. The Company will pay and save each of the Underwriters and any subsequent holder of the Shares harmless from any and all liabilities with respect to or resulting from any failure or 2 delay in paying federal and state stamp and other transfer taxes, if any, which may be payable or determined to be payable in connection with the original issuance or sale to such Underwriter of the Firm Shares and Option Shares. 3. Representations and Warranties of the Company. The Company represents, warrants and covenants to each of the Underwriters that: (a) The Company has prepared and has filed with the Securities and Exchange Commission (the "Commission") a registration statement (Registration No. 333- 42373 on Form S-1 relating to the Shares, including a preliminary prospectus and such amendments to such registration statement as may have been required to the date of this Agreement, under the provisions of the Securities Act of 1933, as amended (the "Act"), and the rules and regulations (collectively referred to as the "Rules and Regulations") of the Commission thereunder. The registration statement and all amendments thereto have been duly authorized and executed by the Company in accordance with the Rules and Regulations. The term "preliminary prospectus" as used herein means a preliminary prospectus included at any time as part of the registration statement as contemplated by Rule 430 or Rule 430A of the Rules and Regulations. Copies of such registration statement and amendments and of each related preliminary prospectus have been delivered to you. If such registration statement has not become effective, a further amendment to such registration statement, including a form of final prospectus, necessary to permit such registration statement to become effective, will be filed promptly by the Company with the Commission. If such registration statement has become effective, a final prospectus containing information permitted to be omitted at the time of effectiveness by Rule 430A of the Rules and Regulations will be filed promptly by the Company with the Commission in accordance with Rule 424(b) of the Rules and Regulations, if required. The term "Registration Statement" as used herein means the registration statement as amended at the time it becomes or became effective (the "Effective Date"), including financial statements and all exhibits and any information deemed to be included by Rule 430A. The term "Prospectus" means the prospectus as first filed with the Commission pursuant to Rule 424(b) of the Rules and Regulations or, if no such filing is required, the form of final prospectus included in the Registration Statement at the Effective Date. (b) On the Effective Date, the date the Prospectus is first filed with the Commission pursuant to Rule 424(b) (if required), at all times subsequent thereto through and including the Closing Date and, if later, the Option Closing Date and when any post-effective amendment to the Registration Statement becomes effective or any amendment or supplement to the Prospectus is filed with the Commission, the Registration Statement and the Prospectus (as amended or as supplemented if the Company shall have filed with the Commission any amendment or supplement thereto), including the financial statements included in the Prospectus, did or will comply with all applicable provisions of the Act and the Rules and Regulations and did or will contain all statements required to be stated therein in accordance with the Act and the Rules and Regulations. On the Effective Date and when any post-effective amendment to the Registration Statement becomes effective, no part of the 3 Registration Statement, the Prospectus or any such amendment or supplement did or will contain an untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein not misleading. On the date any amendment or supplement to the Prospectus is filed with the Commission and at the Closing Date and, if later, the Option Closing Date, the Prospectus did not or will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which they were made, not misleading. The foregoing representations and warranties in this Section 3(b) do not apply to any statements or omissions made in reliance on and in conformity with information relating to the Underwriters furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement or Prospectus or any amendment or supplement thereto. The Company acknowledges that the only information relating to the Underwriters furnished in writing to the Company by the Representatives specifically for inclusion in the Registration Statement, any preliminary prospectus and the Prospectus is the information in the last paragraph on the cover page, the paragraph relating to stabilization on the inside front cover and the statements set forth under the heading "Underwriting" in any preliminary prospectus or the Prospectus. (c) The Company had no subsidiaries (as defined in the Rules and Regulations) as of the Effective Date. As of the Closing Date, the Company will have two subsidiaries (the "Subsidiaries"). The Company and each of the Affiliated Companies (as such term is defined in the Registration Statement) is, and the Company and each of the Subsidiaries at the Closing Date and, if later, the Option Closing Date will be, a corporation or other entity duly organized, validly existing and in good standing under the laws of the respective jurisdiction of their incorporation or organization. At the Closing Date the Company will be the sole legal and beneficial owner of all securities of the Subsidiaries free and clear of all liens, charges and encumbrances, except that Arnold Dorfman will own 10% of the outstanding shares of each Subsidiary. The Company and the Affiliated Companies have, and at the Closing Date and, if later, the Option Closing Date, the Company and each Subsidiary will have, full power and authority to conduct all the activities conducted by it, to own or lease all the assets owned or leased by it and to conduct its business as described in the Registration Statement and the Prospectus. The Company and each Affiliated Company is, and at the Closing Date and, if later, the Option Closing Date the Company and each Subsidiary will be, duly licensed or qualified to do business and in good standing as a foreign corporation in all jurisdictions in which the nature of the activities conducted by it or the character of the assets owned or leased by it makes such licensing or qualification necessary, except where the failure to so qualify would not have a material adverse effect upon the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries taken as a whole, and no proceeding has been instituted in any jurisdiction revoking, limiting or curtailing, or seeking to revoke, limit or curtail, the Company's or any Affiliated Company's power, authority, licensing or qualification. Except as disclosed in the Registration Statement, the Company and the Affiliated Companies do not own, and except for the stock of the Subsidiaries at the Closing Date and, if later, the Option Closing Date the Company will not own, directly or indirectly, any shares of stock or any other equity or long- 4 term debt securities of any corporation or have any equity interest in any firm, partnership, joint venture, association or other entity. Complete and correct copies of the Articles of Incorporation, as amended and restated (the "Articles of Incorporation") and the Bylaws, as amended and restated (the "Bylaws") of the Company and the articles of incorporation and bylaws of each Affiliated Company and all amendments thereto have been delivered to you, and no changes therein will be made subsequent to the date hereof and prior to the Closing Date or, if later, the Option Closing Date. (d) The outstanding shares of the Company's Common Stock have been, and the Shares to be issued and sold by the Company upon such issuance will be, duly authorized, validly issued, fully paid and nonassessable and will not be subject to any preemptive or similar right. The description of the Common Stock in the Registration Statement and the Prospectus is, and at the Closing Date and, if later, the Option Closing Date will be, complete and accurate in all material respects. All offers and sales of securities of the Company have been at all relevant times duly registered under or exempt from the registration requirements of the Act and were duly registered under or exempt from the registration requirements of all applicable state securities or Blue Sky laws. Except as set forth in the Prospectus and except for options issued under the Company's stock option plans, the Company does not have outstanding, and at the Closing Date and, if later, the Option Closing Date will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell any shares of Common Stock or any such warrants, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (e) The financial statements together with the related notes and schedules included in the Registration Statement or the Prospectus present fairly the consolidated financial condition of the Company as of the respective dates thereof and the consolidated results of operations and cash flows of the Company for the respective periods covered thereby, all in conformity with generally accepted accounting principles applied on a consistent basis throughout the entire period involved, except as otherwise disclosed in the Prospectus. The financial and statistical data set forth in the Prospectus under the captions "Prospectus Summary," "Summary Financial Data," "Use of Proceeds," "Capitalization," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," "Business,""Business" and "Management" have been compiled on a basis consistent with that of the audited financial statements contained in the Registration Statement and Prospectus and fairly present the information set forth therein. The information set forth under the caption "Principal Shareholders" fairly presents the information set forth therein. No other financial statements or schedules of the Company are required by the Act, the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or the Rules and Regulations to be included in the Registration Statement or the Prospectus. Arthur Andersen LLP (the "Accountants"), who 5 have reported on certain of such financial statements and schedules, are independent auditors with respect to the Company as required by the Act and the Rules and Regulations. (f) The Company and each of the Affiliated Companies maintain a system of internal accounting controls sufficient to assure that: (i) all material transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of the Company's consolidated financial statements in conformity in all material respects with generally accepted accounting principles consistently applied and to maintain accountability for assets; and (iii) assets are properly accounted for and safeguarded against errors or loss from unauthorized use. Neither the Company, the Affiliated Companies, nor, to the knowledge of the Company or any Affiliated Company, any employee or agent of the Company or the Affiliated Companies has made any payment of funds of the Company or the Affiliated Companies or received or retained any funds in violation of any law, rule or regulation, the receipt or payment of which could have a material adverse effect on the Company. (g) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. (h) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus and prior to the Closing Date and, if later, the Option Closing Date, except as set forth in the Registration Statement and the Prospectus, (i) there has not been and will not have been any material adverse change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and the Affiliated Companies taken as a whole, arising for any reason whatsoever, (ii) the Company and the Affiliated Companies have not incurred nor will they incur any material liabilities or obligations, direct or contingent, except in the ordinary course of business, (iii) the Company and the Affiliated Companies have not entered into any material transaction not in the ordinary course of business, (iv) the Company has not and will not have paid or declared any dividends or other distributions of any kind on any class of its capital stock, (v) there has not been and will not have been any change in the capitalization of the Company or the Affiliated Companies other than pursuant to the exercise of employee stock options or the issuance of shares under the Company's stock option plan. (i) The Company and the Affiliated Companies have timely filed all material federal, state and foreign income and franchise tax returns and have paid all taxes shown thereon as due and which are not being contested in good faith, and there is no tax deficiency that has been or, to the best of the Company's knowledge, might be asserted against the Company or any of the Affiliated Companies that might have a material adverse effect on the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and the Affiliated Companies taken as a whole, and all tax 6 liabilities are adequately provided for on the books of the Company and the Affiliated Companies. (j) The Company is not an "investment company" or an "affiliated person" of, or "promoter" or "principal underwriter" for, an "investment company," as such terms are defined in the Investment Company Act of 1940, as amended. (k) There are no actions, suits or proceedings pending or, to the knowledge of the Company, threatened against or affecting the Company or any Affiliated Company or any of their respective officers in their capacity as such, before or by any federal or state court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, wherein an unfavorable ruling, decision or finding would materially and adversely affect the Company or the Affiliated Companies or its or their business, properties, business prospects, condition (financial or otherwise) or results of operations or prevent or materially hinder the consummation of this Agreement. (l) The Company and the Affiliated Companies have not at any time during the past five years: (i) made any unlawful contributions to any candidate for any political office, or failed fully to disclose any contribution in violation of law; or (ii) made any payment to any state, federal or foreign government official, or other person charged with similar public or quasi-public duty (other than payment required or permitted by applicable law). (m) The Company and the Affiliated Companies have, and the Company and each Subsidiary at the Closing Date and, if later, the Option Closing Date will have: (i) all material governmental licenses, permits, consents, orders, approvals and other authorizations necessary to carry on its business as contemplated in the Prospectus; (ii) complied in all material respects with all laws, regulations and orders applicable to it or its business or properties; and (iii) performed all material obligations required to be performed by it, and the Company and the Affiliated Companies are not, and at the Closing Date and, if later, the Option Closing Date, the Company and each Subsidiary will not be, in default, under any contract or other instrument material to it to which it is a party or by which its property is bound or affected where such default would materially and adversely affect the Company, the Affiliated Companies or its Subsidiaries, as applicable, or their business, properties, business prospects, condition (financial or otherwise) or results of operations or prevent or materially hinder the consummation of this Agreement. To the knowledge of the Company and the Affiliated Companies, as of the date of this Agreement, and the Company and each Subsidiary as of the Closing Date and, if later, the Option Closing Date no other party under any contract or other instrument to which it is a party is in material default thereunder. Neither the Company nor any Affiliated Company is, nor at the Closing Date and, if later, the Option Closing Date will the Company or any Subsidiary be, in violation of any provision of their respective articles of incorporation or bylaws or other organizational documents. (n) No consent, approval, authorization or order of, or any filing or declaration with, any court or governmental agency or body is required for the consummation by the 7 Company of the transactions on its part herein contemplated, except such as have been obtained under the Act or the Rules and Regulations and such as may be required under state securities or Blue Sky laws or the bylaws and rules of the National Association of Securities Dealers, Inc. (the "NASD") in connection with the purchase and distribution by the Underwriters of the Shares, all of which requirements have been satisfied in all material respects (except that no representation is made with respect to NASD compliance). (o) The filing of the Registration Statement and the execution and delivery of this Agreement have been duly authorized by the Board of Directors of the Company, and the Company has full corporate power and authority to enter into this Agreement and to perform its obligations hereunder. This Agreement has been duly executed and delivered by the Company and constitutes a valid and binding agreement of the Company enforceable against the Company in accordance with the terms hereof. Assuming compliance with all applicable state securities laws and the bylaws and rules of the NASD, the performance of this Agreement and the consummation of the transactions contemplated hereby will not result in the creation or imposition of any material lien, charge or encumbrance upon any of the assets of the Company or any Subsidiary pursuant to the terms or provisions of, or result in a breach or violation of any of the terms or provisions of, or constitute a default under, or give any other party a right to terminate any of its obligations under, or result in the acceleration of any obligation under, the Articles of Incorporation or Bylaws of the Company or the respective articles of incorporation or bylaws of its Subsidiaries, any indenture, mortgage, deed of trust, voting trust agreement, loan agreement, bond, debenture, note agreement or other evidence of indebtedness, lease, contract or other agreement or instrument to which the Company or any Subsidiary is a party or by which the Company or any Subsidiary or any of its or their properties are bound or affected, or violate or conflict with any judgment, ruling, decree, order, statute, rule or regulation of any court or other governmental agency or body applicable to the business or properties of the Company or any Subsidiary; the occurrence of which would materially and adversely affect the Company or its Subsidiaries or its business, properties, business prospects, condition (financial or otherwise) or results of operations or prevent or materially hinder the consummation of this Agreement. (p) The Company has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Prospectus or are not material to the business of the Company and the Affiliated Companies taken as a whole. The Company has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by it (the "Leased Properties") subject only to the rights of any mortgagee, lienholder, or other person or entity which has an interest in the Leased Properties that is or may become superior to the interest of the Company or the landlord of such Leased Properties. The Company has no actual notice or knowledge of any material claim of any sort which has been, or may be, asserted by anyone adverse to the Company's rights as lessee or sublessee under any lease or sublease described above, or affecting or questioning the Company's rights to the continued possession of the leased or subleased premises under any 8 such lease or sublease in conflict with the terms thereof. The Company owns or leases all such properties as are necessary to its operations as now conducted. (q) The Company and the Affiliated Companies own or possess adequate rights to use all patents, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names and copyrights which are necessary to conduct their businesses as described in the Registration Statement and Prospectus; neither the Company nor the Affiliated Companies have received any notice of, and have no knowledge of, any infringement of or conflict with asserted rights of the Company or the Affiliated Companies by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights, and the Company and the Affiliated Companies have not received any notice of, and have no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights owned or used by the Company or the Affiliated Companies, which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could have a material adverse effect on the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and the Affiliated Companies taken as a whole. (r) To the best of the Company's and the Affiliated Companies' knowledge, no labor disturbance by the employees of the Company or any of the Affiliated Companies exists or is imminent. (s) The Company and the Affiliated Companies maintain insurance with insurers of recognized financial responsibility against such losses and risks and in such amounts as management believes is appropriate to the business of the Company and all such policies are in full force and effect. The Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not materially and adversely affect the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries taken as a whole. (t) Except as described in the Registration Statement and the Prospectus, there is no factual basis for any action, suit or other proceeding involving the Company, the Affiliated Companies or any of their material assets for any failure of the Company or any Affiliated Company to comply with any requirements of federal, state or local regulation relating to air, water, solid waste management, hazardous or toxic substances, or the protection of health or the environment. To the best knowledge of the Company, there has not been a release of any "hazardous substances in a reportable quantity", as those terms are defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq. ("CERCLA"), by the Company on or at properties leased by the Company. The Company has not received notice or request of information under Section 104 of CERCLA or comparable state laws regarding an investigation evaluating whether any remedial action is 9 needed to respond to a release or threatened release of any hazardous substance at properties leased by the Company. (u) All documents or contracts required to be filed as exhibits to the Registration Statement to which the Company or any Affiliated Company is a party have been filed as exhibits to the Registration Statement and have been duly authorized, executed and delivered by the Company or such Affiliated Company, constitute valid and binding agreements of the Company or such Affiliated Company and are enforceable against the Company or such Affiliated Company in accordance with the terms thereof, except where the lack of authorization, execution, delivery or enforceability of any such contract would not materially and adversely affect the Company, the Affiliated Companies or their business, properties, business prospects, condition (financial or otherwise) or results of operations or prevent or materially hinder the consummation of this Agreement. (v) No statement, representation, warranty or covenant made by the Company in this Agreement or made in any certificate or document required by this Agreement to be delivered to you was or will be, when made, inaccurate, untrue or incorrect in any material respect. (w) The Company has not taken and will not take, directly or indirectly, any action designed to or which might reasonably be expected to cause or result in stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of the Shares or the Common Stock, and the Company is not aware of any such action taken or to be taken by affiliates of the Company. To assure compliance with Regulation M under the Exchange Act, the Company will not make bids for or purchases of or induce bids for or purchases of, directly or indirectly, any shares of Common Stock or securities convertible into Common Stock of the Company until the distribution of all shares of Common Stock being sold in the public offering has been completed. (x) No holder of securities of the Company has rights to require the registration of any securities of the Company because of the filing of the Registration Statement. There are no contracts, agreements or understandings between the Company and any person granting such person the right to require the Company to file a registration statement under the Act with respect to any securities of the Company owned or to be owned by such person or to require the Company to include such securities in the securities registered pursuant to the Registration Statement or in any securities being registered pursuant to any other registration statement filed by the Company under the Act. (y) The Shares have been approved for listing on the National Association of Securities Dealers Automated Quotation National Market System (the "Nasdaq National Market") upon notice of issuance. 10 (z) Other than as contemplated by this Agreement, there is no broker or finder that is entitled to receive from the Company any brokerage or finder's fee or commission as a result of any of the transactions contemplated by this Agreement. (aa) The Company is not in default or breach of any of the terms and provisions set forth in the Amended and Restated Loan and Security Agreement by and between the Company and Southtrust Bank, N.A., dated December 5, 1997 (the "Line of Credit"), and after giving effect to the Offering, the Company will continue to be in compliance with the covenants, terms and provisions of the Line of Credit. (bb) Any certificate signed by any officer of the Company and delivered to you or to counsel for the Underwriters shall be deemed a representation and warranty to each Underwriter as to the matters covered thereby. (cc) The Company has not distributed and will not distribute prior to the later of (i) the Closing Date or the Option Closing Date, as the case may be, or (ii) completion of the distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than any preliminary prospectuses, the Prospectus, the Registration Statement and other materials, if any, permitted by the Act. 4. Covenants of the Company. The Company covenants and agrees with each of the Underwriters as follows: (a) The Company will not, either prior to the Effective Date or thereafter during such period as the Prospectus is required by law to be delivered in connection with sales of the Shares by an underwriter or dealer, file any amendment or supplement to the Registration Statement or the Prospectus, unless a copy thereof shall first have been submitted to you within a reasonable period of time prior to the filing thereof and you shall not have objected thereto in good faith. (b) The Company will use its reasonable best efforts to cause the Registration Statement and any amendment thereto, if not effective at the time and date that this Agreement is executed by the parties hereto, to become effective as promptly as possible and will notify you promptly and confirm such advice in writing: (i) when the Registration Statement has become effective and when any post-effective amendment thereto becomes effective; (ii) of any request by the Commission for amendments or supplements to the Registration Statement or the Prospectus or for additional information; (iii) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the initiation of any proceedings for that purpose or the threat thereof; (iv) of the happening of any event during the period mentioned in the second sentence of Section 4(e) that in the judgment of the Company makes any statement made in the Registration Statement or the Prospectus untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they are made, not 11 misleading; and (v) of receipt by the Company or any representatives or attorney of the Company of any other communication from the Commission relating to the Company, the Registration Statement, any preliminary prospectus or the Prospectus. If at any time the Commission shall issue any order suspending the effectiveness of the Registration Statement, the Company will make every reasonable effort to obtain the withdrawal of such order at the earliest possible moment. If the Company has omitted any information from the Registration Statement pursuant to Rule 430A of the Rules and Regulations, the Company will use its best efforts to comply with the provisions of and make all requisite filings with the Commission pursuant to said Rule 430A and to notify the Representatives promptly of all such filings. If the Company files a term sheet pursuant to Rule 434 of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus and term sheet meeting the requirements of Rule 434(b) or (c), as applicable, of the Rules and Regulations, have been filed, within the time period prescribed, with the Commission pursuant to subparagraph (7) of Rule 424(b) of the Rules and Regulations; if for any reason the filing of the final form of Prospectus is required under Rule 424(b)(3) of the Rules and Regulations, the Company will provide evidence satisfactory to you that the Prospectus contains such information and has been filed with the Commission within the time period prescribed. (c) The Company will furnish to you at or before the Closing Date, without charge, three signed copies of the Registration Statement and of any post- effective amendment thereto, including financial statements and schedules, and all exhibits thereto, and will furnish you with such number of copies of the Registration Statement, without exhibits, and all amendments thereto as you may reasonably request. (d) The Company will comply with all the provisions of any undertakings contained in the Registration Statement. The Company will, from time to time, after the effective date of the Registration Statement file with the Commission such reports as are required by the Act, the Exchange Act, the Rules and Regulations and the rules and regulations promulgated by the Commission pursuant to the Exchange Act (the "Exchange Act Rules and Regulations"), and shall also file with state securities commissions in states where the Shares have been sold by you (as you shall have advised us in writing) such reports as are required to be filed by the securities acts and the regulations of those states, as you shall advise in writing. (e) On the Effective Date, and thereafter from time to time until expiration of the period mentioned in the second sentence of this Section 4(e), the Company will deliver to each of you, without charge, as many copies of the Prospectus or any amendment or supplement thereto as you may reasonably request. The Company consents to the use of the Prospectus or any amendment or supplement thereto by you and by all dealers to whom the Shares may be sold, both in connection with the offering or sale of the Shares and for any period of time thereafter during which the Prospectus is required by law to be delivered in connection therewith. If during such period of time any event shall occur which in the judgment of the Company or your counsel should be set forth in the Prospectus in order to make any statement therein, in light of the circumstances under which it was made, not misleading, or if it is necessary to supplement or amend the Prospectus to comply with law, the Company will 12 forthwith prepare and duly file with the Commission an appropriate supplement or amendment thereto, and will deliver to each of you, without charge, such number of copies thereof as you may reasonably request. (f) Prior to any public offering of the Shares by you, the Company will cooperate with you and your counsel in connection with the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions as you may reasonably request; provided, that in no event shall the Company be obligated to qualify to do business in any jurisdiction where it is not now so qualified or to take any action which would subject it to general service of process in any jurisdiction where it is not now so subject. (g) During a period of two years after the date hereof, the Company will furnish to the Representatives such reports as are generally transmitted to its shareholders, copies of all reports furnished to or filed with any securities exchange or the NASD, and will notify you of the availability on the Internet of all other reports filed with the Commission or copies of every material press release and every material news item or article in respect of the Company or its affairs which was generally released to shareholders or prepared by the Company and, upon request will furnish any additional information of a public nature concerning the Company or its business which you may reasonably request. During such two year period, the Company's financial statements shall be on a consolidated basis to the extent that the accounts of the Company and its Subsidiaries are consolidated and shall be accompanied by similar financial statements for any significant Subsidiary which is not so consolidated. (h) The Company will make generally available to holders of its securities as soon as may be practicable but in no event later than the last day of the 15th full calendar month following the calendar quarter in which the Effective Date falls, an earnings statement (which need not be audited but shall be in reasonable detail) for a period of 12 months ended commencing after the Effective Date, and satisfying the provisions of Section 11(a) of the Act (including Rule 158 of the Rules and Regulations). (i) Whether or not the transactions contemplated by this Agreement are consummated or this Agreement is terminated, the Company will pay, or reimburse if paid by the Underwriters, all costs and expenses incident to the performance of the obligations of the Company under this Agreement, including but not limited to costs and expenses of or relating to: (i) the preparation, printing, and filing of the Registration Statement and exhibits to it, each preliminary prospectus; the Prospectus and any amendment or supplement to the Registration Statement or the Prospectus; (ii) the preparation and delivery of certificates representing the Shares; (iii) the printing of this Agreement and other underwriting documents, including Underwriter's Questionnaires, Underwriter's Powers of Attorney, Blue Sky Memorandum, Master Agreement Among Underwriters and Master Selected Dealer Agreements; (iv) furnishing (including costs of shipping and mailing) such copies of the Registration Statement, the Prospectus and any preliminary prospectus, and all amendments and supplements thereto, as may be requested for use in connection with the offering and sale of the Shares by the Underwriters or by dealers to whom Shares may be sold; (v) the quotation 13 of the Shares on the Nasdaq National Market; (vi) any filings required to be made by you with the NASD, and the reasonable fees, disbursements and other charges of your counsel in connection therewith; (vii) the registration or qualification of the Shares for offer and sale under the securities or Blue Sky laws of such jurisdictions designated pursuant to Section 4(f), including the reasonable fees, disbursements and other charges of your counsel in connection therewith, and the preparation and printing of preliminary, supplemental and final Blue Sky memoranda. (j) If this Agreement shall be terminated by the Company or if for any reason the Company shall be unable to perform its obligations hereunder (other than circumstances involving a matter within your control or any fault of yours) or if this Agreement shall be terminated by the Underwriters based upon a matter within the control of the Company or any fault of the Company, the Company will reimburse you for all reasonable out-of-pocket expenses (including the fees, disbursements and other charges of your counsel) reasonably incurred by you in connection herewith. (k) The Company will not at any time, directly or indirectly, take any action designed, or which might reasonably be expected, to cause or result in, or which will constitute, stabilization of the price of the shares of Common Stock to facilitate the sale or resale of any of the Shares. The Company will not make bids for or purchases of or induce bids for or purchases of, directly or indirectly, any shares of Common Stock or securities convertible into Common Stock of the Company until the distribution of all shares of Common Stock being sold in the public offering has been completed. (l) The Company will apply the net proceeds from the offering and sale of the Shares to be sold by the Company in the manner set forth in the Prospectus under "Use of Proceeds." (m) During the period of 180 days commencing at the Closing Date, the Company will not, without your prior written consent, grant options to purchase shares of Common Stock, except under stock option plans previously approved by the Company's shareholders and except at prices equal to or greater than "fair market value," as defined in the Company's stock option plan. (n) Except pursuant to this Agreement or with the prior written consent of J.C. Bradford & Co., the Company will not, and the Company has provided agreements executed by each of the Company's officers and directors and each record or beneficial owner of the shares of the Company's Common Stock providing that none of them will, for a period of 180 days from the date of the Prospectus as first filed with the Commission pursuant to Rule 424(b), offer, pledge, sell, transfer, contract to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any shares of Common Stock or any security or other instrument which by its terms is convertible into, exercisable for, or exchangeable for shares of Common Stock; provided, however, that nothing contained herein shall prohibit the exercise of stock options or other purchases of Common Stock under stock option plans or 14 other incentive compensation arrangements for employees or directors previously approved by the Company's Board of Directors; provided, further, however, that such owner may give or pledge any such securities without the prior written consent of J.C. Bradford & Co. if the donee or pledgee, as the case may be, agrees in writing prior to such gift or pledge to be bound by all the terms of such agreement and such writing is delivered to J.C. Bradford & Co. within five days after said gift or pledge. (o) The Company and its Subsidiaries will maintain and keep accurate books and records reflecting their assets and maintain internal accounting controls which provide reasonable assurance that: (i) all material transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit the preparation of the Company's consolidated financial statements in conformity to all material respects with generally accepted accounting principles consistently applied and to maintain accountability for assets; and (iii) assets are properly accounted for and safeguarded against errors or loss from unauthorized use. (p) If at any time during the 90-day period after the Registration Statement is declared effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which, in your opinion, the market price for the Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising it as to the effect set forth above, prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. (q) The Company will supply you with copies of all correspondence to and from, and all documents issued to and by, the Commission in connection with the registration of the Shares under the Act. (r) Prior to the Closing Date (and, if applicable, the Option Closing Date), the Company will furnish to you, as soon as they have been prepared, copies of any unaudited interim consolidated financial statements of the Company and its Subsidiaries for any periods subsequent to the periods covered by the financial statements appearing in the Registration Statement and the Prospectus. (s) Prior to the Closing Date (and, if applicable, the Option Closing Date), the Company will not issue any press releases or other communications directly or indirectly and will hold no press conferences with respect to the Company or any of its Subsidiaries, the business, properties, assets, liabilities, financial condition or results of operations of the Company or any of its Subsidiaries, or the offering of the Shares, without your prior written consent, which consent will not be unreasonably withheld. 15 (t) The Company will use its best efforts to maintain the quotation of the Shares on the Nasdaq National Market for three years following the Effective Date. (u) The Company will maintain a transfer agent and, if necessary under the jurisdiction of incorporation of the Company, a registrar (which may be the same entity as the transfer agent) for its Common Stock. (v) During a period of 90 days from the effective date of the Registration Statement, the Company will not file a registration statement registering shares under any stock option plan or other employee benefit plan. (w) The Company will file a registration statement on Form 8-A with the Commission providing for the registration of the Shares under the Exchange Act. 5. Conditions of the Obligations of the Underwriters. The respective obligations of the Underwriters to purchase and pay for the Shares shall be subject to the following conditions: (a) Notification that the Registration Statement has become effective shall be received by you not later than 5:30 p.m., Nashville, Tennessee time, on the date of this Agreement or at such later date and time as shall be consented to in writing by you and all filings required by Rule 424, Rule 430A, Rule 434 and Rule 462(b) of the Rules and Regulations shall have been made. (b) (i) No stop order suspending the effectiveness of the Registration Statement shall have been issued and no proceedings for that purpose shall be pending or, to the knowledge of the Company, threatened by the Commission, (ii) no order suspending the effectiveness of the Registration Statement or the qualification or registration of the Shares under the securities or Blue Sky laws of any jurisdiction shall be in effect, and no proceeding for such purpose shall be pending before or threatened or contemplated by the Commission or the authorities of any such jurisdiction, (iii) any request for additional information on the part of the staff of the Commission or any such authorities shall have been complied with to the satisfaction of the staff of the Commission or such authorities and to the satisfaction of the Representatives, (iv) after the date hereof no amendment or supplement to the Registration Statement or the Prospectus shall have been filed unless a copy thereof was first submitted to you and you did not object thereto in good faith, (v) the NASD, upon review of the terms of the public offering of the Shares, shall not have objected to such offering, such terms or the Underwriters' participation in the same, and (vi) you shall have received certificates, dated the Closing Date and, if applicable, the Option Closing Date and signed by the Chief Executive Officer and the Chief Financial Officer of the Company (who may, as to proceedings threatened or contemplated, rely upon their knowledge, to the effect of clauses (i), (ii) and (iii). 16 (c) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, (i) there shall not have been a material adverse change, or any development involving a prospective material adverse change, in the general affairs, business, business prospects, properties, management, key personnel, condition (financial or otherwise) or results of operations of the Company and the Affiliated Companies, whether or not arising from transactions in the ordinary course of business, in each case other than as set forth in the Registration Statement and the Prospectus (or, in the case of a prospective change, other than as contemplated by the Registration Statement and the Prospectus) and (ii) the Company shall not have sustained any material loss or interference with its business or properties from fire, explosion, flood, hurricane or other casualty or calamity, whether or not covered by insurance, or from any labor dispute or any court or legislative or other governmental action, order or decree, which is not set forth in the Registration Statement and the Prospectus, if in your reasonable judgment any such development makes it inadvisable to consummate the sale and delivery of the Shares by you at the public offering price. Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there shall have been no litigation or other proceeding instituted against the Company, the Affiliated Companies, or any of their officers or directors in their capacities as such, before or by any federal, state or local court, commission, regulatory body, administrative agency or other governmental body, domestic or foreign, in which litigation or proceeding an unfavorable ruling, decision or finding would materially and adversely affect the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and the Affiliated Companies taken as a whole. (d) All corporate proceedings and other legal matters in connection with this Agreement, the Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to counsel to the Underwriters, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section 5(d). (e) Each of the representations and warranties of the Company contained herein shall be true and correct in all material respects at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, as if made at the Closing Date and, with respect to the Option Shares, at the Option Closing Date, and all covenants and agreements herein contained to be performed on the part of the Company and all conditions herein contained to be fulfilled or complied with by the Company at or prior to the Closing Date and, with respect to the Option Shares, at or prior to the Option Closing Date, shall have been duly performed, fulfilled or complied with. (f) The Underwriters shall have received an opinion, dated the Closing Date and, with respect to the Option Shares, the Option Closing Date, satisfactory in form and substance to your counsel, from Kilpatrick Stockton LLP, counsel to the Company, in the form attached hereto as Exhibit A. 17 In addition, such counsel shall state that such counsel has participated in conferences with officials and other representatives of the Company, the Representatives, counsel for the Underwriters and the Accountants, at which such conferences the contents of the Registration Statement and Prospectus and related matters were discussed, and although they have not verified the accuracy or completeness of the statements contained in the Registration Statement or the Prospectus, nothing has come to the attention of such counsel which leads them to believe that, at the time the Registration Statement became effective and at all times subsequent thereto up to and on the Closing Date and on the Option Closing Date, the Registration Statement and any amendment or supplement thereto (other than the financial statements including supporting schedules and other financial and statistical information derived therefrom, as to which such counsel need express no comment) contained any untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein not misleading, or at the Closing Date or the Option Closing Date, as the case may be, the Registration Statement, the Prospectus and any amendment or supplement thereto (except as aforesaid) contained any untrue statement of a material fact or omitted to state a material fact necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading. Counsel rendering the foregoing opinion may rely as to questions of law not involving the laws of the United States or the State of Georgia upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion. (g) You shall have received an opinion, dated the Closing Date and, if applicable, the Option Closing Date, from Nelson Mullins Riley & Scarborough, L.L.P., as your counsel, with respect to the Registration Statement, the Prospectus and this Agreement, which opinion shall be satisfactory in all respects to you, and the Company shall have furnished to such counsel such documents as they reasonably request for the purpose of enabling them to pass upon such matters. (h) You shall have received at or prior to the Closing Date from Nelson Mullins Riley & Scarborough, L.L.P. a memorandum or memoranda, in form and substance satisfactory to you, with respect to the qualification for offering and sale by the Underwriters of the Shares under state securities or Blue Sky laws of such jurisdictions as the Underwriters may have designated to the Company. (i) The Representative shall have received from the Accountants a letter dated the date hereof, and at the Closing Date a second letter dated the Closing Date (and, if applicable, the Option Closing Date), in form and substance satisfactory to the Representatives, stating that they are independent auditors with respect to the Company within the meaning of the Act and the applicable Rules and Regulations, and the answer to Item 509 of Regulation S-K set forth in the Registration Statement is correct insofar as it relates to them, and stating that: 18 (i) In their opinion, the financial statements and schedules examined by them and included in the Registration Statement or Prospectus comply as to form in all material respects with the applicable accounting requirements of the Act and the Rules and Regulations and are presented in accordance with generally accepted accounting principles; and they have made a review in accordance with standards established by the American Institute of Certified Public Accountants of the interim financial statements, selected financial and operating data, and/or condensed financial statements derived from audited financial statements of the Company. (ii) The financial information included in any preliminary prospectus and the Prospectus under the captions "Prospectus Summary," "Summary Financial and Operating Data" and "Selected Financial and Operating Data" for each of the fiscal years ended December 31, 1995, 1996, and 1997 agrees with the corresponding amounts in the audited financial statements included in the Prospectus or previously reported on by them. (iii) On the basis of a reading of the latest available interim financial statements (unaudited) of the Company and its Subsidiaries, a reading of the minute books of the Company and its Subsidiaries, inquiries of officials of the Company and its Subsidiaries responsible for financial and accounting matters and other specified procedures, all of which have been agreed to by the Representatives, nothing came to their attention that caused them to believe that: a. the unaudited financial statements included in the Registration Statement do not comply as to form in all material respects with the accounting requirements of the federal securities laws and the related published rules and regulations thereunder or are not in conformity with generally accepted accounting principles applied on a basis consistent with the basis for the audited financial statements contained in the Registration Statement; b. any other unaudited financial statement data included in the Prospectus do not agree with the corresponding items in the unaudited consolidated financial statements from which data was derived and any such unaudited data were not determined on a basis consistent with the basis for the corresponding amounts in the audited financial statements included in the Prospectus; c. at a specified date not more than five days prior to the date of delivery of such respective letter, there was any change in the consolidated capital stock, decline in shareholders' equity or increase in long-term debt of the Company and its Subsidiaries, or any decreases in consolidated working capital, net current assets or net assets or other items specified by the Underwriters, in each case as compared with amounts shown in the latest balance sheets included 19 in the Prospectus, except in each case for changes, decreases or increases which the Prospectus discloses have occurred or may occur or which are described in such letters; and d. for the period from the closing date of the latest statements of operations included in the Prospectus to a specified date not more than five days prior to the date of delivery of such respective letter, there were any decreases in net revenues or net income of the Company, or other items appearing on the face of the statement of operations specified by the Representatives, or any increases in any items appearing on the face of the statement of operations specified by the Representatives, in each case as compared with the corresponding period of the preceding year, except in each case for decreases which the Prospectus discloses have occurred or may occur or which are described in such letter. (iv) They have carried out certain specified procedures, not constituting an audit, with respect to certain amounts, percentages and financial information specified by you which are derived from the general accounting records of the Company and its Subsidiaries, which appear in the Prospectus and have compared such amounts, percentages and financial information with the accounting records of the Company and its Subsidiaries and have found them to be in agreement. In the event that the letters to be delivered referred to above set forth any such changes, decreases or increases, it shall be a further condition to the obligations of the Underwriters that the Underwriters shall have reasonably determined, after discussions with officers of the Company responsible for financial and accounting matters and with the Accountants, that such changes, decreases or increases as are set forth in such letters do not reflect a material adverse change in the shareholders' equity or long-term debt of the Company as compared with the amounts shown in the latest balance sheet of the Company included in the Prospectus, or a material adverse change in total net revenues or net income of the Company, in each case as compared with the corresponding period of the prior year. (j) At the Closing Date and, as to the Option Shares, the Option Closing Date, there shall be furnished to you a certificate, dated the date of its delivery, signed by each of the Chief Executive Officer and Chief Financial Officer of the Company, in form and substance satisfactory to you, to the effect that: (i) Each of the representations and warranties of the Company contained in Section 3 of this Agreement were, when originally made, and are, at the time such certificate is delivered, true and correct in all material respects; (ii) Each of the covenants required herein to be performed by the Company on or prior to the delivery of such certificate has been performed and each condition herein 20 required to be complied with by the Company on or prior to the date of such certificate has been complied with. (k) On or prior to the Closing Date, you shall have received the executed agreements referred to in Section 4(n). (l) The Shares shall be qualified for sale in such states as you may reasonably request, each such qualification shall be in effect and not subject to any stop order or other proceeding on the Closing Date or the Option Closing Date. (m) The Shares shall have been authorized for quotation and shall have been approved for listing on the Nasdaq National Market upon official notice of issuance. (n) You shall not have advised the Company that the Registration Statement or the Prospectus or any amendment or any supplement thereto, contains an untrue statement of fact which, in your reasonable judgment, is material, or omits to state a fact which, in your reasonable judgment, is material and is required to be stated therein or necessary to make the statements therein not misleading and the Company shall not have cured such untrue statement of fact or stated a statement of fact required to be stated therein. (o) The Company shall have furnished to you such certificates, in addition to those specifically mentioned herein, as you may have reasonably requested as to the accuracy and completeness at the Closing Date and the Option Closing Date of any statement in the Registration Statement or the Prospectus, as to the accuracy at the Closing Date and the Option Closing Date of the representations and warranties of the Company herein, as to the performance by the Company of its obligations hereunder, or as to the fulfillment of the conditions concurrent and precedent to your obligations hereunder. (p) The Consolidation (as defined in the Registration Statement) shall be consummated. All such opinions, certificates, letters and documents will be in compliance with the provisions of this Agreement only if they are reasonably satisfactory to you and counsel for the Underwriters. The Company will furnish you with such conformed copies of such opinions, certificates, letters and documents as you may request. If any of the conditions specified in this Section 5 shall not have been satisfied at or prior to the Closing Date (and, if applicable, the Option Closing Date) or waived by you in writing, this Agreement may be terminated by you on notice to the Company. 