-----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, DWTCA6V5c+SXQdFibAOW7zA7JghGLonlxFGUKgubRDaK14rjTgdFoDE6n7q9te+K r7uNS6NleAjxEt3yzWQHiA== 0000940180-97-001145.txt : 19971217 0000940180-97-001145.hdr.sgml : 19971217 ACCESSION NUMBER: 0000940180-97-001145 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19971216 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOTRAC CORP CENTRAL INDEX KEY: 0001051114 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 581592285 FILING VALUES: FORM TYPE: S-1 SEC ACT: SEC FILE NUMBER: 333-42373 FILM NUMBER: 97739243 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 1 FORM S-1 REGISTRATION STATEMENT AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997 REGISTRATION NO. 333- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 --------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 --------------- INNOTRAC CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) --------------- GEORGIA 7389 58-1592285 (State or other (Primary Standard (I.R.S. Employer jurisdiction of Industrial Identification Number) incorporation or Classification Code organization) Number) 1828 MECA WAY NORCROSS, GEORGIA 30093 (770) 717-2000 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) SCOTT D. DORFMAN CHIEF EXECUTIVE OFFICER 1828 MECA WAY NORCROSS, GEORGIA 30093 (770) 717-2000 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------- COPIES TO: DAVID A. STOCKTON, ESQ. GLENN W. STURM, ESQ. KILPATRICK STOCKTON LLP NELSON MULLINS RILEY & SCARBOROUGH, 1100 PEACHTREE STREET, N.E., SUITE L.L.P. 2800 999 PEACHTREE STREET, N.E., SUITE ATLANTA, GEORGIA 30309 1400 (404) 815-6500 ATLANTA, GEORGIA 30309 (404) 815-6555 (FAX) (404) 817-6000 ---------------(404) 817-6050 (FAX) Approximate date of commencement of proposed sale to the public: AS SOON AS PRACTICABLE AFTER THIS REGISTRATION STATEMENT BECOMES EFFECTIVE. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box: [_] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act of 1933, check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
PROPOSED PROPOSED MAXIMUM MAXIMUM TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE - --------------------------------------------------------------------------------------------------- Common Stock, $0.10 par value per share....... 2,875,000 shares $14.00 $40,250,000 $11,873.75
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes 375,000 shares subject to the exercise of the Underwriters' over- allotment option. (2) Estimated solely for the purpose of calculating the registration fee. --------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A + +REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE + +SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY + +OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT + +BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR + +THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE + +SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE + +UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF + +ANY SUCH STATE. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED DECEMBER 16, 1997 PROSPECTUS 2,500,000 SHARES [LOGO] INNOTRAC CORPORATION COMMON STOCK All of the shares of common stock (the "Common Stock") offered hereby are being sold by Innotrac Corporation (the "Company"). Prior to this offering (the "Offering"), there has been no public market for the Common Stock. It is currently anticipated that the initial public offering price of the Common Stock will be between $12.00 and $14.00 per share. See "Underwriting" for information relating to the factors to be considered in determining the initial public offering price. The Company has filed an application for the Common Stock to be approved for quotation on The Nasdaq Stock Market's National Market ("Nasdaq National Market") under the symbol "INOC." SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED HEREBY. ----------- THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON- TRARY IS A CRIMINAL OFFENSE. - -------------------------------------------------------------------------------- - --------------------------------------------------------------------------------
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 $750,000.00. (3) The Company has granted the Underwriters a 30-day over-allotment option to purchase up to 375,000 additional shares of Common Stock on the same terms and conditions as set forth above. If all such shares are purchased by the Underwriters, the total Price to Public will be $ , the total Underwriting Discount will be $ and the total Proceeds to Company will be $ . See "Underwriting." ----------- The shares of Common Stock are offered subject to receipt and acceptance by the Underwriters, to prior sale and to the Underwriters' right to reject any order in whole or in part, and to withdraw, cancel or modify the offer without notice. It is expected that certificates for the shares of Common Stock will be available for delivery on or about , 1998. ----------- J.C.Bradford&Co. Wheat First Butcher Singer , 1998 [inside front cover graphics] GRAPHIC: The Company's name with stylized design. SUPPORTING TEXT: In the last decade, quality customer relationships have become an important determinant of long-term success. At Innotrac, the future looks bright. CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK. SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING, THE PURCHASE OF COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING." 2 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. 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 services provided to existing telecommunications clients. BROADEN CUSTOMER BASE BY DEVELOPING SALES INFRASTRUCTURE. The Company has experienced rapid revenue growth since 1993 without a significant sales infrastructure. The Company intends to use a portion of the net proceeds of the Offering to develop a national sales force for its services, to form relationships with independent sales agencies and to develop sales and marketing materials to highlight the wide array of services offered by the Company. By developing this infrastructure, the Company intends to broaden its customer base and diversify its sources of revenues. CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a commitment to the use of advanced technology and intends to continue to upgrade and enhance its computer hardware and software applications to enable it to continue to provide flexible and powerful services to its clients. The Company believes that the use of advanced technology provides a competitive advantage and results in greater capacity and reduced labor costs. The Company also believes that continued technological advances, particularly those utilizing the Internet, will provide new opportunities for the Company to tailor its services to meet each client's needs. The Company intends to address the labor- intensive nature of fulfillment services by developing more efficient automated systems that distribute literature via electronic media directly to the customer. The Company also plans to expand its Internet-related capabilities for (i) automated inventory management, (ii) access to order and database information and (iii) virtual warehousing of literature so that such materials no longer need to be maintained in physical form in the Company's warehouses. EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored, value-added solutions that achieve each client's intended marketing results. The Company devotes considerable resources to assessing and understanding a client's industry, products, services, processes and culture, then works with the client to design programs to reduce the costs and investment required to deliver the client's marketing support programs. The Company believes that this consultative partnership approach encourages long-term client relationships, as evidenced by the fact that the Company has serviced its 10 largest clients for an average of six years and its five oldest clients for an average of 11 years. The Company believes that this approach also creates substantial opportunities to expand relationships with existing clients by cross-selling the full range of its services. SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take advantage of the fragmented nature of the marketing support services industry by selectively acquiring complementary companies that extend its presence into new geographic markets or industries, expand its client base, add new product or service applications or provide substantial operating synergies. The Company believes that there are a variety of such potential acquisition opportunities. 4 THE OFFERING Common Stock offered by the Company..................... 2,500,000 shares Common Stock to be outstanding after the 9,000,000 shares(1) Offering.................... Use of Proceeds............. To pay certain distributions in connection with the Consolidation, repay certain indebtedness of the Company, including indebtedness to a shareholder, and for general corporate purposes, including for working capital and potential acquisitions. See "Use of Proceeds" and "Certain Transactions." Proposed Nasdaq National Market symbol............... INOC - -------- (1) Excludes 383,000 shares of Common Stock issuable upon exercise of stock options outstanding under the Company's Stock Option and Incentive Award Plan (the "Stock Option Plan"). See "Management." RISK FACTORS In addition to the other information contained in this Prospectus, prospective investors should consider carefully a number of factors that could affect the Company's business, results of operations and financial condition. See "Risk Factors" beginning on page 8 for a discussion of such factors. ---------------- The Company's principal executive offices are located at 1828 Meca Way, Norcross, Georgia, where its telephone number is (770) 717-2000. 5 SUMMARY FINANCIAL DATA The summary historical and pro forma financial data set forth below should be read in conjunction with "The Consolidation," "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto and the other financial data contained elsewhere in this Prospectus. The pro forma statement of operations data for the nine months ended September 30, 1997 and the pro forma balance sheet data at September 30, 1997 give effect to the Consolidation and the Offering as well as the use of the net proceeds of the Offering, as if the transactions had occurred at January 1, 1997 (for the statement of operations) and September 30, 1997 (for the balance sheet). The pro forma financial information does not purport to represent what the Company's consolidated results of operations would have been if these transactions had in fact occurred on these dates, nor does it purport to indicate the future consolidated financial position or consolidated results of future operations of the Company. The pro forma adjustments are based on currently available information and certain assumptions that management believes to be reasonable.
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- --------------------------------------- PRO FORMA CONSOLIDATED AS ADJUSTED 1993 1994 1995 1996 1996 1997 1997(1) ------ ------- ------- ------- ---------- ---------- --------------- (IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------------------ Revenues, net........... $5,586 $17,380 $44,886 $71,297 $ 53,231 $ 67,314 $ 67,314 Cost of revenues........ 3,495 11,274 30,658 55,520 39,232 51,800 51,800 ------ ------- ------- ------- ---------- ---------- ---------- Gross profit............ 2,091 6,106 14,228 15,777 13,999 15,514 15,514 ------ ------- ------- ------- ---------- ---------- ---------- Operating expenses: Selling, general and administrative expenses.............. 1,538 2,289 6,510 10,391 8,007 9,072 9,072 Depreciation and amortization.......... 157 214 293 429 231 454 454 ------ ------- ------- ------- ---------- ---------- ---------- Total operating expenses.............. 1,695 2,503 6,803 10,820 8,238 9,526 9,526 ------ ------- ------- ------- ---------- ---------- ---------- Operating income........ 396 3,603 7,425 4,957 5,761 5,988 5,988 ------ ------- ------- ------- ---------- ---------- ---------- Other (income) expense: Interest expense....... 123 622 1,090 1,456 955 1,422 5 Other.................. (6) 67 (73) 94 2 (2) (2) ------ ------- ------- ------- ---------- ---------- ---------- Total other expense.... 117 689 1,017 1,550 957 1,420 3 ------ ------- ------- ------- ---------- ---------- ---------- Income before income taxes.................. 279 2,914 6,408 3,407 4,804 4,568 5,985 Income tax provision.... (30) (356) (793) (211) (472) (75) (2,392) ------ ------- ------- ------- ---------- ---------- ---------- Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,332 $ 4,493 $ 3,593 ====== ======= ======= ======= ========== ========== ========== Weighted average shares................. 9,103(2) Net income per share.... $ 0.39(3) ==========
6
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1997 ------------------------------- ------------------------- PRO FORMA CONSOLIDATED 1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4) ------ ------- ------- ------- ---------- -------------- Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,593 $23,842 Property and equipment, net.................... 1,465 5,059 9,099 10,939 8,249 8,249 Total assets............ 3,457 13,548 30,414 49,037 36,387 47,524 Long term obligations... 708 4,278 4,729 4,779 4,157 453 Shareholders' equity(5).............. 409 1,624 3,195 4,540 4,921 31,264
- -------- (1) Pro forma adjustments include (i) the elimination of interest expense related to the line of credit, the term loan and subordinated debt borrowings assumed to be repaid with the proceeds of the Offering, (ii) an income tax provision to reflect the pro forma tax effects as if the Company were taxed as a C corporation and (iii) the tax effect of the interest expense adjustment. (2) Adjusted to reflect the Consolidation, the Offering (assuming the shares were outstanding for the entire period) and the exercise of all options outstanding under the Stock Option Plan (using the "treasury stock" method and assuming the shares were outstanding for the entire period). (3) Excludes the dividend accretion on redeemable capital stock of a subsidiary of approximately $64,000, or $(0.01) per share. (4) Assumes an increase to working capital equal to the aggregate estimated net proceeds less repayment of borrowings under the line of credit facility, the term loan, the subordinated debt, and the redeemable capital stock of a subsidiary. Reflects the recording of deferred tax assets and liabilities associated with the change in tax status to a C corporation of certain of the entities that are parties to the Consolidation and distribution of $6.4 million of undistributed earnings of certain of the entities that are parties to the Consolidation. See "The Consolidation" and "Use of Proceeds." (5) Includes capital stock, partners' capital, members' deficit and retained earnings. 7 RISK FACTORS An investment in the shares of Common Stock offered hereby involves a high degree of risk. In addition to the other information in this Prospectus, the following risk factors should be considered carefully in evaluating an investment in the Common Stock offered hereby. This Prospectus contains certain forward-looking statements (as such term is defined in the Securities Act of 1933, as amended (the "Securities Act")) concerning the Company's operations, performance and financial condition, including, in particular, the likelihood of the Company's success in developing and expanding its business. These statements are based upon a number of assumptions and estimates which are inherently subject to significant uncertainties, many of which are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward- looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those set forth below. RELIANCE ON A SMALL NUMBER OF MAJOR CLIENTS As a result of the Company's focus on developing long-term relationships with large corporations, a significant portion of the Company's revenues are derived from a relatively small number of clients. The Company's three largest clients, BellSouth, Pacific Bell and US West, accounted for an aggregate of 90% of the Company's 1996 revenues and an aggregate of 95% of such revenues for the first nine months of 1997, of which BellSouth accounted for 82% and 87%, respectively. Although the Company has written agreements with all of its telecommunications clients, they generally are terminable upon certain events after the giving of notice and failure to cure and the lapse of 30 to 90 days. In addition, the Company's agreement with BellSouth may be terminated for any reason upon two years' notice. Moreover, the Company's contracts do not assure the Company a specific level of revenues and they generally do not designate the Company as the client's exclusive service provider. Further, the Company does not have written agreements with many clients. There can be no assurance that the Company will be able to retain any of its largest clients, or that the Company will be able to replace such clients with others that generate a comparable amount of revenues or profits. Further, except in the product-based marketing support and fulfillment services it performs for BellSouth and Pacific Bell, the Company does not believe that it is the sole or primary source for most of the services rendered to its clients. The loss of one or more of its largest clients could have a material adverse effect on the Company's business, results of operations and financial condition. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Overview" and "Business--General." RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES In connection with certain of its fulfillment services, the Company purchases Caller ID and other telecommunications equipment from third party vendors and, therefore, assumes the risks of inventory obsolescence, damage to leased units, theft and creditworthiness of purchasers. The ability of the Company to receive payment for sales or rentals of such equipment is dependent on the transmittal of correct customer invoices and remittance on a timely basis by BellSouth and Pacific Bell. If the Company is unable to manage these risks, it could have a material adverse effect on the Company's business, results of operations and financial condition. The credit risk assumed by the Company is particularly significant because of the large number of customers, each of which owes a relatively small amount. The Company's allowance for bad debt was approximately $5.6 million at September 30, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Business--General." RELIANCE ON TELECOMMUNICATIONS INDUSTRY Caller ID is a relatively recent offering by telecommunications companies and there can be no assurance that it will gain or sustain wide acceptance in the marketplace. In addition, the provision of Caller ID services by telecommunications companies is regulated at both the federal and state level. Such regulations may have the effect of delaying the offering or market acceptance of Caller ID service in a market of one of the Company's clients. See "Business--Government Regulation." 8 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 business and prospects of the Company could be materially adversely affected if these persons do not continue in their key roles and the Company is unable to attract and retain qualified replacements. See "Management." COMPLIANCE WITH GOVERNMENT REGULATION Because the Company's current teleservicing business consists primarily of responding to inbound telephone calls, as opposed to outbound calls, it is not highly regulated. However, in connection with the limited amount of outbound telemarketing services that it provides, the Company is required to comply with the Federal Communications Commission's rules under the Federal Telephone Consumer Protection Act of 1991 and the Federal Trade Commission's regulations under the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both of which govern telephone solicitation. If the Company expands its outbound telemarketing services, such rules and regulations would apply to a larger percentage of the Company's business. Furthermore, there may be additional federal and state legislation, or changes in regulatory implementation, that limit the activity of the Company or its clients in the future or significantly increase the costs of compliance. Additionally, the Company could be responsible for its failure to comply with regulations applicable to its clients. The adoption of unfavorable federal or state legislation or regulations affecting Caller ID service could have a material adverse effect upon the Company's business, financial condition and results of operations. See "--Risks Associated with Product-Based Marketing Support Services" and "Business--Government Regulation." CONTROL BY MANAGEMENT; USE OF PROCEEDS TO BENEFIT MANAGEMENT Following the Offering, Scott D. Dorfman, the Company's Chairman, President and Chief Executive Officer, will beneficially own approximately 68% of the outstanding Common Stock (approximately 66% if the Underwriters' over- allotment option is exercised in full). See "Principal Shareholders." As a result, Mr. Dorfman would control the Company's Board of Directors and, therefore, the business, policies and affairs of the Company. Such voting concentration may also have the effect of discouraging, delaying or preventing a change in control of the Company. A portion of the net proceeds of the Offering will be used to make distributions to Mr. Dorfman, his children and a shareholder of the Company of accumulated earnings of two of the entities that are parties to the Consolidation and an amount to pay taxes on the 1997 and 1998 earnings of certain Affiliated Companies, to repay certain indebtedness to a shareholder of the Company and to repay certain indebtedness which is guaranteed by Mr. Dorfman. See "Use of Proceeds" and "Certain Transactions." DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS One component of the Company's strategy is to pursue strategic acquisitions of companies that have services, products, technologies, industry specializations or geographic coverage that extend or complement the Company's existing business. There can be no assurance that the Company will be able to successfully identify, acquire on favorable terms or integrate such companies. If any acquisition is completed, there can be no assurance that such acquisition will enhance the Company's business, results of operations or financial condition. The Company may in the future face increased competition for acquisition candidates, which may inhibit the Company's ability to consummate suitable acquisitions on terms favorable to the Company. A portion of the Company's capital resources and proceeds of this Offering could be used for acquisitions. The Company may require additional debt or equity financing for future acquisitions, which financing may not be available on terms favorable to the Company, if at all. See "Use of Proceeds" and "Management's Discussion and Analysis of Financial Condition and Results of Operations-- Liquidity and Capital Resources." CERTAIN ANTI-TAKEOVER PROVISIONS Certain provisions of the Company's Articles of Incorporation and Bylaws may make a change in control of the Company more difficult to effect, even if a change in control were in the shareholders' interests. Provisions in the Company's Articles of Incorporation allow the Board to determine the terms of preferred stock that may 11 be issued by the Company without approval of the holders of the Common Stock. The ability of the Company to issue preferred stock in such manner could enable the Board to prevent changes in management and control of the Company. The Articles also provide for three classes of directors as nearly equal in size as possible. Each class holds office until the third annual meeting following election except that the initial terms expire in 1998, 1999 and 2000. This provision may have an anti-takeover effect because a third party would be unable to acquire immediate control of the entire Board. In addition, the Company's Board of Directors has adopted a Rights Agreement (as defined herein) pursuant to which holders of Common Stock will be entitled to purchase a fraction of a share of the Company's Series A Participating Cumulative Preferred Stock if a third party acquires beneficial ownership of 15% or more of the Common Stock and will be entitled to purchase the stock of a Principal Party (as defined in the Rights Agreement) at a discount upon the occurrence of certain triggering events. These provisions of the Company's Articles of Incorporation, Bylaws and the Rights Agreement could have the effect of discouraging tender offers or other transactions that would result in shareholders receiving a premium over the market price for the Common Stock. See "Description of Capital Stock." ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF MARKET PRICE Prior to the Offering, there has been no public market for the Common Stock. There can be no assurance that an active trading market will develop or continue after the Offering or that the market price of the Common Stock will not decline below the initial public offering price. The initial public offering price of the Common Stock has been determined by negotiation between the Company, J.C. Bradford & Co. and Wheat, First Securities, Inc. as representatives (the "Representatives") of the several underwriters (the "Underwriters"), and may bear no relationship to the market price for the Common Stock after the Offering. See "Underwriting." From time to time after the Offering, there may be significant volatility in the market price of the Common Stock. Quarterly operating results of the Company, changes in earnings estimates by analysts, changes in general conditions in the economy or the financial markets, or other developments affecting the Company or its industry or competitors could cause the market price of the Common Stock to fluctuate substantially. In addition, recently the stock market has experienced extreme price and volume fluctuations. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. Therefore, the Company cannot predict the market price for the Common Stock subsequent to the Offering. IMMEDIATE AND SUBSTANTIAL DILUTION Purchasers of Common Stock in the Offering will experience an immediate and substantial dilution of $9.53 per share in the net tangible book value of their shares of Common Stock immediately following the Offering. Current shareholders will receive a material increase in the book value of their shares. If the Company issues additional Common Stock in the future, including shares that may be issued in connection with acquisitions, purchasers of Common Stock in the Offering may experience further dilution in net tangible book value per share of the Common Stock. See "Dilution." SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of Common Stock in the public market following the Offering could adversely affect the market price for the Common Stock. Upon consummation of the Offering, the Company will have a total of 9,000,000 shares of Common Stock outstanding (9,375,000 if the Underwriters' over-allotment option is exercised in full). Of these shares, the 2,500,000 shares offered hereby (2,875,000 if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restrictions under the Securities Act. All of the remaining shares are "restricted securities" as that term is defined by Rule 144 promulgated under the Securities Act and will be eligible for sale in compliance with Rule 144 volume and other requirements. The number of outstanding shares of Common Stock available for sale in the public market will be limited by lock-up agreements under which the Company, its officers, directors and shareholders have agreed not to sell or otherwise dispose of any of their shares for a period of 180 days after the date of this Prospectus without the prior written consent of J.C. Bradford & Co., on behalf of the Underwriters, and applicable restrictions under the Securities Act. The Company intends to register for issuance or resale the 800,000 shares 12 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. The Consolidation will be effected simultaneously with, and as a condition to, the Offering. Ninety percent or more of the equity of each of the Affiliated Companies was owned by Scott D. Dorfman, the Chairman, President and Chief Executive Officer of the Company, his family and affiliated entities. In connection with the Consolidation, two of the affiliated entities that are parties to the Consolidation will make certain distributions to their principals, Mr. Dorfman, his children and ITC Service Company ("ITC"), a shareholder of the Company, reflecting a portion of accumulated earnings and an amount equal to the estimated tax payments to be made by such principals with respect to such entities' estimated income for 1997 and 1998. See "Use of Proceeds," "Certain Transactions" and Note 10 of the financial statements. The Company was incorporated in Georgia on August 19, 1984 under the name Video Catalog Operations, Inc. On September 5, 1985, the name was changed to Innotrac Corporation. USE OF PROCEEDS The net proceeds to the Company from the sale of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share are estimated to be approximately $29.5 million (approximately $34.1 million if the Underwriters' over-allotment option is exercised in full) after deduction of the underwriting discount and estimated Offering expenses payable by the Company. The Company intends to use approximately $6.4 million of the net proceeds of the Offering to distribute a portion of the earnings of two of the entities that are parties to the Consolidation to the equity holders thereof, including Mr. Dorfman, his children and ITC. In addition, the Company intends to repay indebtedness with certain of the net proceeds of the Offering as follows: (i) approximately $14.0 million to repay indebtedness under its line of credit facility, (ii) approximately $1.0 million to repay a term loan and (iii) $3.5 million to repay indebtedness to ITC. Such indebtedness currently bears interest per annum at rates equal to (i) at the Company's option, LIBOR plus 225 basis points (8.25%) or the lender's prime rate (8.5%), (ii) 8.95% per annum and (iii) the prime rate plus 8.0% (16.5%), respectively, and, if not repaid, will mature in November, July and April 1999, respectively. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Liquidity and Capital Resources." Approximately $390,000 of such indebtedness under the line of credit will be incurred to fund the redemption of the equity interests of Mr. Dorfman's father in one of the entities that is a party to the Consolidation. The remainder of the net proceeds is expected to be used for general corporate purposes, including (i) approximately $1.0 million to develop the Company's sales infrastructure, which entails hiring new sales personnel, forming relationships with independent sales organizations and developing sales and marketing materials, (ii) approximately $1.0 million to upgrade the Company's computer software, (iii) approximately $500,000 to purchase computer hardware for the Company's call center, (iv) approximately $1.5 million for equipment and fixtures for the Company's new distribution facility and corporate headquarters expected to be completed in the third quarter of 1998, and (v) for general working capital needs. The Company may from time to time consider possible acquisitions of related businesses and the use of net proceeds from the Offering to finance such acquisitions. The Company does not have any present agreements or commitments for, and is not presently engaged in active negotiations with respect to, any particular prospects. Pending application of the net proceeds as described above, the Company will invest the net proceeds in short-term, interest-bearing investment grade or government securities. 14 DIVIDEND POLICY Innotrac has never paid any cash dividends on its Common Stock. The Company currently intends to retain its future earnings, if any, to finance the growth, development, and expansion of the Company's business and, accordingly, does not currently intend to declare or pay any dividends on the Common Stock for the foreseeable future. The declaration, payment and amount of future dividends, if any, will be subject to the discretion of the Company's Board of Directors and will depend upon the future earnings, results of operations, financial condition and capital requirements of the Company, among other factors. In addition, the Company's financing agreements contain limitations on the payment of cash dividends and other distributions of assets. See "The Consolidation" for a description of distributions to equity holders, including shareholders of the Company, made by affiliated companies that are parties to the Consolidation. DILUTION At September 30, 1997, after giving effect to the Consolidation as if it had occurred at such date, the pro forma combined net tangible book value of the Company would have been $5.0 million, or $0.76 per share. Net tangible book value per share represents the amount of the Company's shareholders' equity less intangible assets, divided by the number of shares of Common Stock outstanding. Dilution per share to new investors represents the difference between the price per share of Common Stock in the Offering and the pro forma net tangible book value per share of Common Stock immediately after completion of the Offering. After giving effect to the Consolidation and the sale of the 2,500,000 shares of Common Stock offered hereby at an assumed initial public offering price of $13.00 per share and after deducting the underwriting discount and estimated Offering expenses payable by the Company, the pro forma combined net tangible book value of the Company would have been $31.3 million, or $3.47 per share. This represents an immediate increase in pro forma net tangible book value of $2.71 per share to existing shareholders and an immediate dilution in net tangible book value of $9.53 per share to new investors purchasing the shares of Common Stock in the Offering. The following table illustrates this per share dilution: Assumed initial public offering price per share............... $13.00 Pro forma net tangible book value before the Offering......... $0.76 Increase in net tangible book value per share attributable to new investors................................................ 2.71 ----- Pro forma net tangible book value after the Offering.......... 3.47 ------ Dilution per share to new investors........................... $ 9.53 ======
The following table sets forth, on a pro forma basis to give effect to the Consolidation as of September 30, 1997, the number of shares of Common Stock purchased from the Company, the total consideration paid to the Company and the average price per share paid by existing shareholders and the new investors, assuming the sale of 2,500,000 shares of Common Stock at an assumed initial public offering price of $13.00 per share.