6. Indemnification and Contribution. (a) The Company will indemnify and hold harmless each Underwriter (including, without limitation, in its capacity as an Underwriter or as a "qualified independent 21 underwriter" within the meaning of Rule 2700 of the NASD), the directors, officers, employees and agents of each Underwriter and each person, if any, who controls each Underwriter within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, from and against any and all losses, claims, liabilities, expenses and damages (including any and all investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted), to which they, or any of them, may become subject under the Act, the Exchange Act or other federal or state statutory law or regulation, at common law or otherwise, insofar as such losses, claims, liabilities, expenses or damages arise out of or are based in whole or in part upon (i) any inaccuracy in the representations and warranties of the Company contained herein, (ii) any failure of the Company to perform its obligations hereunder or under law or (iii) any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus, the Registration Statement or the Prospectus or any amendment or supplement to the Registration Statement or the Prospectus or in any documents filed under the Exchange Act or any blue sky application or filing, or the omission or alleged omission to state in such document a material fact required to be stated in it or necessary to make the statements in it not misleading; provided, however, that the foregoing indemnity agreement with respect to any preliminary prospectus or the Prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage or liability; and further provided, that the Company will not be liable to the extent that such loss, claim, liability, expense or damage arises from the sale of the Shares in the public offering to any person by an Underwriter and is based on an untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to an Underwriter furnished in writing to the Company by an Underwriter expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. The Company acknowledges that the information in the last paragraph on the cover page, the paragraphs relating to stabilization and passive market making practices on the inside front cover and the statements set forth under the heading "Underwriting" in any preliminary prospectus and the Prospectus constitute the only information relating to any Underwriter furnished in writing to the Company by you expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. This indemnity agreement will be in addition to any liability that the Company might otherwise have. (b) Each Underwriter will indemnify and hold harmless the Company and each person, if any, who controls the Company within the meaning of Section 15 of the Act or Section 20 of the Exchange Act, each director of the Company and each officer of the Company who signs the Registration Statement to the same extent as the foregoing indemnity from the Company to the Underwriters, but only insofar as losses, claims, liabilities, expenses 22 or damages arise out of or are based on any untrue statement or omission or alleged untrue statement or omission made in reliance on and in conformity with information relating to you furnished in writing to the Company by you expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus. The Company acknowledges that the information set forth in the last paragraph on the cover page, the paragraphs relating to stabilization and passive market making practices on the inside front cover and the statements set forth under the heading "Underwriting" in any preliminary prospectus and the Prospectus constitute the only information relating to the Underwriters furnished in writing to the Company by the Underwriters expressly for inclusion in the Registration Statement, any preliminary prospectus or the Prospectus. This indemnity will be in addition to any liability that the Underwriters might otherwise have. (c) Any party that proposes to assert the right to be indemnified under this Section 6 will, promptly after receipt of notice of commencement of any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 6, notify each such indemnifying party of the commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve it from any liability that it may have to any indemnified party under the foregoing provisions of this Section 6 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly with any other indemnifying party similarly notified, to assume the defense of the action, with counsel reasonably satisfactory to the indemnified party, and after notice from the indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such indemnified party unless (i) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (ii) the indemnified party has reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those available to the indemnifying party, (iii) a conflict of interests exists (based on advice of counsel to the indemnified party) between the indemnified party and the indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (iv) the indemnifying party has not in fact employed counsel to assume the defense of such action within a reasonable time after receiving notice of the commencement of the action, in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees, disbursements 23 and other charges of more than one separate firm admitted to practice in such jurisdiction at any one time for all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An indemnifying party will not be liable for any settlement of any action or claim effected without its written consent (which consent will not be unreasonably withheld). (d) In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs of this Section 6 is applicable in accordance with its terms but for any reason is held to be unavailable from the Company or the Underwriters, then the Company and the Underwriters will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with, and any amount paid in settlement of, any action, suit or proceeding or any claim asserted, but after deducting any contribution received by the Company from persons other than the Underwriters, such as persons who control the Company within the meaning of the Act, officers of the Company who signed the Registration Statement and directors of the Company, who may be liable for contribution) to which the Company and the Underwriters may be subject in such proportion as shall be appropriate to reflect the relative benefits received by the Company and the Underwriters. The relative benefits received by the Company on the one hand and the Underwriters on the other hand shall be deemed to be in the same respective proportions as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. If, but only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company and the Underwriters with respect to the statements or omissions which resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable considerations with respect to such offering. Such relative fault shall be determined by reference to whether the untrue or alleged untrue statement of a material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Underwriters, the intent of the parties and their relative knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 6(d) were to be determined by pro rata or per capita allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take into account the equitable considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense or damage, or action in respect thereof, referred to above in this Section 6(d) shall be deemed to include, for purpose of this Section 6(d), any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this Section 6(d), an Underwriter shall not be required to contribute any amount in excess of the underwriting discounts received by it (less the aggregate amount of any damages which such Underwriter and its controlling persons have otherwise been required to pay in respect of the 24 same or any similar claim), and no person found guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) will be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations to contribute as provided in this Section 6(d) are several in proportion to their respective underwriting obligations and not joint. For purposes of this Section 6(d), any person who controls a party to this Agreement within the meaning of the Act will have the same rights to contribution as that party, and each officer and director of the Company who signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution, promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution maybe made under this Section 6(d), will notify any such party or parties from whom contribution may be sought, but the omission to notify will not relieve the party or parties from whom contribution may be sought from any other obligation it or they may have under this Section 6(d). No party will be liable for contribution with respect to any action or claim settled without its written consent (which consent will not be unreasonably withheld). (e) The indemnity and contribution agreements contained in this Section 6 and the representations and warranties of the Company contained in this Agreement shall remain operative and in full force and effect regardless of (i) any investigation made by the Underwriters or on their behalf, (ii) acceptance of any of the Shares and payment therefor or (iii) any termination of this Agreement. (f) The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 6, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 6 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Act and the Exchange Act. 7. Termination. The Underwriters' obligations under this Agreement may be terminated at any time on or prior to the Closing Date (or, with respect to the Option Shares, on or prior to the Option Closing Date), by notice to the Company from the Representatives, without liability on the part of any of the Underwriters to the Company (provided, however, that this Section 7 and Sections 4(i), 4(j) and 6 shall be and always remain effective), if, prior to delivery and payment for the Shares (or the Option Shares, as the case may be), in your reasonable judgment, (i) the Company shall have failed, refused or been unable to perform any agreement on its part to be performed, or because of such condition the Underwriters' obligations hereunder required to be fulfilled are not fulfilled, including, but not limited to, any change in the business, properties, business prospects, condition (financial or otherwise) or results of operations of the Company and its Subsidiaries taken as a whole from that set forth in the Registration Statement or Prospectus which, in your reasonable judgment, is material and 25 adverse; (ii) any condition specified in Section 5 of this Agreement shall not have been satisfied; (iii) trading in any of the equity securities of the Company shall have been suspended by the Commission, by an exchange that lists the Shares or by the Nasdaq National Market; (iv) trading in securities generally on the New York Stock Exchange or the Nasdaq National Market shall have been suspended or limited or minimum or maximum prices shall have been generally established on such exchange, or additional material governmental restrictions, not in force on the date of this Agreement, shall have been imposed upon trading in securities generally by such exchange or by order of the Commission or any court of other governmental authority; (v) a general banking moratorium shall have been declared by either federal or state authorities; or (vi) any material adverse change in the financial or securities markets in the United States or in political, financial or economic conditions in the United States or any outbreak or material escalation of hostilities or declaration by the United States of a national emergency or war or other calamity, crisis, act of God or hostile act against the United States shall have occurred the effect of any of which is such as to make it, in your reasonable judgment, impracticable or inadvisable to market the Shares on the terms and in the manner contemplated by the Prospectus. 8. Substitution of Underwriters. If any Underwriter shall fail or refuse to purchase any of the Firm Shares which it has agreed to purchase hereunder, and the aggregate number of Firm Shares which such defaulting Underwriter agreed but failed or refused to purchase is not more than one-tenth of the aggregate number of Firm Shares, the other Underwriters shall be obligated, severally, to purchase the Firm Shares that such defaulting Underwriter agreed but failed or refused to purchase, in the proportions which the number of Firm Shares which they have respectively agreed to purchase pursuant to Section 1 bears to the aggregate number of Firm Shares which all such non-defaulting Underwriters have so agreed to purchase, or in such other proportions as you may specify; provided, that in no event shall the maximum number of Firm Shares which an Underwriter has been obligated to purchase pursuant to Section 1 be increased pursuant to this Section 8 by more than one-ninth of such number of Firm Shares without the prior written consent of such Underwriter. If an Underwriter shall fail or refuse to purchase any Firm Shares and the aggregate number of Firm Shares which such defaulting Underwriter agreed but failed or refused to purchase exceeds one-tenth of the aggregate number of the Firm Shares and arrangements satisfactory to the non- defaulting Underwriters or the Company for the purchase of such Firm Shares are not made within 48 hours after such default, this Agreement will terminate without liability on the part of any non-defaulting Underwriter or the Company for the purchase or sale of any Shares under this Agreement. In any such case the Underwriters or the Company shall have the right to postpone the Closing Date or Option Closing Date, but in no event for longer than seven days, in order that the required changes, if any, in the Registration Statement and in the Prospectus or in any other documents or arrangements may be effected. Any action taken pursuant to this Section 8 shall not relieve any defaulting Underwriter from liability in respect to any default of such Underwriter under this Agreement. 26 9. Miscellaneous. All communications hereunder shall be in writing and, if sent to any of the Underwriters, shall be mailed, first class postage prepaid, sent via reliable overnight delivery service, sent by facsimile (and by one of the two preceding methods), delivered by hand or telegraphed and confirmed in writing to the Representatives in care of J.C. Bradford & Co., J.C. Bradford Financial Center, 330 Commerce Street, Nashville, Tennessee 37201, Attention: James H. Graves, or if sent to the Company shall be sent by one of the foregoing methods to the Company at 1828 Meca Way, Norcross, Georgia 30093, Attention: Scott D. Dorfman. This Agreement has been and is made solely for the several Underwriters' and the Company's benefits and of the controlling persons, directors and officers referred to in Section 6, and their respective heirs, executors, administrators, successors and assigns, and no other person shall acquire or have any right under or by virtue of this Agreement. The term "successors and assigns" as used in this Agreement shall not include a purchaser, as such purchaser, of Shares from an Underwriter. This Agreement shall be governed by and construed in accordance with the laws of the State of Tennessee. This Agreement may be signed in two or more counterparts with the same effect as if the signatures thereto and hereto were upon the same instrument. In case any provision in this Agreement shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. THE COMPANY AND YOU EACH HEREBY IRREVOCABLY WAIVE ANY RIGHT THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY CLAIM BASED UPON OR ARISING OUT OF THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY. You hereby represent and warrant to the Company that you have authority to act hereunder on behalf of the several Underwriters, and any action hereunder taken by you will be binding upon all the Underwriters. 27 Please confirm that the foregoing correctly sets forth the agreement between the Company and you. Very truly yours, INNOTRAC CORPORATION By: ------------------------------------ Name: Title: Confirmed and accepted as of the date first above written. J.C. BRADFORD & CO. WHEAT FIRST SECURITIES, INC. For themselves and as Representatives of the several Underwriters By: J.C. Bradford & Co. By: ------------------------------- Name: Title: 28 SCHEDULE I Underwriters Number of Name of Underwriter Firm Shares - ------------------- ----------- J.C. Bradford & Co. ........................... Wheat First Securities, Inc. ................. --------- Total.................................... 2,500,000 ========= EX-3.1 3 AMENDED AND RESTATED ARTICLES OF INCORPORATION EXHIBIT 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INNOTRAC CORPORATION Article I. The name of the Corporation is: Innotrac Corporation. Article II. The Corporation shall have authority to issue not more than 50,000,000 shares of common stock, par value $ 0.10 per share (the "Common Stock") and 10,000,000 shares of preferred stock, par value $0.10 per share (the "Preferred Stock"). Article III. Holders of the Common Stock are entitled to the entire voting power, all distributions declared and all assets of the Corporation upon dissolution, subject to the rights and preferences, if any, of the holders of the Preferred Stock to such voting power, dividends and assets upon dissolution pursuant to applicable law and the resolution or resolutions of the Board of Directors providing for the issue of one or more series of Preferred Stock. Article IV. The Board of Directors is hereby expressly authorized to issue, at any time and from time to time, shares of Preferred Stock in one or more series. The number of shares within any such series shall be designated by the Board of Directors in one or more resolutions, and the shares of each series so designated shall have such preferences with respect to the Common Stock and other series of Preferred Stock, and such other rights, restrictions or limitations with respect to voting, dividends, conversion, exchange, redemption and any other matters, as may be set forth in one or more resolutions adopted by the Board of Directors. The Board of Directors has established below one series of Preferred Stock and to the extent required by law, must file Articles of Amendment setting forth any designation, preferences, rights, restrictions or limitations of other series of Preferred Stock with the Georgia Secretary of State prior to the issuance of any shares of such series. The authority of the Board of Directors with respect to the establishment of each series of Preferred Stock shall include, without limiting the generality of the foregoing, determination of the following matters which may vary between series: (a) The distinctive designation of that series and the number of shares constituting that series, which number may be increased (except where otherwise provided by the Board of Directors in creating such series) or decreased (but not below the number of shares of such series then outstanding) from time to time; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payments of dividends on shares of that series; (c) Whether that series shall have voting rights, in addition to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether that series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provisions for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether the shares of that series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or dates upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions; (f) Whether that series shall have a sinking fund for the redemption or purchase of shares of that series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of that series in the event of voluntary or involuntary liquidation, dissolution or winding-up of the Corporation, and the relative rights of priority, if any, of payment of shares of that series; and (h) Any other relative preferences, rights, restrictions or limitations of that series, including but not limited to any obligations of the Corporation to repurchase shares of that series upon specified events. Article V. 2 In discharging the duties of their respective positions and in determining what is believed to be in the best interests of the Corporation, the Board of Directors, committees of the Board of Directors and individual directors, in addition to considering the effects of any action on the Corporation or its shareholders, may consider the interests of the employees, customers, suppliers, and creditors of the Corporation and its subsidiaries, the communities in which offices or other establishments of the Corporation and its subsidiaries are located, and all other factors the directors consider pertinent. Article VI. No director of the Corporation shall be personally liable to the Corporation or its shareholders for monetary damages for breach of his duty of care or other duty as a director, provided that this provision shall eliminate or limit the liability of a director only to the extent permitted from time to time by the Georgia Business Corporation Code (the "Code") or any successor law or laws. If at any time the Code shall have been amended to authorize the further elimination or limitation of the liability of a director, then the liability of each director of the Corporation shall be eliminated or limited to the fullest extent permitted by the Code, as so amended, without further action by the shareholders, unless the provisions of the Code, as amended, require further action by the shareholders. Any repeal or modification of the foregoing provisions of this Article VII shall not adversely affect the elimination or limitation of liability or alleged liability pursuant hereto of any director of the Corporation for or with respect to any alleged act or omission of the director occurring prior to such repeal or modification. Article VII. The number of directors which shall constitute the whole board shall be not less than five nor more than eleven, the number thereof to be determined from time to time by resolution of the board of directors or the shareholders; provided, however, that no decrease in the number of directors shall have the effect of shortening the term of an incumbent director. Upon the closing of the Corporation's initial public offering of shares of its Common Stock, the directors shall be classified with respect to the time during which they shall severally hold office by dividing them into three classes, as nearly equal in number as possible, and with respect to the initial seven person board, Class 1 shall consist of two directors with a term of one year; Class 2 shall consist of three directors with a term of two years; and Class 3 shall consist of two directors. At each annual meeting of the shareholders held thereafter, the successors to the class of directors whose terms shall expire that year shall be elected to hold office for a term of three years, so that the term of office of one class of directors shall expire in each year. Any increase in the number of directors following the establishment of the staggered board of directors shall be apportioned among the classes so as to make all classes as nearly equal in number as possible. 3 Article VIII. The street address and county of the Corporation's registered agent shall be 1828 Meca Way, Norcross, Gwinnett County, Georgia 30093. The registered agent of the Corporation at that office shall be Melissa Ohlson. Article IX. The mailing address of the Corporation's initial principal office is 1828 Meca Way, Norcross, Georgia 30093. IN WITNESS WHEREOF, the Corporation has caused these Amended and Restated Articles of Incorporation to be executed by its duly authorized officer on the 24th day of November, 1997. INNOTRAC CORPORATION By: /s/ Scott D. Dorfman ------------------------ Scott D. Dorfman, Chairman, President and Chief Executive Officer 4 ARTICLES OF AMENDMENT TO THE AMENDED AND RESTATED ARTICLES OF INCORPORATION OF INNOTRAC CORPORATION 1. The name of the corporation is Innotrac Corporation (the "Corporation"). 2. The Amended and Restated Articles of Incorporation of the Corporation are amended by adding the following Article X; "ARTICLE X SECTION 1. DESIGNATION AND NUMBER OF SHARES. The shares of such series shall be designated as "Series A Participating Cumulative Preferred Stock" (the "SERIES A PREFERRED STOCK"), and the number of shares constituting such series shall be 500,000. Such number of shares of the Series A Preferred Stock may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares issuable upon exercise or conversion of outstanding rights, options or other securities issued by the Corporation. SECTION 2. DIVIDENDS AND DISTRIBUTIONS. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, if any, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable on the last day of March, June, September and December of each year (each such date being referred to herein as a "QUARTERLY DIVIDEND PAYMENT DATE"), commencing on the first Quarterly Dividend Payment Date after the first issuance of any share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 and (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount (payable in kind) of all cash dividends or other distributions and 100 times the aggregate per share amount of all non-cash dividends or other distributions (other than (i) a dividend payable in shares of Common Stock, par value $0.10 per share, of the Corporation (the "COMMON STOCK") or (ii) a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise)), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. If the Corporation shall at any time after January 1, 1998 (the "RIGHTS DECLARATION DATE") declare or pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in SECTION 2(A) immediately after it declares a dividend or distribution on the Common Stock (other than as described in clauses (i) and (ii) of the first sentence of SECTION 2(A)); provided, however, that if no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date (or, with respect to the first Quarterly Dividend Payment Date, the period between the first issuance of any share or fraction of a share of Series A Preferred Stock and such first Quarterly Dividend Payment Date), a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is on or before the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue and be cumulative from the date of issue of such shares, or unless the date of issue is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and on or before such Quarterly Dividend Payment Date, in which case dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued 2 and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof. SECTION 3. VOTING RIGHTS. In addition to any other voting rights required by law, the holders of shares of Series A Preferred Stock shall have the following voting rights: (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of shareholders of the Corporation. If the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as a single class on all matters submitted to a vote of shareholders of the Corporation. (C) (i) If at any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon (whether or not consecutive), the occurrence of such contingency shall mark the beginning of a period (herein called a "DEFAULT PERIOD") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Series A Preferred Stock and any other series of Preferred Stock then entitled as a class to elect directors, voting together as a single class, irrespective of series, shall have the right to elect one Director. (ii) During any default period, such voting right of the holders of Series A Preferred Stock may be exercised initially at a special meeting called pursuant to SECTION 3(C)(III) or at any annual meeting of shareholders, and thereafter 3 at annual meetings of shareholders; provided, however, that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of 10% in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of holders of Common Stock shall not affect the exercise by holders of Preferred Stock of such voting right. At any meeting at which holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancy, if any, in the Board of Directors as may then exist up to one Director or, if such right is exercised at an annual meeting, to elect one Director. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Preferred Stock. ---- ----- (iii) Notwithstanding anything to the contrary contained in the Corporation's Articles of Incorporation or Bylaws, unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any shareholder(s) owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this SECTION 3(C)(III) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any shareholder(s) owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series. Notwithstanding the provisions of this SECTION 3(C)(III), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of shareholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have 4 exercised their right to elect one Director voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in SECTION 3(C)(II) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. References in this SECTION 3(C) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the Articles of Incorporation or Bylaws irrespective of any increase made pursuant to the provisions of SECTION 3(C)(II) (such number being subject, however, to change thereafter in any manner provided by law or in the Articles of Incorporation or Bylaws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (D) Except as otherwise provided herein, holders of Series A Preferred Stock shall have no special voting rights, and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. SECTION 4. CERTAIN RESTRICTIONS. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in SECTION 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on outstanding shares of Series A Preferred Stock shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, or make any other distributions on, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on, or make any other distributions on, any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such 5 other parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem, purchase or otherwise acquire for value any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; provided, however, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem, purchase or otherwise acquire for value any shares of Series A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Preferred Stock and all such other parity stock upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for value any shares of stock of the Corporation unless the Corporation could, under SECTION 4(A), purchase or otherwise acquire such shares at such time and in such manner. SECTION 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock without designation as to series and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors as permitted by the Articles of Incorporation or as otherwise permitted under Georgia law. SECTION 6. LIQUIDATION, DISSOLUTION OR WINDING UP. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment; provided, however, that the holders of shares of Series A Preferred Stock shall be entitled to 6 receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such other parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. If the Corporation shall at any time after the Rights Declaration Date pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. SECTION 7. CONSOLIDATION OR MERGER. If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash or any other property, as the case may be, into which or for which each share of Common Stock is exchanged or changed. If the Corporation shall at any time after the Rights Declaration Date pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. SECTION 8. NO REDEMPTION. The Series A Preferred Stock shall not be redeemable. SECTION 9. RANK. The Series A Preferred Stock shall rank junior (as to dividends and upon liquidation, dissolution and winding up) to all other series of the 7 Corporation's preferred stock, except any series that specifically provides that such series shall rank junior to the Series A Preferred Stock. SECTION 10. FRACTIONAL SHARES. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. SECTION 11. AMENDMENT. The Articles of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Preferred Stock, voting separately as a class." 3. The designation of rights and preferences pertaining to Series A Participating Cumulative Preferred Stock was duly adopted by the sole director of the Corporation on December 11, 1997, pursuant to authority conferred upon the Board of Directors by the Amended and Restated Articles of Incorporation of the Corporation, and by Section 14-2-602 of the Georgia Business Corporation Code without need for shareholder approval. IN WITNESS WHEREOF, the Corporation has caused these Articles of Amendment to be signed by its duly authorized officer, this 31st day of December, 1997. INNOTRAC CORPORATION By: /s/ S. Dorfman ------------------------------------ Title: President --------------------------------- 8 EX-4.1 4 STOCK CERTIFICATE EXHIBIT 4.1 NUMBER SHARES --------- ---------- INCORPORATED UNDER THE LAWS OF THE CUSIP 45767M 10 9 STATE OF GEORGIA [INNOTRAC LOGO] INNOTRAC CORPORATION This certifies that ---------------------------------------------------- is the owner of -------------------------------------------------------------- FULLY PAID AND NON-ASSESABLE SHARES OF COMMON STOCK, PAR VALUE OF $.10 EACH OF Innotrac Corporation transferable only on the books of the Corporation by the holder hereof in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid until countersigned and registered by the Transfer Agent and registered by the Registrar. Countersigned and registered: By: RELIANCE TRUST COMPANY Transfer Agent and Registrar Witness the facsimile seal of the Corporation and the signatures of its duly authorized officers. Dated: [FORM OF INNOTRAC CORPORATE SEAL] Authorized Signature /s/ David Ellin /s/ Scott D. Dorfman - -------------------------- ------------------------------ SECRETARY PRESIDENT AND CHIEF EXECUTIVE OFFICER INNOTRAC CORPORATION The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - Custodian TEN ENT - as tenants by the entireties --------- ---------- JT TEN - as joint tenants with right of (Cust) (Minor) survivorship and not as tenants under Uniform Gifts to Minors in common Act -------------------------- (State)
Additional abbreviations may also be used though not in the above list. For Value received, _____________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ---------------------------------------------------- - ----------------------------------------------------- ________________________________________________________________________________ PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS OF ASSIGNEE ________________________________________________________________________________ ________________________________________________________________________________ Shares of Capital Stock - ------------------------------------- represented by the within Certificate, and do hereby irrevocably constitute and appoint Attorney to transfer the said - -------------------------------------------------- stock on the books of the within-named Corporation with full power of substitution in the premises. Dated, -------------------- ------------------------------------------------------ NOTICE: THIS SIGNATURE TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATEVER. SIGNATURE(S) GUARANTEED: ------------------------------------------------------ THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO S.E.C. RULE 17Ad-15. This certificate also evidences certain Rights as set forth in a Rights Agreement between Innotrac Corporation and Reliance Trust Company, dated as of December 31, 1997 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal office of the Company. The Company will mail to the holder of this certificate a copy of the Rights Agreement without charge promptly after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, such Rights may be evidenced by separate certificates and no longer be evidenced by this certificate, may be redeemed or exchanged or may expire. As set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or an Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may be null and void. EX-4.2 5 RIGHTS AGREEMENT EXHIBIT 4.2 RIGHTS AGREEMENT dated as of December 31, 1997 between INNOTRAC CORPORATION and RELIANCE TRUST COMPANY as Rights Agent TABLE OF CONTENTS/1/
Page ---- Section 1. Definitions.....................................................................1 Section 2. Appointment of Rights Agent.....................................................5 Section 3. Issue of Rights Certificates....................................................5 Section 4. Form of Rights Certificate......................................................6 Section 5. Countersignature and Registration...............................................7 Section 6. Transfer and Exchange of Rights Certificates; Mutilated, Destroyed, Lost or Stolen Rights Certificates...........................................8 Section 7. Exercise of Rights; Purchase Price; Expiration Date of Rights...................8 Section 8. Cancellation and Destruction of Right Certificates.............................10 Section 9. Reservation and Availability of Capital Stock..................................10 Section 10. Preferred Stock Record Date...................................................11 Section 11. Adjustment of Purchase Price, Number and Kind of Shares or Number of Rights.....................................................................12 Section 12. Certificate of Adjusted Purchase Price or Number of Shares....................20 Section 13. Consolidation, Merger or Sale or Transfer of Assets or Earning Power..........21 Section 14. Fractional Rights and Fractional Shares.......................................23 Section 15. Rights of Action..............................................................24 Section 16. Agreement of Right Holders....................................................25 Section 17. Right Certificate Holder Not Deemed a Shareholder.............................25 Section 18. Concerning the Rights Agent...................................................26 Section 19. Merger or Consolidation or Change of Name of Rights Agent.....................26
- ---------------- /1/ The Table of Contents is not a part of this Agreement. i Section 20. Duties of Rights Agent........................................................27 Section 21. Change of Rights Agent........................................................29 Section 22. Issuance of New Right Certificates............................................29 Section 23. Redemption and Termination....................................................30 Section 24. Exchange......................................................................31 Section 25. Notice of Proposed Actions....................................................32 Section 26. Notices.......................................................................32 Section 27. Supplements and Amendments....................................................33 Section 28. Successors....................................................................33 Section 29. Determinations and Actions by the Board of Directors, etc.....................34 Section 30. Benefits of this Agreement....................................................34 Section 31. Severability..................................................................34 Section 32. Governing Law.................................................................35 Section 33. Counterparts..................................................................35 Section 34. Descriptive Headings..........................................................35 Exhibit A - Form of Board Resolution Establishing and Designating Preferred Stock Exhibit B - Form of Rights Certificate Exhibit C - Shareholder Rights Plan Summary of Terms
ii RIGHTS AGREEMENT THIS AGREEMENT is made and entered into as of December 31, 1997, by and between INNOTRAC CORPORATION, a Georgia corporation (the "Company"), and RELIANCE TRUST COMPANY as Rights Agent (the "Rights Agent"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Board of Directors of the Company has approved the execution of this Agreement and has authorized and declared a dividend distribution of one Right (as defined below) for each outstanding share of Common Stock, par value $0.10 per share, of the Company (the "Common Stock") at the close of business on the Effective Date and has authorized the issuance of one Right for each share of Common Stock, each Right representing the right to purchase, one one-hundredth of a share of Series A Participating Cumulative Preferred Stock of the Company having the rights, powers and preferences set forth in the Board Resolution Establishing and Designating Series A Preferred Stock attached hereto as Exhibit A, upon the terms and subject to the conditions contained herein (individually, a "Right," and collectively, the "Rights"); NOW, THEREFORE, for and in consideration of the premises and the mutual agreements contained herein, the parties hereto agree as follows: Section 1. Definitions. The following terms, as used herein, have ----------- the following meanings: (a) "Acquiring Person" means any Person who or which, together with ---------------- all Affiliates and Associates of such Person, shall be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding; provided, however, -------- ------- that, an "Acquiring Person" shall not include the following Persons: (i) any Excluded Person, (ii) any Person who is the Beneficial Owner of 15% or more of the shares of Common Stock outstanding as of the Effective Date, or (iii) any Person, who alone or together with its Affiliates or Associates becomes the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding as a result of an Approved Acquisition; provided, further, that in the event -------- ------- that a Person does not become an Acquiring Person by reason of clause (iii) above, such Person nonetheless shall become an Acquiring Person if such Person thereafter becomes the Beneficial Owner of an additional 2% or more of the Common Stock then outstanding, unless the acquisition of such Common Stock is an Approved Acquisition. Notwithstanding the foregoing, if the Board of Directors of the Company determines in good faith (but only if at the time of such determination by the Board of Directors there are then in office not less than two Continuing Directors and such action is approved by a majority of the Continuing Directors then in office) that a Person who would otherwise be an "Acquiring Person" as defined pursuant to the foregoing provisions of this Section 1(a) has become such inadvertently, and such Person divests as promptly as practicable a sufficient number of shares of Common Stock so that such Person would no longer be an "Acquiring Person" as defined pursuant to the foregoing provisions of this Section 1(a), then such Person shall not be deemed an Acquiring Person for any purposes of this Agreement. (b) "Affiliate" and "Associate" have the respective meanings ascribed --------- --------- to such terms in Rule 12b-2 under the Exchange Act as in effect on the date hereof. (c) "Approved Acquisition" means any acquisition of Common Stock by an -------------------- Acquiring Person that is approved in advance by a majority of the Continuing Directors. (d) A Person shall be deemed the "Beneficial Owner" of, and shall be ---------------- deemed to "beneficially own," any securities: ---------------- (i) which such Person or any of its Affiliates or Associates beneficially owns (as determined pursuant to Rule 13d-3 under the Exchange Act as in effect on the date hereof), directly or indirectly; (ii) which such Person or any of its Affiliates or Associates, directly or indirectly, has (A) the right to acquire (whether such right is exercisable immediately or only upon the occurrence of certain events or the passage of time or both) pursuant to any agreement, arrangement or understanding (whether or not in writing) or upon the exercise of conversion rights, exchange rights, rights (other than pursuant to the Rights), warrants, options or otherwise; provided, however, that a -------- ------- Person shall not be deemed the "Beneficial Owner" of, or to "beneficially own," any securities tendered pursuant to a tender or exchange offer made by or on behalf of such Person or any of its Affiliates or Associates until such tendered securities are accepted for purchase or exchange; or (B) the right to vote or dispose of (whether such right is exercisable immediately or only upon the occurrence of certain events or the passage of time or both) pursuant to any agreement, arrangement or understanding (whether or not in writing) or otherwise; provided, -------- however, that a Person shall not be deemed the "Beneficial Owner" of, ------- or to "beneficially own," any security under this clause (B) as a result of an agreement, arrangement or understanding to vote such security if such agreement, arrangement or understanding (1) arises solely from a revocable proxy or consent given to such Person in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the applicable rules and regulations promulgated under the Exchange Act, and (2) is not also then reportable by such Person on Schedule 13D under the Exchange Act (or any comparable or successor report); or (iii) which are beneficially owned, directly or indirectly, by any other Person (or any Affiliate or Associate thereof) with which such Person (or any of its Affiliates or Associates) has any agreement, arrangement or understanding (whether or not in writing) 2 for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy as described in Subsection (ii)(B) above) or disposing of any such securities; provided, however, that nothing in this Section 1(e) -------- ------- shall cause any Person engaged in business as an underwriter of securities who acquires any securities of the Company through such Person's participation in good faith in a firm commitment underwriting to be deemed the "Beneficial Owner" of, or to "beneficially own," such securities until the expiration of 40 days after the date of such acquisition. (e) "Business Day" means any day other than a Saturday, Sunday or a ------------ day on which banking institutions in the State of Georgia are authorized or obligated by law or executive order to close. (f) "Close of Business" on any given date means 5:00 P.M., Atlanta, ----------------- Georgia time, on such date; provided, however, that if such date is not a -------- ------- Business Day, then it shall mean 5:00 P.M., Atlanta, Georgia time, on the next succeeding Business Day. (g) "Common Stock" means the Common Stock, par value $0.10 per share, ------------ of the Company, except that, when used with respect to any Person other than the Company, "Common Stock" means the capital stock (or other equity interests) of such Person with the greatest voting power, or the equity securities or other equity interests having the power to control or direct the management of such Person. (h) "Continuing Director" means any member of the Board of Directors ------------------- of the Company, while such Person is a member of the Board, who is not an Acquiring Person or an Affiliate or Associate of an Acquiring Person or a representative or nominee of an Acquiring Person or of any such Affiliate or Associate, or otherwise affiliated with an Acquiring Person or of any such Affiliate or Associate, and who either (i) was a member of the Board immediately prior to the Effective Date, or (ii) subsequently becomes a member of the Board, if such Person's nomination for election or election to the Board is recommended or approved by a majority of the Continuing Directors serving at the time of such nomination or election (which shall include without limitation the nominees included in any proxy statement approved by the Continuing Directors). (i) "Distribution Date" means the earlier of (i) the Close of Business ----------------- on the tenth day (or such later day as may be designated by action of a majority of the Continuing Directors) after the Share Acquisition Date, and (ii) the Close of Business on the tenth Business Day (or such later day as may be designated by action of a majority of the Continuing Directors) after the date of the commencement by any Person (other than an Excluded Person) of, or of the first public announcement of the intention by any Person (other than an Excluded Person) to commence, a tender or exchange offer if, upon consummation thereof, such Person, together with all Affiliates and Associates of such Person, would be the Beneficial Owner of 15% or more of the shares of Common Stock then outstanding. (j) "Effective Date" means January 1, 1998. -------------- 3 (k) "Employee Benefit Plan" means any employee benefit plan of the --------------------- Company or any of its Subsidiaries or any Person organized, appointed or established by the Company or any of its Subsidiaries for or pursuant to the terms of any such plan. (l) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (m) "Excluded Person" means the Company, any of its Subsidiaries or -------- any Employee Benefit Plan. (n) "Expiration Date" means the earlier of (i) the Final Expiration --------------- Date, and (ii) the time at which all Rights are redeemed as provided in Section 23 or exchanged as provided in Section 24. (o) "Final Expiration Date" means the Close of Business on --------------------- January 1, 2008. (p) "Flip-in Event" means any event described in Section 11(a)(ii)(A), ------------- (B) or (C), but excluding any event described in Section 11(a)(ii)(D). (q) "Flip-over Event" means any event described in Section 13(a)(x), --------- (y), or (z). (r) "Person" means an individual, corporation, partnership, limited ------ liability company, association, trust or any other entity or organization. (s) "Preferred Stock" means the Series A Participating Cumulative --------------- Preferred Stock, par value $0.10 per share, of the Company having the terms set forth in the form of certificate of designation attached hereto as Exhibit A. (t) "Purchase Price" means the price (subject to adjustment as -------------- provided herein) at which a holder of a Right may purchase one one-hundredth of a share of Preferred Stock (subject to adjustment as provided herein) upon exercise of a Right, which price shall initially be $60.00. (u) "Qualifying Tender Offer" means a tender or exchange offer for all ----------------------- outstanding shares of Common Stock of the Company approved by a majority of Continuing Directors then in office, after taking into account the potential long-term value of the Company and all other factors that they consider relevant. (v) "Securities Act" means the Securities Act of 1933, as amended. -------------- (w) "Share Acquisition Date" means the date of the first public ---------------------- announcement (including the filing of a report on Schedule 13D under the Exchange Act (or any comparable or successor report)) by the Company or an Acquiring Person indicating that an Acquiring Person has become such. 4 (x) "Subsidiary" means, with respect to any Person, any other Person ---------- of which securities or other ownership interests having ordinary voting power, in the absence of contingencies, to elect a majority of the board of directors or other Persons performing similar functions are at the time directly or indirectly owned or controlled by such first Person. (y) "Trading Day" means a day on which the principal national ----------- securities exchange or inter-dealer quotation system on which the shares of Common Stock are listed, admitted to trading or quoted is open for the transaction of business or, if the shares of Common Stock are not listed, admitted to trading or quoted on any national securities exchange or inter- dealer quotation system, a Business Day. (z) "Triggering Event" means any Flip-in Event or any Flip-over Event. ---------------- Section 2. Appointment of Rights Agent. The Company hereby --------------------------- appoints the Rights Agent to act as agent for the Company and the holders of the Rights (who, in accordance with Section 3, shall prior to the Distribution Date also be the holders of the Common Stock) in accordance with the terms and conditions hereof, and the Rights Agent hereby accepts such appointment. The Company may from time to time appoint such co-Rights Agents as it may deem necessary or desirable. If the Company appoints one or more co-Rights Agents, then the respective duties of the Rights Agent and any co-Rights Agents shall be as the Company shall determine. Section 3. Issue of Rights Certificates. (a) Prior to the ---------------------------- Distribution Date, (i) the Rights will be evidenced (subject to Section 3(b)) by the certificates for the Common Stock and not by separate Rights Certificates (as defined below), and the registered holders of the Common Stock shall be deemed to be the registered holders of the associated Rights, and (ii) the Rights will be transferable only in connection with the transfer of the underlying shares of Common Stock (including a transfer to the Company). As soon as practicable after the Company has notified the Rights Agent of the occurrence of a Distribution Date, the Rights Agent will, subject to Section 7(d), send, by first-class, insured, postage prepaid mail, to each record holder of the Common Stock as of the Close of Business on the Distribution Date, at the address of such holder shown on the records of the Company, one or more Rights Certificates, in substantially the form of Exhibit B attached hereto (the "Rights Certificates"), evidencing one Right (subject to adjustment as provided herein) for each share of Common Stock so held. If an adjustment in the number of Rights per share of Common Stock has been made pursuant to Section 11(p), then the Company shall, at the time of distribution of the Rights Certificates to record holders of Common Stock as of the Close of Business on the Distribution Date, make the necessary and appropriate rounding adjustments (in accordance with Section 14(a)) so that Rights Certificates representing only whole numbers of Rights are distributed to such holders and cash is paid to such holders in lieu of any fractional Rights. From and after the Distribution Date, the Rights will be evidenced solely by such Right Certificates. (b) As soon as practicable after the Effective Date, the Company will send a summary of the Rights substantially in the form of Exhibit C attached hereto, by first-class, postage prepaid mail, to each record holder of the Common Stock as of the Close of Business on the 5 Effective Date at the address of such holder shown on the records of the Company. Until the Distribution Date, the Rights shall be evidenced by such certificates evidencing the Common Stock, and the registered holders of such Common Stock shall also be the registered holders of the associated Rights. (c) Rights shall be issued in respect of all shares of Common Stock that become outstanding (on original issuance or out of treasury) after the Effective Date but prior to the earlier of the Distribution Date or the Expiration Date. Certificates for the Common Stock that become outstanding or shall be transferred or exchanged after the Effective Date but prior to the earlier of the Distribution Date or the Expiration Date shall also be deemed to be certificates for Rights and shall have impressed on, printed on, written on or otherwise affixed to them the following legend: This certificate also evidences certain Rights as set forth in a Rights Agreement between Innotrac Corporation and Reliance Trust Company, dated as of December 31, 1997 (the "Rights Agreement"), the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal office of the Company. The Company will mail to the holder of this certificate a copy of the Rights Agreement without charge promptly after receipt of a written request therefor. Under certain circumstances, as set forth in the Rights Agreement, such Rights may be evidenced by separate certificates and no longer be evidenced by this certificate, may be redeemed or exchanged or may expire. As set forth in the Rights Agreement, Rights issued to, or held by, any Person who is, was or becomes an Acquiring Person or an Affiliate or Associate thereof (as such terms are defined in the Rights Agreement), whether currently held by or on behalf of such Person or by any subsequent holder, may be null and void. (d) With respect to the certificates containing the foregoing legend, until the earlier of the Distribution Date or the Expiration Date, the Rights associated with the Common Stock represented by such certificates shall be evidenced by such certificates alone and registered holders of Common Stock shall also be the registered holders of the associated Rights, and the transfer of any of such certificates shall also constitute the transfer of the Rights associated with the Common Stock represented thereby. If the Company purchases or acquires any shares of Common Stock after the Effective Date but prior to the Distribution Date, any Rights associated with such Common Stock shall be deemed canceled and retired so that the Company shall not be entitled to exercise any Rights associated with the Common Stock that are no longer outstanding. Section 4. Form of Rights Certificate. (a) The Rights Certificates -------------------------- (and the forms of assignment, election to purchase and certificates to be printed on the reverse thereof) shall be substantially in the form of Exhibit B attached hereto and may have such marks of identification or designation and such legends, summaries or endorsements printed thereon as the Company 6 may deem appropriate and as are not inconsistent with the provisions of this Agreement, or as may be required to comply with any applicable law, rule or regulation or with any rule or regulation of any stock exchange or inter-dealer quotation system of a registered national securities association on which the Rights may from time to time be listed, traded or quoted or to conform to usage. Subject to Sections 11 and 22, the Rights Certificates, whenever distributed, shall be dated as of the Distribution Date, shall entitle the holders thereof to purchase such number of one one-hundredths of a share of Preferred Stock as shall be set forth therein at the price set forth therein, but the number of such one one-hundredths and the Purchase Price thereof shall be subject to adjustment as provided herein. (b) Any Rights Certificate representing Rights beneficially owned by any Person referred to in Section 7(d)(i), (ii) or (iii) shall (to the extent feasible) contain the following legend: The Rights represented by this Rights Certificate are or were beneficially owned by a Person who was or became an Acquiring Person or an Affiliate or Associate of an Acquiring Person (as such terms are defined in the Rights Agreement). This Rights Certificate and the Rights represented hereby may be or may become null and void in the circumstances specified in Section 7(d) of the Rights Agreement. Section 5. Countersignature and Registration. (a) The Rights --------------------------------- Certificates shall be executed on behalf of the Company by its Chairman of the Board, its President or any Vice President, either manually or by facsimile signature, and shall have affixed thereto the Company's seal or a facsimile thereof which shall be attested by the Secretary or an Assistant Secretary of the Company, either manually or by facsimile signature. The Rights Certificates shall be manually countersigned by the Rights Agent and shall not be valid for any purpose unless so countersigned. In case any officer of the Company whose manual or facsimile signature is affixed to the Rights Certificates shall cease to be such officer of the Company before countersignature by the Rights Agent and issuance and delivery by the Company, such Rights Certificates may, nevertheless, be countersigned by the Rights Agent and issued and delivered with the same force and effect as though the individual who signed such Rights Certificates had not ceased to be such officer of the Company. Any Rights Certificate may be signed on behalf of the Company by any Person who, at the actual date of the execution of such Rights Certificate, shall be a proper officer of the Company to sign such Rights Certificate, although at the date of the execution of this Agreement any such Person was not such an officer. (b) Following the Distribution Date, the Rights Agent will keep or cause to be kept, at its principal office or offices designated as the appropriate place for surrender of Rights Certificates upon exercise, transfer or exchange, books for registration and transfer of the Rights Certificates. Such books shall show with respect to each Rights Certificate the name and address of the registered holder thereof, the number of Rights indicated on the certificate, and the certificate number. 