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. 15 CAPITALIZATION The following table sets forth, as of September 30, 1997, (i) the actual combined capitalization of the Company and (ii) the pro forma consolidated capitalization of the Company giving effect to the Consolidation and to the application of the net proceeds from the Offering at an anticipated initial public offering price of $13.00 per share. The data set forth below should be read in conjunction with "The Consolidation," "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto and the other financial data included elsewhere in this Prospectus.
SEPTEMBER 30, 1997 --------------------- PRO FORMA CONSOLIDATED ACTUAL AS ADJUSTED ------- ------------ (IN THOUSANDS) Indebtedness: Line-of-credit facility................................ $10,446 -- Long term debt(1)...................................... 1,292 $ 70 Subordinated debt...................................... 3,500 -- Redeemable capital stock .............................. 894 504(2) ------- ------- Total indebtedness................................... 16,132 574 ------- ------- Shareholders' equity: Partners' capital...................................... 1,577 -- Members' deficit....................................... (999) -- Preferred Stock, $0.10 par value, 10,000,000 shares authorized; none issued and outstanding............... -- -- Common Stock, $0.10 par value; 50,000,000 shares authorized, 6,500,000 shares issued and outstanding, 9,000,000 shares issued and outstanding as adjusted(3)........................................... 5 900 Additional paid-in capital(3).......................... 14 25,375 Retained earnings...................................... 4,324 4,989 ------- ------- Total shareholders' equity........................... 4,921 31,264 ------- ------- Total capitalization............................... $21,053 $31,838 ======= =======
- -------- (1) Includes current portion of related indebtedness. (2) Represents redeemable capital stock of a subsidiary to be repurchased in the fourth quarter of 1998. See "Certain Transactions." (3) Excludes 383,000 shares of Common Stock reserved for issuance pursuant to stock options granted under the Stock Option Plan. 16 SELECTED FINANCIAL DATA The following table sets forth selected financial data for the Company. The selected historical statements of operations data for each of the years ended December 31, 1995 and 1996, the nine months ended September 30, 1997 and the selected historical balance sheet data for the periods then ended have been derived from the combined financial statements that have been audited by Arthur Andersen LLP, independent public accountants. The selected historical statement of operations data for the nine months ended September 30, 1996 have been derived from the Company's unaudited combined financial statements and include, in the opinion of management, all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the data for such periods. Operating results for interim periods are not necessarily indicative of results for the full fiscal year. The pro forma statement of operations data for the nine months ended September 30, 1997 and the pro forma balance sheet data at September 30, 1997 give effect to the Consolidation and the Offering as well as the use of the net proceeds from the Offering as if the transactions had occurred at January 1, 1997 (for the statement of operations) and September 30, 1997 (for the balance sheet). The pro forma financial information does not purport to represent what the Company's consolidated results of operations would have been if these transactions had in fact occurred on these dates, nor does it purport to indicate the future consolidated financial position or consolidated results of future operations of the Company. The pro forma adjustments are based on currently available information and certain assumptions that management believes to be reasonable. The selected financial data should be read in conjunction with "The Consolidation," "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the financial statements and notes thereto and other financial data included elsewhere in this Prospectus. 17
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- --------------------------------------- PRO FORMA CONSOLIDATED AS ADJUSTED 1993 1994 1995 1996 1996 1997 1997(1) ------ ------- ------- ------- ---------- ---------- --------------- (IN THOUSANDS EXCEPT PER SHARE DATA) ------------------------------------ Revenues, net........... $5,586 $17,380 $44,886 $71,297 $ 53,231 $ 67,314 $ 67,314 Cost of revenues........ 3,495 11,274 30,658 55,520 39,232 51,800 51,800 ------ ------- ------- ------- ---------- ---------- ---------- Gross profit............ 2,091 6,106 14,228 15,777 13,999 15,514 15,514 ------ ------- ------- ------- ---------- ---------- ---------- Operating expenses: Selling, general and administrative expenses.............. 1,538 2,289 6,510 10,391 8,007 9,072 9,072 Depreciation and amortization.......... 157 214 293 429 231 454 454 ------ ------- ------- ------- ---------- ---------- ---------- Total operating expenses.............. 1,695 2,503 6,803 10,820 8,238 9,526 9,526 ------ ------- ------- ------- ---------- ---------- ---------- Operating income........ 396 3,603 7,425 4,957 5,761 5,988 5,988 ------ ------- ------- ------- ---------- ---------- ---------- Other (income) expense: Interest expense....... 123 622 1,090 1,456 955 1,422 5 Other.................. (6) 67 (73) 94 2 (2) (2) ------ ------- ------- ------- ---------- ---------- ---------- Total other expense.... 117 689 1,017 1,550 957 1,420 3 ------ ------- ------- ------- ---------- ---------- ---------- Income before income taxes.................. 279 2,914 6,408 3,407 4,804 4,568 5,985 Income tax provision.... (30) (356) (793) (211) (472) (75) (2,392) ------ ------- ------- ------- ---------- ---------- ---------- Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,332 $ 4,493 $ 3,593 ====== ======= ======= ======= ========== ========== ========== Weighted average shares................. 9,103(2) Net income per share.... $ 0.39(3) ==========
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1997 ------------------------------- ------------------------- PRO FORMA CONSOLIDATED 1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4) ------ ------- ------- ------- ---------- -------------- Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,593 $23,842 Property and equipment, net.................... 1,465 5,059 9,099 10,939 8,249 8,249 Total assets............ 3,457 13,548 30,414 49,037 36,387 47,524 Long-term obligations... 708 4,278 4,729 4,779 4,157 453 Shareholders' equity(5).............. 409 1,624 3,195 4,540 4,921 31,264
- -------- (1) Pro forma adjustments include (i) the elimination of interest expense on the line of credit, the term loan and subordinated debt borrowings assumed to be repaid with the proceeds of the Offering, (ii) an income tax provision to reflect the pro forma tax effects as if the Company were taxed as a C corporation and (iii) the tax effect of the interest expense adjustment. (2) Adjusted to reflect the Consolidation, the Offering (assuming the shares were outstanding for the entire period) and the exercise of all options outstanding under the Stock Option Plan (using the "treasury stock" method and assuming the shares were outstanding for the entire period). (3) Excludes the dividend accretion on redeemable capital stock of a subsidiary of approximately $64,000, or $(0.01) per share. (4) Assumes an increase to working capital equal to the aggregate estimated net proceeds less repayment of borrowings under the line-of-credit facility, the term loan the subordinated debt and the redeemable capital stock of a subsidiary. Reflects the recording of deferred tax assets and liabilities associated with the change in tax status to a C corporation of certain of the entities as a result of the Consolidation, and distribution of $6.4 million of a portion of undistributed earnings of certain of the entities that are parties to the Consolidation. See "The Consolidation" and "Use of Proceeds." (5) Includes capital stock, partners' capital, members' deficit and retained earnings. 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and notes thereto included elsewhere in this Prospectus. OVERVIEW Since its formation in 1984, the Company has expanded its business and facilities to offer distribution and management services, and inbound teleservices in response to the needs of clients in a variety of industries and to capitalize on market opportunities. In 1987, the Company began providing marketing support services to BellSouth. In 1991, the Company initiated a fulfillment program to sell or rent to BellSouth customers Caller ID hardware, phone sets and other equipment, and in 1993, began billing the charges on customers' telephone bills. As part of this program, Innotrac acquires the Caller ID and other telecommunications equipment from third party manufacturers, thereby assuming inventory and credit risk. Upon receipt of an order, the Company ships the product, tracks inventory levels and sales and marketing data and maintains teleservicing operations to handle customer service and technical support. To leverage its experience and infrastructure investment related to the BellSouth marketing support program, in June 1996 the Company entered into an agreement with Pacific Bell to sell Pacific Bell's Caller ID equipment. The Company also provides marketing support services to US West and seeks other telecommunication companies for whom it can provide similar marketing support services. The Company has experienced significant growth in revenue in recent years primarily due to the growth in Caller ID market penetration and service improvements by the Company with respect to product-based marketing support services. Industry sources indicate that at the end of 1995 BellSouth's Caller ID penetration was approximately 13%. BellSouth indicates that through the end of October 1997 its Caller ID penetration had increased to approximately 28%. In 1993 the Company began billing on the telephone bill and in mid-1995, changed the method of selling BellSouth equipment from taking referrals in the Company's call center from BellSouth representatives to having a BellSouth representative negotiate sales on behalf of the Company and send order information to the Company by electronic data interchange ("EDI"). This change in process increased sales and decreased order processing time. Also, in January 1997 the Company implemented an interactive voice response ("IVR") system to handle some of the BellSouth customer service calls, which generally reduced response time and lowered operating costs. Management believes that growth in revenues from Caller ID marketing support services will remain constant for the next several years as market penetration increases and new Caller ID services that require enhanced equipment are introduced. Sales are expected to level-off as penetration of the market matures. According to industry sources, market penetration of Caller ID services in the U.S. as of December 1, 1997 is approximately 18% and is expected to peak at approximately 75% by 2007. Management intends to offset the eventual maturity of its Caller ID business by diversifying its client base and expanding the scope of marketing support services it renders to its clients. The Company intends to use a portion of the net proceeds from the Offering to develop a sales infrastructure to aggressively promote its marketing support services. See "Use of Proceeds" and "Business--Business Strategy." The largest component of the Company's expenses is its cost of revenues, which includes the product costs of telecommunications equipment, depreciation on Caller ID rental equipment, the costs of labor associated with marketing support services for a particular client, telecommunications services costs, materials and freight charges, and directly allocable facilities costs. Most of these costs are variable in nature. A second component of the Company's expenses includes selling, general and administrative ("SG&A") expenses. This expense item is comprised of labor and other costs associated with marketing, financial, information technology support, human resources and administrative functions that are not allocable to specific client services, as well as bad debt expense. SG&A expenses tend to be fixed in nature, with the exception of bad debt, which is related to revenues. 19 RESULTS OF OPERATIONS The following table sets forth summary operating data, expressed as a percentage of revenues, for the years ended December 31, 1995 and 1996 and the nine months ended September 30, 1996 and 1997. Operating results for any period are not necessarily indicative of results for any future period. The financial information provided below has been rounded in order to simplify its presentation. However, the percentages below are calculated using the detailed information contained in the financial statements, the notes thereto and the other financial data included elsewhere in this Prospectus.
YEARS ENDED NINE MONTHS ENDED DECEMBER 31, SEPTEMBER 30, -------------- ------------------ 1995 1996 1996 1997 ------ ------ -------- -------- Revenues, net............................. 100.0% 100.0% 100.0% 100.0% Cost of revenues.......................... 68.3 77.9 73.7 77.0 Gross profit.............................. 31.7 22.1 26.3 23.0 Selling, general and administrative expenses................................. 14.5 14.6 15.0 13.5 Operating income.......................... 16.5 7.0 10.8 8.8 Interest expense.......................... 2.4 2.0 1.8 2.1 Income before income taxes................ 14.3% 4.8% 9.0% 6.8%
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 1996 Revenues. The Company's revenues increased 26.5% to $67.3 million for the nine months ended September 30, 1997 from $53.2 million for the nine months ended September 30, 1996, primarily due to increased sales of Caller ID units to BellSouth and Pacific Bell customers. The growth was partially offset by a decrease in revenues during the nine months ended September 30, 1997 compared to the prior nine month period resulting from the conclusion of a fulfillment program performed by the Company in connection with the 1996 Olympic Games. The Company's sales to Pacific Bell customers have been less than expected due to regulatory delays and a low level of promotion of Caller ID services by Pacific Bell. Cost of Revenues. The Company's cost of revenues increased 32.1% to $51.8 million for the nine months ended September 30, 1997 compared to $39.2 million for the nine months ended September 30, 1996. This increase was due to increased revenue volume and a $1.6 million write-down (2.4% of revenues) on Caller ID equipment purchased for the start-up of the Pacific Bell program. The increase in cost of revenues was also associated with the Company's new call center. Gross Profit. For the nine months ended September 30, 1997, the Company's gross profit was $15.5 million or 23.0% of revenues as compared to $14.0 million or 26.3% of revenues for the nine months ended September 30, 1996. The decrease in gross margin was primarily due to the $1.6 million inventory write- down and costs associated with the new call center, along with the impact of introductory promotional prices on certain Caller ID units, which were lower than regular prices. Selling, General and Administrative Expenses. SG&A expenses for the nine months ended September 30, 1997 were $9.1 million or 13.5% of revenues compared to $8.0 million or 15.0% of revenues for the nine months ended September 30, 1996. The decrease in SG&A expenses as a percentage of revenues was due to improved economies of scale. This was slightly offset by an increase in the Company's bad debt expense, most of which was associated with sales of Caller ID and other telecommunications equipment. Bad debt expense was $5.5 million for the nine months ended September 30, 1997 as compared to $3.5 million for the nine months ended September 30, 1996. The increase in bad debt expense was primarily due to the Company's higher revenue volume and higher Caller ID market penetration, which the Company believes results in an increase in sales of Caller ID units to consumers having higher credit risks. 20 Interest Expense. Interest expense increased to $1.4 million for the nine months ended September 30, 1997 from $1.0 million for the nine months ended September 30, 1996. The increase was primarily due to increased borrowings under the Company's line of credit to fund working capital, consisting primarily of accounts receivable and inventory necessary to support increases in revenues. This increase was slightly offset by lower interest on the Company's subordinated debt in the 1997 period compared to the 1996 period due to a repayment of such debt by the Company in September 1996. Income Taxes. The Company's effective tax rates for the nine months ended September 30, 1997 and 1996 were 1.6% and 9.8%, respectively. The change from 1996 to 1997 was primarily the result of a higher level of income attributable to the pass-through entities involved in the Consolidation. As a result of the Consolidation, the Company expects its effective tax rate in future periods to increase to statutory levels. See "The Consolidation." YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995 Revenues. The Company's revenues increased 58.8% to $71.3 million for the year ended December 31, 1996 from $44.9 million for the year ended December 31, 1995, primarily due to increased sales of Caller ID units to BellSouth customers. Cost of Revenues. The Company's cost of revenues increased 80.8% to $55.5 million for the year ended December 31, 1996 from $30.7 million for the year ended December 31, 1995, primarily due to increased revenue volume, as well as costs associated with the Company's new call center, which opened in June 1996. Gross Profit. The Company's gross profit for the year ended December 31, 1996 increased 11.2% to $15.8 million or 22.1% of revenues from $14.2 million or 31.7% of revenues for the year ended December 31, 1995. The decrease in gross margin was primarily due to costs associated with the call center that opened in June 1996, along with the impact of introductory promotional prices on certain Caller ID units sold during the last six months of 1996. Selling, General and Administrative Expenses. SG&A expenses for the year ended December 31, 1996 were $10.4 million or 14.5% of revenues compared to $6.5 million or 14.6% of revenues for the year ended December 31, 1995. The increase in the 1996 period over the 1995 period was primarily due to the fixed costs associated with the Company's new call center and an increase in the Company's bad debt expense. The bad debt expense, which was associated with sales of Caller ID and other telecommunications equipment, was $5.6 million for the year ended December 31, 1996, compared to $3.0 million for the year ended December 31, 1995. The increase in bad debt expense was primarily due to the Company's higher revenue volume and Caller ID market penetration, which the Company believes results in an increase in sales of Caller ID units to consumers having higher credit risks. Interest Expense. Interest expense increased to $1.5 million for the year ended December 31, 1996 from $1.1 million for the year ended December 31, 1995. The increase was primarily due to additional borrowings in the 1996 period under the Company's line of credit to fund working capital, consisting primarily of accounts receivable and inventory required to support increased revenue. The increase was partially offset by lower interest on the Company's subordinated debt in the 1996 period compared to the 1995 period due to a repayment of such debt made by the Company in September 1996. Income Taxes. The Company's effective tax rates for the years ended December 31, 1996 and 1995 were 6.2% and 12.3%, respectively. This change was primarily the result of a higher level of income attributable to the pass-through entities involved in the Consolidation. See "The Consolidation." LIQUIDITY AND CAPITAL RESOURCES Historically, the Company has funded its operations and capital expenditures primarily through cash flow from operations and borrowings from banks and shareholders. The Company had cash and cash equivalents of approximately $40,000, $2.0 million and $425,000 at December 31, 1995, December 31, 1996 and September 21 30, 1997, respectively. The Company maintains a $25.0 million revolving line of credit with a bank, maturing in November 1999, which was increased from $18.0 million in December 1997. Borrowings under the line of credit bear interest at the Company's option at the bank's prime rate, as adjusted from time to time, or LIBOR plus up to 225 basis points. At September 30, 1997, the interest rate was 8.5%. The Company also has a term loan with the same bank that matures in July 1999 and bears interest at 8.95% per annum. In