7 Section 6. Transfer and Exchange of Rights Certificates; Mutilated, -------------------------------------------------------- Destroyed, Lost or Stolen Rights Certificates. (a) Subject to Section 4(b), - --------------------------------------------- 7(d), and 14, at any time after the Close of Business on the Distribution Date and prior to the Close of Business on the Expiration Date, any Rights Certificate(s) may, upon the terms and subject to the conditions set forth in this Section 6(a), be transferred or exchanged for another Rights Certificate(s) evidencing a like number of Rights as the Rights Certificate(s) surrendered. Any registered holder desiring to transfer or exchange any Rights Certificate(s) shall make such request in writing delivered to the Rights Agent, and shall surrender such Rights Certificate(s) (with, in the case of a transfer, the form of assignment and certificate on the reverse side thereof duly executed) to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose. Neither the Rights Agent nor the Company shall be obligated to take any action whatsoever with respect to the transfer of any such surrendered Rights Certificate(s) until the registered holder of the Rights has complied with the requirements of Section 7(e). Upon satisfaction of the foregoing requirements, the Rights Agent shall, subject to Sections 4(b), 7(d), 14 and 24, countersign and deliver to the Person entitled thereto a Rights Certificate(s) as so requested. The Company may require payment of a sum sufficient to cover any transfer tax or other governmental charge that may be imposed in connection with any transfer or exchange of any Rights Certificate(s). (b) Upon receipt by the Company and the Rights Agent of evidence reasonably satisfactory to them of the loss, theft, destruction or mutilation of a Rights Certificate, and, in case of loss, theft or destruction, of indemnity or security reasonably satisfactory to them, and, at the Company's request, reimbursement to the Company and the Rights Agent of all reasonable expenses incidental thereto, and upon surrender to the Rights Agent and cancellation of the Rights Certificate if mutilated, the Company will issue and deliver a new Rights Certificate of like tenor to the Rights Agent for countersignature and delivery to the registered holder in lieu of the Rights Certificate so lost, stolen, destroyed or mutilated. Section 7. Exercise of Rights; Expiration Date of Rights; ---------------------------------------------- Restrictions on Transfer. (a) Subject to Section 7(d), the registered holder - ------------------------ of any Rights Certificate may exercise the Rights evidenced thereby (except as otherwise provided herein, including, without limitation, Sections 7(e), 9(c), 11(a), 13, 23, and 24), in whole or in part, at any time after the Distribution Date and prior to the Expiration Date upon surrender of the Rights Certificate, with the form of election to purchase and the certificate on the reverse side thereof duly executed (with signatures guaranteed), to the Rights Agent at the principal office or offices of the Rights Agent designated for such purpose, together with payment of the aggregate Purchase Price (in lawful money of the United States of America by certified check or bank draft payable to the order of the Company) with respect to the Rights then to be exercised and an amount equal to any applicable transfer tax or other governmental charge. (b) Upon satisfaction of the requirements of Section 7(a) and subject to Section 20(k), the Rights Agent shall thereupon promptly (i)(A) requisition from any transfer agent of the Preferred Stock (or make available, if the Rights Agent is the transfer agent therefor) certificates for the total number of one one-hundredths of a share of Preferred Stock to be purchased (and the Company hereby irrevocably authorizes its transfer agent to comply with all 8 such requests), or (B) if the Company shall have elected to deposit the shares of Preferred Stock issuable upon exercise of the Rights with a depository agent, requisition from the depository agent depository receipts representing such number of one one-hundredths of a share of Preferred Stock as are to be purchased (in which case certificates for the shares of Preferred Stock represented by such receipts shall be deposited by the transfer agent with the depository agent), and the Company will direct the depository agent to comply with such request, (ii) requisition from the Company the amount of cash, if any, to be paid in lieu of issuance of fractional shares in accordance with Section 14, and (iii) after receipt of such certificates or depository receipts and cash, if any, cause the same to be delivered to or upon the order of the registered holder of such Rights Certificate (with such certificates or receipts registered in such name or names as may be designated by such holder). If the Company is obligated to deliver Common Stock, other securities or assets pursuant to this Agreement, the Company will make all arrangements necessary so that such other securities and assets are available for distribution by the Rights Agent, if and when appropriate. (c) In case the registered holder of any Rights Certificate shall exercise less than all the Rights evidenced thereby, a new Rights Certificate evidencing the number of Rights remaining unexercised shall be issued by the Rights Agent and delivered to, or upon the order of, the registered holder of such Rights Certificate, registered in such name or names as may be designated by such holder, subject to the provisions of Section 14. (d) Notwithstanding anything in this Agreement to the contrary, from and after the first occurrence of a Flip-in Event, any Rights beneficially owed by (i) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (ii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (iii) a transferee of an Acquiring Person (or of any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such and receives such Rights pursuant to either (A) a transfer (whether or not for consideration) from the Acquiring Person (or any such Associate or Affiliate) to holders of equity interests in such Acquiring Person (or in any such Associate or Affiliate) or to any Person with whom the Acquiring Person (or any such Associate or Affiliate) has any continuing agreement, arrangement or understanding regarding the transferred Rights, or (B) a transfer which the Continuing Directors have determined is part of a plan, arrangement or understanding which has as a primary purpose or effect the avoidance of this Section 7(d) shall become null and void without any further action, and no holder of such Rights shall have any rights whatsoever with respect to such Rights, whether under any provision of this Agreement or otherwise; provided, -------- however, that the foregoing provisions of this Section 7(d) shall not apply to - ------- Rights beneficially owned by an Acquiring Person (or an Associate or Affiliate) of such Acquiring Person or a transferee thereof if such Person became an Acquiring Person pursuant to a Qualifying Tender Offer. The Company shall use all reasonable efforts to insure that the provisions of Section 4(b) and this Section 7(d) and are complied with, but shall have no liability to any holder of Rights Certificates or other Person as a result of its failure to make any determinations with respect to an Acquiring Person or its Affiliates and Associates or any transferee of any of them hereunder. 9 (e) Notwithstanding anything in this Agreement to the contrary, neither the Rights Agent nor the Company shall be obligated to undertake any action with respect to a registered holder of Rights upon the occurrence of any purported transfer pursuant to Section 6 or exercise pursuant to this Section 7 unless such registered holder (i) shall have completed and signed the certificate contained in the form of assignment or election to purchase, as the case may be, set forth on the reverse side of the Rights Certificate surrendered for such transfer or exercise, as the case may be, (ii) shall not have indicated an affirmative response to clause 1 or 2 thereof, and (iii) shall have provided such additional evidence of the identity of the Beneficial Owner (or former Beneficial Owner) or Affiliates or Associates thereof as the Company shall reasonably request. Section 8. Cancellation and Destruction of Right Certificates. -------------------------------------------------- All Rights Certificates surrendered for exercise, transfer or exchange shall, if surrendered to the Company or to any of its agents, be delivered to the Rights Agent for cancellation or in canceled form, or, if surrendered to the Rights Agent, shall be canceled by it, and no Rights Certificates shall be issued in lieu thereof except as expressly permitted by this Agreement. The Company shall deliver to the Rights Agent for cancellation and retirement, and the Rights Agent shall cancel and retire, any other Rights Certificate purchased or acquired by the Company otherwise than upon the exercise thereof. The Rights Agent shall deliver all canceled Rights Certificates to the Company, or shall, at the written request of the Company, destroy such canceled Rights Certificates, and in either such case shall deliver a certificate of cancellation or destruction thereof, as appropriate, to the Company. Section 9. Reservation and Availability of Capital Stock. (a) The --------------------------------------------- Company covenants and agrees that it will use reasonable efforts to cause to be reserved and kept available out of its authorized and unissued shares of Preferred Stock (and, following the occurrence of Triggering Event, out of its authorized and unissued shares of Common Stock) a number of shares of Preferred Stock (and, following the occurrence of a Triggering Event, out of its authorized but unissued shares of Common Stock) that will be, except as provided in Section 11(a)(iii), sufficient to permit the exercise in full of all outstanding Rights as provided in this Agreement. (b) So long as the Preferred Stock (and, following the occurrence of Triggering Event, Common Stock and other securities) issuable and deliverable upon the exercise of the Rights may be listed on any national securities exchange or inter-dealer quotation system of a registered national securities association, the Company shall use its best efforts to cause, from and after such time as the Rights become exercisable, all securities reserved for such issuance to be listed on any such exchange or quotation system upon official notice of issuance upon such exercise. (c) The Company shall use its best efforts (i) to file, as soon as practicable following the earliest date after the occurrence of a Flip-in Event, or as soon as is required by law following the Distribution Date, as the case may be, a registration statement under the Securities Act with respect to the securities issuable upon exercise of the Rights, (ii) to cause such registration statement to become effective as soon as practicable after such filing, and (iii) to cause such 10 registration statement to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the earlier of (A) the date as of which the Rights are no longer exercisable for such securities, and (B) the Expiration Date. The Company will also take such action as may be appropriate under, or to ensure compliance with, the securities or blue sky laws of the various states in connection with the exercisability of the Rights. The Company may temporarily suspend, for a period of time not to exceed 90 days after the date set forth in this Section 9(c)(i), the exercisability of the Rights in order to prepare and file such registration statement and permit it to become effective. Upon any such suspension, the Company shall notify the Rights Agent and issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect that the rights are currently exercisable. Notwithstanding any such provision of this Agreement to the contrary, the Rights shall not be exercisable for securities in any jurisdiction if the requisite qualification in such jurisdiction shall not have been obtained, such exercise therefor shall not be permitted under applicable law or a registration statement in respect of such securities shall not have been declared effective. (d) The Company covenants and agrees that it will take all such action as may be necessary to ensure that all one one-hundredths of a share of Preferred Stock (and, following the occurrence of a Triggering Event, Common Stock or other securities) issuable upon exercise of the Rights shall, at the time of delivery of the certificates for such securities (subject to payment of the Purchase Price), be duly authorized, validly issued, fully paid, and nonassessable. (e) The Company further covenants and agrees that it will pay when due and payable any and all federal and state transfer taxes and other governmental charges which may be payable in respect of the issuance or delivery of the Rights Certificates and of any certificates for Preferred Stock (or Common Stock or other securities, as the case may be) upon the exercise of Rights. The Company shall not, however, be required to pay any transfer tax or other governmental charge which may be payable in respect of any transfer involved in the issuance or delivery of any Rights Certificates or of any certificates for Preferred Stock (or Common Stock or other securities, as the case may be) to a Person other than the registered holder of the applicable Rights Certificate, and prior to any such transfer, issuance or delivery any such tax or other governmental charge shall have been paid by the holder of such Rights Certificate or it shall have been established to the Company's satisfaction that no such tax or other governmental charge is due. Section 10. Preferred Stock Record Date. Each Person (other than --------------------------- the Company) in whose name any certificate for Preferred Stock (or Common Stock or other securities, as the case may be) is issued upon the exercise of Rights shall for all purposes be deemed to have become the holder of record of such Preferred Stock (or Common Stock or other securities, as the case may be) represented thereby on, and such certificate shall be dated, the date upon which the Rights Certificate evidencing such Rights was duly surrendered and payment of the Purchase Price (and any applicable transfer taxes or other governmental charges) was made; provided, however, that if the date of such surrender and -------- ------- payment is a date upon which the transfer books of the Company relating to the Preferred Stock (or Common Stock or other securities, as the case may be) are closed, such Person shall be deemed to have become the record holder of such shares 11 on, and such certificate shall be dated, the next succeeding Business Day on which the applicable transfer books of the Company are open. Section 11. Adjustment of Purchase Price, Number and Kind of Shares ------------------------------------------------------- or Number of Rights. The Purchase Price, the number and kind of shares - ------------------- covered by each Right, and the number of Rights outstanding are subject to adjustment from time to time, as provided in this Section 11. (a)(i) If the Company shall at any time after the date of this Agreement (A) declare or pay a dividend on the Preferred Stock payable in shares of Preferred Stock (or other capital stock), (B) subdivide the outstanding Preferred Stock into a greater number of shares, (C) combine the outstanding Preferred Stock into a smaller number of shares, or (D) issue any shares of its capital stock in a reclassification of the Preferred Stock (including any such reclassification in connection with a consolidation or merger involving the Company in which the Company is the surviving or continuing corporation), except as otherwise provided in Section 7(d) and this Section 11(a), then the Purchase Price in effect immediately prior to the record date for such dividend or of the effective date of such subdivision, combination or reclassification, and the number and kind of shares of Preferred Stock or other capital stock issuable on such date shall be proportionately adjusted so that each holder of a Right shall thereafter be entitled to receive, upon exercise thereof at the Purchase Price in effect immediately prior to such date, the aggregate number and kind of shares of Preferred Stock or other capital stock, as the case may be, which, if such Right had been exercised immediately prior to such date and at a time when the applicable transfer books of the Company were open, such holder would have been entitled to receive upon such exercise and by virtue of such dividend, subdivision, combination or reclassification. If an event occurs which requires an adjustment under both this Section 11(a)(i) and Section 11(a)(ii), the adjustment provided for in this Section 11(a)(i) shall be in addition to, and shall be made prior to, any adjustment required pursuant to Section 11(a)(ii). (ii) Subject to Sections 23 and 24, if: (A) any Person, alone or together with its Affiliates and Associates, shall, at any time after the date of this Agreement become an Acquiring Person (other than pursuant to a Qualifying Tender Offer), or (B) during such time as there is an Acquiring Person, there shall be a reclassification of securities (including any reverse stock split), recapitalization of the Company, or any merger or consolidation of the Company with any of its Subsidiaries or any other transaction or series of transactions involving the Company or any of its Subsidiaries (whether or not with or into or otherwise involving an Acquired Person), other than a Flip-over Event(s), which has the effect, directly or indirectly, of increasing by more than [2%] the proportionate share of the outstanding shares of any class of equity or convertible securities of the Company or any of its Subsidiaries which is directly or indirectly beneficially owned by any Acquiring Person or any Associate or Affiliate of any Acquiring Person, or 12 (C) any Acquiring Person or any Associate or Affiliate of any Acquiring Person, at any time after the date of this Agreement, directly or indirectly, (1) shall merge into the Company or otherwise combine or consolidate with the Company and the Company shall be the continuing or surviving corporation of such merger, combination or consolidation and, in connection with such merger, combination or consolidation, none of the outstanding shares of the Common Stock of the Company shall be changed into or exchanged for stock or other securities of the Company or of any other Person or cash or any other property, (2) shall, in one transaction or a series of transactions, other than in connection with the exercise of a Right or Rights and other than in connection with the exercise or conversion of securities exercisable for or convertible into securities of the Company which securities were outstanding prior to the time such Acquiring Person became such, transfer any assets to the Company or to any of its Subsidiaries in exchange (in whole or in part) for shares of Common Stock, for other equity securities of the Company, or for securities exercisable for or convertible into shares of equity securities of the Company (Common Stock or otherwise) or otherwise obtain from the Company, with or without consideration, any additional shares of such equity securities or securities exercisable for or convertible into shares of such equity securities (other than pursuant to a pro rata offer or distribution to all holders of Common Stock), (3) shall sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise dispose of assets (in one or more transactions), to, from, with or of, as the case may be, the Company or any of its Subsidiaries (including, in the case of Subsidiaries, by way of a merger, combination or consolidation of any Subsidiary), on terms and conditions less favorable to the Company than the Company would be able to obtain in arm's-length negotiations with an unaffiliated third party, other than pursuant to a Flip-over Event, (4) shall sell, purchase, lease, exchange, mortgage, pledge, transfer or otherwise acquire or dispose of in one transaction or a series of transactions, to, from or with (as the case may be) the Company or any of its Subsidiaries (other than incidental to the lines of business, if any, engaged in as of such date between the Company and such Acquiring Person or Associates or Affiliate) assets having an aggregate fair market value of more than $4,000,000, other than pursuant to a transaction set forth in Section 13(a), (5) shall receive any compensation from the Company or any of its Subsidiaries other than compensation for full-time employment as a regular employee, or fees for serving as a director, at rates in accordance with the Company's (or its Subsidiaries') past practices, or (6) shall receive the benefit, directly or indirectly (except proportionately as a shareholder and except if resulting from a requirement of law or governmental regulation), of any loans, assumptions of loans, advances, guarantees, pledges or other financial assistance, or any tax credits or other tax advantage, provided by the Company or any of its Subsidiaries, (D) provided that the events described in Sections 11(a)(ii)(A), (B) and (C) shall not include a repurchase by the Company of Common Stock that is 13 approved by a majority of Continuing Directors, promptly following five days after the date of the occurrence of the event described in Section 11(a)(ii)(A) hereof and promptly following the occurrence of any event described in Section 11(a)(B) or (C) hereof, then proper provision shall promptly be made so that each holder of a Right shall (except as otherwise provided herein, including, without limitation, Section 7(d)) thereafter be entitled to receive, upon exercise of the Right, without payment of the Purchase Price and in lieu of Preferred Stock, such number of duly authorized, validly issued, fully paid and nonassessable shares of Common Stock of the Company (such shares being referred to herein as the "Adjustment Shares") as shall be equal to the result obtained by (x) multiplying the then current Purchase Price by the number of one -hundredths of a share of Preferred Stock for which a Right is then exercisable (such product being thereafter referred to as the "Purchase Price" for each Right and for all purposes of this Agreement), and dividing that product by (y) the current market price (determined pursuant to Section 11(d)(i)) per share of Common Stock on the date of such first occurrence; provided, however, that if the transaction that -------- ------- would otherwise give rise to the foregoing adjustment is also subject to the provisions of Section 13, then only the provisions of Section 13 shall apply and no adjustment shall be made pursuant to this Section 11(a)(ii). (iii) If the number of shares of Common Stock which are authorized by the Company's articles of incorporation but not outstanding or reserved for issuance other than upon exercise of the Rights is insufficient to permit the exercise in full of the Rights in accordance with Section 11(a)(ii), the Company shall (A) determine the excess of (1) the value of the Adjustment Shares issuable upon the exercise of a Right (computed using the "current market price" used to determine the number of Adjustment Shares), over (2) the Purchase Price (such excess being referred to herein as the "Spread"), and (B) with respect to each Right, make adequate provision to substitute for the Adjustment Shares, (1) (to the extent available) Common Stock and then, (2) (to the extent available) other equity securities of the Company which a majority of the Continuing Directors has determined to be essentially equivalent to shares of Common Stock in respect to dividend, liquidation and voting rights (such securities being referred to herein as "common stock equivalents"), and then, if necessary, (3) other equity or debt securities of the Company, cash or other assets, a reduction in the Purchase Price or any combination of the foregoing, having an aggregate value (as determined by the Continuing Directors based upon the advice of a nationally recognized investment banking firm selected by the Continuing Directors) equal to the value of the Adjustment Shares; provided, -------- however, if the Company shall not have made adequate provision to deliver value - ------- pursuant to clause (B) above within thirty (30) days following the latter of (x) the first occurrence of a Flip-in Event and (y) the date on which the Company's right of redemption pursuant to Section 23 expires, then the Company shall be obligated to deliver, upon the surrender for exercise of a Right and without requiring payment of the Purchase Price, shares of Common Stock (to the extent available), shares of Preferred Stock of the Company, and then, if necessary, cash, which shares and cash have an 14 aggregate value equal to the Spread. If the Continuing Directors of the Company shall determine in good faith that it is likely that sufficient additional shares of Common Stock could be authorized for issuance upon exercise in full of the Rights, the 30 day period set forth above (such period, as it may be extended, being referred to herein as the "Substitution Period") may be extended to the extent necessary, but not more than 90 days following the first occurrence of a Flip-In Event, in order that the Company may seek shareholder approval for the authorization of such additional shares. If the Company determines that some action is to be taken pursuant to the first or second sentence of this Section 11(a)(iii), then the Company (x) shall provide, subject to Section 7(d), that such action shall apply uniformly to all outstanding Rights, and (y) may suspend the exercisability of the Rights until the expiration of the Substitution Period in order to seek any authorization of additional shares or to decide the appropriate form and value of any consideration to be delivered as referred to in such first or second sentence. If any such suspension occurs, the Company shall issue a public announcement stating that the exercisability of the Rights has been temporarily suspended, as well as a public announcement at such time as the suspension is no longer in effect. For purposes of this Section 11(a)(iii), the value of the Common Stock shall be the current market price per share of Common Stock (as determined pursuant to Section 11(d)) on the later of the date of the first occurrence of a Flip-in Event and the first date that the right to redeem the Rights pursuant to Section 23 shall expire; any common stock equivalent shall be deemed to have the same value as the Common Stock on such date; and the value of other securities or assets shall be determined pursuant to Section 11(d)(iii). (b) If the Company shall fix a record date for the issuance of rights, options or warrants to all holders of Preferred Stock entitling them to subscribe for or purchase (for a period expiring within 45 calendar days after such record date) Preferred Stock (or securities having the same rights, privileges and preferences as the shares of Preferred Stock ("equivalent preferred stock")) or securities convertible into or exercisable for Preferred Stock (or equivalent preferred stock) at a price per share of Preferred Stock (or equivalent preferred stock) (in each case, taking account of any conversion or exercise price) less than the current market price (as determined pursuant to Section 11(d)) per share of Preferred Stock on such record date, the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such date by a fraction, the numerator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of shares of Preferred Stock which the aggregate price (taking account of any conversion or exercise price) of the total number of shares of Preferred Stock (and/or equivalent preferred stock) so to be offered would purchase at such current market price, and the denominator of which shall be the number of shares of Preferred Stock outstanding on such record date, plus the number of additional shares of Preferred Stock (and/or equivalent preferred stock) so to be offered. In case such subscription price may be paid by delivery of consideration part or all of which shall be in a form other than cash, the value of such consideration shall be as determined in good faith by the Board of Directors of the Company, whose determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. Shares of Preferred Stock owned by or held for the account of the Company shall not be deemed outstanding for the purpose of any such computation. Such adjustment shall be made successively whenever such a record date is fixed, 15 and if such rights, options or warrants are not so issued, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (c) In case the Company shall fix a record date for the making of a distribution to all holders of Preferred Stock (including any such distribution made in connection with a consolidation or merger involving the Company in which the Company is the surviving entity) of evidences of indebtedness, equity securities other than Preferred Stock, cash or assets (other than a regular periodic cash dividend out of the earnings or retained earnings of the Company) or rights, options or warrants (excluding those referred to in Section 11(b)), the Purchase Price to be in effect after such record date shall be determined by multiplying the Purchase Price in effect immediately prior to such record date by a fraction, the numerator of which shall be the current market price (as determined pursuant to Section 11(d)) per share of Preferred Stock on such record date, less the value (as determined pursuant to Section 11(d)(iii)) of such evidences of indebtedness, equity securities, assets, rights, options or warrants so to be distributed with respect to one share of Preferred Stock, and the denominator of which shall be such current market price per share of Preferred Stock (as determined by Section 11(d)). Such adjustment shall be made successively whenever such a record date is fixed, and if such distribution is not so made, the Purchase Price shall be adjusted to be the Purchase Price which would then be in effect if such record date had not been fixed. (d)(i) For the purpose of any computation hereunder other than computations made pursuant to Section 11(a)(iii) or 14, the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the 30 consecutive Trading Days immediately prior to such date; for purposes of computations made pursuant to Section 11(a)(iii), the "current market price" per share of Common Stock on any date shall be deemed to be the average of the daily closing prices per share of such Common Stock for the 10 consecutive Trading Days immediately following such date; and for purposes of computations made pursuant to Section 14, the "current market price" per share of Common Stock for any Trading Day shall be deemed to be the closing price per share of Common Stock for such Trading Day; provided, however, that if the current market price -------- ------- per share of the Common Stock is determined during a period following the announcement by the issuer of such Common Stock of (A) a dividend or distribution on such Common Stock payable in shares of such Common Stock or securities exercisable for or convertible into shares of such Common Stock (other than the Rights), or (B) any subdivision, combination or reclassification of such Common Stock, and prior to the expiration of the requisite 30 Trading Day or 10 Trading Day period after the ex-dividend date for such dividend or distribution, or the record date for such subdivision, combination or reclassification, then, and in each such case, the "current market price" shall be properly adjusted to take into account ex-dividend trading. The closing price for each day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported in the principal consolidated transaction reporting system with respect to securities listed or admitted to trading on the New York Stock Exchange or, if the shares of Common Stock are not listed or admitted to trading on the New York Stock Exchange, on the principal national securities exchange on which the shares of Common Stock are listed or admitted to trading or, if the shares of Common Stock are not listed or admitted to trading on any 16 national securities exchange, the last quoted price or, if not so quoted, the average of the high bid and low asked prices in the over-the-counter market, as reported by The Nasdaq Stock Market or such other system then in use or, if on any such date the shares of Common Stock are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional market maker making a market in the Common Stock selected by a majority of the Continuing Directors. If on any such date no market maker is making a market in the Common Stock, then the fair value of such shares on such date as determined in good faith by a majority of the Continuing Directors shall be used. If the Common Stock is not publicly held or not so listed or traded, the "current market price" per share means the fair value per share as determined in good faith by a majority of the Continuing Directors, or if there are no Continuing Directors, by a nationally recognized investment banking firm selected by the Board of Directors, which determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (ii) For the purpose of any computation hereunder, the "current market price" per share of Preferred Stock shall be determined in the same manner set forth above for the Common Stock in Section 11(d)(i) (other than the last sentence thereof). If the current market price per share of Preferred Stock cannot be determined in such manner, or if the Preferred Stock is not publicly held or listed or traded in a manner described in Section 11(d)(i), then the "current market price" per share of Preferred Stock shall be conclusively deemed to be an amount equal to 100 (as such number may be appropriately adjusted for such events as stock splits, stock dividends and recapitalizations with respect to the Common Stock occurring after the date of this Agreement) multiplied by the current market price per share of Common Stock (as determined pursuant to Section 11(d)(i) (other than the last sentence thereof)). If neither the Common Stock nor the Preferred Stock is publicly held or so listed or traded, the "current market price" per share of the Preferred Stock shall be determined in the same manner as set forth in the last sentence of Section 11(d)(i). For all purposes of this Agreement, the "current market price" of one one-hundredth of a share of Preferred Stock shall be equal to the "current market price" of one share of Preferred Stock divided by 100. (iii) For the purpose of any computation hereunder, the value of any securities or assets other than Common Stock or Preferred Stock shall be the fair value as determined in good faith by a majority of the Continuing Directors then in office, or, if there are no Continuing Directors, by a nationally recognized investment banking firm selected by the Board of Directors, which determination shall be described in a statement filed with the Rights Agent and shall be conclusive for all purposes. (e) Anything herein to the contrary notwithstanding, no adjustment in the Purchase Price shall be required unless such adjustment would require an increase or decrease of at least 2% in the Purchase Price; provided, however, -------- ------- that any adjustments which by reason of this Section 11(e) are not required to be made shall be carried forward and taken into account in any subsequent adjustment. All calculations under this Section 11 shall be made to the nearest cent 17 or to the nearest ten-thousandth of a share of Common Stock or other share or one-millionth of a share of Preferred Stock, as the case may be. (f) If at any time, as a result of an adjustment made pursuant to Section 11(a)(ii) or Section 13(a), the holder of any Right shall be entitled to receive upon exercise of such Right any shares of capital stock other than Preferred Stock, thereafter the number of such other shares so receivable upon exercise of any Right and the Purchase Price thereof shall be subject to adjustment from time to time in a manner and on terms as nearly equivalent as practicable to the provisions with respect to the Preferred Stock contained in Sections 11(a), (b), (c), (e), (g), (h), (i), (j), (k) and (m), and the provisions of Sections 7, 9, 10, 13 and 14 with respect to the Preferred Stock shall apply on like terms to any such other shares. (g) All Rights originally issued by the Company subsequent to any adjustment made hereunder shall evidence the right to purchase, at the Purchase Price then in effect, the then applicable number of one one-hundredths of a share of Preferred Stock and other capital stock of the Company issuable from time to time hereunder upon exercise of the Rights, all subject to further adjustment as provided herein. (h) Unless the Company shall have exercised its election as provided in Section 11(i), upon each adjustment of the Purchase Price as a result of the calculations made in Sections 11(b) and (c), each Right outstanding immediately prior to the making of such adjustment shall thereafter evidence the right to purchase, at the adjusted Purchase Price, that number of one one-hundredths of a share of Preferred Stock (calculated to the nearest one-millionth) obtained by (i) multiplying (x) the number of one one-hundredths of a share for which a Right was exercisable immediately prior to this adjustment by (y) the Purchase Price in effect immediately prior to such adjustment of the Purchase Price, and (ii) dividing the product so obtained by the Purchase Price in effect immediately after such adjustment of the Purchase Price. (i) The Company may elect on or after the date of any adjustment of the Purchase Price to adjust the number of Rights, in lieu of any adjustment in the number of one one-hundredths of a share of Preferred Stock issuable upon the exercise of a Right. Each of the Rights outstanding after such adjustment of the number of Rights shall be exercisable for the number of one one-hundredths of a share of Preferred Stock for which such Right was exercisable immediately prior to such adjustment. Each Right held of record prior to such adjustment of the number of Rights shall become that number of Rights (calculated to the nearest ten-thousandth) obtained by dividing the Purchase Price in effect immediately prior to adjustment of the Purchase Price by the Purchase Price in effect immediately after adjustment of the Purchase Price. The Company shall make a public announcement of its election to adjust the number of Rights, indicating the record date for the adjustment, and, if known at the time, the amount of the adjustment to be made. This record date may be the date on which the Purchase Price is adjusted or any day thereafter, but, if the Rights Certificates have been issued, shall be at least 10 days later than the date of the public announcement. If Rights Certificates have been issued, upon each adjustment of the number of Rights pursuant to this Section 11(i), the Company shall, as promptly as practicable, cause to be distributed to holders of record of Rights Certificates on such record date Right Certificates evidencing, subject to Section 14, the 18 additional Rights to which such holders shall be entitled as a result of such adjustment, or, at the option of the Company, shall cause to be distributed to such holders of record in substitution and replacement for the Rights Certificates held by such holders prior to the date of adjustment, and upon surrender thereof, if required by the Company, new Rights Certificates evidencing all the Rights to which such holders shall be entitled after such adjustment. Rights Certificates so to be distributed shall be issued, executed and countersigned in the manner provided for herein (and may bear, at the option of the Company, the adjusted Purchase Price) and shall be registered in the names of the holders of record of Rights Certificates on the record date specified in the public announcement. (j) Irrespective of any adjustment or change in the Purchase Price or the number of one one-hundredths of a share of Preferred Stock issuable upon the exercise of the Rights, the Rights Certificates theretofore and thereafter issued may continue to express the Purchase Price per one one-hundredth of a share and the number of shares which were expressed in the initial Rights Certificates issued hereunder. (k) Before taking any action that would cause an adjustment reducing the Purchase Price below the par value, if any, of the number of one one- hundredths of a share of Preferred Stock issuable upon exercise of the Rights, the Company shall take any corporate action which may, in the opinion of its counsel, be necessary in order that the Company may validly and legally issue fully paid and nonassessable such number of one one-hundredths of a share of Preferred Stock at such adjusted Purchase Price. (l) In any case in which this Section 11 shall require that an adjustment in the Purchase Price be made effective as of a record date for a specified event, the Company may elect to defer until the occurrence of such event the issuance to the holder of any Right exercised after such record date the number of one one-hundredths of a share of Preferred Stock or other capital stock of the Company, if any, issuable upon such exercise over and above the number of one one-hundredths of a share of Preferred Stock or other capital stock of the Company, if any, issuable upon such exercise on the basis of the Purchase Price in effect prior to such adjustment; provided, however, that the -------- ------- Company shall deliver to such holder a due bill or other appropriate instrument evidencing such holder's right to receive such additional shares upon the occurrence of the event requiring such adjustment. (m) Anything in this Section 11 to the contrary notwithstanding, the Company shall be entitled to make such reductions in the Purchase Price, in addition to those adjustments expressly required by this Section 11, as and to the extent that it, in its sole discretion, shall determine to be advisable in order that any (i) consolidation or subdivision of the Preferred Stock, (ii) issuance wholly for cash of any Preferred Stock at less than the current market price, (iii) issuance wholly for cash of Preferred Stock or securities which by their terms are convertible into or exercisable for Preferred Stock, (iv) stock dividends, or (v) issuance of rights, options or warrants referred to in this Section 11, hereafter made by the Company to the holders of its Preferred Stock, shall not be taxable to such shareholders. 19 (n) The Company covenants and agrees that it will not at any time after the Distribution Date, (i) consolidate with any other Person, (ii) merge with or into any other Person, (iii) effect a statutory share exchange with any Person, or (iv) sell, lease or otherwise transfer (and/or permit any of its Subsidiaries to sell, lease or otherwise transfer), in one transaction or a series of related transactions, assets aggregating more than 50% of the assets (measured by either book value or fair market value) or generating more than 50% of operating income or cash flow of the Company and its Subsidiaries, taken as a whole, to any other Person or Persons if (x) at the time of or immediately after such consolidation, merger, statutory share exchange, sale, lease or transfer there are any rights, warrants or other instruments or securities outstanding or any agreements or arrangements in effect which would substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights, or (y) prior to, simultaneously with or immediately after such consolidation, merger, statutory share exchange, sale, lease or transfer, the shareholders of a Person who constitutes, or would constitute, the "Principal Party" for the purposes of Section 13 shall have received a distribution of Rights previously owned by such Person or any of its Affiliates and Associates. (o) The Company covenants and agrees that after the Distribution Date, it will not, except as permitted by Sections 23, 24 or 27, take (or permit any Subsidiary to take) any action if at the time such action is taken it is reasonably foreseeable that such action will substantially diminish or otherwise eliminate the benefits intended to be afforded by the Rights, unless such action is approved by a majority of the Continuing Directors. (p) Notwithstanding anything in this Agreement to the contrary, if at any time after the Effective Date and prior to the Distribution Date the Company shall (i) pay a dividend on the outstanding shares of Common Stock payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock into a larger number of shares, or (iii) combine the outstanding Common Stock into a smaller number of shares, the number of Rights associated with each share of Common Stock then outstanding, or issued or delivered thereafter shall be proportionately adjusted so that the number of Rights thereafter associated with each share of Common Stock following any such event shall equal the result obtained by multiplying the number of Rights associated with each share of Common Stock immediately prior to such event by a fraction the numerator of which shall be the total number of shares of Common Stock outstanding immediately prior to the occurrence of the event and the denominator of which shall be the total number of shares of Common Stock outstanding immediately following the occurrence of such event. Section 12. Certificate of Adjusted Purchase Price or Number of --------------------------------------------------- Shares. Whenever an adjustment is made as provided in Sections 11 and 13, the - ------ Company shall (a) promptly prepare a certificate setting forth such adjustment and a brief statement of the facts accounting for such adjustment, (b) promptly file with the Rights Agent and with each transfer agent for the Preferred Stock and the Common Stock a copy of such certificate, and (c) mail a brief summary thereof to each holder of a Rights Certificate (or, if prior to the Distribution Date, to each holder of a certificate representing shares of Common Stock) in the manner set forth in Section 26. The Rights Agent shall be fully protected in relying on any such certificate and on any adjustment contained therein. 20 Section 13. Consolidation, Merger or Sale or Transfer of Assets or ------------------------------------------------------ Earning Power. (a) Except for any transaction with a Person who has - ------------- consummated a Qualifying Tender Offer which transaction is approved by a majority of the Continuing Directors, if following the Share Acquisition Date, directly or indirectly, (w) the Company shall consolidate with, merge with or into, or otherwise combine with, any other Person, and the Company shall not be the continuing or surviving corporation of such consolidation, merger or combination, or (x) any Person shall consolidate with, merge with or into, or otherwise combine with, the Company, and the Company shall be the continuing or surviving corporation of such consolidation, merger or combination and, in connection with such consolidation, merger or combination, all or part of the outstanding shares of Common Stock shall be changed into or exchanged for other stock or securities of the Company or any other Person or cash or any other property, or (y) the Company shall be a party to any statutory share exchange with any other Person after which the Company is a subsidiary of any other Person, or (z) the Company and/or one or more of its Subsidiaries shall sell, lease or otherwise transfer, in one transaction or a series of related transactions, assets aggregating more than 50% of the assets (measured by either book value or fair market value) or generating more than 50% of the operating income or cash flow of the Company and its Subsidiaries, taken as a whole, to any other Person or Persons, then, and in each such case, proper provision shall promptly be made so that (i) each holder of a Right, except as provided in Section 7(d), shall thereafter be entitled to receive, upon exercise thereof at the then current Purchase Price, such number of duly authorized, validly issued, fully paid and nonassessable shares of freely tradable Common Stock of the Principal Party (as defined below), not subject to any rights of call or first refusal, liens, encumbrances or other claims, as shall be equal to the result obtained by (A) multiplying the then current Purchase Price by the number of one one-hundredths of a share of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Flip-over Event (or, if a Flip-in Event has previously occurred, multiplying the number of such one one-hundredths of a share of Preferred Stock for which a Right was exercisable immediately prior to the first occurrence of a Flip-in Event by the Purchase Price in effect immediately prior to such first occurrence) (such product being thereafter referred to as the "Purchase Price" for each Right and for all purposes of this Agreement), and dividing that product by (B) 50% of the current market price (determined pursuant to Section 11(d)(i)) per share of the Common Stock or other securities of such Principal Party) on the date of consummation of such consolidation, merger, combination, statutory share exchange, sale, lease or transfer; 21 (ii) the Principal Party shall thereafter be liable for, and shall assume, by virtue of such consolidation, merger, combination, statutory share exchange, sale, lease or transfer, all the obligations and duties of the Company pursuant to this Agreement; (iii) the term "Company" shall thereafter be deemed to refer to such Principal Party, it being specifically intended that the provisions of Section 11 shall apply only to such Principal Party following the first occurrence of a Flip-over Event; (iv) such Principal Party shall take such steps (including, without limitation, the authorization and reservation of a sufficient number of shares of its Common Stock to permit exercise of all outstanding Rights in accordance with this Section 13(a)) in connection with the consummation of any such transaction as may be necessary to assure that the provisions hereof shall thereafter be applicable, as nearly as reasonably may be, in relation to the shares of its Common Stock thereafter deliverable upon the exercise of the Rights; and (v) the provisions of Section 11(a)(ii) shall be of no effect following the first occurrence of a Flip-over Event. (b) "Principal Party" means: (i) in the case of any transaction described in Sections 13(a) (w), (x) or (y), (A) the Person that is the issuer of any securities into which shares of Common Stock of the Company are converted in such merger, consolidation, or combination or for which shares of Common Stock of the Company are exchanged in such statutory share exchange, or, if there is more than one such issuer, the issuer of the Common Stock of which has the greatest aggregate market value, or (B) if no securities are issued, (x) the person that survives such consolidation or is the other party to the merger, combination or statutory share exchange, or, if there is more than one such Person, the Person the Common Stock of which has the greatest aggregate market value, or (y) if the Person that is the other party to the merger does not survive the merger, the Person that does survive the merger (including the Company if it survives); and (ii) in the case of any transactions described in Sections 13(a)(z), the Person that is the party receiving the greatest portion of the assets, operating income or cash flow transferred pursuant to such transaction or transactions, or, if each person that is a party to such transaction or transactions receives the same portion of the assets, operating income or cash flow so transferred, or, if the Person receiving the greatest portion of the assets, operating income or cash flow cannot be determined, the person the Common Stock of which has the greatest aggregate market value; provided, however, that in any such case, (A) if the Common Stock of such Person - -------- ------- is not at such time and has not been continuously over the preceding 12-month period registered under Section 12 of the Exchange Act, and such Person is a direct or indirect Subsidiary of another Person the 22 Common Stock of which is and has been so registered, "Principal Party" shall refer to such other Person; and (B) in case such Person is a Subsidiary, directly or indirectly, of more than one Person, the Common Stock of two or more of which are and have been so registered, "Principal Party" shall refer to whichever of such Persons is the issuer of the Common Stock having the greatest aggregate market value. (c) The Company shall not consummate any such consolidation, merger, combination, statutory share exchange, sale, lease or transfer unless the Principal Party shall have a sufficient number of authorized shares of its Common Stock which are not outstanding or otherwise reserved for issuance to permit the exercise in full of the Rights in accordance with this Section 13 and unless prior thereto the Company and such Principal Party shall have executed and delivered to the Rights Agent a supplemental agreement providing for the terms set forth in Sections 13(a) and (b) and further providing that, as soon as practicable after the date of any consolidation, merger, combination, statutory share exchange, sale, lease or transfer mentioned in Section 13(a), the Principal Party will (i) prepare and file a registration statement under the Securities Act with respect to the Rights and the securities issuable upon exercise of the Rights on an appropriate form, and will use its best efforts to cause such registration statement (A) to become effective as soon as practicable after such filing, and (B) to remain effective (with a prospectus at all times meeting the requirements of the Securities Act) until the Expiration Date; and (ii) deliver to holders of the Rights historical financial statements for the Principal Party and each of its Affiliates which comply in all respects with the requirements for registration on Form 10 under the Exchange Act. (d) The provisions of this Section 13 shall similarly apply to successive mergers, consolidations, combinations, statutory share exchanges, sales, leases or other transfers. If any Flip-over Event shall occur at any time after the occurrence of a Flip-in Event, the Rights which have not theretofore been exercised shall thereafter become exercisable in the manner described in Section 13(a). Section 14. Fractional Rights and Fractional Shares. (a) The --------------------------------------- Company shall not be required to issue fractions of Rights, except prior to the Distribution Date as provided in Section 11(p), or to distribute Rights Certificates which evidence fractional Rights. In lieu of any such fractional Rights, the Company shall pay to the registered holders of the Rights Certificates with regard to which such fractional Rights would otherwise be issuable an amount in cash equal to the same fraction of the current market price of a whole Right. For purposes of this Section 14(a), the current market price of a whole Right shall be the closing price of a Right for the Trading Day immediately prior to the date on which such fractional Rights would otherwise have been issuable. The closing price of a Right for any day shall be the last sale price, regular way, or, in case no such sale takes place on such day, the average of the closing bid and asked prices, regular way, in either case as reported on the principal national securities exchange on which the Rights are listed or admitted to trading or, if the Rights are not listed or admitted to trading on any national securities exchange, the last quoted price, or, if not so quoted, the average of the high bid and low asked prices in the over-the- counter market, as reported by The Nasdaq Stock Market or such other system then in use or, if on any such date the Rights are not quoted by any such organization, the average of the closing bid and asked prices as furnished by a professional 23 market maker making a market in the Rights selected by a majority of the Continuing Directors. If on any such date no such market maker is making a market in the Rights, the current market price of the Rights on such date shall be as determined in good faith by a majority of the Continuing Directors. (b) The Company shall not be required to issue fractions of shares of Preferred Stock (other than fractions which are multiples of one one-hundredth of a share of Preferred Stock) upon exercise of the Rights or to distribute certificates which evidence fractional shares of Preferred Stock (other than fractions which are multiples of one one-hundredth of a share of Preferred Stock). In lieu of any such fractional shares of Preferred Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised as herein provided an amount in cash equal to the same fraction of the current market price of one one-hundredth of a share of Preferred Stock. For purposes this Section 14(b), the current market price of one one-hundredth of a share of Preferred Stock shall be one one-hundredth of the closing price of a share of Preferred Stock (as determined pursuant to Section 11(d)) for the Trading Day immediately prior to the date of such exercise. (c) Following the occurrence of any Triggering Event or upon any exchange pursuant to Section 24, the Company shall not be required to issue fractions of shares of Common Stock upon exercise of the Rights or to distribute certificates which evidence fractional shares of Common Stock. In lieu of fractional shares of Common Stock, the Company shall pay to the registered holders of Rights Certificates at the time such Rights are exercised or exchanged as provided herein an amount in cash equal to the same fraction of the current market price of a share of Common Stock. For purposes of this Section 14(c), the current market price of a share of Common Stock shall be the closing price of a share of Common Stock (as determined pursuant to Section 11(d)(i)) for the Trading Day immediately prior to the date of such exercise or exchange. (d) The holder of a Right by the acceptance of the Right expressly waives his right to receive any fractional Rights or any fractional shares upon exercise of a Right except as permitted by this Section 14. Section 15. Rights of Action. All rights of action in respect of ---------------- this Agreement are vested in the respective registered holders of the Rights Certificates (and, prior to the Distribution Date, the registered holders of Common Stock), and any registered holder of any Rights Certificate (or, prior to the Distribution Date, of any Common Stock), without the consent of the Rights Agent or of the holder of any other Rights Certificate (or, prior to the Distribution Date, of any Common Stock), may, in his own behalf and for his own benefit, enforce, and may institute and maintain any suit, action or proceeding against the Company to enforce, or otherwise act in respect of, his right to exercise the Rights evidenced by such Rights Certificate in the manner provided in such Rights Certificate and in this Agreement. Without limiting the foregoing or any remedies available to the holders of Rights, it is specifically acknowledged that the holders of Rights would not have an adequate remedy at law for any breach of this Agreement and will be entitled to specific performance of the obligations under, and injunctive 24 relief against actual or threatened violations of the obligations of, any Person subject to this Agreement. Section 16. Agreement of Right Holders. Every holder of a Right by -------------------------- accepting the same consents and agrees with the Company and the Rights Agent and with every other holder of a Right that: (a) prior to the Distribution Date, the Rights will be transferable only in connection with the transfer of Common Stock; (b) after the Distribution Date, the Rights Certificates are transferable only on the registry books of the Rights Agent if surrendered at the principal office or offices of the Rights Agent designated for such purposes, duly endorsed or accompanied by a proper instrument of transfer and with the appropriate forms and certificates fully executed; (c) subject to Sections 6(a) and 7(e), the Company and the Rights Agent may deem and treat the Person in whose name a Rights Certificate (or, prior to the Distribution Date, a certificate representing Common Stock) is registered as the absolute owner thereof and of the Rights evidenced thereby (notwithstanding any notations of ownership or writing on the Rights Certificate or the certificate representing shares of Common Stock made by anyone other than the Company or the Rights Agent) for all purposes whatsoever, and neither the Company nor the Rights Agent, subject to the last sentence of Section 7(d), shall be affected by any notice to the contrary; and (d) notwithstanding anything in this Agreement to the contrary, neither the Company nor the Rights Agent shall have any liability to any holder of a Right or other Person as a result of its inability to perform any of its obligations under this Agreement by reason of any preliminary or permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction or by a governmental, regulatory or administrative agency or commission, or any statute, rule, regulation or executive order promulgated or enacted by any governmental authority prohibiting or otherwise restraining performance of such obligation; provided, however, that the Company must use its -------- ------- best efforts to have any such order, decree or ruling lifted or otherwise overturned as soon as possible. Section 17. Rights Certificate Holder Not Deemed a Shareholder. No -------------------------------------------------- holder, as such, of any Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the shares of capital stock which may at any time be issuable on the exercise of the Rights represented thereby, nor shall anything contained herein or in any Rights Certificate be construed to confer upon the holder of any Rights Certificate, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in Section 25), or to receive dividends or subscription rights, or otherwise, until the Right or Rights evidenced by such Rights Certificate shall have been exercised in accordance with the provisions hereof. 