addition, the Company has a subordinated note payable to a shareholder, which matures in April 1999 and bears interest at a particular bank's prime rate, as adjusted from time to time, plus 8.0% per annum. At September 30, 1997, the interest rate was 16.5%. At December 1, 1997, approximately $9.1 million, $1.1 million and $3.5 million were outstanding under the line of credit, the term loan and the subordinated note, respectively. The Company anticipates that all outstanding indebtedness under the line of credit, term loan and subordinated note will be repaid from the net proceeds of this Offering. The Company will be able to continue to draw on the line of credit from time to time. See "Use of Proceeds." At September 30, 1997, the Company had entered into various operating leases in the ordinary course of business. In December 1997, the Company entered into an operating lease for a new distribution facility and corporate offices expected to be ready for occupancy in the third quarter of 1998. As a result of this lease, rental expense will increase approximately $400,000 per year through 2008. In addition, the Company entered into an agreement with a related party to acquire from him by the end of 1998 all of his interest in a subsidiary of the Company and one entity involved in the Consolidation for an aggregate of $980,000. See "Certain Transactions." During the nine months ended September 30, 1997, the Company generated (used) cash flow from operating activities of $11.6 million compared to ($5.8 million) in the same period in 1996. Although the Company historically has generated positive cash flow from operations, the negative cash flow for the nine months ended September 30, 1996 was due to the increased working capital needed to support the expansion of the Company's Caller ID programs, along with the impact of the delay in the Pacific Bell Caller ID program in California, which resulted in higher inventory levels. During the fiscal years ended December 31, 1996 and 1995, the Company generated cash flow from operating activities of $88,000 and $6.4 million, respectively. The lower cash flow from operating activities for the year ended December 31, 1996 was due to lower net income and increased working capital requirements needed to support the expansion of the Company's Caller ID programs, along with the impact of the delay in the Pacific Bell Caller ID program. Net cash used in investing activities was $5.0 million for the nine months ended September 30, 1997 compared to $4.4 million for the nine months ended September 30, 1996. This increase was primarily due to increased purchases of telecommunications equipment. Net cash used in investing activities was $8.0 million for the year ended December 31, 1996 compared to $7.8 million for the year ended December 31, 1995. This increase was primarily due to increased purchases of telecommunications equipment and capital costs associated with the build-out and opening of the Company's call center. Net cash provided from (used in) financing activities was ($8.2 million) for the nine months ended September 30, 1997 compared to $6.7 million for the nine months ended September 30, 1996. The use of cash for financing activities in the 1997 period reflects repayments under the line of credit and term loan. Net cash provided from financing activities was $9.8 million for the year ended December 31, 1996 and $588,000 for the year ended December 31, 1995. The increase in cash provided by financing activities for the year ended December 31, 1996 was due to increased borrowings under the line of credit to fund increased accounts receivable and inventory, partially offset by repayments on the term loan and subordinated debt and distributions to equity holders of entities involved in the Consolidation. The Company estimates that its cash and financing needs through 1998 will be met by cash flows from operations, its line of credit facility, and the net proceeds from the Offering. However, any increases in the Company's growth rate, shortfalls in anticipated revenues, increases in anticipated expenses, or significant acquisitions could have a material adverse effect on the Company's liquidity and capital resources and would require the Company to raise additional capital from public or private equity or debt sources in order to finance 22 operating losses, anticipated growth and contemplated capital expenditures. If such sources of financing are insufficient or unavailable, the Company will be required to modify its growth and operating plans in accordance with the extent of available funding. The Company may need to raise additional funds in order to take advantage of unanticipated opportunities, such as acquisitions of complementary businesses or the development of new products, or otherwise respond to unanticipated competitive pressures. There can be no assurance that the Company will be able to raise any such capital on terms acceptable to the Company or at all. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"), which requires companies that do not choose to account for stock-based compensation as prescribed by the statement to disclose the pro forma effects on earnings and earnings per share as if SFAS 123 had been adopted. The Company has chosen the disclosure method, but for all periods presented herein the Company did not have any stock option plans. Subsequent to September 30, 1997, the Company adopted the Stock Option Plan. Therefore, in subsequent periods the Company will have additional disclosures related to SFAS 123. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"), which redefines how entities compute earnings per share. SFAS 128 requires presentation of "basic earnings per share" and "diluted earnings per share," as defined. Primary earnings per share will be replaced by basic earnings per share which will be computed exclusively based on the weighted average number of common shares outstanding. This statement is effective for periods ending after December 15, 1997 and will require restatement of all prior period earnings per share data presented. The adoption of SFAS 128 is not expected to have a material impact on the Company's earnings per share data. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes standards for reporting and presentation of comprehensive income and its components in a full set of general purpose financial statements. This statement is effective for periods beginning after December 15, 1997. The adoption of SFAS 130 is not expected to have an impact on the Company's financial statements. In June 1997, the FASB issued Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS 131"), which establishes standards for the way that public business enterprises report information about operating segments in annual financial statements and requires that those enterprises report selected information about operating segments in interim financial reports issued to stockholders. It also establishes standards for related disclosures about products and services, geographic areas and major customers. This Statement is effective for financial statements for periods beginning after December 15, 1997. The adoption of SFAS 131 is not expected to have a material impact on the Company's financial statements. 23 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. 24 BUSINESS STRATEGY The Company's strategy is to take advantage of market trends towards outsourcing by leveraging its core expertise, reputation for quality and timely service and strong client relationships. The following are the key elements of this strategy: LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand its customer base in the telecommunications industry by leveraging the expertise it has developed and the results it has achieved through long- standing relationships with several clients in the industry. The Company is also seeking to expand the level of services provided to existing telecommunications clients. BROADEN CUSTOMER BASE BY DEVELOPING SALES INFRASTRUCTURE. The Company has experienced rapid revenue growth since 1993 without a significant sales infrastructure. The Company intends to use a portion of the net proceeds of the Offering to develop a national sales force for its services, to form relationships with independent sales agencies and to develop sales and marketing materials to highlight the wide array of services offered by the Company. By developing this infrastructure, the Company intends to broaden its customer base and diversify its sources of revenues. CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a commitment to the use of advanced technology and intends to continue to upgrade and enhance its computer hardware and software applications to enable it to continue to provide flexible and powerful services to its clients. The Company believes that the use of advanced technology provides a competitive advantage and results in greater capacity and reduced labor costs. The Company also believes that continued technological advances, particularly those utilizing the Internet, will provide new opportunities for the Company to tailor its services to meet each client's needs. The Company intends to address the labor-intensive nature of fulfillment services by developing more efficient automated systems that distribute literature via electronic media directly to the customer. The Company also plans to expand its Internet- related capabilities for (i) automated inventory management, (ii) access to order and database information and (iii) virtual warehousing of literature so that such materials no longer need to be maintained in physical form in the Company's warehouses. EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored, value-added solutions that achieve each client's intended marketing results. The Company devotes considerable resources to assessing and understanding a client's industry, products, services, processes and culture, then works with the client to design programs to reduce the costs and investment required to deliver the client's marketing support programs. The Company believes that this consultative partnership approach encourages long-term client relationships, as evidenced by the fact that the Company has serviced its 10 largest clients for an average of six years and its five oldest clients for an average of 11 years. The Company believes that this approach also creates substantial opportunities to expand relationships with existing clients by cross-selling the full range of its services. SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take advantage of the fragmented nature of the marketing support services industry by selectively acquiring complementary companies that extend its presence into new geographic markets or industries, expand its client base, add new product or service applications or provide substantial operating synergies. The Company believes that there are a variety of such potential acquisition opportunities. CLIENTS The flexibility of its services allows the Company to attract clients in a broad range of industries. Innotrac targets companies that have developed a large customer base, numerous and/or geographically diverse subsidiary or affiliate operations, extensive marketing needs, or complex point-of- distribution requirements. Companies with these characteristics tend to need customer support, product or literature distribution, inventory warehousing and management, or tracking and reporting capabilities. Although a company may elect to perform these functions in-house, it will require the development of expensive, labor intensive infrastructures, which may divert a company's focus from its core competencies. Outsourcing these functions to a company such as Innotrac may result in a lower cost and higher quality level than such companies can achieve 25 on an in-house basis. The following are some examples of the Company's clients and the marketing support services the Company performs for them: SIEMENS ENERGY AND AUTOMATION Starting with the provision of marketing support services for just one business unit in 1986, Innotrac currently provides marketing support services for more than 20 business units of Siemens E&A. One component of these services is the storage of technical literature, product catalogs and brochures. Siemens E&A sales offices, dealers and distributors may order, via telephone, fax or Innotrac's Internet gateway, various types of literature stored in the Company's distribution facilities. Innotrac processes the order, packs and ships the product using the least expensive carrier for the time frame requested. Innotrac provides Siemens E&A with detailed inventory management and charge back reports to allow Siemens E&A to allocate costs appropriately to each business unit. Innotrac also distributes literature and information from Siemens E&A's corporate office to its sales offices, dealers and distributors. Siemens E&A frequently provides various other projects that require Innotrac to assemble, collate, print and distribute information contained in various databases maintained by Innotrac. HOME DEPOT Home Depot purchases in-store signage from various vendors and warehouses the inventory in one of Innotrac's distribution facilities. For new store openings, promotions or replacement, Home Depot orders signs from Innotrac to ship to one or several of its stores in the United States and Canada. Innotrac does not own the inventory, but manages it and provides cost and inventory reports directly to Home Depot. As requested, Innotrac may assemble special signs or products for distribution to Home Depot stores. In addition, Innotrac provides Home Depot with cost accounting for each store's usage of signs so that Home Depot can allocate those costs directly to the appropriate stores. The Company invoices Home Depot monthly for order processing, consultative account services, fulfillment and other expenses (such as freight and supplies). BELLSOUTH Since 1987, the Company has provided many marketing support services for BellSouth, including the Caller ID display unit distribution program, which began in 1991. A transaction generally begins when a customer calls BellSouth and speaks with one of over 4,000 BellSouth service representatives to obtain Caller ID service. On behalf of Innotrac, the representative may offer to sell or rent to the customer one of several models of Caller ID and telephone products that can be paid for through the customer's phone bill, on an interest free installment basis. If the representative makes the sale, the order is sent via EDI to Innotrac. Occasionally, if more detailed information is required, the customer's call is transferred directly to Innotrac. Innotrac generally ships the order the next day and electronically submits monthly to BellSouth the appropriate charges to be included on the customer's telephone bill. Innotrac also provides the BellSouth customer with order status, billing information and technical product support through its call center by IVR or representative. Innotrac does not charge BellSouth for its services but instead derives its fees from the difference in the price of the Caller ID display unit charged to the customer and the wholesale cost of the product. The Company has also been selected by BellSouth, starting in the first quarter of 1998, to sell telephone network services such as voice mail and upgraded Caller ID service. When one of Innotrac's thousands of daily customer service calls for BellSouth is received, Innotrac's computer system will be able to determine if the customer's telephone system can support the enhanced services. If the customer and its existing system meet certain parameters, the Innotrac representative will be prompted by the computer to offer the new features. Innotrac will be paid by BellSouth on a per sale basis under this program, and the program is expected to require minimal additional cost to Innotrac. MARKETING SUPPORT SERVICES Innotrac designs flexible marketing support solutions that range from small, specialty projects to large integrated fulfillment, teleservicing and database tracking project from among the following service options: 26 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 27 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 28 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 29 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 30 services that Innotrac provides. The Company continuously explores new outsourcing service opportunities, typically in circumstances where clients are experiencing inefficiencies in non-core areas of their businesses and management believes it can develop a superior outsourced solution to such inefficiency on a cost-effective basis. The Company primarily competes with the in-house operations of its current and potential clients and also competes with certain companies that provide similar services on an outsourced basis, many of whom have greater resources than the Company. GOVERNMENT REGULATION Telephone sales practices are regulated at both the federal and state level and primarily relate to outbound teleservices, which Innotrac generally does not provide. To the extent that Innotrac offers outbound teleservices, such operations are regulated by the rules of the Federal Communications Commission (the "FCC") under the Federal Telephone Consumer Protection Act of 1991 (the "TCPA"), the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 (the "TCFAPA") and various state regulations regarding telephone solicitations. The Company believes that it is in compliance with the TCPA, the TCFAPA and the FCC rules thereunder and the various state regulations and that it would operate in compliance with those rules and regulations if it were to engage in more substantial outbound teleservice operations in the future. The Caller ID services offered by the Company's telecommunications clients are subject to various federal and state regulations. The legality of Caller ID has been challenged in cases decided under the Electronic Communications Privacy Act (the "ECPA") and several state statutes. In March 1994, an FCC report preempted certain state regulation of interstate calling party number parameter ("CPN") based services, the technology underlying Caller ID. This report requires certain common carriers to transmit CPN and its associated privacy indicator (which allows telephone callers to block the display of their phone numbers on Caller ID display units) on an interstate call to connecting carriers without charge (the "Free Passage" rule). In connection with this report, the Department of Justice issued a memorandum which concluded that the installation or use of interstate Caller ID service is not prohibited by any federal wiretap statute and that, in general, the FCC has authority to preempt state laws that the FCC finds would hinder federal communications policy on Caller ID services. Court decisions since the FCC issued its March 1994 report have consistently held that Caller ID does not violate any state or federal wiretap statute. In May 1995, the FCC narrowed its March 1994 preemption of state public utilities blocking regulations by permitting subscribers to choose per-line blocking or per-call blocking on interstate calls, provided that all carriers were required to adopt a uniform method of overriding blocking on any particular call. At the same time, the FCC specifically preempted a California Public Utilities Commission ("CPUC") per-line blocking default policy, which required that all emergency service organizations and subscribers with nonpublished numbers, who failed to communicate their choice between per-call blocking and per-line blocking, be served with a per-line blocking. The FCC's revised rules and regulations also require carriers to explain to their subscribers that their telephone numbers may be transmitted to the called party and that there is a privacy mechanism (i.e., the "blocking" feature) available on interstate calls, and explain how the mechanism can be activated. The CPUC, seeking to protect the caller's privacy, has ruled that a carrier can offer Caller ID or transmit CPN to interconnecting carriers only upon CPUC approval of its customer notification and education plan. The CPUC has approved the education plan of Pacific Bell, whose Caller ID market includes California. The Company works closely with its clients and their advisors to ensure that the Company and the client are in compliance with such regulations. The Company cannot predict whether the status of the regulation of Caller ID services will change and what effect, if any, such change would have on the Company or its industry. INTELLECTUAL PROPERTY The Company has used the service mark "Innotrac" since 1985 and has filed applications for federal registration of this service mark in multiple classes. The "innotrac.com" domain name has been a registered 31 domain name since 1995. Due to the possible use of identical or phonetically similar service marks by other companies in different businesses, there can be no assurance that the United States Patent and Trademark Office will grant the Company's registration of its service mark, or that such service mark will not be challenged by other users. The Company does not believe that it owns or utilizes any other service marks that are material to its business. The Company's operations, however, frequently incorporate proprietary and confidential information. In accordance with industry practice, the Company relies upon a combination of contract provisions and trade secret laws to protect the proprietary technology it uses and to deter misappropriation of its proprietary rights and trade secrets. LEGAL PROCEEDINGS The Company may be involved from time to time in litigation arising in the normal course of business. The Company is not a party to any current legal proceeding. 