25 Section 18. Concerning the Rights Agent. (a) The Company agrees to --------------------------- pay to the Rights Agent reasonable compensation for all services rendered by it hereunder and, from time to time, on demand of the Rights Agent, its reasonable expenses and counsel fees and other disbursements incurred in the execution or administration of this Agreement and the exercise and performance of its duties hereunder. The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement or the exercise or performance of its duties hereunder, including the costs and expenses of defending against any claim of liability. (b) The Rights Agent shall be protected and shall incur no liability for or in respect of any action taken, suffered or omitted by it in connection with the administration of this Agreement or the exercise or performance of its duties hereunder in reliance upon any Rights Certificate or certificate for Common Stock or for other securities of the Company, instrument of assignment or transfer, power of attorney, endorsement, affidavit, letter, notice, instruction, direction, consent, certificate, statement, or other paper or document believed by it to be genuine and to be signed, executed and, where necessary, verified or acknowledged, by the proper Person or Persons. Section 19. Merger or Consolidation or Change of Name of Rights --------------------------------------------------- Agent. (a) Any corporation into which the Rights Agent or any successor Rights - ----- Agent may be merged or with which it may be consolidated, or any corporation resulting from any merger or consolidation to which the Rights Agent or any successor Rights Agent shall be a party, or any corporation succeeding to the corporate trust or stock transfer business of the Rights Agent or any successor Rights Agent, shall be the successor to the Rights Agent under this Agreement without the execution or filing of any paper or any further act on the part of any of the parties hereto; provided, however, that such corporation would be -------- ------- eligible for appointment as a successor Rights Agent under the provisions of Section 21. In case at the time such successor Rights Agent shall succeed to the agency created by this Agreement, any of the Rights Certificates shall have been countersigned but not delivered, any such successor Rights Agent may adopt the countersignature of a predecessor Rights Agent and deliver such Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, any successor Rights Agent may countersign such Rights Certificates either in the name of the predecessor Rights Agent or in the name of the successor Rights Agent; and in all such cases such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. (b) In case at any time the name of the Rights Agent shall be changed and at such time any of the Rights Certificates shall have been countersigned but not delivered, the Rights Agent may adopt the countersignature under its prior name and deliver Rights Certificates so countersigned; and in case at that time any of the Rights Certificates shall not have been countersigned, the Rights Agent may countersign such Rights Certificates either in its prior name 26 or in its changed name; and in all such cases, such Rights Certificates shall have the full force provided in the Rights Certificates and in this Agreement. Section 20. Duties of Rights Agent. The Rights Agent undertakes the ---------------------- duties and obligations imposed by this Agreement upon the following terms and conditions, by all of which the Company and the holders of Rights Certificates, by their acceptance thereof, shall be bound: (a) The Rights Agent may consult with legal counsel (who may be legal counsel for the Company), and the opinion of such counsel shall be full and complete authorization and protection to the Rights Agent as to any action taken or omitted by it in good faith and in accordance with such opinion. (b) Whenever in the performance of its duties under this Agreement the Rights Agent shall deem it necessary or desirable that any fact or matter (including, without limitation, the identity of any "Acquiring Person" and the determination of "current market price") be proved or established by the Company prior to taking, suffering or omitting to take any action hereunder, such fact or matter (unless other evidence in respect thereof is specifically prescribed herein) may be deemed to be conclusively proved and established by a certificate signed by the Chairman of the Board, the President, any Vice President, the Secretary or any Assistant Secretary of the Company and delivered to the Rights Agent. Any such certificate shall be full authorization to the Rights Agent for any action taken, suffered or omitted in good faith by it under the provisions of this Agreement in reliance upon such certificate. (c) The Rights Agent shall be liable hereunder only for its own negligence, bad faith or willful misconduct. (d) The Rights Agent shall not be liable for or by reason of any of the statements of fact or recitals contained in this Agreement or in the Rights Certificates (except its countersignature thereof) or be required to verify the same, but all such statements and recitals are and shall be deemed to have been made by the Company only. (e) The Rights Agent shall not be under any responsibility in respect of the validity of this Agreement or the execution and delivery hereof (except the due execution hereof by the Rights Agent) or in respect of the validity or execution of any Rights Certificate (except its countersignature thereof); nor shall it be responsible for any breach by the Company of any covenant or condition contained in this Agreement or in any Rights Certificate; nor shall it be responsible for any change in the exercisability of the Rights (including the Rights becoming void pursuant to Section 7(d)) or any adjustment in the terms of the Rights (including the manner, method or amount thereof) provided for in Sections 3, 11, 13, 23 or 24, or the ascertaining of the existence of facts that would require any such adjustment (except with respect to the exercise of Rights evidenced by Rights Certificates after actual notice of any such adjustment); nor shall it by any act hereunder be deemed to make any representation or warranty as to the authorization or reservation of any shares of Common Stock or Preferred Stock to be issued pursuant to this Agreement or any Rights Certificate or as to whether any shares of 27 Common Stock or Preferred Stock will, when issued, be duly authorized, validly issued, fully paid and nonassessable. (f) The Company agrees that it will perform, execute, acknowledge and deliver or cause to be performed, executed, acknowledged and delivered all such further and other acts, instruments and assurances as may reasonably be required by the Rights Agent for the carrying out or performing by the Rights Agent of the provisions of this Agreement. (g) The Rights Agent is hereby authorized and directed to accept instructions with respect to the performance of its duties hereunder from the Chairman of the Board, the President any Vice President, the Secretary or any Assistant Secretary of the Company, and to apply to such officers for advice or instructions in connection with its duties, and it shall not be liable for any action taken, suffered or omitted to be taken by it in good faith in accordance with instructions of any such officer. (h) The Rights Agent and any shareholder, director, officer or employee of the Rights Agent may buy, sell or deal in any of the Rights or other securities of the Company or become pecuniarily interested in any transaction in which the Company may be interested, or contract with or lend money to the Company or otherwise act as fully and freely as though it were not the Rights Agent under this Agreement. Nothing herein shall preclude the Rights Agent from acting in any other capacity for the Company or for any other Person. (i) The Rights Agent may execute and exercise any of the rights or powers hereby vested in it or perform any duty hereunder either itself or by or through its attorneys or agents, and the Rights Agent shall not be answerable or accountable for any act, default, neglect or misconduct of any such attorneys or agents or for any loss to the Company or to any holders of Rights resulting from any such act, default, neglect or misconduct; provided, however, that reasonable -------- ------- care was exercised in the selection and continued employment thereof. (j) No provision of this Agreement shall require the Rights Agent to expend or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder or in the exercise of its rights if there shall be reasonable grounds for believing that repayment of such funds or adequate indemnification against such risk or liability is not reasonably assured to it. (k) If, with respect to any Rights Certificate surrendered to the Rights Agent for exercise or transfer, the certificate attached to the form of assignment or form of election to purchase, as the case may be, has either not been completed or indicates an affirmative response to clause 1 or 2 thereof, the Rights Agent shall not take any further action with respect to such requested exercise or transfer without first consulting with the Company. Section 21. Change of Rights Agent. The Rights Agent or any ---------------------- successor Rights Agent may resign and be discharged from its duties under this Agreement upon 30 days' written notice mailed to the Company and to each transfer agent of the Common Stock and Preferred Stock by registered or certified mail, and, subsequent to the Distribution Date, to the holders of the Rights Certificates by first-class mail. The Company may remove the Rights Agent or any successor Rights Agent upon 30 days' written notice, mailed to the Rights Agent or successor Rights Agent, as the case may be, and to each transfer agent of the Common Stock and Preferred Stock by registered or certified mail, and subsequent to the Distribution Date, to the holders of 28 the Rights Certificates by first-class mail. If the Rights Agent shall resign or be removed or shall otherwise become incapable of acting, the Company shall appoint a successor to the Rights Agent. If the Company shall fail to make such appointment within a period of 30 days of giving notice of such removal or after it has been notified in writing of such resignation or incapacity by the resigning or incapacitated Rights Agent or by the holder of a Rights Certificate (who shall, with such notice, submit his Rights Certificate for inspection by the Company), then the registered holder of any Rights Certificate may apply to any court of competent jurisdiction for the appointment of a new Rights Agent. Any successor Rights Agent, whether appointed by the Company or by such a court, shall be (a) a corporation organized and doing business under the laws of the United States or of the States of Georgia (or any other state of the United States so long as such corporation is authorized to do business as a banking institution in the States of Georgia), in good standing, having a principal office in the State of Georgia, and which is authorized under such laws to exercise stock transfer or corporate trust powers and is subject to supervision or examination by federal or state authority or (b) an Affiliate of a corporation described in Section 21(a). After appointment, the successor Rights Agent shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent without further act or deed; but the predecessor Rights Agent shall deliver and transfer to the successor Rights Agent any property at the time held by it hereunder, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. Not later than the effective date of any such appointment, the Company shall file notice thereof in writing with the predecessor Rights Agent and each transfer agent of the Common Stock and the Preferred Stock, and, subsequent to the Distribution Date, mail a notice thereof in writing to the registered holders of the Rights Certificates. Failure to give any notice provided for in this Section 21, or any defect therein, shall not affect the legality or validity of the resignation or removal of the Rights Agent or the appointment of the successor Rights Agent, as the case may be. Section 22. Issuance of New Right Certificates. Notwithstanding ---------------------------------- any of the provisions of this Agreement or of the Rights to the contrary, the Company may, at its option, issue new Rights Certificates evidencing Rights in such form as may be approved by its Board of Directors to reflect any adjustment or change in the Purchase Price and the number or kind or class of shares or other securities issuable or property purchasable upon exercise of the Rights made in accordance with the provisions of this Agreement. Section 23. Redemption and Termination. (a) The Company may, at its -------------------------- option, but only upon the vote of a majority of the Continuing Directors then in office, at any time prior to the earlier of (i) the Close of Business on the Share Acquisition Date, or (ii) the Final Expiration Date, redeem all but not less than all of the then outstanding Rights at a redemption price of $0.001 per Right, as such amount may be appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such redemption price being 29 referred to herein as the "Redemption Price"), and the Company may, at its option, pay the Redemption Price in shares of Common Stock (based on the "current market value," as defined in Section 11(d), of the shares of Common Stock at the time of redemption), cash or any other form of consideration deemed appropriate by the Board of Directors; provided, however, that any redemption -------- ------- of Rights shall also be subject to any additional approval procedures required by the articles of incorporation or bylaws of the Company. Notwithstanding anything in this Agreement to the contrary, the Rights shall not be exercisable after the first occurrence of a Flip-in Event until such time as the Company's right of redemption hereunder has expired. (b) If, following the occurrence of a Share Acquisition Date (i) a Person who is an Acquiring Person shall have transferred or otherwise disposed of a number of shares of Common Stock in one transaction or series of transactions, not directly or indirectly involving the Company or any of its Subsidiaries, which did not result in the occurrence of a Triggering Event such that such Person is thereafter the Beneficial Owner of 10% or less of the outstanding Common Stock, and (ii) there are no other Persons immediately following the occurrence of the event described in clause (i) who are Acquiring Persons, then the right of redemption shall be reinstated and thereafter be subject to the provisions of this Section 23. (c) Immediately upon the action of the Continuing Directors electing to redeem the Rights, and without any further action and without any notice, the right to exercise the Rights will terminate and thereafter the only right of the holders of Rights shall be to receive the Redemption Price for each Right so held. The Company shall promptly thereafter give notice of such redemption to the Rights Agent and the holders of the Rights in the manner set forth in Section 26; provided, however, that the failure to give, or any defect in, such -------- ------- notice shall not affect the validity of such redemption. Any notice which is mailed in the manner provided herein shall be deemed given, whether or not the holder receives the notice. Each such notice of redemption will state the method by which the payment of the Redemption Price will be made. Section 24. Exchange. (a) At any time after any Person becomes an -------- Acquiring Person, a majority of the Continuing Directors may, at their option, exchange all or part of the then outstanding and exercisable Rights (which shall not include Rights that have become void pursuant to Section 7(d)) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right, appropriately adjusted to reflect any stock split, stock dividend or similar transaction occurring after the date hereof (such exchange ratio being hereinafter referred to as the "Exchange Ratio"). (b) Immediately upon the action of the Continuing Directors electing to exchange any Rights pursuant to Section 24(a) and without any further action and without any notice, the right to exercise such Rights will terminate and thereafter the only right of a holder of such Rights shall be to receive that number of shares of Common Stock equal to the number of such Rights held by such holder multiplied by the Exchange Ratio. The Company shall promptly thereafter give notice of such exchange to the Rights Agent and the holders of the Rights to be exchanged in the manner set forth in Section 26; provided, however, that -------- ------- the failure to give, or any defect in, such notice shall not affect the validity of such exchange. Any notice which is mailed in the manner provided herein shall be deemed given, whether or not the holder receives the notice. 30 Each such notice of exchange will state the method by which the exchange of the shares of Common Stock for Rights will be effected and, in the event of any partial exchange, the number of Rights which will be exchanged. Any partial exchange shall be effected pro rata based on the number of Rights (other than Rights which have become void pursuant to Section 7(d)) held by each holder of Rights. (c) If there shall not be sufficient Common Stock issued but not outstanding or authorized but unissued to permit any exchange of Rights as contemplated by this Section 24, the Company shall take all such action as may be necessary to authorize additional Common Stock for issuance upon exchange of the Rights. In the event the Company shall, after a good faith effort, be unable to take all such action as may be necessary to authorize such additional Common Stock, the Company may substitute common stock equivalents (as defined in Section 11(a)(iii)) for shares of Common Stock exchangeable for Rights, at the initial rate of one common stock equivalent for each share of Common Stock, as appropriately adjusted to reflect adjustments in dividend, liquidation and voting rights of common stock equivalents pursuant to the terms thereof, so that each common stock equivalent delivered in lieu of each share of Common Stock shall have essentially the same dividend, liquidation and voting rights as one share of Common Stock. (d) The Company shall not be required to issue fractional shares of Common Stock or to distribute certificates which evidence fractional shares of Common Stock. In lieu of such fractional shares of Common Stock, the Company shall pay to the registered holders of Rights Certificates with regard to which such fractional shares of Common Stock would otherwise be issuable, an amount in cash equal to the same fraction of the current market value of a whole share of Common Stock. For purposes of this Section 24(d), the current market value of a whole share of Common Stock shall be the closing price of a share of Common Stock (as determined pursuant to Section 11(d)) for the Trading Day immediately prior to the date of the exchange. Section 25. Notice of Proposed Actions. (a) If the Company shall -------------------------- propose, at any time after the Distribution Date, (i) to pay any dividend payable in stock of any class to the holders of Preferred Stock or to make any other distribution to the holders of Preferred Stock (other than a regular quarterly cash dividend out of earnings or retained earnings of the Company), (ii) to offer to the holders of its Preferred Stock rights or warrants to subscribe for or to purchase any additional shares of Preferred Stock or shares of stock of any class or any other securities, rights or options, (iii) to effect any reclassification of its Preferred Stock (other than a reclassification involving only the subdivision or combination of outstanding shares of Preferred Stock), (iv) to effect any consolidation or merger with or into any other Person, or to effect a statutory share exchange with any Person, or to effect and/or to permit one or more of its Subsidiaries to effect any sale, lease or other transfer, in one transaction or a series of related transactions, of assets aggregating more than 50% of the assets (measured by either book value or fair market value) or generating more than 50% of the operating income or cash flow of the Company and its Subsidiaries, taken as a whole, to any other Person or Persons, or (v) to effect the liquidation, dissolution or winding up of the Company, then, in each such case, the Company shall give to each holder of a Right, to the extent feasible and in accordance with Section 26, a notice of such proposed action, which shall specify the record date for the purposes of any such 31 dividend, distribution or offering of rights or warrants, or the date on which any such reclassification, consolidation, merger, statutory share exchange, sale, lease, transfer, liquidation, dissolution or winding up is to take place and the date of participation therein by the holders of Preferred Stock, if any such date is to be fixed, and such notice shall be so given in the case of any action covered by clause (i) or (ii) above at least 20 days prior to the record date for determining holders of the Preferred Stock entitled to participate in such dividend, distribution or offering, and in the case of any such other action, at least 20 days prior to the date of the taking of such proposed action or the date of participation therein by the holders of Preferred Stock, whichever shall be the earlier. The failure to give notice required by this Section or any defect therein shall not affect the legality or validity of the action taken by the Company or the vote upon any such action. (b) Notwithstanding anything in this Agreement to the contrary, prior to the Distribution Date a public filling by the Company with the Securities and Exchange Commission shall constitute sufficient notice to the holders of securities of the Company, including the Rights, for purposes of this Agreement and no other notice need be given to such holders. (c) If a Triggering Event shall occur, then, in any such case, (i) the Company shall as soon as practicable thereafter give to each holder of a Right, in accordance with Section 26, a notice of the occurrence of such event, which shall specify the event and the consequences of the event to holders of Rights under Section 11(a)(ii) or 13, as the case may be, and (ii) all references in Section 25(a) to Preferred Stock shall be deemed thereafter to refer to Common Stock or other capital stock, as the case may be. Section 26. Notices. Notices or demands authorized by this ------- Agreement to be given or made by the Rights Agent or by the holder of any Right to or on the Company shall be sufficiently given or made if sent by first-class, postage prepaid mail to the address of the Company indicated on the signature page hereof or such other address as the Company shall specify in writing to the Rights Agent. Subject to the provisions of Section 21, any notice or demand authorized by this Agreement to be given or made by the Company or by the holder of any Right to or on the Rights Agent shall be sufficiently given or made if sent by first-class, postage prepaid mail to the address of the Rights Agent indicated on the signature page hereof or such other address as the Rights Agent shall specify in writing to the Company. Notices or demands authorized by this Agreement to be given or made by the Company or the Rights Agent to the holder of any Rights Certificate (or, prior to the Distribution Date, to the holder of any certificate representing shares of Common Stock) shall be sufficiently given or made if sent by first-class, postage prepaid mail to the address of such holder shown on the registry books of the Company. Section 27. Supplements and Amendments. Prior to the Distribution -------------------------- Date and subject to the penultimate sentence of this Section 27, the Company may and the Rights Agent shall, if the Company so directs, supplement or amend any provision of this Agreement without the approval of any holders of certificates representing shares of Common Stock. From and after the Distribution Date, and subject to the penultimate sentence of this Section 27, the Company and the Rights Agent shall, if the Company so directs, supplement or amend this Agreement without 32 the approval of any holders of Right Certificates in order (a) to cure any ambiguity, (b) to correct or supplement any provision contained herein which may be defective or inconsistent with any other provisions herein, (c) to shorten or lengthen any time period hereunder (which shortening or lengthening shall be effective only if there are Continuing Directors in office and shall require the concurrence of a majority of such Continuing Directors), or (d) to change or supplement the provisions hereof in any manner which the Company may deem necessary or desirable and which shall not adversely affect the interests of the holders of Rights (other than an Acquiring Person or an Affiliate or Associate of an Acquiring Person); provided, however, that this Agreement may not be -------- ------- supplemented or amended pursuant to Section 27(c) to lengthen (i) a time period relating to when the Rights may be redeemed at such time as the Rights are not then redeemable, or (ii) any other time period, unless lengthening such other time period is for the purpose of protecting, enhancing, or clarifying the rights of, or benefits to the holders of, the Rights. Notwithstanding the foregoing, after any Person has become an Acquiring Person, any supplement or amendment shall be effective only if there are Continuing Directors then in office, and such supplement or amendment shall have been approved by a majority of such Continuing Directors. Prior to the Distribution Date, the interests of the holders of Rights shall be deemed coincident with the interests of the holders of Common Stock. Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made at any time which changes the Redemption Price, the Final Expiration Date, the Purchase Price, the requisite ownership of Common Stock necessary for a Person to be deemed an Acquiring Person, the number of one one-hundredths of a share of Preferred Stock for which a Right is exercisable, or the definition of an Excluded Person, unless in any such case there are Continuing Directors then in office and such supplement or amendment shall have been approved by a majority of such Continuing Directors. Upon the delivery of a certificate from an appropriate officer of the Company which states that the proposed supplement or amendment is in compliance with the terms of this Section, the Rights Agent shall execute such supplement or amendment. Section 28. Successors. All the covenants and provisions of this ---------- Agreement by or for the benefit of the Company or the Rights Agent shall bind and inure to the benefit of their respective successors and assigns hereunder. Section 29. Determinations and Actions by the Board of Directors. ---------------------------------------------------- For all purposes of this Agreement, any calculation of the number of shares of Common Stock outstanding at any particular time, including for purposes of determining the particular percentage of such outstanding shares of Common Stock of which any Person is the Beneficial Owner, shall be made in accordance with the last sentence of Rule 13d-3(d)(1)(i) under the Exchange Act as in effect on the date of this Agreement. A majority of the Continuing Directors shall have the exclusive power and authority to administer this Agreement and to exercise all rights and powers specifically granted to the Board or to the Company, or as may be necessary or advisable in the administration of this Agreement, including, without limitation, the right and power to (a) interpret the provisions of this Agreement, and (b) make all determinations deemed necessary or advisable for the administration of this Agreement (including a determination to redeem or exchange or not to redeem or exchange the Rights or to amend this Agreement); provided, however, that any redemption of Rights shall also be -------- ------- subject to any additional approval procedures required by the articles of incorporation or bylaws of the Company. All such actions, calculations, interpretations and determinations (including, for purposes of clause (y) below, all omissions with respect to the foregoing) which are done or made by the Continuing Directors in good faith, shall (x) be final, conclusive and binding on the Company (subject to any additional 33 redemption approval procedures referred to in the proviso to the immediately preceding sentence), the Rights Agent, the holders of the Rights and all other parties, and (y) not subject the Board of Directors of the Company or the Continuing Directors to any liability to the holders of the Rights. Section 30. Benefits of this Agreement. Nothing in this Agreement -------------------------- shall be construed to give to any Person other than the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the certificates representing the shares of Common Stock) any legal or equitable right, remedy or claim under this Agreement; but this Agreement shall be for the sole and exclusive benefit of the Company, the Rights Agent and the registered holders of the Rights Certificates (and, prior to the Distribution Date, the certificates representing the shares of Common Stock). Section 31. Severability. If any term, provision, covenant or ------------ restriction of this Agreement is held by a court of competent jurisdiction or other authority to be invalid, void or unenforceable, the remainder of the terms, provisions, covenants and restrictions of this Agreement shall remain in full force and effect and shall in no way be affected, impaired or invalidated; provided, however, that, notwithstanding anything in this Agreement to the - -------- ------- contrary, if any such term, provision, covenant or restriction is held by such court or authority to be invalid, void or unenforceable and a majority of the Continuing Directors determines in its good faith judgment that severing the invalid language from this Agreement would adversely affect the purpose or effect of this Agreement, the right of redemption set forth in Section 23 hereof shall be reinstated and shall not expire until the close of business on the tenth day following the date of such determination by the Continuing Directors. Section 32. Governing Law. This Agreement, each Right and each ------------- Rights Certificate issued hereunder shall be deemed to be a contract made under the laws of the State of Georgia and for all purposes shall be governed by and construed in accordance with the laws of such State (other than its conflicts of laws rules) applicable to contracts to be made and performed entirely within such State. Section 33. Counterparts. This Agreement may be executed in any ------------ number of counterparts and each of such counterparts shall for all purposes be deemed to be an original, and all such counterparts shall together constitute one and the same instrument. Section 34. Descriptive Headings. The captions herein are included -------------------- for convenience of reference only, do not constitute a part of this Agreement and shall be ignored in the construction and interpretation hereof. 34 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. INNOTRAC CORPORATION By: /s/ Scott Dorfman ------------------------------------- Name: Scott Dorfman -------------------------------- Title: President ------------------------------- 1828 Meca Way Norcross, Georgia 30093 Attention: President RELIANCE TRUST COMPANY By: /s/ Jerry W. Dawson ------------------------------------- Name: Jerry W. Dawson -------------------------------- Title: Senior Vice President ------------------------------- Reliance Trust Company ------------------------------------- 3384 Peachtree Rd., N.E., Suite 900 ------------------------------------- Atlanta, GA 30326-1106 ------------------------------------- Attention: Jerry W. Dawson --------------------------- 35 Exhibit A FORM OF BOARD RESOLUTION ESTABLISHING AND DESIGNATING SERIES A PARTICIPATING CUMULATIVE PREFERRED STOCK OF INNOTRAC CORPORATION Pursuant to Section 14-2-602 of the Georgia Business Corporation Code Section 1. Designation and Number of Shares. The shares of such series shall be designated as "Series A Participating Cumulative Preferred Stock" (the "Series A Preferred Stock"), and the number of shares constituting such series shall be 500,000. Such number of shares of the Series A Preferred Stock may be increased or decreased by resolution of the Board of Directors; provided, however, that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares issuable upon exercise or conversion of outstanding rights, options or other securities issued by the Corporation. Section 2. Dividends and Distributions. (A) Subject to the prior and superior rights of the holders of any shares of any series of Preferred Stock ranking prior and superior to the shares of Series A Preferred Stock with respect to dividends, if any, the holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable on the last day of March, June, September and December of each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of any share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of (a) $1.00 and (b) subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount (payable in kind) of all cash dividends or other distributions and 100 times the aggregate per share amount of all non-cash dividends or other distributions (other than (i) a dividend payable in shares of Common Stock, par value $0.10 per share, of the Corporation (the "Common Stock") or (ii) a subdivision A-1 of the outstanding shares of Common Stock (by reclassification or otherwise)), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. If the Corporation shall at any time after _________, ____ (the "Rights Declaration Date") declare or pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (b) of the preceding sentence shall be adjusted by multiplying such amount by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in Section 2(A) immediately after it declares a dividend or distribution on the Common Stock (other than as described in clauses (i) and (ii) of the first sentence of Section 2(A)); provided, however, that if no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date (or, with respect to the first Quarterly Dividend Payment Date, the period between the first issuance of any share or fraction of a share of Series A Preferred Stock and such first Quarterly Dividend Payment Date), a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (C) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is on or before the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue and be cumulative from the date of issue of such shares, or unless the date of issue is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and on or before such Quarterly Dividend Payment Date, in which case dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof. Section 3. Voting Rights. In addition to any other voting rights required by law, the holders of shares of Series A Preferred Stock shall have the following voting rights: A-2 (A) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of shareholders of the Corporation. If the Corporation shall at any time after the Rights Declaration Date declare or pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction, the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (B) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as a single class on all matters submitted to a vote of shareholders of the Corporation. (C) (i) If at any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon (whether or not consecutive), the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time when all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Series A Preferred Stock and any other series of Preferred Stock then entitled as a class to elect directors, voting together as a single class, irrespective of series, shall have the right to elect one Director. (ii) During any default period, such voting right of the holders of Series A Preferred Stock may be exercised initially at a special meeting called pursuant to Section 3(C)(iii) or at any annual meeting of shareholders, and thereafter at annual meetings of shareholders; provided, however, that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of 10% in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of holders of Common Stock shall not affect the exercise by holders of Preferred Stock of such voting right. At any meeting at which holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancy, if any, in the Board of Directors as may then exist up to one Director or, if such right is exercised at an annual meeting, to elect one Director. If the number which may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or pari passu with the Series A Preferred Stock. ---- ----- A-3 (iii) Notwithstanding anything to the contrary contained in the Corporation's Articles of Incorporation or Bylaws, unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any shareholder(s) owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of holders of Preferred Stock, which meeting shall thereupon be called by the President, a Vice President or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this Section 3(C)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to him at his last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any shareholder(s) owning in the aggregate not less than ten percent (10%) of the total number of shares of Preferred Stock outstanding, irrespective of series. Notwithstanding the provisions of this Section 3(C)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of shareholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect one Director voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in Section 3(C)(ii) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock which elected the Director whose office shall have become vacant. References in this Section 3(C) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the Articles of Incorporation or Bylaws irrespective of any increase made pursuant to the provisions of Section 3(C)(ii) (such number being subject, however, to change thereafter in any manner provided by law or in the Articles of Incorporation or Bylaws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (D) Except as otherwise provided herein, holders of Series A Preferred Stock shall have no special voting rights, and their consent shall not be required (except to the extent they are entitled to vote with holders of Common Stock as set forth herein) for taking any corporate action. A-4 Section 4. Certain Restrictions. (A) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section 2 are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on outstanding shares of Series A Preferred Stock shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, or make any other distributions on, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on, or make any other distributions on, any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such other parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem, purchase or otherwise acquire for value any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; provided, however, that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem, purchase or otherwise acquire for value any shares of Series A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Preferred Stock and all such other parity stock upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (B) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for value any shares of stock of the Corporation unless the Corporation could, under Section 4(A), purchase or otherwise acquire such shares at such time and in such manner. Section 5. Reacquired Shares. Any shares of Series A Preferred Stock redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock without designation as to series and may be reissued as part of a new series of Preferred Stock to be created by resolution A-5 or resolutions of the Board of Directors as permitted by the Articles of Incorporation or as otherwise permitted under Georgia law. Section 6. Liquidation, Dissolution or Winding Up. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $1.00 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment; provided, however, that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such other parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. If the Corporation shall at any time after the Rights Declaration Date pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. Section 7. Consolidation or Merger. If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash or any other property, as the case may be, into which or for which each share of Common Stock is exchanged or changed. If the Corporation shall at any time after the Rights Declaration Date pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination or consolidation of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. A-6 Section 8. No Redemption. The Series A Preferred Stock shall not be redeemable. Section 9. Rank. The Series A Preferred Stock shall rank junior (as to dividends and upon liquidation, dissolution and winding up) to all other series of the Corporation's preferred stock, except any series that specifically provides that such series shall rank junior to the Series A Preferred Stock. Section 10. Fractional Shares. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders of Series A Preferred Stock. Section 11. Amendment. The Articles of Incorporation of the Corporation shall not be further amended in any manner which would materially alter or change the powers, preferences or special rights of the Series A Preferred Stock so as to affect them adversely without the affirmative vote of the holders of a majority or more of the outstanding shares of Series A Preferred Stock, voting separately as a class. A-7 Exhibit B Form of Rights Certificate Certificate No. R- _______________Rights NOT EXERCISABLE AFTER THE EARLIER OF JANUARY 1, 2008, AND THE DATE ON WHICH THE RIGHTS EVIDENCED HEREBY ARE REDEEMED OR EXCHANGED BY THE COMPANY AS SET FORTH IN THE RIGHTS AGREEMENT. THE RIGHTS ARE SUBJECT TO REDEMPTION AT $0.001 PER RIGHT AND TO EXCHANGE ON THE TERMS SET FORTH IN THE RIGHTS AGREEMENT. AS SET FORTH IN THE RIGHTS AGREEMENT, RIGHTS ISSUED TO, OR HELD BY, ANY PERSON WHO IS, WAS OR BECOMES AN ACQUIRING PERSON OR AN AFFILIATE OR ASSOCIATE THEREOF (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT), WHETHER CURRENTLY HELD BY OR ON BEHALF OF SUCH PERSON OR BY ANY SUBSEQUENT HOLDER, MAY BE NULL AND VOID. [THE RIGHTS REPRESENTED BY THIS RIGHTS CERTIFICATE ARE OR WERE BENEFICIALLY OWNED BY A PERSON WHO WAS OR BECAME AN ACQUIRING PERSON OR AN AFFILIATE OR AN ASSOCIATE OF AN ACQUIRING PERSON (AS SUCH TERMS ARE DEFINED IN THE RIGHTS AGREEMENT). THIS RIGHTS CERTIFICATE AND THE RIGHTS REPRESENTED HEREBY MAY BE OR MAY BECOME NULL AND VOID IN THE CIRCUMSTANCES SPECIFIED IN SECTION 7(d) OF THE RIGHTS AGREEMENT.)]/1/ RIGHTS CERTIFICATE INNOTRAC CORPORATION This Rights Certificate certifies that ________, or registered assigns, is the registered holder of the number of Rights set forth above, each of which entitles the holder (upon the terms and subject to the conditions set forth in the Rights Agreement, dated as of December 31, 1997 (the "Rights Agreement"), between Innotrac Corporation, a Georgia corporation (the "Company"), and Reliance Trust Company (the "Rights Agent")), to purchase from the Company, at any time after the Distribution Date (as such term is defined in the Rights Agreement) and prior to the Expiration Date (as such term is defined in the Rights Agreement), one one-hundredth{s} of a fully paid, non- assessable share of Series A Participating Cumulative Preferred Stock (the "Preferred Stock") of the Company, at a purchase price of $60.00 per one one- hundredth of a share (the "Purchase Price"), payable in lawful money of the United States of America, upon surrender of this Rights Certificate, with the form of election to purchase and related certificate duly executed, and payment of the Purchase Price at an office of the Rights Agent designated for such purpose. - --------------------- /1/ If applicable, insert this portion of the legend and delete the preceding sentence. B-1 Terms used herein and not otherwise defined herein have the meanings assigned to them in the Rights Agreement. The number of Rights evidenced by this Rights Certificate (and the number and kind of shares issuable upon exercise of each Right) and the Purchase Price set forth above are as of ____________, _____, and may have been or in the future may be adjusted as a result of the occurrence of certain events, as more fully provided in the Rights Agreement. Upon the occurrence of a Flip-in Event, if the Rights evidenced by this Rights Certificate are beneficially owned by (a) an Acquiring Person or an Associate or Affiliate of an Acquiring Person, (b) a transferee of an Acquiring Person (or any such Associate or Affiliate) who becomes a transferee after the Acquiring Person becomes such, or (c) under certain circumstances specified in the Rights Agreement, a transferee of an Acquiring Person (or any such Associate or Affiliate) who becomes a transferee prior to or concurrently with the Acquiring Person becoming such, such Rights shall become null and void, and no holder hereof shall have any right with respect to such Rights from and after the occurrence of such Flip-in Event. This Right Certificate is subject to all of the terms, provisions and conditions of the Rights Agreement, which terms, provisions and conditions are hereby incorporated herein by reference and made a part hereof and to which Rights Agreement reference is hereby made for a full description of the rights, limitations of rights, obligations, duties and immunities hereunder of the Rights Agent, the Company and the holders of the Rights Certificates, which limitations of rights include the temporary suspension of the exercisability of such Rights under the specific circumstances set forth in the Rights Agreement. Copies of the Rights Agreement are on file at the office of the Company and are also available upon written request to the Company. Upon surrender at the principal office or offices of the Rights Agent designated for such purpose and subject to the terms and conditions set forth in the Rights Agreement, any Rights Certificate(s) may be transferred or exchanged for another Rights Certificate(s) evidencing a like number of Rights as the Rights Certificate(s) surrendered. If this Rights Certificate shall be exercised in part, the holder shall be entitled to receive upon surrender hereof another Rights Certificate(s) for the number of whole Rights not exercised. Subject to the provisions of the Rights Agreement, the Board of Directors of the Company may, at its option, (a) at any time prior to the earlier of (i) the Close of Business on the Share Acquisition Date and (ii) the Final Expiration Date, redeem all but not less than all the then outstanding Rights at a redemption price of $0.001 per Right; or (b) at any time after any Person becomes an Acquiring Person, exchange all or part of the then outstanding Rights (other than Rights held by the Acquiring Person and certain related Persons) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right. If the Rights shall be exchanged in part, the holder of this Rights Certificate shall be entitled to receive B-2 upon surrender hereof another Rights Certificate(s) for the number of whole Rights not exchanged. After the expiration of the redemption period, the Company's right of redemption may be reinstated if an Acquiring Person reduces his beneficial ownership to ten percent (10%) or less of the outstanding shares of Common Stock in a transaction or series of transactions not involving the Company and there is no other Acquiring Person. No fractional shares of Preferred Stock are required to be issued upon the exercise of any Right(s) evidenced hereby (other than fractions which are multiples of one one-hundredth of a share of Preferred Stock, which may, at the election of the Company, be evidenced by depository receipts), but in lieu thereof a cash payment will be made, as provided in the Rights Agreement. No holder of this Rights Certificate shall be entitled to vote, receive dividends or be deemed for any purpose the holder of the shares of capital stock which may at any time be issuable on the exercise hereof, nor shall anything contained in the Rights Agreement or herein be construed to confer upon the holder hereof, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action, or to receive notice of meetings or other actions affecting shareholders (except as provided in the Rights Agreement), or to receive dividends or subscription rights, or otherwise, until the Right(s) evidenced by this Rights Certificate shall have been exercised as provided in the Rights Agreement. This Rights Certificate shall not be valid or obligatory for any purpose until it shall have been countersigned by the Rights Agent. B-3 IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal by its authorized officers. Dated as of _____________________, ______ INNOTRAC CORPORATION By: ---------------------------- Title: (SEAL) Attest: - ------------------------------------ Secretary Countersigned: Reliance Trust Company as Rights Agent By: --------------------------------- Authorized Signature B-4 Form of Reverse Side of Rights Certificate FORM OF ASSIGNMENT (To be executed if the registered holder desires to transfer the Rights Certificate.) FOR VALUE RECEIVED ------------------------------------------------------------ hereby sells, assigns and transfers unto -------------------------------------- - ------------------------------------------------------------------------------ (Please print name and address of transferee) - ------------------------------------------------------------------------------ this Rights Certificate, together with all right, title and interest therein, and does hereby irrevocably constitute and appoint _______________________ Attorney, to transfer the within Rights Certificate on the books of the within- named Company, with full power of substitution. Dated: ------------------------- ----------------------------- Signature Signature Guaranteed: B-5 Certificate The undersigned hereby certifies by checking the appropriate boxes that: (1) the Rights evidenced by this Rights Certificate ___ are ___ are not being assigned by or on behalf of a Person who is or was an Acquiring Person or an Affiliate or Associate of any such Acquiring Person (as such terms are defined in the Rights Agreement); (2) after due inquiry and to the best knowledge of the undersigned, it ___ did ___ did not acquire the Rights evidenced by this Rights Certificate from any Person who is, was or became an Acquiring Person or an Affiliate or Associate of an Acquiring person. Dated: --------------------------- -------------------------------- Signature NOTICE The signatures to the foregoing Assignment and Certificate must correspond to the name as written upon the face of this Rights Certificate in every particular, without alteration or enlargement or any change whatsoever. B-6 ------------------- FORM OF ELECTION TO PURCHASE (To be executed if the registered holder desires to exercise Rights represented by the Rights Certificate.) To: Innotrac Corporation The undersigned hereby irrevocably elects to exercise ______________ Rights represented by this Rights Certificate to purchase shares of Preferred Stock issuable upon the exercise of the Rights (or such other securities of the Company or of any other Person which may be issuable upon the exercise of the Rights) and requests that certificates for such securities be issued in the name of and delivered to: Please insert social security or other identifying number - -------------------------------------------------------------------------------- (Please print name and address) - -------------------------------------------------------------------------------- If such number of Rights shall not be all the Rights evidenced by this Rights Certificate, a new Rights Certificate for the balance of such Rights shall be registered in the name of and delivered to: Please insert social security or other identifying number - --------------------------------------------- (Please print name and address) - --------------------------------------------- Dated: ____________________, _______ ------------------------- Signature Signature Guaranteed: B-7 EXHIBIT C ------------ INNOTRAC CORPORATION SHAREHOLDER RIGHTS PLAN Summary of Terms Form of Security: The Board of Directors has declared a dividend of one preferred stock purchase right for each outstanding share of the Company's Common Stock, payable to holders of record as of the close of business on January 1, 1998 (the "Effective Date") (each a "Right," and collectively, the "Rights"). Distribution Date: The earlier of: (1) the 10th day after public announcement that (a) any person or group has become, after the Effective Date, the beneficial owner of 15% or more of the Company's Common Stock, or (b) an acquisition (other than an Approved Acquisition) of an additional 2% or more of the Common Stock has been made by (i) a person or group which previously acquired a 15% or greater interest in an Approved Acquisition or (ii) a person or group which owned 15% or more of the Company's Common Stock prior to the Effective Date; and (2) the 10th business day after the date of the commencement of a tender or exchange offer (other than a Qualifying Tender Offer) by any person which would, if consummated, result in such person becoming the beneficial owner of 15% or more of the Company's Common Stock, in each case, subject to extension by a majority of the Continuing Directors. Approved Acquisition: An acquisition, approved in advance by a majority of the Continuing Directors, of (i) 15% or more of the Common Stock by any person, or (ii) an additional 2% or more of the Common Stock by a previously approved 15% or more holder. Qualifying Tender Offer: A tender or exchange offer for all the Common Stock which C-1 is approved in advance by a majority of the Continuing Directors. Transfer: Prior to the Distribution Date, the Rights will be evidenced by the certificates for and will be transferred with the Common Stock, and the registered holders of the Common Stock will be deemed to be the registered holders of the Rights. After the Distribution Date, the Rights Agent will mail separate certificates evidencing the Rights to each record holder of the Common Stock as of the close of business of the Distribution Date, and thereafter the Rights will be transferable separately from the Common Stock. Exercise: Prior to the Distribution Date, the Rights will not be exercisable. After the Distribution Date, each Right will be exercisable to purchase, for $60.00 (the "Purchase Price"), one one-hundredth of a share of Series A Participating Cumulative Preferred Stock, par value $0.10 per share, of the Company. Flip-In: If (1) any person or group (an "Acquiring Person") becomes, after the Effective Date, the beneficial owner of 15% or more of the Company's Common Stock (other than an Approved Acquisition or a Qualifying Tender Offer), (2) during such time as there is an Acquiring Person, an event occurs which results in such Acquiring Person acquiring an additional 2% or more of the Common Stock (other than an Approved Acquisition or a Qualifying Tender Offer), (3) the Company is the surviving corporation in a merger with an Acquiring Person and its Common Stock is not changed or exchanged, or (4) an Acquiring Person engages in one or more "self- dealing" transactions as set forth in the Rights Agreement, then each Right (other than Rights beneficially owned by the Acquiring Person and certain affiliated persons) will entitle the holder to elect to receive a number of shares of the Company's Common Stock (or in certain circumstances, cash, property or other securities of the Company) having a market value equal to the Purchase Price, without payment of the Purchase Price and in lieu of the Preferred Stock. Notwithstanding the foregoing, in most instances following the occurrence of the events set forth in this paragraph, all Rights that are, or (under certain circumstances specified in the Rights Agreement) were, beneficially owned by any Acquiring Person will be null and void. However, Rights are not exercisable following the occurrence of the events set C-2 forth above until such time as the Rights are no longer redeemable by the Company as set forth below. Flip-Over: If, after any person has become an Acquiring Person (other than pursuant to an Approved Acquisition or a Qualifying Tender Offer), (1) the Company is involved in a merger or other business combination in which the Company is not the surviving corporation or its Common Stock is exchanged for other securities or assets, or (2) the Company and/or one or more of its subsidiaries sell or otherwise transfer assets aggregating more than 50% of the assets or generating more than 50% of the operating income or cash flow of the Company and its subsidiaries, taken as a whole (other than a Qualifying Tender Offer), then each Right will entitle the holder to purchase, for the Purchase Price, a number of shares of common stock of the other party to such business combination or sale (or in certain circumstances, an affiliate) having a market value of twice the Purchase Price. Exchange: At any time after any person has become an Acquiring Person a majority of the Continuing Directors may exchange all or part of the Rights (other than the Rights beneficially owned by the Acquiring Person and certain affiliated persons) for shares of Common Stock at an exchange ratio of one share of Common Stock per Right. Redemption: Subject to the applicable provisions in the Company's articles of incorporation and bylaws, a majority of Continuing Directors may redeem all of the Rights at a price of $0.001 per Right at any time prior to the close of business on the date of the public announcement that any person has become an Acquiring Person (subject to extension by a majority of the Continuing Directors). The Company's right of redemption may be reinstated if an Acquiring Person reduces his beneficial ownership to 10% or less of the outstanding shares of Common Stock in a transaction or series of transactions not involving the Company. Immediately upon the action of a majority of Continuing Directors ordering redemption of the Rights, the Rights will terminate and the only right of the holders of the Rights will be to receive the redemption price thereof. Continuing Director: Means any member of the Board of Directors who was a member of the Board prior to the Effective Date or any person who is subsequently elected to the Board if such person is recommended or approved by a majority of the C-3 Continuing Directors. Continuing Directors do not include an Acquiring Person, an affiliate or associate of an Acquiring Person or any representative or nominee of the foregoing. Expiration: The Rights will expire 10 years from the Effective Date unless earlier exchanged or redeemed. Amendments: Prior to the Distribution Date, the Rights Agreement may be amended in any respect; provided that, at any time, any change in the Redemption Price, the Expiration Date, the Purchase Price or the number of shares of Preferred Stock for which a Right is exercisable must be approved by a majority of the Continuing Directors. After the Distribution Date, the Rights Agreement may be amended in any respect that does not adversely affect the Rights holders (other than any Acquiring Person and certain affiliated persons); provided that, at any time, any change in the Redemption Price, the Expiration Date, the Purchase Price or the number of shares of Preferred Stock for which a Right is exercisable must be approved by a majority of the Continuing Directors. After any person has become an Acquiring Person, the Rights Agreement may be amended only with the approval of a majority of the Continuing Directors. Voting Rights: Rights holders have no rights as a shareholder of the Company, including the right to vote and to receive dividends. Antidilution Provisions: The Purchase Price payable, and the number of shares of Preferred Stock or other securities or property issuable upon exercise of the Rights are subject to adjustment from time to time to prevent dilution (1) in the event of a stock dividend on, or a subdivision, combination or reclassification of, the Preferred Stock, (2) upon the grant to holders of the Preferred Stock of certain rights or warrants to subscribe for or purchase Preferred Stock at a price, or securities convertible into Preferred Stock with a conversion price, less than the then-current market price of the Preferred Stock, or (3) upon the distribution to holders of the Preferred Stock of evidences of indebtedness or assets (excluding regular periodic cash dividends paid out of earnings or retained earnings) or of subscription rights or warrants. The number of outstanding Rights and the number of 1/100ths of a share of Preferred Stock issuable upon exercise of each Right are also subject to adjustment in the event of a stock split of the Common Stock or a stock dividend on the Common Stock payable in Common Stock or subdivisions, consolidations or combinations of the Common Stock occurring prior to the Distribution Date. C-4 With certain exceptions, no adjustment in the Purchase Price will be required until cumulative adjustments amount to at least of the Purchase Price. No fractional shares of Preferred Stock will be issued (other than fractions which are integral multiples of 1/100th of a share of a Preferred Stock), and in lieu thereof, an adjustment in cash will be made based on the market price of the Preferred Stock on the last trading date prior to the date of exercise. Preferred Stock: The dividend and liquidation rights of the Preferred Stock are designed so that the value of one one-hundredth of a share of Preferred Stock issuable upon exercise of each Right will approximate the same economic value of one share of Common Stock, including voting rights. Shares of Preferred Stock issuable upon exercise of the Rights will not be redeemable. Each share of Preferred Stock will entitle the holder to a minimum preferential dividend of $1.00 per share, but will entitle the holder to an aggregate dividend payment of 100 times the dividend declared on each share of Common Stock. In the event of liquidation, each share of Preferred Stock will be entitled to a minimum preferential liquidation payment of $1.00, plus accrued and unpaid dividends and distributions thereon, but will be entitled to an aggregate payment of 100 times the payment made per share of Common Stock. In the event of any merger, consolidation or other transaction in which Common Stock is exchanged for or changed into other stock or securities, cash or other property, each share of Preferred Stock will be entitled to receive 100 times the amount received per share of Common Stock. Each share of Preferred Stock will be entitled to 100 votes on all matters submitted to a vote of the shareholders of the Company, and shares of Preferred Stock will generally vote together as one class with the Common Stock and any other voting capital stock of the Company on all matters submitted to a vote of the Company's shareholders. Further, whenever dividends on the Preferred Stock are in arrears in an amount equal to six quarterly payments, the Preferred Stock, together with any other shares of preferred stock then entitled to elect directors, shall have the right, as a single class, to elect one director until the default has been cured. C-5 Taxes: While the dividend of the Rights will not be taxable to shareholders or to the Company, shareholders or the Company may, depending upon the circumstances, recognize taxable income in the event that the Rights become exercisable as set forth above. C-6 EX-5 6 OPINION OF KILPATRICK STOCKTON LLP [KILPATRICK STOCKTON LLP LETTERHEAD APPEARS HERE] EXHIBIT 5 ATTORNEYS AT LAW Suite 2800 1100 Peachtree Street Atlanta, Georgia 30309-4530 Telephone: 404.815.6500 Facsimile: 404.815.6555 February 10, 1998 E-MAIL: JDAVIDSON@KILSTOCK.COM Direct Dial: 404.815.6483 Innotrac Corporation 1828 Meca Way Norcross, GA 30093 RE: INNOTRAC CORPORATION REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-42373) Gentlemen: At your request, we have examined the Registration Statement on Form S-1 File No. 333-42373, as amended (the "Registration Statement") filed by Innotrac Corporation (the "Company"), a Georgia corporation, with the Securities and Exchange Commission with respect to the registration under the Securities Act of 1933, as amended, of 2,500,000 shares of Common Stock, par value $0.10 per share, of the Company (the "Common Stock"), to be sold by the Company to the underwriters named in the Registration Statement (the "Underwriters") for resale by them to the public, together with an additional 375,000 shares of Common Stock subject to an over-allotment option granted to the Underwriters by the Company. As your counsel, and in connection with the preparation of the Registration Statement, we have examined the originals or copies of such documents, corporate records, certificates of public officials and officers of the Company, and other instruments related to the authorization and issuance of the Common Stock as we deemed relevant or necessary for the opinion expressed herein. Based upon the foregoing, it is our opinion that the shares of Common Stock to be issued and sold by the Company to the Underwriters will be, upon issuance, sale, and delivery in the manner and under the terms and conditions described in the Registration Statement, validly issued, fully paid, and nonassessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name in the "Legal Matters" section of the EX-10.2(B) 7 AMENDED STOCK OPTION AND INCENTIVE AWARD PLAN EXHIBIT 10.2(b) FIRST AMENDMENT TO INNOTRAC CORPORATION STOCK OPTION AND INCENTIVE AWARD PLAN THIS FIRST AMENDMENT TO INNOTRAC CORPORATION STOCK OPTION AND INCENTIVE AWARD PLAN (the "FIRST AMENDMENT") is made as of the 24th day of November, 1997. WHEREAS, the sole shareholder and sole member of the Board of Directors (the "BOARD") of the Innotrac Corporation (the "CORPORATION") adopted that certain Innotrac Corporation Stock Option and Incentive Award Plan on November 24, 1997 (the "PLAN"); and WHEREAS, the sole member of the Board amended Article 13.3 of the Plan pursuant to Article 14.1 thereof, by Written Consent of the Board dated November 24, 1997; NOW THEREFORE, the Plan is hereby amended by deleting the first sentence or Article 13.3 in its entirety. IN WITNESS WHEREOF, the undersigned has executed this First Amendment as of the date first above written. INNOTRAC CORPORATION By: /s/ Scott Dorfman ------------------------- SCOTT DORFMAN PRESIDENT ATTEST: By: /s/ David Ellin ------------------------- DAVID ELLIN SENIOR VICE PRESIDENT EX-10.8 8 LEASE AGREEMENT EXHIBIT 10.8 STATE OF GEORGIA GWINNETT COUNTY LEASE AGREEMENT --------------- THIS LEASE AGREEMENT ("Lease"), made this 8th day of December, 1997, by and between WEEKS DEVELOPMENT PARTNERSHIP, hereinafter referred to as "Landlord", and INNOTRAC CORPORATION, hereinafter referred to as "Tenant"; ARTICLE I PREMISES -------- 1.01 Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the property hereinafter referred to as the LEASED PREMISES, described as: (i) an office warehouse building (the "Building") containing approximately 250,000 square feet of leasable space (50,000 square feet of office space and 200,000 square feet of warehouse space) in the Sugarloaf Office Park, Duluth, Georgia, with a street address of 6655 Sugarloaf Parkway, which Building is to be constructed by Landlord for Tenant, at Landlord's sole cost and expense, in accordance with the Approved Plans and Specifications (as defined in Section 3.03 hereof), and (ii) the land on which the Building is to be located with all its rights and appurtenances (the "Land") and as more particularly described on Exhibit "A" attached hereto and by this reference incorporated herein. (The Building and Land are sometimes collectively referred to as the "Leased Premises"). 1.02 Landlord represents, warrants and covenants to and with Tenant, knowing that Tenant is relying on each such representation, warranty and covenant, that: (a) Landlord is a general partnership, duly organized, validly existing and in good standing under the laws of the State of Georgia. All partnership action has been taken by Landlord authorizing and approving the execution of and entry into this Lease and the performance by Landlord of Landlord's duties and obligations under this Lease. (b) To the best of Landlord's knowledge, there are no actions, suits or proceedings pending or threatened against, by or affecting Landlord which affect title to the Leased Premises or which question the validity or enforceability of this Lease or of any action taken by Landlord under this Lease, in any court or before any governmental authority, domestic or foreign. (c) The execution of and entry into this Lease, and the performance by Landlord of Landlord's duties and obligations under this Lease are consistent with and not in violation of, and will not create any adverse condition under, any contract, agreement or other instrument to which Landlord is a party, any judicial order or judgment of any nature by which Landlord is bound, or the organizational documents of Landlord. (d) By the Commencement Date, Landlord shall have good and marketable fee simple title to the Leased Premises subject only to the exceptions, liens and encumbrances listed on Exhibit "A-1" ("Permitted Exceptions"). (e) There are no encroachments on the Land, with the exception of a monument sign located on the corner of Sugarloaf Parkway and Premier Parkway, and the Building will be situated entirely within the boundaries of the Land and within applicable building lines. (f) The Building or any improvements to be constructed by Landlord on the Leased Premises will not contain hazardous substances or hazardous materials; and, to the best of Landlord's knowledge, no Hazardous Substances have been released, introduced, spilled, discharged or disposed of on, in or under any adjacent land. (g) By the Commencement Date, the Land will constitute either a previously subdivided lot in compliance with applicable subdivision regulations and similar governmental requirements, or will constitute a lot that was created in a manner not subject thereto; and no subdivision filing or approval or similar governmental filing or approval will be required for the conveyance of the Land. (h) To the best of Landlord's knowledge, there are no pending, threatened or contemplated condemnation actions involving all or any portion of the Land; and, to the best of Landlord's knowledge and belief, there are no existing, proposed or contemplated plans to widen, modify or realign any public rights-of-way located adjacent to any portion of the Land. (i) By the Commencement Date, all utilities (including, without limitation, water, storm and sanitary sewer, electricity, gas, telephone and cable television) will be available on the Land through private easements or properly dedicated public easements in capacities sufficient to serve and operate the Building. (j) By the Commencement Date, access to the Land from streets and roads adjoining the Land shall be provided by a curb cut to Sugarloaf Parkway and a curb cut to Premier Parkway as shown on the Site Plan referred to on Exhibit "B", and such access shall not otherwise be limited or restricted. 2 ARTICLE II TERM ---- 2.01 TO HAVE AND TO HOLD said Leased Premises for a term commencing on the date of Substantial Completion of the Leased Premises (hereinafter referred to as the "Commencement Date") and continuing for a period of ten (10) years, (provided that if the Commencement Date is not the first day of a calendar month, the term of this lease shall continue until the last day of the calendar month in which the tenth (10th) anniversary of the Commencement Date occurs) upon the terms, conditions, and covenants contained herein. "Substantial Completion" shall mean the date three (3) weeks after the: (i) completion of construction of the Leased Premises in accordance with the Approved Plans and Specifications, subject only to normal punchlist items which shall be set forth in the Punch List described in section 7.03; and (ii) issuance of a Certificate of Occupancy for the Building, and all other certificates, licenses, permits, authorizations and approvals for the full and complete uses and occupancy of the Leased Premises by Tenant ("Other Licenses"), by all governmental authorities having jurisdiction with respect thereto; provided, however, that Other Licenses shall not include any certificate, license, permit or other authorization or approval that (i) Tenant is required to obtain under this Lease; or (ii) relate to Tenant's own operations at the Leased Premises. It is understood and agreed by Landlord and Tenant that in order to achieve Substantial Completion the Punch List must be those items which shall, if taken either individually or in the aggregate, do not materially or substantially interfere with Tenant's taking possession of, moving its personal property and effects into, or using and enjoying the Leased Premises for the purposes for which it was intended. Landlord agrees to provide to Tenant at least fifteen (15) days prior written notice of the date on which it expects to achieve Substantial Completion. ARTICLE III RENTAL ------ 3.01 As rental for the Leased Premises, Tenant agrees to pay to Landlord, without offset or abatement, except as otherwise provided in the Lease, Base Rental as set forth below: Years 1 - 5 $71,458.33/month $857,500.00/year Years 6 - 10 $80,000.00/month $960,000.00/year due on or before the first day of each calendar month beginning on or following the Commencement Date and thereafter for the remainder of the term, together 3 with any other additional rental as hereinafter set forth. Tenant shall pay interest at a rate of eight percent (8%) per annum on any payment of Base Rental remaining due five (5) days after the due date thereof. Tenant has deposited with Landlord, upon delivery of this Lease Agreement, an amount equal to Seventy-One Thousand Four Hundred Fifty-Eight and 33/100 Dollars ($71,458.33) which is to be applied as first month's rental, and part of the second month's rental if the first month is a partial month. Landlord shall hold an amount equal to Ten Thousand Seven Hundred Sixty-two and 50/100 ($10,762.50) Dollars from Tenant's previous lease agreement, and upon execution of this Lease, shall apply said amount to be held as a refundable security deposit for this Lease. If Tenant shall perform each provision of this Lease, any portion of the security deposit which has not been appropriated by Landlord in accordance with the provisions hereof shall be returned to Tenant, without interest, within thirty (30) days after the expiration of the term of this Lease. Notwithstanding anything to the contrary, Landlord shall not appropriate any portion of the security deposit without first giving Tenant notice which expressly sets forth which provision of the Lease was breached by Tenant and the damages suffered by Landlord as a result of such breach. If the Commencement Date of this Lease shall be a date other than the first day of a calendar month, applicable rent for such month shall be prorated on a daily basis, based on the number of days in such month, and such sum shall be due on the Commencement Date. 3.02 In addition to the rentals called for herein, Landlord agrees to provide or contract for the common area maintenance ("CAM") and Tenant agrees to pay Landlord additional rental for said CAM. CAM shall consist of: maintaining parking areas, planted areas, signs, and routine lawn maintenance, including the trimming of plantings and pruning of trees in the summer, all done in a manner consistent with like-kind space in the northern corridor of the Atlanta, Georgia Metropolitan area. Specifically excluded from the definition of the term "CAM" are expenses for repairs, replacements and general maintenance to the extent paid by proceeds of insurance or by Tenant or other third parties; expenses for repairs, replacements or maintenance to the extent same are to be paid for by Landlord pursuant to the provisions this Lease; interest, amortization or other payments on loans to Landlord whether secured or unsecured; depreciation of the Building; leasing commissions; legal expenses; salaries of officers, executives, employees and agents not directly involved in the on-site operation of the Building; state, federal or local income taxes, excess profits or franchise taxes or other such taxes imposed on or measured by or determined from the gross income of Landlord; and any capital improvements to the Leased Premises with the exception of those mandated by governmental requirements occurring after the Commencement Date. Each year during the term hereof, Landlord shall give Tenant written notice of its estimate of the amount of CAM charges (collectively "Charges") for the Leased Premises for the calendar year. Tenant shall, thereafter, during that calendar year, pay to Landlord one-twelfth (1/12) of the amount set forth in said statement at such time as its monthly installments of base rental hereunder are due and payable. At such time as Landlord is able to determine the actual Charges for such calendar year, Landlord shall deliver to Tenant a statement thereof, and in the event the estimated Charges differ from 4 the actual Charges, any adjustment necessary shall be made to additional rental payments next coming due under this section. Charges for the Leased Premises shall be set at $.25 per square foot of space contained within the Leased Premises for the first full year of the Lease and can only be increased five percent (5%) per annum thereafter. CAM for the calendar years during which the Commencement Date and the last day of the term of Lease occur shall be prorated so that Tenant pays only that portion of the CAM for such calendar years allocable to periods of time during the term of this Lease. 3.03 The base rental provided in section 3.01 above, was based, in part, on a tenant finish allowance for the office space in the amount of $25.00 per square foot ($1,250,000.00) (the "Allowance") for the costs and expenses of construction of the tenant finish to the Leased Premises as set forth in the plans and specifications attached hereto in Exhibit "B" and by reference incorporated herein (herein referred to as the "Approved Plans and Specifications"). Any increases in costs and expenses due to Change Orders shall be taken into account in the manner described in Section 7.01. 3.04 Tenant agrees to pay as additional rent to Landlord, upon demand, its pro rata share of any utility surcharges, or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any Federal, State, Municipal or local governmental authorities in connection with its use or occupancy of the Leased Premises. 3.05 Tenant recognizes that the Leased Premises are subject to the Protective Covenants (as defined below) and that the Protective Covenants provide, among other things, for the imposition of assessments and other charges against the Leased Premises and the Land. Tenant agrees to pay as additional rent to Landlord, upon demand, any costs, expenses or assessments levied, assessed or imposed on the Leased Premises ("Covenant Assessments") by, or at the direction of, any entity or group authorized by the Protective Covenants to make such assessments or levy such costs in connection with the Leased Premises. Tenant may, within the time and in the manner prescribed by the Protective Covenants for such purpose, in its own name and behalf or, if necessary or appropriate in order to perfect such challenge, in the name and on behalf of Landlord, challenge the amount, validity or applicability of any such costs, expenses or assessments (an "Assessment Protest"); provided that (a) Tenant shall pay any such cost, expense or assessment under protest, prior to delinquency, if any such Assessment Protest does not suspend the collection thereof from any party, and (b) no portion of the Leased Premises or any rentals payable hereunder or Landlord's title or interest therein would be in any danger of being sold, forfeited, interrupted or lost as a result of such Assessment Protest. Tenant shall prosecute any Assessment Protest with due diligence and continuity. Tenant shall provide Landlord with copies of any application, petition or other pleading filed in connection with any Assessment Protest before filing. Landlord may, at its own expense, join with Tenant in making any such application, petition or other pleading, retain co-counsel, attend hearings, present evidence and arguments, and generally participate in the 5 conduct of the Assessment Protest. If and to the extent that Landlord is requested in writing to do so by Tenant, Landlord agrees to cooperate with Tenant in good faith in connection with any Assessment Protest undertaken by Tenant ("Landlord's Cooperation With Assessment Protest"), provided Tenant promptly reimburses Landlord for reasonable expenses in connection therewith. Subject to Landlord's right to reimbursement as set forth below, Tenant shall be entitled to receive and retain any refund of any costs, expense or assessments obtained by Tenant, to the extent such cost, expense or assessment was paid by Tenant under this section 3.05. Nothing contained in this section 3.05 shall limit or restrict Landlord's right to undertake any Assessment Protest with respect to the Leased Premises at its own expense. Any reduction in or refund of any such costs, expenses or assessments previously paid by Tenant obtained by Landlord shall be applied first to Landlord's reasonable costs and expenses incurred in connection with Landlord's Cooperation With Assessment Protest, with the balance refunded to Tenant in the manner described above, and in the event of a reduction in any such costs, expenses and assessments not yet paid by Tenant, Tenant shall reimburse Landlord, within thirty (30) days of receipt of Landlord's invoice therefor, for Landlord's reasonable costs and expenses incurred in connection with Landlord's Cooperation With Assessment Protest, up to the amount of the reduction obtained. In the event Tenant undertakes or files any Assessment Protest in the name of Landlord, Tenant shall promptly provide Landlord written notice thereof, and Tenant acknowledges that Tenant's use of Landlord's name shall be subject to the indemnification of Landlord contained in Article 12 hereof. Tenant shall give Landlord five (5) days advance written notice of any such use of Landlord's name. Covenant Assessments for the calendar years during which the Commencement Date and the last day of the term of the Lease occur shall be prorated so that Tenant pays only that portion of the Covenant Assessments for such calendar years allocable to periods of time during the term of this Lease. "Protective Covenants" means the Initial Declaration of Covenants, Conditions and Restrictions, dated November 1,1996 by King & Spalding, recorded in Deed Book 13418, Page 0001, Gwinnett County, Georgia Records, as further amended. 3.06 It is the purpose and intent of Landlord and Tenant that (except as otherwise expressly provided in this Lease) the base rental payable under this Lease be net. Tenant covenants and agrees with Landlord to pay and discharge on a timely basis, as additional rent hereunder, those items set forth above and in Articles 6 and 8 hereof, excepting only any costs, expenses and/or obligations which arise as a result of the negligence, intentional misconduct or unauthorized acts of Landlord which are not covered by the insurance under Article 17 hereof. Notwithstanding the foregoing, nothing contained herein shall be construed to require Tenant to make any debt service payments under any secured or unsecured indebtedness of Landlord or to pay any costs and expenses which this Lease expressly provided for Landlord to pay (including the costs and expenses Landlord agrees to pay under Article 7 hereof), or to pay any income taxes, franchise taxes, estate or gift taxes, inheritance taxes, transfer taxes, recording taxes or intangibles taxes of Landlord. 6 ARTICLE IV DELAY IN DELIVERY OF POSSESSION ------------------------------- 4.01 Attached hereto as Exhibit "C" is a schedule of construction of the Leased Premises, including the dates by which Tenant must make certain decisions regarding the Leased Premises (hereinafter referred to as the "Construction Schedule"). Landlord and Tenant shall use their diligent good faith efforts to ensure construction of the Leased Premises remains on schedule in accordance with the Construction Schedule, provided, however, that in no event shall the failure of Landlord to cause Substantial Completion to occur on or before the Substantial Completion Deadline (hereinafter defined), constitute a default by Landlord under this Lease. In the event of any delay in Substantial Completion of the Leased Premises caused by Tenant Delays (hereafter defined), the Commencement Date (for purposes of Tenant's obligation to commence the payment of rent and for purposes of fixing the lease term) shall be the date on which Substantial Completion would have occurred but for such delay. 4.02. Landlord acknowledges and agrees that it is of critical importance to Tenant that Landlord shall have achieved Substantial Completion by 7/1/98 (the "Substantial Completion Deadline"). Accordingly, Landlord agrees that Landlord shall be liable to and shall pay Tenant for damages suffered by Tenant ("Tenant's Damages") as a result of Landlord's failure to meet such construction deadlines, and such Tenant's Damages shall be calculated as follows: (i) if Substantial Completion, as extended by Tenant Delays or Excusable Delays other than adverse weather conditions, occurs after 7/1/98 but prior to 8/1/98 and was delayed by (a) reasons other than adverse weather conditions, then Tenant's Damages shall be the amount which is the greater of the rent paid or to be paid by Tenant for the month of August 1998 for the lease at 6866 Jimmy Carter Boulevard or the last month's rent paid by Tenant under such lease (such greater amount shall be known herein as "Tenant's Rent Payment"), or (b) reasons of adverse weather conditions, then Tenant's Damages shall be one-half (1/2) of Tenant's Rent Payment; or (ii) if Substantial Completion, as extended by Tenant Delays or Excusable Delays, occurs on or after 8/1/98 then Tenant's Damages shall be: (a) the amount by which the sum of all of the rent paid by Tenant to its landlords under its current leases (1828 Meca Way, Shackleford Road, 6866 Jimmy Carter Boulevard, and parking lot lease at 1 Meca Way) and any other lease which Tenant enters into because of Landlord's failure to meet such construction deadlines, exceeds the Base Rental that would have been due under this Lease, and (b) all moving, storage, setup and any other expenses related to moving to any temporary space; provided, however, that the parties agree to cooperate in good faith in an attempt to mitigate Tenant's Damages as calculated in this subparagraph (ii) 7 by utilizing other space which Landlord may have available and shall provide to Tenant at no cost. Furthermore, in addition to Landlord's liability for such damages, Tenant shall be entitled to a credit against future Base Rental equal to the Base Rental for the number of days by which the work necessary to achieve Substantial Completion remains incomplete following the Substantial Completion Deadline for any reason other than Tenant Delays or Excusable Delays. 4.03 In the event the Substantial Completion has not occurred by 9/15/98, as such date has been extended for Excusable Delays and Tenant Delays, or, in the event Substantial Completion has not occurred by 11/1/98, as such date has been extended for only Tenant Delays, then, in either said event, Tenant shall have the right to terminate this Lease by giving Landlord five (5) days written notice, whereupon neither party shall have further liability to the other hereunder except as provided for in Section 4.02 above. ARTICLE V USE OF LEASED PREMISES ---------------------- 5.01 The Leased Premises may be used and occupied only for general manufacturing and assembly, testing, warehousing and distribution, showroom and offices, and such other uses as are incidental thereto and customary in connection therewith (collectively herein the "Permitted Uses'), and for no other purpose or purposes, without Landlord's prior written consent. Tenant shall promptly comply at its sole expense with all laws, ordinances, orders, and regulations (collectively herein "Laws", or singularly "Law") which are applicable as a result of Tenant's specific use of the Leased Premises, but specifically not including any zoning Law, building Law or other Law applicable to the construction or installation of the Building (except as a result of or in connection with any alterations made by Tenant). Tenant shall not, without prior written notice to Landlord, do or permit anything to be done in or about the Leased Premises that will in any way increase the insurance premiums due for fire insurance upon the Building. Tenant shall be solely responsible for all increases in fire insurance premium amounts resulting from Tenant's specific use of the Building. Tenant will not perform any act or carry on any practices that will likely injure the building or constitute a nuisance to owners or occupants of adjoining premises. Tenant shall not cause, maintain or permit any outside storage on or about the Leased Premises, including pallets or other refuse. No area outside of the Leased Premises shall be used by Tenant for storage without Landlord's prior written consent. The rear loading areas of the Tenant's unit must be clean and unobstructed. Tenant shall, at Tenant's sole cost and expense, comply fully with all environmental laws and regulations, and all other legal requirements, applicable to Tenant's operations at, on or within, or to Tenant's use and occupancy of, the Leased Premises. On or before the Commencement Date, Tenant shall take possession of, and, thereafter, continuously occupy the Leased Premises during the term of this Lease, and 8 operate thereon the normal business operations of Tenant, subject to sections 18.01, 18.02, and 20.01. 5.02 Tenant shall not cause or permit the escape, disposal or release of any biologically or chemically active or other hazardous substances or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not permitted by law for the storage and use of such substances or materials, nor allow to be brought into the Lease Premises any such materials or substances except to use in the ordinary course of Tenant's business. Without limitation, hazardous substances or materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. If any governmental agency shall ever require testing of the Leased Premises to ascertain whether or not there has been any release of hazardous substances or materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand only if such governmental agency makes a written determination that Tenant caused the release of such hazardous substances or materials and Tenant is provided a copy of such determination. In addition, Tenant agrees to provide Landlord with notice any time it brings hazardous substances or materials on to the Leased Premises in such a manner that it would result in a reporting obligation under any federal, state or local law. In addition, Tenant shall execute affidavits, representations and the like from time to time, but limited to one time per calendar year, at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of hazardous substances or materials on the Leased Premises. Tenant shall indemnify Landlord and hold Landlord harmless from and against any and all claims, damages, fines, judgments, penalties, costs, liabilities and losses (including, without limitation, any and all sums paid for settlement of claims, attorneys' fees and consultant and expert fees) arising from or in connection with the presence of hazardous substances in or on the Leased Premises resulting from the actions of Tenant except as a result of the acts or omissions of Landlord, its agents, employees and contractors for which Landlord shall indemnify Tenant and hold Tenant harmless in the manner provided in section 5.03 below. Without limitation of the foregoing, these indemnifications shall include any and all costs incurred due to any investigation of the site or any cleanup, removal, or restoration mandated by a federal, state, or local agency or political subdivision. The indemnification covenants in this section 5.02 shall survive the expiration or earlier termination of the lease term. 5.03 Landlord shall indemnify Tenant and hold Tenant harmless from and against any and all claims, damages, fines, judgments, penalties, costs, liabilities and losses (including, without limitation, any and all sums paid for settlement of claims, attorneys' fees and consultant and expert fees) arising from or in connection with the presence of hazardous substances in or on the Leased Premises which presence resulted from the acts of Landlord except as a result of the acts or omissions of Tenant, its agents, employees and contractors 9 for which Tenant shall indemnify Landlord and hold Landlord harmless in the manner provided in section 5.02 above. Without limitation of the foregoing, these indemnifications shall include any and all costs incurred due to any investigation of the site or any cleanup, removal, or restoration mandated by a federal, state, or local agency or political subdivision. The indemnification covenants in this section 5.03 shall survive the expiration or earlier termination of the lease term. 5.04 In the event of the discovery of the presence of hazardous substances or materials on the Leased Premises which presence arose prior to the Commencement Date, Tenant shall have the right to terminate the Lease with one hundred twenty (120) days prior notice to Landlord. Notwithstanding the foregoing, Tenant shall not have the right to terminate the Lease if: (i) within ninety (90) days following such notice Landlord brings the Leased Premises in compliance with all laws related to hazardous substances and materials, or to the extent such compliance shall be incapable of completion within such ninety (90) days, if Landlord shall commence such compliance within such ninety (90) day period and continuously and in good faith prosecute the performance of the same until completion; and (ii) the presence of such hazardous substances or materials does not materially affect Tenant's operations at the Leased Premises. ARTICLE VI UTILITIES --------- 6.01 Landlord shall not be liable in the event of any interruption in the supply of any utilities unless and except to the extent caused by the actions or inactions of Landlord, its employees, agents, contractors or invitees. Notwithstanding the foregoing, Tenant will not seek recovery against Landlord for damages for the interruption of utility service to the extent such damages have been previously paid by any business interruption insurance that may be carried by Tenant, but Tenant has no requirement to carry such insurance. Also, notwithstanding the foregoing, Landlord agrees to use all reasonable efforts to aid Tenant in having any such interrupted utility restored in an expeditious manner. Tenant agrees that it will not knowingly install any equipment which will exceed or overload the capacity of any utility facilities and that if any equipment installed by Tenant shall require additional utility facilities, the same shall be installed by Tenant at Tenant's expense in accordance with plans and specifications approved in writing by Landlord to the extent required by Article 9. Tenant shall be solely responsible for and shall pay all charges for its use or consumption of sanitary sewer, water, gas, electricity and any other utility services for the Leased Premises. 10 ARTICLE VII LANDLORD'S OBLIGATIONS ---------------------- 7.01 The Leased Premises shall be constructed by Landlord: (i) in accordance with the Approved Plan and Specifications and anything reasonably inferable therefrom; (ii) in compliance with all federal, state, county, municipal or local government laws, ordinances, regulations, rules and orders (including, without limitation, the Occupational Safety and Health Act of 1970, as amended), and after obtaining all necessary approvals and permits; (iii) diligently, continuously and in a workman-like manner; and (iv) with new and first-class materials. The obligations of Landlord in the preceding sentence shall be referred to as "Landlord's Work". All costs of Landlord's Work shall be borne by Landlord. Changes in the Approved Plans and Specifications shall be made only pursuant to written change order (hereafter a "Change Order") signed by both Tenant and Landlord and shall be in compliance with the Protective Covenants. Such Change Order shall specify the increase or decrease in construction costs as a result of the change (which shall be based on the actual costs and expenses attributable thereto with no mark-up or profit by Landlord or general contractor whatsoever, except for a 10% mark-up for overhead and profit to be charged by Landlord), and any reasonably expected increase or decrease in the time, if any, required to substantially complete construction as a result of such change. In the event of a net increase in the cost of construction resulting from such Change Orders requested by Tenant, Landlord shall invoice Tenant for the net increase upon Substantial Completion of the Leased Premises, in which event Tenant shall pay Landlord the amount thereof within ten (10) business days after delivery of such invoice. In the event of a net increase in the amount of time required for substantial completion resulting from such Change Orders requested by Tenant, such Change Orders shall constitute an amendment to this Lease extending the dates specified in Article 4 hereof by that number of days of net additional time so specified in such Change Orders; provided, however, that in such event the Commencement Date, for purposes of Tenant's obligation to commence the payment of rent and for purposes of fixing the lease term, shall be the date on which Substantial Completion would have occurred but for the extension of time caused by such Change Order. Landlord shall indemnify and hold Tenant harmless from or in connection with any occurrence during construction of the Leased Premises, unless such claims or demands are caused by any act or negligence of Tenant or its agents, contractors, employees or invitees. 7.02 During the course of construction of the Leased Premises, Tenant may enter upon the Leased Premises for purposes of inspecting and reviewing Landlord's Work, taking measurements, making plans, installing trade fixtures and telephones, erecting temporary or permanent signs and doing such other work as may be appropriate or desirable without being deemed thereby to have taken possession or obligated itself to pay rent but Tenant agrees that: (a) Landlord shall have no liability for injury to any person or damage to any property of Tenant stored on the Leased Premises except for damages caused by the negligence of Landlord or its employees, contractors, or agents, (b) Tenant shall not materially interfere with Landlord's construction work on the Leased Premises, (c) Tenant shall indemnify, protect and hold harmless Landlord from and against any and all claims, demands, damages, losses, costs, expenses, liabilities and 11 actions at law or in equity directly arising out of Tenant's exercise of such right, and (d) Tenant shall be solely responsible for the permitting of any such work it performs to the extent required. 7.03 No later than twenty (20) days after the Commencement Date, Tenant and Landlord shall an agreed final punch list ("Punch List") setting forth the work, if any, remaining to be done, or requiring correction, on the Leased Premises, and Landlord shall promptly commence, and thereafter with due diligence prosecute to completion the work required by the Punch List (which shall in no event include, except on the condition Tenant shall pay to Landlord the actual cost thereof plus ten percent (10%) of such amount, work required as a consequence of injury or damages to the Leased Premises attributable to Tenant, its agents, employees, contractors or movers). If the parties cannot agree upon the Punch List, then the Punch List shall be determined by an independent professional engineer employed by the mutual agreement of Landlord and Tenant. Landlord agrees to commence to complete all the items on the Punch List within thirty (30) days after Substantial Completion. Landlord acknowledges and agrees that in the event it has not completed all of the items on the Punch List within ninety (90) days after Substantial Completion, Tenant shall have the right to complete such items and charge Landlord the cost thereof. 7.04 Notwithstanding anything elsewhere in this Lease to the contrary, Landlord shall, at its sole cost and expense, upon notice by Tenant, for a period of one (1) year immediately subsequent to the Commencement Date, repair, replace or otherwise correct any defects or problems related to any of Landlord's Work, as well as defects in any of the additional items to be constructed or installed by Landlord in accordance with this Lease, provided that Landlord shall not have any obligation to correct or repair any defect or condition directly caused by the acts of Tenant, its agents, contractors, employees or invitees. In addition, Landlord acknowledges and agrees that it shall, at its sole cost and expense, repair any defects or problems in any of the structural components of the Leased Premises (including but not limited to the roof, exterior walls, and foundation) discovered during the Lease Term. Landlord acknowledges and agrees that Landlord's costs incurred in connection with its obligations under this Section 7.04 shall not be passed through as CAM. 7.05 From the Commencement Date until the expiration or earlier termination of the term hereof, Tenant shall have exclusive control of the Leased Premises and Landlord shall be under no obligation to inspect the same. Tenant shall report in writing to Landlord any defective condition known to it which Landlord is required to repair, and Landlord shall move with reasonable diligence to repair such condition. Landlord agrees that in the event Landlord fails to maintain the Leased Premises as required or fails to commence to make repairs within thirty (30) days after its receipt of notice from Tenant, or fails thereafter to diligently pursue such repair to completion, then Tenant shall have the right to make such repairs or have a contractor make such repairs and charge Landlord for the cost thereof. Failure to report such defects within 12 a reasonable time after discovery shall make Tenant responsible to Landlord for any and all additional costs or liability incurred by Landlord resulting from such delay in notification. ARTICLE VIII TENANT REPAIRS -------------- 8.01 Except as otherwise expressly provided in Article 7, Tenant shall, at its sole cost, keep and maintain the Leased Premises and appurtenances and every part thereof, including by way of illustration and not by way of limitation the all windows, and skylights, doors, any store front and the interior of the Leased Premises, including all plumbing, heating, air conditioning, sewer, electrical systems and all fixtures and all other similar equipment serving the Leased Premises (but expressly excluding the roof, exterior walls, foundation and all structural elements of the Building) in good and sanitary order, condition, and repair. Tenant shall be responsible for its own pest control within the Leased Premises. In the event Tenant fails to maintain the Leased Premises as required herein or fails to commence repairs (requested by Landlord in writing) within thirty (30) days after such request, or fails diligently to proceed thereafter to complete such repairs, Landlord shall have the right in order to preserve the Leased Premises or portion thereof, and/or the appearance thereof, to make such repairs or have a contractor make such repairs and charge Tenant for the cost thereof as additional rent. 8.02 Tenant shall obtain upon occupancy and keep current during the lease term a service maintenance contract on the heating, ventilation and air conditioning (HVAC) equipment serving the Leased Premises. The contract shall be between Tenant and a dealer-authorized company acceptable to Landlord, and shall at a minimum provide for an equipment check and tune-up service each spring and fall, and filter and lubrication service every six (6) months. A copy of said contract shall be provided to Landlord, as shall any modification, extension, renewal or replacement thereof. ARTICLE IX ALTERATIONS, MECHANICS' LIENS ----------------------------- 9.01 Alterations may not be made to the Leased Premises without prior written consent of Landlord, and any alterations of the Leased Premises excepting moveable furniture and trade fixtures shall at Landlord's option become part of the realty and belong to Landlord. Notwithstanding the foregoing provisions, Tenant shall have the absolute right to make alterations, additions or improvements to the Leased Premises ("Tenant's Alterations") having a cost of Fifteen Thousand Dollars ($15,000.00) for each alteration, addition or improvement, or Forty-Five Thousand Dollars ($45,000.00) in the aggregate per lease year, provided Tenant's Alterations do not materially and adversely affect the structure, electrical, mechanical or plumbing systems of the Building. 13 9.02 Should Tenant desire to alter the Leased Premises and Landlord must consent to such alterations, at Landlord's option, Tenant shall contract with a contractor approved by Landlord for the construction of such alterations. 9.03 Notwithstanding anything in section 9.01 or 9.02 above, Tenant may, install trade fixtures, machinery or other trade equipment in conformance with all applicable laws, statutes, ordinances, rules, regulations, and the same may be removed upon the termination of this Lease, and the Leased Premises are not damaged by such removal. Tenant shall return the Leased Premises on the termination of this Lease in the same condition as when rented to Tenant, reasonable wear and tear only excepted. Upon termination of the Lease, Tenant shall not be required to remove: (i) any alteration, addition or improvement approved by Landlord during the term unless Landlord advises Tenant at time of such approval that it will require such removal; and (ii) any of Tenant's Alterations unless Landlord advises Tenant within ten (10) days of its knowledge of such alteration that it will require such removal. Tenant shall keep the Leased Premises, the building and property in which the Leased Premises are situated free from any liens arising out of any work performed for, materials furnished to, or obligations incurred by Tenant, and Tenant shall discharge of record by bond or otherwise, within ten (10) days following the filing thereof, any mechanic's or similar lien or encumbrance filed against the Leased Premises for work or materials claimed to have been furnished to or for the benefit of Tenant and/or the Leased Premises, but expressly excluding any work performed for, materials furnished to, or obligations incurred by Landlord. All such work provided for above requiring Landlord's approval, shall be done at such times and in such manner as Landlord may from time to time designate. ARTICLE X WASTE AND QUIET CONDUCT ----------------------- 10.01 Tenant shall not commit, or suffer any waste upon the Leased Premises, or any nuisance, or other act or thing which may unreasonably interfere with the quiet enjoyment of any owner or occupant of any other property in the project in which the Leased Premises are located. ARTICLE XI FIRE INSURANCE, HAZARDS ----------------------- 11.01 No use shall be made or permitted to be made of the Leased Premises, nor acts done which might increase the existing rate of insurance upon the Building or cause the cancellation of any insurance policy covering the Building, or any part thereof, nor shall Tenant sell, or permit to be kept, used or sold, in or about the Leased Premises, any article which may be prohibited by 14 the standard form of fire insurance policies. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to the Leased Premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering the Leased Premises and appurtenances. In the event that Tenant takes any actions in the future, or conducts its business in such a way that causes an increase in the fire insurance rate on the Building, Landlord shall give Tenant notice of such proposed increase, and Tenant shall have a period of ten (10) days within which to discontinue such actions or use before Tenant shall be responsible for the payment of such increase in cost. ARTICLE XII INDEMNIFICATION BY TENANT ------------------------- 12.01 Tenant shall indemnify Landlord and hold Landlord harmless against and from any and all claims arising from Tenant's use of the Leased Premises (other than those arising from any negligence of Landlord or its agents or employees), or the conduct of its business or from any activity, work, or thing done, permitted or suffered by the Tenant in or about the Leased Premises, and shall further indemnify and hold harmless Landlord against and from any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act, neglect, fault or omission of the Tenant, or of its agents or employees, and from and against all costs, reasonable attorney's fees, expenses and liabilities incurred in or about such claim or any action or proceeding brought relative thereto and in case any action or proceeding be brought against Landlord by reason of any such claim. Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel, chosen by Tenant, and who is reasonably acceptable to Landlord. The obligations of Tenant under this Section 12.01 shall survive any termination or expiration of this Lease. 12.02 Landlord shall indemnify and hold harmless Tenant against and from all claims arising from any breach or default in the performance of any obligation on Landlord's part to be performed under this Lease, or arising from any act, neglect, fault or omission of Landlord or of its agents, employees or contractors and from and against all reasonable costs, reasonable attorneys' fees actually incurred, expenses and liabilities actually incurred in or about such claim or any action or proceeding brought relative thereto and in case any action or proceeding be brought against Tenant by reason of any such claim. Landlord upon notice from Tenant shall defend the same at Landlord's expense by counsel, chosen by Landlord, and who is reasonably acceptable to Tenant. The obligations of Landlord under this Section 12.02 shall survive any termination or expiration of this Lease. 15 ARTICLE XIII WAIVER OF CLAIMS ---------------- 13.01 Notwithstanding any indemnity granted herein, and notwithstanding any other term or provision of the Lease to the contrary, Landlord and Tenant hereby both release the other and their respective employees, agents and invitees from and waive any claims either may have against the other and their employees, agents, servants or invitees for any loss or damage to the Building, Leased Premises, Land, improvements on or to the Building, Leased Premises, or Land, or the contents of the foregoing, and any personal property stored or placed thereon by either of them caused by any of the perils insurable against under fire and extended coverage insurance policies with "all risks" endorsement, whether such damage or loss was caused by the negligence of either of them or their respective employees, agents, servants or invitees. The foregoing mutual release and waiver of subrogation shall apply whether or not such insurance on the Building, Leased Premises, Land, improvements, contents, and/or personal property was in force at the time of the loss of damage. Moreover, each party agrees to take all actions necessary to make the foregoing release effective and binding upon their respective insurance carriers so that such carriers specifically waive any right of subrogation that such carriers might otherwise have against the other party and/or their respective employees, agents, servants or invitees. ARTICLE XIV SIGNS, LANDSCAPING ------------------ 14.01 Landlord shall have the right to control landscaping and approve the placing of signs and the size and quality of the same. Tenant shall, however, be entitled to make changes to the landscaping plan shown on the Approved Plans and Specifications, with the prior written consent of the Landlord. Tenant shall place no exterior signs on the Leased Premises without the prior written consent of Landlord, but Landlord hereby approves the placement of an appropriate monument sign at the Sugarloaf Parkway entrance and a smaller monument sign and "truck entrance" and/or "delivery entrance" sign at the Premiere Parkway entrance. Any signs not in conformity with the Lease may be immediately removed by Landlord. Notwithstanding the above language, Landlord acknowledges and agrees that Tenant shall be entitled to have corporate identification signage on any and all Sugarloaf Office Park signs which list tenants or any multi-user directional signs constructed by Landlord within the Sugarloaf Office Park, and, furthermore, Landlord acknowledges and agrees that it will not withhold its approval of any proposed Tenant signage based upon size so long as such signage is in conformance with the Protective Covenants and all applicable governmental requirements. Finally, Tenant shall have the absolute right to place such identification signs within the interior of the Building as Tenant so elects. 16 ARTICLE XV ENTRY BY LANDLORD ----------------- 15.01 Tenant shall permit Landlord and Landlord's agents to enter the Leased Premises at all reasonable times during normal business hours for the purpose of inspecting the same or for the purpose of maintaining the building, or for the purpose of making repairs, alterations, or additions to any portion of the building, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required or for the purpose of posting notices of non-responsibility for alterations, additions or repairs; and shall permit Landlord upon the Leased Premises at any time within thirty (30) days prior to the expiration of this Lease for the purpose of placing any usual or ordinary "to let" or "to lease" signs, or placing upon the Building any usual or ordinary "for sale" signs, or ninety (90) days prior to the expiration of this Lease for showing the Leased Premises to prospective tenants, without any rebate of rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Leased Premises thereby occasioned. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the exterior doors about the Leased Premises. Notwithstanding the foregoing, Landlord agrees to use all reasonable efforts to provide Tenant at least twenty-four (24) hours prior written notice of its intent to enter the Leased Premises and further agrees any such entry shall be conducted in such manner so as to minimize any interference with Tenant's business operations. ARTICLE XVI TAXES ----- 16.01 (a) Tenant shall, without notice or demand, as additional rent, pay and discharge, on or before the last day on which the same may be paid without penalty, but in no event earlier than ten (10) days after receipt of any invoice or similar notice, all "taxes" (as hereinafter defined) which shall or may during the term be levied, assessed or imposed on or become a lien upon or grow due or payable out of or by reason of the Leased Premises or any part thereof, or the Landlord's interest in the Leased Premises. For the purposes hereof "taxes" shall mean all ad valorem taxes at any time imposed by the United States of America or by any state, city, county or other political or taxing subdivision thereof upon or against this Lease, the Leased Premises, the use or occupancy thereof, the buildings, improvements or personally thereon, any rent or use tax imposed on rent paid by Tenant under this Lease, or any assessments after the Commencement Date for the benefit of public works or improvements which benefit the Leased Premises. Notwithstanding anything hereinabove to the contrary, "taxes" shall not include any penalties or interest imposed or incurred because of Landlord's dilatory payment, unless the delay in payment is due to Tenant's breach of its obligations under this Lease including this Article 16, or any payment to reimburse Landlord or any affiliate, or related or controlled entity, for any site development or work done on the Leased Premises 17 or in the Sugarloaf Office Park. Taxes for the calendar years during which the Commencement Date and the last day of the term of the Lease occur shall be prorated so that Tenant pays only that portion of the taxes for such calendar years allocable to periods of time during the term of this Lease. (b) All taxes imposed upon the Leased Premises during the term of this Lease for public works or improvements which shall benefit the Leased Premises after the expiration of this Lease shall be equitably prorated, so that only the portion of such taxes allocable to the term of this Lease shall be included in determining Tenant's share of "taxes" in accordance with section 16.01(a) above. (c) Notwithstanding anything to the contrary expressed or implied in this Article 16 or elsewhere in this Lease, nothing herein is intended to or shall be held or construed so as to require Tenant to pay for any income taxes, franchise taxes, estate or gift taxes, inheritance taxes, or intangible taxes of Landlord. 16.02 Tenant shall pay as additional rent the amount of all taxes, other than income taxes, upon or measured by the rent payable hereunder, whether as a sales tax, transaction privilege tax, excise tax, or otherwise, which additional rent shall be due and payable at the same time as each installment of base rental. 16.03 Personal Property Taxes. Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Leased Premises. 16.04 Tax Protest. Tenant may, within the respective times and in the manner prescribed by law for such purposes, in its own name and behalf or, if necessary or appropriate in order to perfect such petition, in the name and on behalf of Landlord (subject to the provisions of section 16.06 hereof), petition for reduction of the assessed valuation of the Building and the Land, claim a refund of real estate taxes or assessments or otherwise challenge the amount, validity or applicability of any taxes or other tax that must be paid by Tenant under this Lease (a "Tax Protest"); provided that (a) Tenant shall pay such tax or assessment under protest, prior to delinquency, if such Tax Protest does not suspend the collection thereof from any party, and (b) no portion of the Leased Premises or any rentals payable hereunder or Landlord's title or interest herein would be in any danger of being sold, forfeited, interrupted or lost as a result of such Tax Protest. Tenant shall prosecute any Tax Protest with due diligence and continuity. Tenant shall provide Landlord with copies of any application, petition or other pleading filed in connection with any Tax Protest before filing. Landlord may, at its own expense, join with Tenant in making any such application, petition or other pleading, retain co-counsel, attend hearings, present evidence and arguments, and generally participate in the conduct of the tax Protest. If and to the extent that Landlord is requested to do so by Tenant, Landlord agrees to cooperate with Tenant in good faith in connection 18 with any Tax Protest undertaken by Tenant ("Landlord's Cooperation With Tax Protest"), provided Tenant promptly reimburses Landlord for any reasonable expenses in connection therewith. Subject to Landlord's right to reimbursement as set forth below, Tenant shall be entitled to receive and retain any refund of taxes or assessments obtained by Tenant, to the extent such taxes or assessment was paid by Tenant under this Article 16. Nothing contained in this section 16.04 shall limit or restrict Landlord's right to undertake any Tax Protest with respect to the Leased Premises at its own expense; to the extent Landlord obtains any reduction in or refund of taxes or assessments, Landlord's reasonable expenses of Landlord's Cooperation With Tax Protest shall be additional rent payable by Tenant to Landlord within ten (10) days of Tenant's receipt of Landlord's invoice therefore, but Landlord shall not be entitled to reimbursement by Tenant for the costs of such Landlord's Cooperation With Tax Protest in excess of any reduction and/or refund of such taxes or assessments so obtained. 16.05 In the event Tenant undertakes or files any Tax Protest in the name of Landlord, Tenant shall promptly provide Landlord written notice thereof, and Tenant acknowledges that Tenant's use of Landlord's name shall be subject to the indemnification of Landlord contained in Article 12 hereof. Tenant shall give Landlord five (5) days advance written notice of any such use of Landlord's name. 16.06 Landlord agrees to provide to Tenant a copy of any tax assessment, tax bill, tax statement or other tax invoice within ten (10) days of its receipt of the same. ARTICLE XVII INSURANCE --------- 17.01 (a) Liability Insurance. Tenant, at its own expense, shall obtain and keep in full force and effect at all times during the term of this Lease public liability insurance for the benefit of Landlord and Tenant (and, at Landlord's request, any Mortgagee (hereinafter defined) of Landlord) jointly against liability for personal injury and property damage in the amount of not less than Three Million Dollars ($3,000,000.00) in respect to injuries to or death of more than one person in any one occurrence, in the amount of not less than One Million Dollars ($1,000,000.00) in respect to injuries to or death of any one person, and in the amount of not less than One Million Dollars ($1,000,000.00) per occurrence in respect to damage to property. Tenant shall increase said insurance coverage as reasonably required by Landlord; provided, however, that the insurance premiums paid for such increased coverage shall not be 5% greater than the prior premiums paid by Tenant. All or part of the liability insurance coverage, if any, that may from time to time be required or maintained in excess of the minimum limits set forth above may be provided by an umbrella policy complying in all respects with the requirements of this Article 17 and which provides that its coverage is not limited or affected by claims made with respect to personal injury or property damage at other locations. As 19 used herein, "Mortgage" means any deed to secure debt, mortgage, deed of trust, or similar security instrument. "Mortgagee" means the holder of a Mortgage. (b) Tenant shall obtain and keep in full force and effect at all times during the term of this Lease on all of its personal property in the Leased Premises (including without limitation fixtures, equipment, movable and non- movable trade fixtures, inventory, merchandise and goods) a policy or policies of fire and extended coverage insurance with standard coverage endorsement to the full extent of their insurable value (provided, however, that so long as at least eighty percent (80%) of such insurable value is covered under Tenant's primary policy, the remaining coverage up to full insurable value may be provided by an umbrella policy complying in all respects with the requirements of this Article 17 and which provides that such coverage is not limited or affected by claims for loss or damage to insured property at other locations). During the term of this Lease the proceeds from any such policy or policies of insurance shall be used for the repair or replacement of the personal property, and Landlord will sign all reasonable documents necessary or proper in connection with the settlement of any claim or loss by Tenant. Landlord will have no obligation to carry insurance on Tenant's possessions and Landlord will not be responsible for any damage thereto except as expressly set forth in this Lease to the contrary. (c) Landlord shall procure and maintain in full force and effect fire and extended coverage insurance covering the Building in an amount at least equal to the full replacement cost thereof ("Landlord's Insurance"). Tenant shall reimburse Landlord for the cost of the premiums for Landlord's Insurance thirty (30) days after receipt of evidence showing payment by Landlord of such premiums; provided, that, Tenant shall only reimburse Landlord for such premiums to the extent the premiums, the coverage and the deductibles related to Landlord's Insurance are reasonable and customary. Landlord shall furnish Tenant with certificates of such policies whenever reasonably required by Tenant to satisfy Tenant that such policies are in full force and effect. (d) Each insurance policy required to be maintained by Tenant hereunder shall be written by a company having an A.M. Best Company rating of "A" or better and a financial category of "VII" or better and legally qualified to issue such insurance, and shall name as insured parties Landlord (and, at Landlord's request, any Mortgagee of Landlord) and Tenant as their interests may appear. Each such policy shall provide that it shall not be canceled or reduced except after not less than thirty (30) days written notice to Landlord (and any Mortgagee of Landlord), and shall also provide that the interest of Landlord and any Mortgagee of Landlord shall not be invalidated by any act or negligence of Tenant or Landlord or of any person or entity having an interest in the Leased Premises nor by occupancy or use of the Leased Premises for any purpose that is more hazardous than permitted by such policy. Tenant shall deliver to Landlord (and, at Landlord's request, any Mortgagee of Landlord) a certificate of 20 insurance evidencing the existence and renewal of each insurance policy which is required to be maintained by Tenant hereunder (and specifically confirming that such policy shall not be canceled or reduced except after not less than thirty (30) days written notice to Landlord and any Mortgagee of Landlord), such delivery to be made promptly after such insurance is obtained at least thirty (30) days prior to the expiration date of such insurance policy. If any such insurance policy has a deductible clause, Tenant shall be liable for the full deductible amount Each policy of property insurance maintained by Tenant hereunder shall provide that the insurer waives any right of subrogation against Landlord and any Mortgagee of Landlord, and any policy or policies of property insurance maintained by Landlord with respect to the Leased Premises shall provide that the insurer waives any right of subrogation against Tenant. Each such policy maintained by Tenant shall be primary and non-contributing with any insurance carried by Landlord (and any Mortgagee of Landlord). The limits of any insurance provided hereunder shall not limit the liability of Tenant hereunder. If Tenant shall fail to procure and maintain any insurance required hereunder, Landlord may, but shall not be required to, procure and maintain the same but at the expense of Tenant. (e) In addition to the foregoing, Tenant shall comply with any reasonable requirements of any Mortgagee of Landlord with respect to insurance on or with respect to the Leased Premises, provided such requirements do not materially increase the obligations or diminish the rights of Tenant hereunder. ARTICLE XVIII ABANDONMENT ----------- 18.01 Subject to Tenant's right to assign or sublease set forth in section 20.1, Tenant shall not vacate nor abandon the Leased Premises at any time during the term of this Lease; and if Tenant shall abandon, vacate or surrender the Leased Premises, or be dispossessed by process of law, or otherwise, any personal property belonging to Tenant and left on the Leased Premises shall, at the option of the Landlord, be deemed abandoned and be and become the property of Landlord. 18.02 Notwithstanding anything to the contrary, Tenant may vacate the Leased Premises during the term of this Lease provided that: (i) Tenant has not been notified in writing of an Event of Default hereunder prior to vacating the Leased Premises; (ii) Tenant adequately secures the Leased Premises to prevent damage, destruction or vandalism to the Leased Premises; (iii) Tenant continues such utilities to the Leased Premises as will prevent any damage to the Leased Premises; and (iv) Tenant continues to provide insurance for the Leased Premises and Tenant pays any increased premium resulting from a lack of a tenant in the Leased Premises. 21 ARTICLE XIX DESTRUCTION ----------- 19.01 In the event of damage to or destruction of the Leased Premises during the lease term which requires repairs to the Leased Premises, Landlord shall (subject to section 19.02 below) forthwith make repairs and put the Leased Premises in a condition at least as good as the condition which existed immediately prior to the damage or destruction ("Landlord's Reconstruction"), provided in Landlord's and Tenant's reasonable judgment repairs can be completed within one hundred twenty (120) days from the date of such damage or destruction under the laws and regulations of authorized public authorities, but such damage or destruction (including any destruction necessary in order to make repairs) shall in no way annul or void this Lease, except that Tenant shall be entitled to a proportionate reduction of rent while such repairs are being made. The proportionate reduction is to be based upon the extent to which the damage or destruction, or the making of repairs, shall interfere with the business carried on by Tenant in the Leased Premises. Notwithstanding anything to the contrary, if Landlord's Reconstruction cannot in Landlord's and Tenant's reasonable judgment be completed within one hundred twenty (120) days, then this Lease may be terminated at the option of either party, and all sums payable by Tenant shall be apportioned and paid through the date of such damage or destruction. Notwithstanding the foregoing, if Landlord's Reconstruction is not completed within one hundred twenty (120) days from the date of such damage or destruction, then this Lease may be terminated by Tenant, and all sums payable by Tenant shall be so apportioned. Landlord agrees to notify Tenant in writing of the estimated time period for the completion of required repairs within thirty (30) days after Landlord receives notice of the occurrence of the damaging event, and to promptly commence and diligently prosecute unto completion any repairs required to be made by Landlord hereunder. 19.02 (a) Either Landlord or Tenant may require that any dispute under this Article 19 be submitted to arbitration pursuant to this section 19.03. To the extent the provisions of this section 19.03 vary from or are inconsistent with the rules of the American Arbitration Association or any other arbitration tribunal, the provisions of this section 19.03 shall govern. All arbitration shall occur at a location in Atlanta, Georgia chosen by the arbitrators and shall, except as expressly provided to the contrary in this section 19.03, be conducted pursuant to the rules of the American Arbitration Association (or the successor organization, or if no such organization exists, then an organization composed of persons of similar professional qualifications). (b) The party desiring such arbitration shall give notice to that effect to the other party. As soon as possible, but in any event within the next ten (10) days, Landlord and Tenant shall each select one arbitrator. As soon as possible, but in any event within the next ten (10) days, the two arbitrators so selected shall select a third arbitrator. Each arbitrator shall be, if reasonably possible, a recognized expert in the subject matter of the arbitration. In the event of the failure, refusal or inability of any arbitrator to act, a new arbitrator shall be appointed in his stead, which appointment shall be made in the same manner as provided above. At the request of either party, the arbitrators shall 22 authorize the service of subpoenas for the production of documents or attendance of witnesses. (c) Within twenty (20) days after their appointment, the arbitrators so chosen shall hold a hearing at which each party may submit evidence, be heard and cross-examine witnesses, with each party having at least ten (10) days advance notice of the hearing. The hearing shall be conducted such that each of Landlord and Tenant shall have reasonably adequate time to present oral evidence or argument, but either party may present whatever written evidence it deems appropriate prior to the hearing (with copies of any such written evidence being sent to the other party). (d) The decision of the arbitrators so chosen shall be given within a period of twenty (20) days after the conclusion of such hearing, and shall be accompanied by findings of fact. The decision within which any two arbitrators so appointed and acting hereunder concur, shall in all cases be binding and conclusive upon the parties and shall be the basis for a judgment entered in any court of competent jurisdiction. (e) The fees and expenses of the arbitration proceeding and the fees of the third arbitrator appointed under this section 19.03 shall be equally borne by both parties. Landlord and Tenant shall each pay the fees of the arbitrator each selected, and the fees and expenses of preparing and presenting its own case. Landlord and Tenant may at any time by mutual written agreement discontinue arbitration proceedings and agree themselves upon any such matter submitted to arbitration. ARTICLE XX ASSIGNMENT AND SUBLETTING ------------------------- 20.01 Landlord shall have the right to transfer and assign, in whole or in part its rights and obligations in the Leased Premises; provided, however, in the event of any such transfer and assignment, Landlord shall remain primarily responsible for any liability to Tenant arising either: (i) prior to the date of said assignment; or (ii) by virtue of Landlord's failure to timely deliver the Leased Premises to Tenant in accordance with the standards and schedules set forth in this Lease. Tenant shall not assign this Lease or sublet all or any part of the Leased Premises without the prior written consent of the Landlord. Landlord agrees to provide Tenant written notice of its decision to either approve or disapprove of any proposed sublessee or assignee within ten (10) days of Tenant's request for such approval and failure to deliver such notice by Landlord within this ten (10) day period shall be deemed approval. Tenant shall state in its request for such approval that Landlord has only ten (10) days to respond or Landlord's approval will be deemed granted. In the event of any assignment or subletting, Tenant shall nevertheless at all times, remain fully 23 responsible and liable for the payment of the rent and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. Notwithstanding the foregoing, Tenant shall have the right, without Landlord's consent, to sublet the Leased premises or any part thereof, or assign this Lease, to any of Tenant's parent, subsidiaries or affiliated companies; provided, however, as a condition to any such subletting or assignment: (i) both Tenant and the proposed subtenant or, if applicable, assignee, shall be solvent at the time of each such subletting and/or assignment; (ii) Tenant shall provide Landlord at least ten (10) business days prior written notice of each such subletting and/or assignment; and (iii) no such subletting and/or assignment shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay Base Rental or additional rent hereunder and to perform all obligations to be performed by Tenant under this Lease. Upon the occurrence of an "Event of Default" as defined below, if all or any part of the Leased Premises are then assigned or sublet, Landlord, in addition to any other remedies provided by this Lease or provided by law, may at its option, collect directly from the assignee or subtenant all rents becoming due to Tenant by reason of the assignment or sublease. Any collection directly by Landlord from the assignee or subtenant shall not be construed to constitute a novation or a release of Tenant from the further performance of its obligations under this Lease, or an acceptance of such assignee or subtenant. In the event that Tenant sublets the Leased Premises or any part thereof, or assigns this Lease and at any time receives rent and/or other consideration which exceeds that which Tenant would at that time be obligated to pay to Landlord, Tenant shall pay to Landlord 50% of the gross excess in such rent as such rent is received by Tenant and 50% of any other consideration received by Tenant from such subtenant in connection with such sublease or, in the case of any assignment of this Lease by Tenant, Landlord shall receive 50% of any consideration paid to Tenant by such assignee in connection with such assignment Landlord acknowledges and agrees that Tenant shall be entitled to recoup any and all normal customary costs incurred in connection with its re-leasing or assigning the Leased Premises prior to sharing with Landlord any gross excess and/or additional consideration received by Tenant as a result of any sublease or assignment. In addition, should Landlord agree to an assignment or sublease agreement, Tenant will pay to Landlord on demand the sum of $500.00 to partially reimburse Landlord for its costs, including reasonable attorneys' fees, incurred in connection with processing such assignment or subletting request. 20.02 Landlord understands that Tenant, as a part of its business, stores materials and information for its clients and charges for such storage. Such storage shall not be considered an assignment or sublease under paragraph 20.01 and shall be a considered a Permitted Use under paragraph 5.01. 24 ARTICLE XXI INSOLVENCY OF TENANT -------------------- 21.01 Either (a) the appointment of a receiver to take possession of all or substantially all of the assets of Tenant, or (b) a general assignment by Tenant for the benefit of creditors, or (c) any action taken or suffered by Tenant under any insolvency or bankruptcy act shall, if any such appointments, assignments or action continues for a period of sixty (60) days, constitute a breach of this Lease by Tenant, and Landlord may at its election without notice, terminate this Lease and in that event be entitled to immediate possession of the Leases Premises and damages as provided below. ARTICLE XXII BREACH BY TENANT ---------------- 22.01 The occurrence of any of the following shall constitute an Event of Default ("Event of Default") under this Lease on the part of Tenant: (a) Failure to pay when due any payment of base rental, additional rent, or any other sum of money payable by Tenant under this Lease, and such failure to pay continues for a period of ten (10) days after notice from Landlord of such failure to pay; provided, however, Landlord shall not be required to provide such notice more than two (2) times in any one (1) calendar year, the third (3rd) and any subsequent such failure in such calendar year to pay within ten (10) days after the due date therefor constituting an Event of Default without Landlord being required to provide such notice or allow Tenant a grace period after such notice; (b) Tenant's interest in this Lease or the Leased Premises shall be subjected to any attachment, execution, levy or other judicial seizure pursuant to any order or decree entered against Tenant in any legal proceeding that is not stayed (so as to prevent seizure) pending appeal and such order or decree is not vacated or bonded against so as to prevent seizure upon the earlier to occur of (aa) fifteen (15) days prior to the sale of such interest pursuant to such order or decree, or (bb) sixty (60) days after entry of the order; or (c) Tenant breaches or fails to comply with any term, provision, condition, or covenant of this Lease, other than as described in clause 21.01(i) above, and such breach or failure continues for thirty (30) days after written notice from Landlord of such breach or failure to comply; or in the event such breach or failure is curable but cannot be cured within thirty (30) days and Tenant does not commence to cure such breach or failure promptly within such thirty (30) day period and continuously thereafter pursue such cure and remedy such breach or failure within a reasonable period of time, not to exceed an additional 90 days. 25 22.02 Upon the occurrence of an Event of Default, Landlord shall have the option to do and perform any one or more of the following in addition to, and not in limitation of, any other remedy or right permitted it by law or in equity or by this Lease: (a) Landlord, with or without terminating this Lease, may immediately or at any time thereafter re-enter the Leased Premises and correct or repair any condition which shall constitute a failure on Tenant's part to keep, observe, perform, satisfy, or abide by any term, condition, covenant, agreement, or obligation of this Lease or of any notice given Tenant by Landlord pursuant to the terms of this Lease, and Tenant shall fully reimburse and compensate Landlord on demand for Landlord's actual costs so incurred. (b) Landlord, with or without terminating this Lease, may immediately or at any time thereafter demand in writing that Tenant vacate the Leased Premises and thereupon Tenant shall immediately vacate the Leased Premises and remove therefrom all property thereon belonging to or placed in the Leased Premises by, at the direction of, or with consent of Tenant, whereupon Landlord shall have the right to re-enter and take possession of the Leased Premises. Any such demand, reentry and taking possession of the Leased Premises by Landlord, shall not of itself constitute an acceptance by Landlord of a surrender of this Lease, or of the Leased Premises by Tenant, and shall not of itself constitute a termination of this Lease by Landlord. (c) Landlord, with or without terminating this Lease, may immediately or at any time thereafter, reenter the Leased Premises pursuant to a court order and remove therefrom Tenant and all property belonging to or placed on the Leased Premises by, at the direction of, or with consent of Tenant. Any such re-entry and removal by Landlord shall not of itself constitute an acceptance by Landlord of a surrender of this Lease or of the Leased Premises by Tenant and shall not of itself constitute a termination of this Lease by Landlord. (d) Landlord, with or without terminating this Lease, may immediately or at any time thereafter use reasonable efforts to relet the Leased Premises or any part thereof, without cost to Landlord (it being agreed that "reasonable efforts" does not require Landlord to make any effort to relet the Leased Premises or any portion thereof in preference to any unleased space or space leased or subleased by Landlord or its affiliates in other buildings) for such time or times, at such rental or rentals and upon such other terms and conditions as Landlord in its sole, but reasonable judgment (taking into account the fair market rental value of the Leased Premises) deems advisable, and Landlord may make any alterations or repairs to the Leased Premises which it in its reasonable determination may be necessary or proper to facilitate such reletting; and Tenant shall pay all reasonable costs of such reletting including but not limited to the cost of any such alterations and repairs to the Leased Premises, reasonable 26 attorneys' fees actually incurred, leasing inducements, and brokerage commissions; and if this Lease shall not have been terminated, Tenant shall continue to pay all rent due under this Lease up to and including the date of beginning of payment of rent by any subsequent tenant of part or all of the Leased Premises, and thereafter Tenant shall pay monthly during the remainder of the term of this Lease the difference, if any, between the rent and other charges collected from any such subsequent tenant or tenants and the rent and other charges reserved in this Lease, but Tenant shall not be entitled to receive any excess of any such rents collected over the rent reserved herein. (e) Landlord may immediately or at any time thereafter terminate this Lease, and this Lease shall be deemed to have been terminated upon receipt by Tenant of notice of such termination; upon such termination Landlord shall recover from Tenant all damages that Landlord may suffer by reason of such termination including, without limitation, all arrearages in rentals, reasonable costs, charges, additional rentals, and reimbursements, the cost (including court costs and reasonable attorneys' fees actually incurred) of recovering possession of the Leased Premises, the actual or estimated (as reasonably estimated by Landlord) cost of any alteration of or repair to the Leased Premises which is necessary or proper to prepare the same for reletting and, in addition thereto, Landlord shall have and recover from Tenant an amount equal to the present value (discounted at a rate per annum equal to the discount rate of the Federal Reserve Bank of Atlanta at the time the Event of Default occurs) of the rental to be paid by Tenant for the remainder of the lease term, over the present value (discounted at the same rate) of the fair market value of the Leased Premises for the remainder of the lease term. 22.03 If Landlord re-enters the Leased Premises or terminates this Lease pursuant to any of the provisions of this Lease, Tenant hereby waives all claims for damages which may be caused by such re-entry or termination by Landlord's reasonable acts complying with the provisions of this Lease. No such reentry or termination shall be considered or construed to be forcible entry. 22.04 "Events of Default by Landlord" under this Lease shall be deemed to be the situations where Landlord shall fail to comply with any term, provision or covenant of this Lease and shall not commence to cure such failure within thirty (30) days after written notice thereof and diligently and in good faith continue to cure the default until completion. If the default cannot reasonably be cured within such thirty (30) day period, Landlord shall not be in default if Landlord commences to cure the default within the thirty (30) day period and diligently and in good faith continues to cure the default until completion. In no event shall Landlord's right to cure extend beyond ninety (90) days following written notice from Tenant, unless such period is extended by Tenant Delays or Excusable Delays. 27 22.05 Upon the occurrence of any Event of Default by Landlord, Tenant shall have the right to perform the obligations of Landlord and Tenant shall have Landlord reimburse Tenant on demand for any reasonable and necessary costs and expenses which Tenant may have incurred. ARTICLE XXIII ATTORNEY'S FEES --------------- 23.01 If Landlord and Tenant litigate any provision of this Lease or the subject matter of this Lease, the unsuccessful litigant will pay to the successful litigant all costs and expenses, including reasonable attorneys' fees and court costs, incurred by the successful litigant at trial and on any appeal. If, without fault, either Landlord or Tenant is made a party to any litigation instituted by or against the other, the other will indemnify the faultless one against all loss, liability, and expense, including reasonable attorneys' fees and court costs, incurred by it in connection with such litigation. ARTICLE XXIV CONDEMNATION ------------ 24.01 If, at any time during the term of this Lease, title to the entire Leased Premises should become vested in a public or quasi-public authority by virtue of the exercise of expropriation, appropriation, condemnation or other power in the nature of eminent domain, or by voluntary transfer from the owner of the Leased Premises under threat of such a taking then this Lease shall terminate as of the time of such vesting of title, after which neither party shall be further obligated to the other except for occurrence antedating such taking. The same results shall follow if less than the entire Leased Premises be thus taken, or transferred in lieu of such a taking, but to such extent that it would be not feasible or commercially impractical for Tenant to reasonably conduct his trade or business therein. 24.02 Should there be such a partial taking or transfer in lieu thereof, but not to such an extent as to make such continued occupancy and operation by Tenant not feasible or commercially impractical, then this Lease shall continue on all of its same terms and conditions subject only to an equitable reduction in rent proportionate to the effect (if any) of such taking on Tenant's continued occupancy and operation. 24.03 Subject to section 24.04 below, in the event of any such taking or transfer, whether or not it covers the entire Leased Premises or a portion thereof, it is expressly agreed and understood that all sums awarded, allowed or received in connection therewith shall belong to Landlord, and any such rights otherwise vested in Tenant are hereby assigned to Landlord, and Tenant shall have no interest in or claim to any such sums or any portion thereof, whether 28 the same be for the taking of the property or for damages, or otherwise; provided, however, that Tenant may separately claim and receive from the condemning authority (but not from Landlord), for compensation for Tenant's removal and relocation costs and/or business interruption, the value of any of Tenant's property taken, and any alterations, additions or improvements made by Tenant. 24.04 If all or any part of the Leased Premises shall be the subject of a temporary taking, this Lease shall nevertheless remain in full force and effect, and Tenant shall continue to be responsible for all of its obligations hereunder insofar as Tenant's ability and authority to comply with such obligations are not affected by such taking including, without limitation, the payment of all base rental and additional rent. The award for any such temporary taking payable for any period prior to the expiration date of this Lease shall be paid to Tenant and the award for any temporary taking for any period thereafter shall be paid to Landlord. A taking or transfer in lieu of taking shall be deemed to be a temporary taking if the term of such taking does not extend beyond the then current lease term. ARTICLE XXV NOTICES ------- 25.01 Prior to the Commencement Date of this Lease, all notices, statements, demands, requests, consents, approvals, authorization, offers, agreements, appointments, or designations under this Lease by either party to the other shall be in writing and shall be sufficiently given and served upon the other party, if sent by facsimile to the number for each party set forth below or by certified mail, return receipt requested, postage prepaid, at the address for each party set forth below: (a) To Tenant at 1828 Meca Way, Norcross, Georgia 30093, Attention: David Ellin, Facsimile No. 770-717-2111, with a copy to such other place as Tenant may from time to time designate by notice to Landlord. (b) To Landlord at 4497 Park Drive, Norcross, Georgia 30093, Facsimile No._____________, with a copy to such other place as Landlord may from time to time designate by notice to Tenant. 25.02 Following the Commencement Date, the numbers and addresses shall be: (a) To Tenant at the Leased Premises, Attention: David Ellin, Facsimile No. _________________, with a copy to such other place as Tenant may from time to time designate by notice to Landlord. 29 (b) To Landlord at 4497 Park Drive, Norcross, Georgia 30093, Facsimile _______________, with a copy to such other place as Landlord may from time-to-time designate by notice to Tenant. 25.03 All notices shall be deemed received five (5) days after being deposited in the mail in accordance with the foregoing provisions, or if sent by facsimile on the date of the facsimile transmittal. ARTICLE XXVI WAIVER ------ 26.01 The waiver by either party of any breach of any term, covenant, or condition herein contained shall not be deemed to be a waiver of such term, covenant, or condition or any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant, or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. ARTICLE XXVII EFFECT OF HOLDING OVER ---------------------- 27.01 If Tenant should remain in possession of the Leased Premises after the expiration of the lease term and without executing a new lease, then such holding over shall be construed as a tenancy from month to month, subject to all the conditions, provisions, and obligations of this Lease insofar as the same are applicable to a month to month tenancy, except that the rent payable pursuant to subsection 3.01 hereof shall be 125% of the rent payable pursuant to subsection 3.01 for any month or portion thereof during the first thirty (30) days of any holdover period. In such event, Landlord shall have the right to terminate such tenancy-at-sufferance by giving Tenant fifteen (15) business days prior written notice of such termination. ARTICLE XXVIII SUBORDINATION ------------- 28.01 This Lease and all rights of Tenant hereunder are and shall be subject and subordinate to each Mortgage which may now or hereafter affect Landlord's fee simple title to the Leased Premises and to any modifications, renewals, consolidations, extensions or replacements thereof; provided, however, that such subordination is conditioned upon the holder of any such Mortgage 30 first executing and delivering to Tenant a Subordination, Non-Disturbance and Attornment Agreement as described in section 28.02 below. Subject to the provisions of the immediately preceding sentence, Tenant agrees to recognize and attorn to any party succeeding to the interest of Landlord as a result of the enforcement of any Mortgage, and to be bound to such party under all of the terms, covenants, and conditions of this Lease, for the balance of the term of this Lease, including renewal terms, with the same force and effect as if such party were the original Landlord under this Lease. 28.02 Upon the request of Landlord, the lessor under any such Prime Lease or the holder of any Mortgage, Tenant agrees to execute a Subordination, Non- Disturbance and Attornment Agreement with respect to each Mortgage or other instrument from time to time encumbering fee simple title to the Leased Premises. Tenant agrees to execute and deliver any Subordination, Non- Disturbance and Attornment Agreement substantially in the form attached hereto as Exhibit "E" ("SNDA"), or in such other form as Landlord or the holder of such Mortgage shall reasonably request. Notwithstanding anything to the contrary in this Lease: (i) Tenant's obligations under this Lease shall be contingent upon (and only Tenant shall have the right to waive such contingency) Tenant, Landlord and all of the holders of Mortgages on the Leased Premises each executing an SNDA prior to the Commencement Date; and (ii) Landlord covenants to deliver to Tenant an SNDA executed by each of the holders of Mortgages on the Leased Premises and Landlord prior to the Commencement Date. 28.03 Notwithstanding the foregoing provisions of this Article 28, Tenant shall, upon demand, at any time or times, execute, acknowledge and deliver to Landlord or holder of any Mortgage, any and all instruments that may be necessary to make this Lease superior to the lien of such Mortgage, and each renewal, modification, consolidation, replacement and extension thereof. ARTICLE XXIX ESTOPPEL CERTIFICATE -------------------- 29.01 Upon ten (10) days notice from Landlord to Tenant, Tenant shall deliver a certificate dated as of the first day of the calendar month in which such notice is received, executed by an appropriate officer, partner or individual, in the form as Landlord may reasonably require and stating the following: (i) the commencement date of this Lease; (ii) the space occupied by Tenant hereunder; (iii) the expiration date hereof; (iv) a description of any renewal or expansion options; (v) the amount of rental currently and actually paid by Tenant under this Lease; (vi) the nature of any default or claimed default hereunder by Landlord; (vii) that Tenant is not in default hereunder nor has any event occurred which with the passage of time or the giving of notice would become a default by Tenant hereunder and (viii) such other statements as Landlord may reasonably require. 31 29.02 Upon ten (10) days notice from Tenant to Landlord, Landlord shall deliver a certificate dated as of the first day of the calendar month in which such notice is received, executed by an appropriate officer, partner or individual, in the form as Tenant may reasonably require and stating the following: (i) the commencement date of this Lease; (ii) the space occupied by Tenant hereunder; (iii) the expiration date hereof; (iv) a description of any renewal or expansion options; (v) the amount of rental currently and actually paid by Tenant under this Lease; (vi) the nature of any default or claimed default hereunder by Tenant; (vii) that Landlord is not in default hereunder nor has any event occurred which with the passage of time or the giving of notice would become a default by Landlord hereunder and (viii) such other statements as Tenant may reasonably require. ARTICLE XXX PARKING ------- 30.01 Tenant agrees to park all Tenant's trucks in the designated parking spaces, if any such exist, at the rear of the Building. "Parking" as used herein means the use by Tenant's employees, its visitors, invitees, and customers for the parking of motor vehicles for such periods of time as are reasonably necessary in connection with use of and/or visits to the Leased Premises. No vehicle may be repaired or serviced in the parking area and any vehicle deemed abandoned by Landlord in its reasonable discretion will be towed from the Leased Premises and all costs therein shall be borne by the Tenant. ARTICLE XXXI MORTGAGE PROTECTION ------------------- 31.01 In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any holder of a Mortgage covering the Leased Premises whose address shall have been furnished to Tenant, and shall offer such Mortgagee a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. Tenant shall accept cure by Landlord's Mortgagee; provided, however, such cure must occur within the same time period provided for a Landlord cure under the Lease. 32 ARTICLE XXXII RULES AND REGULATIONS --------------------- 32.01 Tenant shall comply with all covenants, restrictions and other matters of record in the deed records of the county in which the Leased Premises are located which affect or encumber the Leased Premises, the Building or the Land. ARTICLE XXXIII BROKERAGE COMMISSIONS --------------------- 33.01 Landlord and Tenant acknowledge that Carter & Associates, L.L.C. ("Broker") has represented Tenant in connection with this Lease. Broker's commission, however, shall be payable by Landlord. Landlord shall pay to Broker a leasing commission in an amount as set forth in a separate agreement between Broker and Landlord. The parties hereto do acknowledge and agree that that certain Commission Agreement dated September 15, 1997, by and between Weeks Development Partnership, a Georgia general partnership, as lessor/owner and Carter & Associates, L.L.C. as broker is hereby incorporated into this lease as if same were repeated in full. Broker acknowledges that Broker is not entitled to any other compensation in connection with this Lease other than as expressly provided hereinabove. 33.02 Landlord and Tenant each represents and warrants to the other that it has not dealt with any broker, agent, commission salesman or other person (other than Broker) in the negotiations for and procurement of this Lease and of the Leased Premises and that no commissions, fees, or compensation of any kind are due and payable in connection herewith to any broker, agent, commission salesman or other person (other than Broker) as a result of any such dealings. Landlord and Tenant each hereby agrees to indemnify the other and hold the other harmless from and against any and all claims, suits or judgments or in the enforcement of this indemnity for any fees, commissions or compensation of any kind which arise out of or in any way connected with any claimed dealings or relationship with the indemnifying party. 33.03 Broker represents and warrants to Landlord and Tenant that Broker has not dealt with any broker, agent, commission salesman or other person in the negotiations for and procurement of this Lease and of the Leased Premises, and that no commissions, fees, or other compensation of any kind are due and payable in connection herewith to any broker, agent, commission salesman or other person as a result of any such dealings. Broker agrees to indemnify Landlord and Tenant and hold Landlord and Tenant harmless from and against any and all claims, suits or judgments (including without limitation, reasonable attorneys' fees and court costs incurred in connection with any such claims, suits or judgments or in the enforcement of this indemnity) for any fees, commissions or 33 compensation of any kind which arise out of or in any way connected with any claimed dealings or relationship with Broker. 33.04 Broker has executed this Lease solely for the purpose of agreeing to the provisions of this Article 34 and for no other purpose. ARTICLE XXXIV DELAYS ------ 34.01 Definition. The term "Excusable Delays" shall mean any delay due to war, natural catastrophe, future order of any government, court or regulatory body claiming jurisdiction, blockage, embargo, or similar regulation or order of any government or other regulatory body, storm, flood, washout, adverse weather conditions, inability to obtain or delay in obtaining permits for reasons beyond the control of the party seeking such permits, (provided that applications for permits have been made within a reasonable time), or inability to obtain any approval or consent required under the Protective Covenants for reasons beyond the control of the party seeking such approval or consent, or any other cause whatsoever beyond the reasonable control of the party from whom performance is required, whether or not similar to any of the causes stated above; provided, however, that a party's lack of funds or a party's failure, refusal or neglect to pay any amount due hereunder shall not be deemed to be a cause beyond the control of such party. 34.02 Performance Excused. Landlord and Tenant shall each be excused for the period of any Excusable Delay from, and shall not be deemed in default with respect to, the performance of any of the terms, covenants and conditions of this Lease to be performed by such party when prevented from doing so by Excusable Delays; provided, however, that nothing contained in this section shall excuse a party's performance or prohibit the other party from exercising any remedy in any circumstance in which any other provision of this Lease expressly provides that such party is not excused or that such remedy may be exercised notwithstanding or without regard to the existence of all or certain Excusable Delays. 34.03 The term "Tenant Delays" shall mean and refer to delays directly attributable to or caused by Tenant or Tenant's employees or agents, including any failure by Tenant to make any decision within the time frame specified in the Construction Schedule, except those delays contributed to by Landlord or Landlord's employees, agents, contractors or invitees. 34.04 The time period for any Excusable Delay or Tenant Delay hereunder shall not be deemed to have commenced until a party claiming such delay sends notice to the other party that such delay has occurred. Notwithstanding the 34 foregoing, a party claiming a delay can set a date in such notice up to five (5) days prior to the date the notice is sent and this date shall be deemed the commencement of such delay; provided that, the delay did in fact commence on such day. Any Excusable Delay or Tenant Delay shall continue only as long as necessary in the reasonable determination of the party claiming such delay, and only so long as the party claiming such delay exercises due diligence to remove and overcome such delay. MISCELLANEOUS PROVISIONS ------------------------ A. Whenever the singular number is used in this Lease and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders, and the word "person" shall include corporation, firm or association. If there be more than one tenant, the obligations imposed upon Tenant under this Lease shall be joint and several. B. The headings or titles to sections of this Lease are not a part of this Lease and shall have no effect upon the construction or interpretation of any part of this Lease. C. This instrument contains all of the agreements and conditions made between the parties to this Lease and may not be modified orally or in any other manner than by agreement in writing signed by all parties to this Lease. D. Time is of the essence of each term and provision of this Lease. E. Except as otherwise expressly stated, each payment required to be made by Tenant shall be in addition to and not in substitution for other payments to be made by Tenant. F. Subject to Article 19, the terms and provisions of this Lease shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors, and assigns of Landlord and Tenant. G. Except as otherwise expressly provided herein, all covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. H. Where the consent, approval or acceptance of a party is required, the party agrees that such consent, approval or acceptance shall not be unreasonably withheld, conditioned or delayed. I. This Lease shall create the relationship of Landlord and Tenant between Landlord and Tenant; no estate shall pass out of Landlord; Tenant has only a 35 usufruct, not subject to levy and/or sale and not assignable by Tenant except as provided in section 19.01 hereof. J. Tenant acknowledges and agrees that Landlord shall not provide guards or other security protection for the Leased Premises and that any and all security protection shall be the sole responsibility of Tenant; provided, -------- however, that if Landlord and Tenant reasonably determine that security - ------- protection would assist to prevent vandalism or other mischief at the Leased Premises, then Landlord shall hire reasonable security protection for the Leased Premises and 50% of such costs can be charged to Tenant as CAM. K. This Lease shall be governed by Georgia law. L. Both parties shall execute a memorandum of this Lease for the purpose of recordation attached as Exhibit "F" contemporaneous with the execution of the Lease. Said memorandum or short form of this Lease shall describe the parties, the Leased Premises and the lease term, the renewal and purchase options, and shall incorporate this Lease by reference. Said memorandum or short form of this Lease shall not include the economic terms of this Lease unless both parties consent. M. Except as otherwise expressly provided herein, Landlord's liability for performance of its obligations under the terms of this Lease shall be limited to its interest in the Leased Premises, and neither Landlord, nor any officer, director, shareholder or partner of Landlord, or of any partner of Landlord, shall have any personal liability whatsoever with respect to this Lease. Landlord's exculpation of liability hereunder shall not apply to any liability of Landlord resulting from its failure to timely deliver the Leased Premises to Tenant. 36 IN WITNESS WHEREOF, the parties hereto who are individuals have set their hands and seals, and the parties who are corporations have caused this instrument to be duly executed by its proper officers and its corporate seal to be affixed, as of the day and year first above written.
LANDLORD: Signed, sealed and delivered WEEKS DEVELOPMENT PARTNERSHIP, a Georgia general as to the Landlord, in the partnership presence of: /s/ By: Weeks Realty Services, Inc., a Georgia - ------------------------------- corporation, its managing general partner Unofficial Witness /s/ By: /s/ Forrest Robinson - ------------------------------- -------------------------------------------- Notary Public Name: Forrest Robinson ------------------------------------------ Its: President/COO ------------------------------------------- (CORPORATE SEAL) TENANT: Signed, sealed and delivered INNOTRAC CORPORATION as to the Tenant, in the presence of: By: /s/ David Ellin /s/ ------------------------------------------- - ------------------------------- Name: David Ellin Unofficial Witness ----------------------------------------- /s/ Its: Sr. V.P. & COO - ------------------------------- ----------------------------------------- Notary Public (CORPORATE SEAL) BROKER: Signed, sealed and delivered CARTER & ASSOCIATES, L.L.C. as to the Broker, in the presence of: By: /s/ George P. Edwards /s/ ------------------------------------------ - ------------------------------- Name: George P. Edwards Unofficial Witness ----------------------------------------- Its: Authorized Agent ----------------------------------------- /s/ (CORPORATE SEAL) - ------------------------------- Notary Public
37 EX-10.9 9 SPLIT DOLLAR LIFE INSURANCE AGREEMENT EXHIBIT 10.9 SPLIT DOLLAR LIFE INSURANCE AGREEMENT (the "Agreement" or the "Plan") THIS AGREEMENT is made as of the 10 day of July, 1997, by and between (1) INNOTRAC CORPORATION, a Georgia corporation (the "Corporation"), (2) BRUCE V. BENATOR, as Trustee of THE SCOTT DAVID DORFMAN FAMILY TRUST #2 U/A January 28, 1997 (the "Owner"), and (3) SCOTT DAVID DORFMAN ("SCOTT") (the Corporation, the Owner and SCOTT sometimes are referred to herein collectively as the "Parties" and individually as a "Party"). The Corporation highly values SCOTT's efforts, abilities and accomplishments. SCOTT is deemed to be a member of a select group of management personnel and one of the Corporation's highly regarded employees. The Corporation, as an inducement to SCOTT's continued employment, wishes to assist SCOTT with SCOTT's personal life insurance program. SCOTT agrees to participate in such program to the extent hereinafter provided. The Plan is intended to qualify as a life insurance employee benefit plan as described in Revenue Ruling 64-328. NOW, THEREFORE, in consideration of the mutual covenants and agreements hereinafter set forth, the Parties hereto agree as follows: a) Life Insurance Policy/Policies: ------------------------------ (1) In furtherance of the purposes of this Agreement, one or more life insurance policies having an aggregate face amount of up to One Million Dollars ($1,000,000) (collectively the "Policies" and individually a "Policy") have been or may be issued on SCOTT's life by one or more insurance companies (collectively the "Insurers" and individually an "lnsurer"). See Schedule A attached to this Agreement for particulars regarding each Policy issued in connection with this Plan. (2) This Agreement will be effective as to each Policy upon the later to occur of (A) the execution of this Agreement, or (B) the issuance to and acceptance of such Policy by the Owner. b) Rights of Parties: ----------------- (1) The Owner shall be the sole and absolute owner of each Policy and shall have and may exercise all incidents and rights of ownership with respect to each Policy, including, by way of illustration and not limitation, the right to surrender the Policy, the right to make policy loans, the right to designate and change the beneficiary and the right to elect and to receive dividends. All such rights are reserved exclusively to the Owner and may be exercised solely by the Owner. (2) In exchange for the Corporation's payment of premiums as provided in paragraph (c) of this Agreement, the Owner agrees to make the applicable payment(s) described in subparagraphs (b)(2)(A) through (b)(2)(C) of this Agreement below upon the first to occur of the following events: (A) SCOTT's death; (B) as to any particular Policy, the lapse of such Policy or the cancellation or surrender of such Policy by the Owner; or (C) the bankruptcy, receivership, dissolution or cessation of business of or by the Corporation (the first to occur of such events is referred to as the "Triggering Event"). (A) If the Triggering Event is SCOTT's death, the Owner agrees to return to the Corporation with respect to each Policy that shall be in existence at SCOTT's death an amount equal to the lesser of: (i) the Corporation's Premium Advance with respect to such Policy; or (ii) the amount of the net proceeds payable upon SCOTT's death with respect to such Policy. (B) If the Triggering Event is the lapse, cancellation or surrender of a Policy, the Owner agrees to return to the Corporation an amount equal to the lesser of: (i) the Corporation's Premium Advance with respect to such Policy; or (ii) the sum of the Total Cash Value of such Policy at the time of such lapse, cancellation or surrender, plus all unpaid loan amounts outstanding against such Policy at the time of such lapse, cancellation or surrender. (C) If the Triggering Event is the bankruptcy, receivership, dissolution or cessation of business of or by the Corporation, the Owner agrees to return to the Corporation with respect to each Policy, that shall be in existence at the time of such bankruptcy, receivership, dissolution or cessation of business an amount equal to the lesser of: (i) the Corporation's Premium Advance with respect to such Policy; or (ii) the sum of the Total Cash Value of such Policy at the time of such bankruptcy, receivership, dissolution or cessation of business, plus all unpaid loan amounts outstanding against such Policy at the time of such bankruptcy, receivership, dissolution or cessation of business. c) Payments of Premiums: -------------------- (1) The Owner shall remit to the Insurer in a timely manner a portion of each premium due on each Policy, which portion (herein referred to as the "Owner's Portion") shall be equal to the lesser of: (A) the value of the entire economic benefit that would be taxable to SCOTT but for such payment; or (B) the entire premium in question. The -2- economic value that would be taxable to SCOTT but for such payment shall be calculated by using the lower of: (A) the "PS 58" rate, whichever shall be applicable, as set forth in the laws, regulations or rulings which governs the federal income tax consequences of split dollar life insurance arrangements at the time in question; or (B) the Insurer's applicable annual renewable term insurance rates for providing a comparable amount of insurance at the time in question. The Owner shall be entitled to elect to pay any additional part or all of any premium on any Policy by policy loan or other borrowing, and shall deliver notice of such election to the Corporation on or before the premium due date. The Owner shall have the right to apply any dividends declared on any Policy toward the reduction of a premium otherwise payable. (2) The Corporation shall remit to each Insurer in a timely manner all premium amounts not paid by the Owner with respect to each Policy. d) Use of Dividends: All dividends attributable to each Policy shall ---------------- be applied, in the Owner's sole discretion, to the purchase of paid-up additions from the Insurer or a reduction of premiums. e) Payment of Proceeds: Upon the SCOTT's death, such party or ------------------- parties as shall be designated in writing by the Owner as beneficiary (or beneficiaries) of each Policy shall receive the proceeds of such Policy. f) Definitions: For purposes of this Agreement, the following ----------- definitions are applicable: (1) The "Guaranteed Cash Value" of a Policy is its contractually guaranteed cash value only. (2) The "Total Cash Value" of a Policy consists of such Policy's Guaranteed Cash Value, cash values of additions, values from accumulation and accrued but unpaid dividends. (3) The "Corporation's Premium Advance" with respect to each Policy is an amount equal to the cumulative total of the premiums paid by the Corporation with respect to such Policy. g) Termination of Agreement: This Agreement shall terminate and be ------------------------ of no further effect upon the Owner's complete satisfaction of all of the Owner's obligations to reimburse the Corporation as set forth in subparagraph (b)(2) of this Agreement. h) Named Fiduciary: The Treasurer of the Corporation (currently SCOTT --------------- DAVID DORFMAN) is hereby designated as the Named Fiduciary of the Plan, in accordance with the Employee Retirement Income Security Act of 1984, and shall serve in such capacity until his/her resignation or removal by the Board of Directors of the Corporation and the -3- appointment of a successor by a duly adopted resolution of such Board. The business address and telephone number of the Named Fiduciary are: INNOTRAC CORPORATION; 1828 Meca Way, N.W., Norcross, GA 30093. The Named Fiduciary shall have the authority to control and manage the operation and administration of this Plan. However, the Named Fiduciary may allocate his/her responsibilities for the operation and administration of this Plan, including the designation of persons who are not Named Fiduciaries, to carry out fiduciary responsibilities. The Named Fiduciary shall affect such allocation of his/her responsibilities by delivering to the Corporation a written instrument signed by him/her that specifies the nature and extent of the responsibilities allocated, including, if appropriate, the person(s) who are designated to carry out fiduciary responsibilities under this Plan. The Named Fiduciary of this Plan shall be responsible for making timely delivery of any required premiums to the Insurer. All Plan documents shall be retained by the Named Fiduciary and made available for examination at the above business address. Upon written request, the Plan documents and other information shall be provided to the Parties. i) Claims Procedure: Benefits shall be payable in accordance with ---------------- the Plan provisions. Should the Owner or a properly designated beneficiary (collectively referred to as the "Claimant") fail to receive benefits to which the Claimant believes he, she or they is or are entitled, a claim may be filed. Any claim for a Plan benefit hereunder shall be filed by the Claimant by a written communication which is made by the Claimant or the Claimant's authorized representative which is reasonably calculated to bring the claim to the attention of the Named Fiduciary. If a claim for a Plan benefit is wholly or partially denied, a written notice of the decision shall be furnished to the Claimant by the Named Fiduciary or his/her designee within a reasonable period of time after receipt of the claim by the Plan, which notice shall include the following information: (1) The specific reason or reasons for the denial; (2) Specific reference to the pertinent Plan provisions upon which the denial based; (3) A description of any additional material or information necessary for the Claimant to perfect the claim and an explanation of why such material or information is necessary; and (4) An explanation of the Plan's claim review procedures. In order that a Claimant may appeal a denial of a claim, a Claimant or his/her duly authorized representative: -4- (A) May request review to the Named Fiduciary or his/her designee not later than sixty (60) days after receipt by the Claimant of written notification of the denial of a claim; (B) May review pertinent documents; and (C) May submit issues and comments in writing. A decision on review of a denied claim shall be made not later than sixty (60) days after the Plan's receipt of a request for review, unless special circumstances require an extension of time for processing, in which case a decision shall be rendered within a reasonable period of time, but not later than one hundred twenty (120) days after receipt of a request for review. The decision on review shall be in writing and shall include the specific reason(s) for the decision and the specific reference(s) to the pertinent Plan provisions on which the decision is based. Notwithstanding anything in this paragraph to the contrary, any claim for a death benefit under a Policy under this Plan shall be filed with the Insurer by the Claimant or his or her authorized representative on the form or forms prescribed for such purpose by the Insurer. The Insurer shall have the authority for determining whether a death claim shall or shall not be paid, either in whole or in part, in accordance with the terms of such Policy. j) Amendment of Agreement: This Agreement may be altered, amended or ---------------------- written agreement signed by the Corporation and the Owner. k) Governing Law: The laws of the State of Georgia shall governs this ------------- Agreement. l) Interpretation of Agreement: Where appropriate in this Agreement, --------------------------- words used in the singular shall include the plural and words used in the masculine shall include the feminine and vice versa. m) Liability of Insurer(s): No Insurer is a party to this Agreement. ----------------------- No Insurer shall have any liability except as set forth in such Policy issued by such Insurer. No Insurer shall be bound to inquire into or take notice of any of the covenants herein contained as to such Policy, or as to the application of the proceeds of such Policy. Each Insurer shall be discharged from all liability in making payments of the proceeds of a Policy issued by such Insurer, and in permitting rights and privileges under the Policy to be exercised, pursuant to the provisions of the Policy. n) Binding Agreement: This Agreement shall bind all Parties and their ----------------- successors and assigns. -5- IN WITNESS WHEREOF, the Parties have executed this Agreement as of the day and year first above written. INNOTRAC CORPORATION, the Corporation Employer Identification By: /s/ Scott David Dorfman (SEAL) ------------------------ Number 58-1592285 SCOTT DAVID DORFMAN Treasurer /s/ Bruce V. Benator -------------------- BRUCE V. BENATOR, as Trustee of THE SCOTT DAVID DORFMAN FAMILY TRUST #2 U/A 1/28/97 /s/ Scott David Dorfman (SEAL) ----------------------- SCOTT DAVID DORFMAN -6- SCHEDULE A INSURANCE POLICY FACE INSURED COMPANY NUMBER AMOUNT ------------------ ----------------- ------ ---------- SCOTT DAVID THE MIDLAND LIFE U75068 $1 MILLION DORFMAN INSURANCE COMPANY -7- EX-10.10 10 INNOTRAC CORPORATION DEFERRED COMPENSATION PLAN Exhibit 10.10 INNOTRAC CORPORATION DEFERRED COMPENSATION PLAN (Effective As of October 16, 1997) INNOTRAC CORPORATION DEFERRED COMPENSATION PLAN -------------------------- TABLE OF CONTENTS ----------------- ARTICLE I INTRODUCTION AND ESTABLISHMENT...................................1 ARTICLE II DEFINITIONS.....................................................2 2.1 Account...........................................................2 2.2 Anniversary Date..................................................2 2.3 Beneficiary.......................................................2 2.4 Change in Control.................................................2 2.5 Code..............................................................3 2.6 Company...........................................................3 2.7 Compensation......................................................3 2.8 Deferral Subaccount...............................................3 2.9 Effective Date....................................................3 2.10 Election Form.....................................................3 2.11 Employee..........................................................3 2.12 Employer..........................................................3 2.13 Employer Credit Subaccount........................................3 2.14 ERISA.............................................................3 2.15 40l(k) Plan.......................................................3 2.16 Participant.......................................................4 2.17 Plan..............................................................4 2.18 Plan Administrator................................................4 2.19 Plan Year.........................................................4 2.20 Section 40l(a)(17) Limitation.....................................4 2.21 Valuation Date....................................................4 2.22 Year of Service...................................................4 ARTICLE III PARTICIPATION..................................................5 3.1 Eligibility to Participate........................................5 3.2 Deferral Election.................................................5 3.3 Time and Manner of Election.......................................5 3.4 Change of Election................................................6 -i- ARTICLE IV INTEREST OF PARTICIPANTS........................................7 4.1 Accounting for Participants' Interests............................7 4.2 Vesting of a Participant's Account................................8 4.3 Distribution of a Participant's Account...........................9 4.4 Withdrawals During Employment.....................................9 ARTICLE V PLAN ADMINISTRATOR..............................................11 5.1 Members..........................................................11 5.2 Action...........................................................11 5.3 Right and Duties.................................................11 5.4 Compensation, Indemnity and Liability............................12 5.5 Taxes............................................................12 ARTICLE VI CLAIMS PROCEDURE...............................................13 6.1 Claims for Benefits..............................................13 6.2 Appeals..........................................................13 ARTICLE VII AMENDMENT AND TERMINATION.....................................14 7.1 Amendments.......................................................14 7.2 Termination of Plan..............................................14 ARTICLE VIII MISCELLANEOUS................................................15 8.1 Limitation on Participant's Rights...............................15 8.2 Benefits Unfunded................................................15 8.3 Other Plans......................................................15 8.4 Receipt or Release...............................................15 8.5 Governing Law....................................................16 8.6 Adoption of Plan by Related Employers............................16 8.7 Gender, Tense, and Headings......................................16 8.8 Successors and Assigns; Nonalienation of Benefits................16 -ii- ARTICLE I --------- INTRODUCTION AND ESTABLISHMENT ------------------------------ Innotrac Corporation (the "Company") hereby establishes the Innotrac Corporation Deferred Compensation Plan (the "Plan") for the benefit of certain management and highly compensated employees of the Company and affiliated adopting employers, as such employees are selected by the Chairman of the Board of Directors (or his designee) of the Company. The Plan provides supplemental benefits for eligible employees whose benefits under the Innotrac Corporation Employee Retirement Plan are limited by the provisions of the Internal Revenue Code of 1986, as amended, or the Employee Retirement Income Security Act of 1974, as amended. The Plan shall be effective as of October 16, 1997. 1 ARTICLE II ---------- DEFINITIONS ----------- When used in this Plan, the following terms shall have the meanings set forth below unless a different meaning is plainly required by the context: 2.1 "Account" means the records maintained by the Plan Administrator ------- to determine each Participant's interest under this Plan. Such Account may be reflected as an entry in the Employer's records, or as a separate account under any trust established to provide benefits under the Plan, or as a combination of both. Each Participant's Account shall consist of at least two subaccounts: a Deferral Subaccount and an Employer Credit Subaccount. The Plan Administrator may establish such additional subaccounts as it deems necessary for the proper administration of the Plan. 2.2 "Anniversary Date" means the last day of each Plan Year. ---------------- 2.3 "Beneficiary" means the person or persons last designated in ----------- writing by the Participant to receive the amount in his Account in the event of such Participant's death; or if no designation shall be in effect at the time of a Participant's death or if all designated Beneficiaries shall have predeceased the Participant, then the Beneficiary shall be the following, in the order listed: (a) Such Participant's surviving spouse, if any; (b) Otherwise, the Participant's estate. 2.4 "Change in Control" means the purchase or other acquisition after ----------------- the date hereof by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of Company's then outstanding voting securities entitled to vote generally, or the approval by the stockholders of Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of Company immediately prior to such reorganization, merger or consolidation do not immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of the directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of Company or the sale of all or substantially all of Company's assets. For purposes of this Section 2.4, acquisition 2 of the common stock of the Company by an employee benefit plan sponsored or maintained by the Company or its affiliate (or a trust maintained for such plan) shall not be considered a Change in Control. 2.5 "Code" means the Internal Revenue Code of 1986, as amended. ---- 2.6 "Company" means Innotrac Corporation, or its successor or ------- successors. 2.7 "Compensation" means "Compensation" as that term is defined in ------------ the 401(k) Plan, as the same may be amended from time to time, but without regard to the Section 401(a)(17) Limitation. Compensation shall also include amounts deferred by the Employee under this Plan or other deferred compensation plans of the Employer (except to the extent specified by the Employer). 2.8 "Deferral Subaccount" means the subaccount of a Participant's ------------------- Account maintained to reflect his interest in the Plan attributable to his deferrals of Compensation and earnings or losses credited to such account. 2.9 "Effective Date" means October 16, 1997. -------------- 2.10 "Election Form" means the form prescribed by the Plan ------------- Administrator on which a Participant may specify the amount of his Compensation that is to be deferred pursuant to the provisions of Article III. 2.11 "Employee" means any management or highly compensated employee -------- of an Employer. 2.12 "Employer" means the Company and each affiliated employer which -------- has adopted the Plan with the consent of the Company. 2.13 "Employer Credit Subaccount" means the subaccount of a -------------------------- Participant's Account maintained to reflect his interest in the Plan attributable to the Employer's contribution credits, and any earnings or losses credited to such account. 2.14 "ERISA" means the Employee Retirement Income Security Act of ----- 1974, as amended. 2.15 "40l(k) Plan" means the Innotrac Corporation Employee Retirement ----------- Plan, as it may be amended from time to time. Any reference herein to a provision or term of the 401(k) Plan shall mean such provision or term as it may be amended from time to time. 3 2.16 "Participant" means any eligible Employee who has satisfied the ----------- requirements for participation in this Plan and who has an Account. 2.17 "Plan" means the Innotrac Corporation Deferred Compensation ---- Plan, as it may be amended from time to time. 2.18 "Plan Administrator" means the committee or individual appointed ------------------ pursuant to the provisions of this Plan to administer the Plan. In the absence of such appointment, the Company shall be the Plan Administrator. 2.19 "Plan Year" means the 12-month period January 1 to December 31. --------- 2.20 "Section 40l(a)(17) Limitation" means the limitation on an ----------------------------- Employee's compensation that may be used for benefit calculation purposes in the 401(k) Plan that is set forth in Code Section 40l(a)(17), as it may be increased from time to time in accordance with applicable IRS rules. 2.21 "Valuation Date" means the Annual Valuation Date, December 31, -------------- and any other date(s) selected by the Plan Administrator in its sole discretion as of which the Accounts of Participants are valued. 2.22 "Year of Service" means a 12 consecutive month period during --------------- which a Participant has 1,000 hours of service, as determined under and consistent with the terms of the 401(k) Plan. 4 ARTICLE III ----------- PARTICIPATION ------------- 3.1 Eligibility to Participate. The Chairman of the Board of -------------------------- Directors of the Company (the "Board") or its designee shall specify the Employees of the Employer who are eligible to participate in the Plan and the effective date and period of each such Employee's eligibility to participate. Such eligibility designation may be made by establishing a minimum compensation level for participation or by the use of such other criteria as the Board deems appropriate from time to time. An Employee designated as eligible to participate shall become a Participant on the eligibility date specified by the Board in its discretion, provided in all instances that the Employee completes the Election Form provided for in Section 3.3 below. A Participant shall continue to be eligible to participate in the Plan until earlier of (a) the date as of which the Board determines he is no longer eligible, (b) his death, or (c) his termination of service, retirement or distribution due to disability. 3.2 Deferral Election. Each Participant may elect to defer under the ----------------- Plan any whole percentage of his Compensation in the manner described in Section 3.3. The amount deferred by the Participant shall be deducted each pay period in which the Participant has Compensation during his period of participation in the Plan. 3.3 Time and Manner of Election. An eligible Employee desiring to --------------------------- exercise a deferral election must, prior to the beginning of each Plan Year (or within thirty (30) days of his initial eligibility to participate or within thirty (30) days of the Effective Date of the Plan) complete an Election Form indicating the percentage of Compensation to be deferred under the Plan. Such election must be made prior to the period of service for which the Compensation subject to the deferral election would otherwise be payable. If a Participant fails to file a properly completed and duly executed Election Form with the Plan Administrator by the prescribed time, he will be deemed to have elected not to defer any Compensation under this Plan for the Plan Year, except to the extent the Plan Administrator in its sole discretion permits an extension of the election period. Except as provided in Section 3.4, a Participant may not, after the applicable election date, discontinue his election to participate or change the percentage of Compensation he has elected to defer for a Plan Year. The Participant shall designate on the Election Form (or on a separate form provided by the Plan Administrator) a Beneficiary to receive payment of amounts in his Account in the event of his death. In the Plan Year for which an eligible Employee is first eligible to participate in the Plan, if the Employee fails to properly file an Election form, he will be deemed to have made an election of zero deferrals and the minimum earnings rate. 5 3.4 Change of Election. Upon written notice to the Plan ------------------ Administrator by December 31st of a Plan Year, a Participant may increase, decrease, or discontinue his deferral election for the following Plan Year; provided, however, that (a) the form and amount deferred, and (b) the amount to be deferred after such election, satisfy the provisions of Sections 3.2 and 3.3. If the Participant fails to deliver a change of Election Form in the manner provided in this section, his prior deferral election shall remain in effect for the following Plan Year. In addition, a Participant may at any time during the Plan Year terminate an election and discontinue future deferrals of Compensation under this Plan by providing written notice to the Plan Administrator prior to the start of the next payroll period for which Compensation will be payable. In such event, Compensation earned for services subsequent to such termination notice will be paid directly to the Participant and will not be subject to his prior deferral election. A Participant who elects to discontinue participation in the Plan for a Plan Year may not recommence participation in the Plan until the next following Plan Year (or such later Plan Year in which he is again eligible to participate), provided the Participant completes and executes the required Election Form. Increases or decreases in the amount a Participant elects to defer (other than a suspension of deferrals) shall not be permitted during the Plan Year. 6 ARTICLE IV ---------- INTEREST OF PARTICIPANTS ------------------------ 4.1 Accounting for Participants' Interests. -------------------------------------- (a) Deferral Subaccount. Each Participant's Deferral Subaccount ------------------- shall be credited with the amounts of Compensation deferred by the Participant under this Plan. The timing and manner in which amounts are credited to Participants' Accounts under this Plan shall be determined by the Company and the Plan Administrator in their discretion, but his deferral election shall be applied to each pay period in which he has Compensation during his period of participation in the Plan. (b) Employer Credit Subaccount. The Employer Credit Subaccount is -------------------------- determined under subsection (i), subject to the additional terms of subsections (ii) and (iii). (i) At the end of each Plan Year, an Employer contribution credit for that Plan Year to a Participant's Employer Credit Subaccount is made by applying the appropriate percentage to the amounts of Compensation (but not more than 30% of Compensation, excluding any bonus compensation) deferred by the Participant under Section 3.2 of this Plan for the Plan Year based on the Participant's full Years of Service as of the end of the Plan Year: Years of Service Percentage of Deferred Compensation ---------------- ----------------------------------- less than 5 25% 5 but less than 8 50% 8 but less than 10 75% 10 or more 100% (ii) At the end of the Plan Year, an Employer contribution credit for that Plan Year to a Participant's Employer Credit Subaccount is made by calculating the amount that would have been the earnings rate on the amount of the Employer contribution credit made for that Plan Year under (i) above if such amount had been credited monthly at the end of each calendar month and invested in the manner indicated under subsection (c) below. (iii) In the Plan Year during which the Participant terminates service, retires or dies, the Employer contributions determined under subsections (i) and (ii) above shall be prorated for the period prior to the Valuation Date established for the payment of benefits under Section 4.3 and shall be credited as of such Valuation Date. 7 (c) Account Earnings or Losses. The Participant's Account shall be -------------------------- credited with earnings (or losses) each Valuation Date. The earnings rate credited to the Participant's Account will be determined assuming the amounts credited to his Account were invested in the investment funds the Participant has selected from the funds made available under the Plan for such purpose by the Board or its designee. The Participant must make his initial selection among such funds on the form provided for such purpose by the Plan Administrator in one percent (1%) increments. Thereafter, the Participant may change his election with respect to prior deferrals and future deferrals of Compensation once each calendar quarter to be effective as of the first day of the immediately following calendar quarter by submitting a new election form to the Plan Administrator. The use of a Participant's funds election is solely for the purpose of valuing his Account and does not in any way require the Employer or any trustee of assets designated as available to pay Plan benefits to make such investments. 4.2 Vesting of a Participant's Account. A Participant's Account ---------------------------------- shall be vested as provided in this Section 4.2. (a) A Participant's interest in the value of his Deferral Subaccount shall at all times be 100% vested and nonforfeitable. (b) A Participant's interest in the value of his Employer Credit Subaccount shall be vested and nonforfeitable at the end of the Plan Year in which the Participant attains Years of Service in accordance with the following schedule: Years of Service Vested Percentage ---------------- ----------------- Less than 2 0% 2 20% 3 40% 4 60% 5 80% 6 or more 100% In the year in which a Participant retires or terminates service with the Employer (including termination for disability under Section 4.3), Years of Service and vesting for the purpose of the foregoing vesting schedule is determined upon the Participant's termination of service. (c) A Participant's interest in the value of his Employer Credit Subaccount shall be 100% vested upon a Change in Control or upon the Participant's death notwithstanding any other provision herein. 8 4.3 Distribution of a Participant's Account. A Participant's --------------------------------------- Account shall be distributed as provided in this Section 4.3. A Participant's Account shall continue to be credited with earnings or losses under Section 4.1 until the Account is fully distributed. (a) Termination of Service or Retirement. In the event the ------------------------------------ Participant has a termination of service or retires, the amounts credited to his Account shall be paid to such Participant in either a lump sum or in substantially equal annual installments over a period of years (not to exceed 10), as designated by the Participant, which election must be made at least twenty-four (24) months prior to his termination of service or retirement. Payments commence as soon as practical after such termination of employment; provided, however, the Participant may elect to delay the commencement of payment until the date specified by the Participant on a form provided for such purpose by the Plan Administrator, provided such election to defer payment is made at least twenty-four (24) months prior to the date of his termination of service or retirement. A Participant may not defer the commencement of payment beyond the date he reaches age seventy (70). If his election as to the form of payment or time of payment is not made at least twenty-four (24) months prior to the date of his termination of service or retirement, the balance credited to his Account shall be paid to him as he most recently elected to commence such payments (but at least twenty-four months prior to the date of his termination of service or retirement, as applicable). In the absence of a valid election, the balance credited to his Account shall be paid to him in a lump sum as soon as practical after his effective date of termination of service or retirement. If the payout is due to the Participant's suffering a disability (as determined by the Plan Administrator based on eligibility for the Company's long term disability benefits plan), the twenty-four (24) month restriction will not apply and the Participant's most recent election as to the time and/or method of payment will apply. (b) Death of Participant. In the event of the death of a -------------------- Participant, distribution of the balance credited to a Participant's Account as of the date of his death shall be made in a lump sum to his Beneficiary as soon as practical following his death. If the Participant dies after payment of his interest in the Plan has commenced, but prior to payment of his entire Account, the remaining balance will be paid in a lump sum to his Beneficiary (or Beneficiaries) as soon as possible following his death. 4.4 Withdrawals During Employment. Except as expressly provided in ----------------------------- this Section 4.4, no payment of benefits shall be made under this Plan prior to a Participant's termination of employment. A Participant who is suffering an unforeseen and severe financial hardship as a result of an illness or accident of the Participant or his immediate family, or loss of Participant's property due to casualty, or for such other reasons as the Plan Administrator may establish, may file a written request with the Plan Administrator for distribution of all or a 9 portion of the amount credited to his Account and vested under Section 4.2. The Plan Administrator shall have sole discretion to determine whether to grant a Participant's hardship request and the amount to distribute to the Participant. The Plan Administrator shall not authorize distribution of an amount in excess of that reasonably necessary to alleviate the Participant's hardship. Any Participant who receives a hardship withdrawal under this section shall not be eligible to make additional deferrals of Compensation to the Plan for a period of twelve (12) months immediately following the date of the withdrawal. If such Participant becomes eligible to reparticipate in the Plan prior to the last day of a Plan Year, he must elect to reparticipate within thirty (30) days of the date he is eligible to reparticipate. If he does not elect within such thirty- day period, he shall not be eligible to reparticipate until the first day of the immediately following Plan Year. 10 ARTICLE V --------- PLAN ADMINISTRATOR ------------------ 5.1 Members. The Plan Administrator shall be a committee or an ------- individual appointed by the Company to serve at its pleasure, provided that in the absence of such appointment the Company shall be the Plan Administrator and shall have the duties of the Plan Administrator provided for herein. Members of the committee shall not be required to be employees of the Company or Participants. Any committee member may resign by giving notice, in writing, filed with the Company. 5.2 Action. Action of the Plan Administrator may be taken with or ------ without a meeting of committee members; provided, however, that any action shall be taken only upon the vote or other affirmative expression of a majority of the committee members qualified to vote with respect to such action. If a member of the committee or the appointed individual is a Participant in the Plan, he shall not participate in any decision which solely affects his own Account. The Plan Administrator shall for purposes of administering the Plan choose a secretary who shall keep minutes of the Plan Administrator's proceedings and all records and documents pertaining to the administration of this Plan. The secretary may execute any certificate or any other written direction on behalf of the Plan Administrator. 5.3 Right and Duties. The Plan Administrator shall administer and ---------------- manage the Plan and shall have all powers necessary to accomplish that purpose, including (but not limited to) the following: (a) To construe, interpret, and administer this Plan; (b) To make allocations and determinations required by this Plan, and to maintain records regarding Participants' Accounts; (c) To compute and certify to the Employer the amount and kinds of benefits payable to Participants or their Beneficiaries, and to determine the time and manner in which such benefits are to be paid; (d) To authorize all disbursements by the Employer pursuant to this Plan; (e) To maintain (or cause to be maintained) all the necessary records of the administration of this Plan; (f) To make and publish such rules for the regulation of this Plan as are not inconsistent with the terms hereof; 11 (g) To delegate to other individuals or entities from time to time the performance of any of its duties or responsibilities hereunder; (h) To establish or to change the investment funds or arrangements under Section 4.1(d) of the Plan; and (i) To hire agents, accountants, actuaries, consultants and legal counsel to assist in operating and administering the Plan. The Plan Administrator shall have the exclusive discretionary authority to construe and to interpret the Plan, to decide all questions of eligibility for benefits and to determine the amount and manner of payment of such benefits, and its decisions on such matters shall be final and conclusive on all parties. 5.4 Compensation, Indemnity and Liability. The Plan Administrator ------------------------------------- shall serve as such without bond and without compensation for services hereunder. All expenses of the Plan and the Plan Administrator shall be paid by the Employer. If the Plan Administrator is a committee, no member of the committee shall be liable for any act or omission of any other member of the committee, nor for any act or omission on his own part, excepting his own willful misconduct. The Employer shall indemnify and hold harmless the Plan Administrator and each member of the committee, if any, against any and all expenses and liabilities, including reasonable legal fees and expenses, arising out of his membership on the committee, excepting only expenses and liabilities arising out of his own willful misconduct. 5.5 Taxes. If the whole or any part of any Participant's Account ----- shall become liable for the payment of any estate, inheritance, income, or other tax which the Employer shall be required to pay or withhold, the Employer shall have the full power and authority to withhold and pay such tax out of any monies or other property in its hand for the account of the Participant whose interests hereunder are so liable. The Employer shall provide the Participant notice of such withholding. Prior to making any payment, the Employer may require such releases or other documents from any lawful taxing authority as it shall deem necessary. 12 ARTICLE VI ---------- CLAIMS PROCEDURE ---------------- 6.1 Claims for Benefits. If a Participant or Beneficiary (hereafter, ------------------- "Claimant") does not receive timely payment of any benefits which he believes are due and payable under the Plan, he may make a claim for benefits to the Plan Administrator. The claim for benefits must be in writing and addressed to the Plan Administrator or to the Company. If the claim for benefits is denied, the Plan Administrator shall notify the Claimant in writing within 90 days after the Plan Administrator initially received the benefit claim. However, if special circumstances require an extension of time for processing the claim, the Plan Administrator shall furnish notice of the extension to the Claimant prior to the termination of the initial 90-day period and such extension shall not exceed one additional, consecutive 90-day period. Any notice of a denial of benefits shall advise the Claimant of the basis for the denial, any additional material or information necessary for the Claimant to perfect his claim, and the steps which the Claimant must take to have his claim for benefits reviewed. 6.2 Appeals. Each Claimant whose claim for benefits has been denied ------- may file a written request for a review of his claim by the Plan Administrator. The request for review must be filed by the Claimant within 60 days after he received the written notice denying his claim. The decision of the Plan Administrator will be made within 60 days after receipt of a request for review and shall be communicated in writing to the Claimant. Such written notice shall set forth the basis for the Plan Administrator's decision. If there are special circumstances which require an extension of time for completing the review, the Plan Administrator's decision shall be rendered not later than 120 days after receipt of a request for review. 13 ARTICLE VII ----------- AMENDMENT AND TERMINATION ------------------------- 7.1 Amendments. The Board shall have the right in its sole ---------- discretion to amend this Plan in whole or in part at any time; provided, however, that no such amendment shall reduce the amounts credited at that time to any Participant's Account. Any amendment shall be in writing and executed by a duly authorized officer of the Company. All Participants shall be bound by such amendment. 7.2 Termination of Plan. The Company expects to continue this Plan, ------------------- but does not obligate itself to do so. The Company reserves the right to discontinue and terminate the Plan at any time, in whole or in part, for any reason (including a change, or an impending change, in the tax laws of the United States or any State). If the Plan is terminated, the Plan Administrator shall be notified of such action in a writing executed by a duly authorized officer of the Company, and the Plan shall be terminated at the time therein set forth. Termination of the Plan shall be binding on all Participants, but in no event may such termination reduce the amounts credited at that time to any Participant's Account. If this Plan is terminated, amounts theretofore credited to Participants' Accounts shall either be paid in a lump sum immediately, or distributed in some other manner consistent with this Plan, as determined by the Plan Administrator in its sole discretion. 14 ARTICLE VIII ------------ MISCELLANEOUS ------------- 8.1 Limitation on Participant's Rights. Participation in this Plan ---------------------------------- shall not give any Participant the right to be retained in the Company's employ or any right or interest in this Plan or any assets of the Company other than as herein provided. The Company reserves the right to terminate the employment of any Participant without any liability for any claim against the Company under this Plan, except to the extent provided herein. 8.2 Benefits Unfunded. The benefits provided by this Plan shall be ----------------- unfunded. All amounts payable under this Plan to Participants shall be paid from the general assets of the Company or Employer, and nothing contained in this Plan shall require the Company or Employer to set aside or hold in trust any amounts or assets for the purpose of paying benefits to Participants. This Plan shall create only a contractual obligation on the part of the Company or Employer, and Participants shall have the status of general unsecured creditors of the Company or Employer under the Plan with respect to amounts of Compensation they defer hereunder or any other obligation of the Employer to pay benefits pursuant hereto. Any funds of the Employer available to pay benefits pursuant to the Plan shall be subject to the claims of general creditors of the Company or Employer, and may be used for any purpose by the Company or Employer. Notwithstanding the preceding paragraph, the Company or Employer may at any time transfer assets to a trust for purposes of paying all or any part of its obligations under this Plan. However, to the extent provided in the trust only, such transferred amounts shall remain subject to the claims of general creditors of the Company and Employer only in accordance with the terms of such trust. To the extent that assets are held in the trust when a Participant's benefits under the Plan become payable, the Plan Administrator shall direct the trustee to make trust assets available to pay such benefits to the Participant. Any payments made to a Participant or Beneficiary from such trust shall relieve the Company and Employer from any further obligations under the Plan only to the extent of such payment. 8.3 Other Plans. This Plan shall not affect the right of any ----------- eligible Employee or Participant to participate in and receive benefits under and in accordance with the provisions of any other employee benefit plans which are now or hereafter maintained by the Employer, unless the terms of such other employee benefit plan or plans specifically provide otherwise. 8.4 Receipt or Release. Any payment to a Participant in accordance ------------------ with the provisions of this Plan shall, to the extent thereof, be in full satisfaction of all claims against the Plan Administrator and the Company, and the Plan Administrator may require such Participant, as a condition precedent to such payment, to execute a receipt and release to such effect. 15 8.5 Governing Law. This Plan shall be construed, administered, and ------------- governed in all respects in accordance with applicable federal law and, to the extent not preempted by federal law, in accordance with the laws of the State of Georgia. If any provisions of this instrument shall be held by a court of competent jurisdiction to be invalid or unenforceable, the remaining provisions hereof shall continue to be fully effective. 8.6 Adoption of Plan by Related Employers. With the consent of the ------------------------------------- Company, any corporation related to the Company by stock ownership is authorized to adopt the Plan by action of its board of directors. The action taken by the board shall include the effective date of the adoption of the Plan by such related employer. 8.7 Gender, Tense, and Headings. In this Plan, whenever the context --------------------------- so indicates, the singular or plural number and the masculine, feminine, or neuter gender shall be deemed to include the other. Headings and subheadings in this Plan are inserted for convenience of reference only and are not considered in the construction of the provisions hereof. 8.8 Successors and Assigns; Nonalienation of Benefits. This Plan ------------------------------------------------- shall inure to the benefit of and be binding upon the parties hereto and their successors, heirs and assigns; provided, however, that the amounts credited to the Account of a Participant shall not (except as provided in Section 5.5) be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, either voluntary or involuntary, and any attempt to anticipate, alienate, sell, transfer, assign, pledge, encumber, charge or otherwise dispose of any right to any benefits payable hereunder, including, without limitation, any assignment or alienation in connection with a separation, divorce, child support or similar arrangement, shall be null and void and not binding on the Plan or the Company. 16 IN WITNESS WHEREOF, the Company has caused this Plan to be executed by its duly authorized officer to be effective as of October 16, 1997. COMPANY: INNOTRAC CORPORATION By: /s/ Scott Dorfman ------------------ Title: President ----------------- 17 EX-10.11 11 INNOTRAC CORPORATION GRANTOR TRUST AGREEMENT EXHIBIT 10.11 INNOTRAC CORPORATION GRANTOR TRUST AGREEMENT This Grantor Trust Agreement (the "Trust Agreement") is made this 16th day of October, 1997 by and between Innotrac Corporation ("the Company") and Wachovia Bank, N.A. ("the Trustee"). RECITALS -------- (a) WHEREAS, the Company has adopted the nonqualified deferred compensation Plans and Agreements (the "Arrangements") as listed in Attachment I; (b) WHEREAS, the Company has incurred or expects to incur liability under the terms of such Arrangements with respect to the individuals participating in such Arrangements (the "Participants and Beneficiaries"); (c) WHEREAS, the Company hereby establishes a Trust (the "Trust") and shall contribute to the Trust assets that shall be held therein, subject to the claims of the Company's creditors in the event of the Company's Insolvency, as herein defined, until paid to Participants and their Beneficiaries in such manner and at such times as specified in the Arrangements and in this Trust Agreement; (d) WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Arrangements as an unfunded plan maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; and (e) WHEREAS, it is the intention of the Company to make contributions to the Trust to provide itself with a source of funds (the "Fund") to assist it in satisfying its liabilities under the Arrangements. NOW, THEREFORE, the parties do hereby establish the Trust and agree that the Trust shall be comprised, held and disposed of as follows: SECTION 1. ESTABLISHMENT OF THE TRUST -------------------------- (a) The Trust is intended to be a Grantor Trust, of which the Company is the Grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (b) The Company shall be considered a Grantor for the purposes of the Trust. (c) The Trust hereby established is revocable by the Company; it shall become irrevocable upon a Change of Control, as defined herein. 1 (d) The Company hereby deposits with the Trustee in the Trust one-thousand dollars and zero cents ($1,000.00) which shall become the principal of the Trust to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. (e) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of the Company and shall be used exclusively for the uses and purposes of Participants and general creditors as herein set forth. Participants and their Beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Arrangements and this Trust Agreement shall be unsecured contractual rights of Participants and their Beneficiaries against the Company. Any assets held by the Trust will be subject to the claims of the general creditors of the Company under federal and state law in the event the Company is Insolvent, as defined in Section 3(a) herein. (f) The Company, in its sole discretion, may at any time, or from time to time, make additional deposits of cash or other property acceptable to the Trustee in the Trust to augment the principal to be held, administered and disposed of by the Trustee as provided in this Trust Agreement. Prior to a Change of Control, neither the Trustee nor any Participant or Beneficiary shall have any right to compel additional deposits. (g) Upon a Potential Change of Control, the Company shall, as soon as possible, but in no event longer than thirty (30) days following the occurrence of a Potential Change of Control, as defined herein, make a contribution to the Trust in an amount that is sufficient to fund the Trust in an amount equal to no less than 100% but no more than 120% of the amount necessary to pay each Participant or Beneficiary the benefits to which Participants or their Beneficiaries would be entitled pursuant to the terms of the Arrangements as of the date on which the Potential Change of Control occurred. (h) In the event a Change of Control does not occur within one year of a Potential Change of Control, the Company shall have the right to recover any amounts contributed to and remaining on hand in the Trust pursuant to Section 1(g). (i) Upon a Change of Control, the Company shall, as soon as possible, but in no event longer than thirty (30) days following the occurrence of a Change of Control, as defined herein, make an irrevocable contribution to the Trust in an amount that is sufficient to fund the Trust in an amount equal to no less than 100 % but no more than 120% of the amount necessary to pay each Participant or Beneficiary the benefits to which Participants or their Beneficiaries would be entitled pursuant to the terms of the Arrangements as of the date on which the Change of Control occurred. 2 SECTION 2. PAYMENTS TO PARTICIPANTS AND THEIR BENEFICIARIES ------------------------------------------------ (a) Prior to a Change of Control, distributions from the Trust shall be made by the Trustee to Participants and Beneficiaries at the direction of the Company. The entitlement of a Participant or his or her Beneficiaries to benefits under the Arrangements shall be determined by the Company or such party or professional administrator as it shall designate under the Arrangements as the Company's agent, and any claim for such benefits shall be considered and reviewed under the procedures set out in the Arrangements. (b) The Company may make payment of benefits directly to Participants or their Beneficiaries as they become due under the terms of the Arrangements. The Company shall notify the Trustee of its decision to make payment of benefits directly prior to the time amounts are payable to Participants or their Beneficiaries. In addition, if the principal of the Trust, and any earnings thereon, are not sufficient to make payments of benefits in accordance with the terms of the Arrangements, the Company shall make the balance of each such payment as it falls due in accordance with the Arrangements. The Trustee shall notify the Company where principal and earnings are not sufficient. Nothing in this Agreement shall relieve the Company of its liabilities to pay benefits due under the Arrangements except to the extent such liabilities are met by application of assets of the Trust. (c) After a Potential Change of Control and before a Change of Control, the Company shall deliver to the Trustee a schedule of benefits due under the Arrangements. Subsequent to a Change of Control, the Trustee shall pay benefits due in accordance with such schedule. After a Change of Control, the Company shall continue to make the determination of benefits due to Participants or their Beneficiaries and shall provide the Trustee with an updated schedule of benefits due; provided however, a Participant or their Beneficiaries may make application to the Trustee for an independent decision as to the amount or form of their benefits due under the Arrangements. In making any determination required or permitted to be made by the Trustee under this Section, the Trustee shall, in each such case, reach its own independent determination, in its absolute and sole discretion, as to the Participant's or Beneficiary's entitlement to a payment hereunder. In making its determination, the Trustee may consult with and make such inquiries of such persons, including the Participant or Beneficiary, the Company, legal counsel, actuaries or other persons, as the Trustee may reasonably deem necessary. Any reasonable costs incurred by the Trustee in arriving at its determination shall be reimbursed by the Company and, to the extent not paid by the Company within a reasonable time, shall be charged to the Trust. The Company waives any right to contest any amount paid over by the Trustee hereunder pursuant to a good faith determination made by the Trustee notwithstanding any claim by or on behalf of the Company (absent a manifest abuse of discretion by the Trustee) that such payments should not be made. (d) The Trustee agrees that it will not itself institute any action at law or at equity, whether in the nature of an accounting, interpleading action, request for a declaratory judgment or otherwise, requesting a court or administrative or quasi-judicial body to make the determination required to be made by the Trustee under this Section 2 in the place and stead of the Trustee. The Trustee may institute an action to collect a contribution due the 3 Trust following a Change of Control or in the event that the Trust should ever experience a short-fall in the amount of assets necessary to make payments pursuant to the terms of the Arrangements. (e) In the event any Participant or his or her Beneficiary is determined to be subject to federal income tax on any amount to the credit of his or her account under any Arrangement prior to the time of payment hereunder, whether or not due to the establishment of or contributions to this Trust, a portion of such taxable amount equal to the federal, state and local taxes (excluding any interest or penalties) owed on such taxable amount, shall be distributed by the Trustee as soon thereafter as practicable to such Participant or Beneficiary. The Company shall promptly reimburse the Trust for any such distribution in an amount certified by the Trustee to be needed for the Participant's benefits. For these purposes, a Participant or Beneficiary shall be deemed to pay state and local taxes at the highest marginal rate of taxation in the state in which the Participant resides or is employed (or both) where a tax is imposed and federal income taxes at the highest marginal rate of taxation, net of the maximum reduction in federal income taxes which could be obtained from deduction of such state and local taxes. Such distributions shall be at the direction of the Company or the Trustee, or upon proper application of the Participant or Beneficiary; provided that the actual amount of the distribution shall be determined by the Company prior to a Change of Control and the Trustee following a Change of Control. An amount to the credit of a Participant's Account shall be determined to be subject to federal income tax upon the earliest of: (a) a final determination by the United States Internal Revenue Service addressed to the Participant or his Beneficiary which is not appealed to the courts; (b) a final determination by the United States Tax Court or any other federal court affirming any such determination by the Internal Revenue Service; or (c) an opinion by the Company's tax counsel, addressed to the Company and the Trustee, to the effect that by reason of Treasury Regulations, amendments to the Internal Revenue Code, published Internal Revenue Service rulings, court decisions or other substantial precedent, amounts to the credit of Participants hereunder are subject to federal income tax prior to payment. The Company shall undertake at its sole expense to defend any tax claims described herein which are asserted by the Internal Revenue Service against any Participant or Beneficiary, including attorney fees and cost of appeal, and shall have the sole authority to determine whether or not to appeal any determination made by the Service or by a lower court. The Company also agrees to reimburse any Participant or Beneficiary for any interest or penalties in respect of tax claims hereunder upon receipt of documentation of same. Any distributions from the Fund to a Participant or Beneficiary under this Section 2(e) shall be applied in accordance with the provisions of the Arrangement to reduce the Company liabilities to such Participant and/or Beneficiary under the Arrangement with such reductions to be made on a pro- rata basis over the term of benefit payments under the Arrangement; provided, however, that in no event shall any Participant, Beneficiary or estate of any Participant or Beneficiary have any obligation to return all or any part of such distribution to the Company if such distribution exceeds benefits payable under an Arrangement. Any reduction in accordance with the foregoing sentence and the Arrangements shall be determined by the Company prior to a Change of Control. Following a Change of Control, the Company shall continue to make such determination subject to the right of a Participant to petition the Trustee under Section 2(c). 4 SECTION 3. TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO THE TRUST ------------------------------------------------------ BENEFICIARY WHEN THE COMPANY IS INSOLVENT ----------------------------------------- (a) The Trustee shall cease payment of benefits to Participants and their Beneficiaries if the Company is Insolvent. The Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) the Company is unable to pay its debts as they become due, or (ii) the Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, the principal and income of the Trust shall be subject to claims of general creditors of the Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of the Company shall have the duty to inform the Trustee in writing that the Company is Insolvent. If a person claiming to be a creditor of the Company alleges in writing to the Trustee that the Company has become Insolvent, the Trustee shall determine whether the Company is Insolvent and, pending such determination, the Trustee shall discontinue payment of benefits to Participants or their Beneficiaries. (2) Unless the Trustee has actual knowledge that the Company is Insolvent, or has received notice from the Company or a person claiming to be a creditor alleging that the Company is Insolvent, the Trustee shall have no duty to inquire whether the Company is Insolvent. The Trustee may in all events rely on such evidence concerning the Company's solvency as may be furnished to the Trustee and that provides the Trustee with a reasonable basis for making a determination concerning the Company's solvency. (3) If at any time the Trustee has determined that the Company is Insolvent, the Trustee shall discontinue payments to Participants or their Beneficiaries and shall hold the assets of the Trust for the benefit of the Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Participants or their Beneficiaries to pursue their rights as general creditors of the Company with respect to benefits due under the Arrangements or otherwise. (4) The Trustee shall resume the payment of benefits to Participants or their Beneficiaries in accordance with Section 2 of this Trust Agreement only after the Trustee has determined that the Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if the Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, 5 the first payment following such discontinuance shall include the aggregate amount of all payments due to Participants or their Beneficiaries under the terms of the Arrangements for the period of such discontinuance, less the aggregate amount of any payments made to Participants or their Beneficiaries by the Company in lieu of the payments provided for hereunder during any such period of discontinuance. SECTION 4. PAYMENTS WHEN A SHORT-FALL OF THE TRUST ASSETS OCCURS ----------------------------------------------------- (a) If there are not sufficient assets for the payment of benefits pursuant to Section 2 or Section 3(c) hereof and the Company does not otherwise make such payments within a reasonable time after demand from the Trustee, the Trustee shall make payment of benefits from the Trust to the Participants or their Beneficiaries in the following order of priority: (1) retired Participants and their Beneficiaries; (2) vested Participants over the age of 55 who were terminated within two years following a Change of Control and their Beneficiaries; (3) vested active Participants over the age of 55 and their Beneficiaries; (4) any other vested active Participants and their Beneficiaries; (5) vested former Participants and their Beneficiaries; and (6) non-vested Participants and their Beneficiaries. (b) Within each category set forth under Section 4(a), payments shall be prioritized in the following order: (1) Participants and their Beneficiaries with 5 (five) or more years of participation in the Arrangements; (2) balance to be paid pro-rata to remaining Participants and their Beneficiaries. (c) Upon receipt of a contribution from the Company necessary to make up for a short-fall in the payments due, the Trustee shall resume payments to all the Participants and Beneficiaries under the Arrangements. Following a Change of Control, the Trustee shall have the right to compel a contribution to the Trust from the Company to make-up for any short-fall. SECTION 5. PAYMENTS TO THE COMPANY ----------------------- Except as provided in Section 3 hereof, after the Trust has become irrevocable, the Company shall have no right or power to direct the Trustee to return to the Company or to divert to others any of the Trust assets before all payment of benefits have been made to Participants and their Beneficiaries pursuant to the terms of the Arrangements. After all payments under the 6 Arrangements are made to the Participants and their Beneficiaries, any remaining funds will be returned to the Company. SECTION 6. INVESTMENT AUTHORITY -------------------- (a) The Trustee shall not be liable in discharging its duties hereunder, including without limitation its duty to invest and reinvest the Fund, if it acts for the exclusive benefit of the Participants and their Beneficiaries, in good faith and as a prudent person would act in accomplishing a similar task and in accordance with the terms of this Trust Agreement and any applicable federal or state laws, rules or regulations. (b) Subject to investment guidelines agreed to in writing from time to time by the Company and the Trustee prior to a Change of Control, the Trustee shall have the power in investing and reinvesting the Fund in its sole discretion: (1) To invest and reinvest in any readily marketable common and preferred stocks, bonds, notes, debentures (including convertible stocks and securities but not including any stock or security of Innotrac Corporation other than a de minimus amount held in a collective or mutual fund), certificates of deposit or demand or time deposits (including any such deposits with the Trustee) and shares of investment companies and mutual funds, without being limited to the classes or property in which the Trustees are authorized to invest by any law or any rule of court of any state and without regard to the proportion any such property may bear to the entire amount of the Fund; (2) To commingle for investment purposes all or any portion of the Fund with assets of any other similar trust or trusts established by the Company with the Trustee for the purpose of safeguarding deferred compensation or retirement income benefits of its employees and/or directors; (3) To retain any property at any time received by the Trustee; (4) To sell or exchange any property held by it at public or private sale, for cash or on credit, to grant and exercise options for the purchase or exchange thereof, to exercise all conversion or subscription rights pertaining to any such property and to enter into any covenant or agreement to purchase any property in the future; (5) To participate in any plan of reorganization, consolidation, merger, combination, liquidation or other similar plan relating to property held by it and to consent to or oppose any such plan or any action thereunder or any contract, lease, mortgage, purchase, sale or other action by any person; (6) To deposit any property held by it with any protective, reorganization or similar committee, to delegate discretionary power thereto, and to pay part of the expenses and compensation thereof any assessments levied with respect to any such property to deposited; 7 (7) To extend the time of payment of any obligation held by it; (8) To hold uninvested any moneys received by it, without liability for interest thereon, but only in anticipation of payments due for investments, reinvestments, expenses or disbursements; (9) To exercise all voting or other rights with respect to any property held by it and to grant proxies, discretionary or otherwise; (10) For the purposes of the Trust, to borrow money from others, to issue its promissory note or notes therefor, and to secure the repayment thereof by pledging any property held by it; (11) To employ suitable contractors and counsel, who may be counsel to the Company or to the Trustee, and to pay their reasonable expenses and compensation from the Fund to the extent not paid by the Company; (12) To register investments in its own name or in the name of a nominee; to hold any investment in bearer form; and to combine certificates representing securities with certificates of the same issue held by it in other fiduciary capacities or to deposit or to arrange for the deposit of such securities with any depository, even though, when so deposited, such securities may be held in the name of the nominee of such depository with other securities deposited therewith by other persons, or to deposit or to arrange for the deposit of any securities issued or guaranteed by the United States government, or any agency or instrumentality thereof, including securities evidenced by book entries rather than by certificates, with the United States Department of the Treasury or a Federal Reserve Bank, even though, when so deposited, such securities may not be held separate from securities deposited therein by other persons; provided, however, that no securities held in the Fund shall be deposited with the United States Department of the Treasury or a Federal Reserve Bank or other depository in the same account as any individual property of the Trustee, and provided, further, that the books and records of the Trustee shall at all times show that all such securities are part of the Trust Fund; (13) To settle, compromise or submit to arbitration any claims, debts or damages due or owing to or from the Trust, respectively, to commence or defend suits or legal proceedings to protect any interest of the Trust, and to represent the Trust in all suits or legal proceedings in any court or before any other body or tribunal; provided, however, that the Trustee shall not be required to take any such action unless it shall have been indemnified by the Company to its reasonable satisfaction against liability or expenses it might incur therefrom; (14) To hold and retain policies of life insurance or interests therein, annuity contracts, and other property of any kind which policies are contributed to the Trust by the Company or any subsidiary of the Company or are purchased by the Trustee; 8 (15) To hold any other class of assets which may be contributed by the Company and that is deemed reasonable by the Trustee, unless expressly prohibited herein; (16) To loan any securities at any time held by it to brokers or dealers upon such security as may be deemed advisable, and during the terms of any such loan to permit the loaned securities to be transferred into the name of and voted by the borrower or others; and (17) Generally, to do all acts, whether or not expressly authorized, that the Trustee may deem necessary or desirable for the protection of the Fund. (c) Prior to a Change of Control, the Company shall have the right, subject to this Section to direct the Trustee with respect to investments. (1) The Company may at any time direct the Trustee to segregate all or a portion of the Fund in a separate investment account or accounts and may appoint one or more investment managers and/or an investment committee established by the Company to direct the investment and reinvestment of each such investment account or accounts. In such event, the Company shall notify the Trustee of the appointment of each such investment manager and/or investment committee. No such investment manager shall be related, directly or indirectly, to the Company, but members of the investment committee may be employees of the Company. (2) Thereafter, the Trustee shall make every sale or investment with respect to such investment account as directed in writing by the investment manager or investment committee. It shall be the duty of the Trustee to act strictly in accordance with each direction. The Trustee shall be under no duty to question any such direction of the investment manager or investment committee, to review any securities or other property held in such investment account or accounts acquired by it pursuant to such directions or to make any recommendations to the investment managers or investment committee with respect to such securities or other property. (3) Notwithstanding the foregoing, the Trustee, without obtaining prior approval or direction from an investment manager or investment committee, shall invest cash balances held by it from time to time in short term cash equivalents including, but not limited to, through the medium of any short term mutual fund established and maintained by the Trustee subject to the instrument establishing such trust fund, U.S. Treasury Bills, commercial paper (including such forms of commercial paper as may be available through the Trustee's Trust Department), certificates of deposit (including certificates issued by the Trustee in its separate corporate capacity), and similar type securities, with a maturity not to exceed one year; and, furthermore, sell such short term investments as may be necessary to carry out the instructions of an investment manager or investment committee regarding more permanent type investment and directed distributions. 9 (4) The Trustee shall neither be liable nor responsible for any loss resulting to the Fund by reason of any sale or purchase of an investment directed by an investment manager or investment committee nor by reason of the failure to take any action with respect to any investment which was acquired pursuant to any such direction in the absence of further directions of such investment manager or investment committee. (5) Notwithstanding anything in this Agreement to the contrary, the Trustee shall be indemnified and saved harmless by the Company from and against any and all personal liability to which the Trustee may be subjected by carrying out any directions of an investment manager or investment committee issued pursuant hereto or for failure to act in the absence of directions of the investment manager or investment committee including all expenses reasonably incurred in its defense in the event the Company fails to provide such defense; provided, however, the Trustee shall not be so indemnified if it participates knowingly in, or knowingly undertakes to conceal, an act or omission of an investment manager or investment committee, having actual knowledge that such act or omission is a breach of a fiduciary duty; provided further, however, that the Trustee shall not be deemed to have knowingly participated in or knowingly undertaken to conceal an act or omission of an investment manager or investment committee with knowledge that such act or omission was a breach of fiduciary duty by merely complying with directions of an investment manager or investment committee or for failure to act in the absence of directions of an investment manager or investment committee. The Trustee may rely upon any order, certificate, notice, direction or other documentary confirmation purporting to have been issued by the investment manager or investment committee which the Trustee believes to be genuine and to have been issued by the investment manager or investment committee. The Trustee shall not be charged with knowledge of the termination of the appointment of any investment manager or investment committee until it receives written notice thereof from the Company. (d) Following a Change of Control, the Trustee shall have the sole and absolute discretion in the management of the Trust assets and shall have all the powers set forth under Section 6(b). In investing the Trust assets, the Trustee shall consider: (1) the needs of the Arrangements; (2) the need for matching of the Trust assets with the liabilities of the Arrangements; and (3) the duty of the Trustee to act solely in the best interests of the Participants and their Beneficiaries. (e) The Trustee shall have the right, in its sole discretion, to delegate its investment responsibility to an investment manager who may be an affiliate of the Trustee. In 10 the event the Trustee shall exercise this right, the Trustee shall remain, at all times responsible for the acts of an investment manager. The Trustee shall have the right to purchase an insurance policy or an annuity to fund the benefits of the Arrangements. (f) The Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust. This right is exercisable by the Company in a nonfiduciary capacity without the approval or consent of any person in a fiduciary capacity. SECTION 7. INSURANCE CONTRACTS ------------------- (a) To the extent that the Trustee is directed by the Company prior to a Change of Control to invest part or all of the Trust Fund in insurance contracts, the type and amount thereof shall be specified by the Company. The Trustee shall be under no duty to make inquiry as to the propriety of the type or amount so specified. (b) Each insurance contract issued shall provide that the Trustee shall be the owner thereof with the power to exercise all rights, privileges, options and elections granted by or permitted under such contract or under the rules of the insurer. The exercise by the Trustee of any incidents of ownership under any contract shall, prior to a Change of Control, be subject to the direction of the Company. After a Change of Control, the Trustee shall have all such rights. (c) The Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against an insurance policy held in the Trust Fund. (d) No insurer shall be deemed to be a party to the Trust and an insurer's obligations shall be measured and determined solely by the terms of contracts and other agreements executed by the insurer. SECTION 8. DISPOSITION OF INCOME --------------------- (a) Prior to a Change of Control, all income received by the Trust, net of expenses and taxes, may be returned to the Company or accumulated and reinvested within the Trust at the direction of the Company. (b) Following a Change of Control, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested within the Trust. SECTION 9. ACCOUNTING BY THE TRUSTEE ------------------------- The Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, 11 and all other transactions required to be made, including such specific records as shall be agreed upon in writing between the Company and the Trustee within forty-five (45) days following the close of each calendar year and within forty- five (45) days after the removal or resignation of the Trustee. The Trustee shall deliver to the Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. The Company may approve such account by an instrument in writing delivered to the Trustee. In the absence of the Company's filing with the Trustee objections to any such account within ninety (90) days after its receipt, the Company shall be deemed to have so approved such account. In such case, or upon the written approval by the Company of any such account, the Trustee shall, to the extent permitted by law, be discharged from all liability to the Company for its acts or failures to act described by such account. The foregoing, however, shall not preclude the Trustee from having its accounting settled by a court of competent jurisdiction. The Trustee shall be entitled to hold and to commingle the assets of the Trust in one Fund for investment purposes but at the direction of the Company prior to a Change of Control, the Trustee shall create one or more sub-accounts. SECTION 10. RESPONSIBILITY OF THE TRUSTEE ----------------------------- (a) The Trustee shall act with the care, skill, prudence and diligence under the circumstances then prevailing that a prudent person acting in like capacity and familiar with such matters would use in the conduct of an enterprise of a like character and with like aims, provided, however, that the Trustee shall incur no liability to any person for any action taken pursuant to a direction, request or approval given by the Company which is contemplated by, and in conformity with, the terms of the Arrangements or this Trust and is given in writing by the Company. In the event of a dispute between the Company and a party, the Trustee may apply to a court of competent jurisdiction to resolve the dispute, subject, however to Section 2(d) hereof. (b) The Company hereby indemnifies the Trustee against losses, liabilities, claims, costs and expenses in connection with the administration of the Trust, unless resulting from the negligence or misconduct of Trustee. To the extent the Company fails to make any payment on account of an indemnity provided in this paragraph 10(b), in a reasonably timely manner, the Trustee may obtain payment from the Trust. If the Trustee undertakes or defends any litigation arising in connection with this Trust or to protect a Participant's or Beneficiary's rights under the Arrangements, the Company agrees to indemnify the Trustee against the Trustee's costs, reasonable expenses and liabilities (including, without limitation, attorneys' fees and expenses) relating thereto and to be primarily liable for such payments. If the Company does not pay such costs, expenses and liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) Prior to a Change of Control, the Trustee may consult with legal counsel (who may also be counsel for the Company generally) with respect to any of its duties or obligations 12 hereunder. Following a Change of Control the Trustee shall select independent legal counsel and may consult with counsel or other persons with respect to its duties and with respect to the rights of Participants or their Beneficiaries under the Arrangements. (d) The Trustee may hire agents, accountants, actuaries, investment advisors, financial consultants or other professionals to assist it in performing any of its duties or obligations hereunder and may rely on any determinations made by such agents and information provided to it by the Company. (e) The Trustee shall have, without exclusion, all powers conferred on the Trustee by applicable law, unless expressly provided otherwise herein. (f) Notwithstanding any powers granted to the Trustee pursuant to this Trust Agreement or to applicable law, the Trustee shall not have any power that could give this Trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedure and Administrative Regulations promulgated pursuant to the Internal Revenue Code. SECTION 11. COMPENSATION AND EXPENSES OF THE TRUSTEE ---------------------------------------- The Trustee's compensation shall be as agreed in writing from time to time by the Company and the Trustee. The Company shall pay all administrative expenses and the Trustee's fees and shall promptly reimburse the Trustee for any fees and expenses of its agents. If not so paid, the fees and expenses shall be paid from the Trust. SECTION 12. RESIGNATION AND REMOVAL OF THE TRUSTEE -------------------------------------- (a) Prior to a Change of Control, the Trustee may resign at any time by written notice to the Company, which shall be effective sixty (60) days after receipt of such notice unless the Company and the Trustee agree otherwise. Following a Change of Control, the Trustee may resign only after the appointment of a successor Trustee. (b) The Trustee may be removed by the Company on sixty days (60) days notice or upon shorter notice accepted by the Trustee prior to a Change of Control. Subsequent to a Change of Control, the Trustee may only be removed by the Company with the consent of a majority of the Participants. (c) If the Trustee resigns within two years after a Change of Control, as defined herein, the Company, or if the Company fails to act within a reasonable period of time following such resignation, the Trustee shall apply to a court of competent jurisdiction for the appointment of a successor Trustee or for instructions. (d) Upon resignation or removal of the Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor Trustee. The transfer shall be completed within sixty (60) days after receipt of notice of resignation, removal or transfer, unless the Company extends the time limit. 13 (e) If the Trustee resigns or is removed, a successor shall be appointed by the Company, in accordance with Section 13 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made, the Trustee may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of the Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. SECTION 13. APPOINTMENT OF SUCCESSOR ------------------------ (a) If the Trustee resigns or is removed in accordance with Section 12 hereof, the Company may appoint, subject to Section 12, any third party national banking association with a market capitalization exceeding $100,000,000 to replace the Trustee upon resignation or removal. The successor Trustee shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust. The former Trustee shall execute any instrument necessary or reasonably requested by the Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Section 8 and 9 hereof. The successor Trustee shall not be responsible for and the Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. SECTION 14. AMENDMENT OR TERMINATION ------------------------ (a) This Trust Agreement may be amended by a written instrument executed by the Trustee and the Company. Notwithstanding the foregoing, no such amendment shall conflict with the terms of the Arrangements or shall make the Trust revocable after it has become irrevocable in accordance with Section 1 hereof. (b) The Trust shall not terminate until the date on which Participants and their Beneficiaries have received all of the benefits due to them under the terms and conditions of the Arrangements. (c) Upon written approval of all Participants or Beneficiaries entitled to payment of benefits pursuant to the terms of the Arrangements, the Company may terminate this Trust prior to the time all benefit payments under the Arrangements have been made. All assets in the Trust at termination shall be returned to the Company. (d) This Trust Agreement may not be amended or terminated by the Company for two (2) years following a Change of Control without the written consent of a majority of the Participants. 14 SECTION 15. CHANGE OF CONTROL ----------------- (a) For purposes of this Trust, the following terms shall be defined as set forth below: (1) Potential Change of Control shall mean: the purchase or other acquisition after the date hereof by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 15 percent or more of either the outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, or the approval by the shareholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger, or consolidation do not, immediately thereafter, own more than 75 percent of the combined voting power entitled to vote generally in the election of the directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of Company or the sale of all or substantially all of the Company's assets. The acquisition of common stock of the Company by an employee benefit plan sponsored or maintained by the Company or its affiliate (or a trust maintained for such plan) shall not be considered a Change in Control. (2) Change of Control shall mean: the purchase or other acquisition after the date hereof by any person, entity or group of persons, within the meaning of section 13(d) or 14(d) of the Securities Exchange Act of 1934 ("Act"), or any comparable successor provisions, of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Act) of 30 percent or more of either the outstanding shares of common stock or the combined voting power of the Company's then outstanding voting securities entitled to vote generally, or the approval by the shareholders of the Company of a reorganization, merger, or consolidation, in each case, with respect to which persons who were stockholders of the Company immediately prior to such reorganization, merger, or consolidation do not, immediately thereafter, own more than 50 percent of the combined voting power entitled to vote generally in the election of the directors of the reorganized, merged or consolidated Company's then outstanding securities, or a liquidation or dissolution of Company or the sale of all or substantially all of the Company's assets. The acquisition of common stock of the Company by an employee benefit plan sponsored or maintained by the Company or its affiliate (or a trust maintained for such plan) shall not be considered a Change in Control. For purposes of this Section 15(a), the Incumbent Board, by a majority vote, shall have the power to determine on the basis of information known to them (a) the number of shares beneficially owned by any person, entity or group; (b) whether there exists an agreement, arrangement or understanding with another as to matters referred to in this Section 15(a); and (c) such other matters with respect to which a determination is necessary under this Section 15(a). 15 (b) The General Counsel of the Company shall have the specific authority to determine whether a Potential Change of Control or Change of Control has transpired under the guidance of this Section 15(a) and shall be required to give the Trustee notice of a Change of Control or a Potential Change of Control. The Trustee shall be entitled to rely upon such notice, but if the Trustee receives notice of a Change of Control from another source, the Trustee shall make its own independent determination. SECTION 16. MISCELLANEOUS ------------- (a) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (b) The Company hereby represents and warrants that all of the Arrangements have been established, maintained and administered in accordance with all applicable laws, including without limitation, ERISA. The Company hereby indemnifies and agrees to hold the Trustee harmless from all liabilities, including attorney's fees, relating to or arising out of the establishment, maintenance and administration of the Arrangements. To the extent the Company does not pay any of such liabilities in a reasonably timely manner, the Trustee may obtain payment from the Trust. (c) Benefits payable to Participants and their Beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (d) This Trust Agreement shall be governed by and construed in accordance with the laws of Georgia. IN WITNESS WHEREOF, this Grantor Trust Agreement has been executed on behalf of the parties hereto on the day and year first above written. INNOTRAC CORPORATION WACHOVIA BANK, N.A. By: /s/ Scott Dorfman By: /s/ Peter Quinn -------------------------------- --------------------------------- Its: President Its: -------------------------------- --------------------------------- 16 ATTACHMENT I Innotrac Corporation Deferred Compensation Plan 17 EX-23.2 12 CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP - ----------------------- Arthur Andersen LLP Atlanta, Georgia February 10, 1998 EX-27 13 FINANCIAL DATA SCHEDULE
5 This financial data schedule contains summary financial information extracted from the combined balance sheets of Innotrac Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. and the related combined statements of operations for the year ended December 31, 1997. 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 $553,746 0 25,788,474 5,707,245 2,935,611 24,329,191 12,710,507 5,101,992 32,495,243 22,807,753 0 916,949 0 18,960 4,807,802 32,495,243 87,978,487 87,978,487 0 67,986,434 13,202,717 14,077,000 1,788,003 4,882,938 (76,700) 4,959,638 0 0 0 4,959,638 0 0
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