32 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. 40 President, Chief Executive Officer 2000 Dorfman(1)(3)......... and Chairman of the Board David L. Ellin(1)...... 39 Senior Vice President, Chief 2000 Operating Officer, Secretary and Director Donald L. Colter, 37 Vice President--Operations Jr. .................. Larry C. Hanger........ 42 Vice President--Business Development 1998 and Director John H. Nichols, III... 43 Vice President and Chief Financial Officer Bruce V. 40 Director 1998 Benator(1)(2)......... Martin J. Blank(2)(3).. 50 Director 1999 Campbell B. Lanier, 47 Director 1999 III(2)................ William H. Scott, 50 Director 1999 III(3)................ Key Employees: Nancy C. Bergeron...... 46 Director of Marketing Robert C. Covington, 41 Director of Information Technology III................... Robert Jackson, Jr. ... 46 Director of Fulfillment Operations Melissa B. Ohlson...... 33 Director of Human Resources Robert W. Seitz........ 51 Director of Client Services J. Mark Tobin.......... 39 Director of Call Center Operations
- -------- (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee Mr. Dorfman is the founder of Innotrac and has served as President, Chief Executive Officer and Chairman of the Board of the Company since its inception in 1984. Prior to founding the Company, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc. ("Paymaster"), an equipment distributor, where he developed and managed Paymaster's mail order catalog and developed proprietary software to track and analyze marketing programs. Prior to his employment with Paymaster, Mr. Dorfman co-founded and served as President of Features Mail Order Catalog, where he gained experience in distribution, tracking and inventory control. Mr. Ellin joined Innotrac in 1986, was appointed Secretary of the Company in December 1997 and has served as Senior Vice President and Chief Operating Officer of the Company since November 1997. He served as the Company's Vice President from 1988 to November 1997. From 1984 to 1986, Mr. Ellin was employed by the Atlanta branch of WHERE Magazine, where he managed the sales and production departments. From 1980 to 1984, Mr. Ellin was employed by Paymaster, where he was responsible for Paymaster's sales and collections. Mr. Colter joined Innotrac in 1995 and has served as Vice President- Operations since November 1997. He served as the Company's Chief Financial Officer from 1995 to November 1997. Prior to joining Innotrac, Mr. Colter was from 1993 to 1995 the corporate controller of Gay & Taylor/Thomas Howell Group, an international insurance adjusting company. From 1991 to 1993, Mr. Colter was corporate controller of Outdoor West, Inc., an outdoor advertising company. Mr. Colter is a certified public accountant and has over 15 years of experience in the financial and accounting industry. 33 Mr. Hanger joined Innotrac in 1994, and has served as Vice President- Business Development since November 1997. He served as the Company's Department Manager of Business Development from 1994 to November 1997, and was responsible for the management of the telecommunication equipment marketing and service business. From 1979 to 1994, Mr. Hanger served as Project Manager- Third Party Marketing at BellSouth, where he managed the marketing program for BellSouth's network services and was involved in implementing the billing options program for BellSouth with Innotrac. Mr. Nichols joined Innotrac in November 1997 as Vice President and Chief Financial Officer. From 1993 until November 1997 he served as Vice President and Chief Financial Officer for Storehouse, Inc., a furniture retailer. From 1982 until 1993, Mr. Nichols was employed by Contel Corporation and GTE Corporation in various senior financial management positions in both the telephone and cellular telephone business units. Mr. Nichols is a certified public accountant. Mr. Benator is a partner of Williams Benator and Libby, LLP, certified public accountants. He has been affiliated with the firm since 1984 and is the firm's Director of Accounting and Auditing Services. He has been associated with the Company since its inception, serving as a financial advisor and its outside accountant. From 1979 to 1984, Mr. Benator was employed by Ernst & Young, LLP. Mr. Blank has been a director since December 1997 and is a co-founder of Automobile Protection Corporation ("APCO"), a publicly held corporation engaged in the marketing of extended vehicle service contracts and warranty programs. Mr. Blank has served as Secretary and Director of APCO since its inception in 1984 and as Chairman of the Board and Chief Operating Officer since 1988. Mr. Blank's experiences prior to co-founding APCO include the practice of law and the representation of and financial management for professional athletes. Mr. Blank is admitted to the bar in the States of Georgia and California. Mr. Lanier has been a director since December 1997 and is Chairman of the Board and Chief Executive Officer of ITC Holding Company, Inc. ("ITC Holding"), the parent company of ITC. He has served as a director of ITC Holding since its inception in 1989. In addition, Mr. Lanier is an officer and director of several ITC Holding subsidiaries. He also is a director of KNOLOGY Holdings, Inc. ("KNOLOGY"), a broadband telecommunications services company currently operating in Alabama, Florida and Georgia (formerly known as CyberNet Holding, Inc.); MindSpring Enterprises, Inc., an Internet service provider; National Vision Associates, Ltd., a full service optical retailer; K&G Men's Center, Inc., a discount retailer of men's clothing; Vice Chairman of the Board of AvData Systems, Inc. ("AvData"), a company providing data communications networks; Chairman of the Board of Powertel, Inc. (formerly InterCel, Inc.) ("Powertel"), a wireless telecommunications services company operating in the southeastern United States, and Chairman of the Board of ITC DeltaCom, Inc. ("ITC DeltaCom") a full service telecommunications provider to business customers in the southeastern United States. He has served as a Managing Director of South Atlantic Private Equity Fund IV, Limited Partnership since 1997. Mr. Scott has been a director since December 1997 and has served as President and Chief Operating Officer of ITC Holding since 1991. He has been a director of ITC Holding since 1989. From 1989 to 1991, he served as Executive Vice President of ITC Holding. Mr. Scott is a director of Powertel, AvData, KNOLOGY, ITC DeltaCom and MindSpring. Ms. Bergeron joined Innotrac in April 1997 as Director of Marketing. From 1994 to 1996, Ms. Bergeron was Director of Marketing of Chemtronics, Inc., a chemical manufacturer, and from 1992 until 1994 she served as Director of Communications of Diversified Products, a home fitness equipment manufacturer. Mr. Covington joined Innotrac in 1995 as Director of Information Technology. From February 1995 to October 1995, Mr. Covington was a Technical Services Manager at Alexander Howden North America, Inc., an insurance broker, where he managed the company's information technology services. From 1985 to 1994, Mr. Covington was the Director of MIS Operations at Digital Communications Associates, Inc., a computer hardware and software manufacturer. 34 Mr. Jackson joined Innotrac in June 1997 as Director of Fulfillment Operations. Prior to joining Innotrac, Mr. Jackson was from 1996 to 1997 a Manufacturing Team Leader and Quality Engineer at Prestolite Wire Corporation. From 1995 to 1996, Mr. Jackson was a Strategic Business Unit Manager at Heatcraft Refrigeration and from 1993 to 1995 he engaged in independent consulting with Total Quality Management. From 1976 to 1993, Mr. Jackson served in various management roles at Digital Equipment Corporation. Ms. Ohlson joined Innotrac in 1994 as Director of Human Resources. Prior to joining Innotrac, Ms. Ohlson was from May to October 1994 engaged on a short- term assignment as a human resource generalist with GEC Marconi Avionics, Inc. From 1992 to May 1994, Ms. Ohlson was the Personnel Director at Star Manufacturing, Inc. Mr. Seitz joined Innotrac in December 1997 as Director of Client Services. Prior to joining Innotrac, Mr. Seitz was from 1996 until November 1997 a Principal and Senior Consultant at Weisser, Fitzpatrick & Greene Marketing. From 1995 until 1996, Mr. Seitz was Manager of Market Development and Communications at Boehringer Mannheim Corporation. From 1992 until 1995, Mr. Seitz was a Principal and Senior Consultant at Winston, Greene Assoc. and from 1991 to 1992, he was Corporate Manager of Marketing Communications at Coulter Corporation. Mr. Seitz also has 15 years of marketing communications experience at Baxter Healthcare Corporation. Mr. Tobin joined Innotrac in June 1997 as Director of Call Center Operations. Prior to joining Innotrac, Mr. Tobin was from 1996 to April 1997 engaged in independent consulting in the telemarketing field. From 1995 to 1996, Mr. Tobin was the Call Center Director at ICT Global Enterprises, Inc., a telemarketing company. From 1985 to 1995, Mr. Tobin served as Area Manager- Financial Management at SBC Communications, a telecommunications company. EXECUTIVE COMPENSATION The following table sets forth certain information regarding the annual compensation for services in all capacities to the Company for the year ended December 31, 1996 with respect to the Company's Chairman, President and Chief Executive Officer and each of the Company's two other executive officers who earned more than $100,000 in salary and bonus during such fiscal year (the "Named Executive Officers"):
ANNUAL COMPENSATION -------------------- NAME AND PRINCIPAL POSITION SALARY BONUS --------------------------- ---------- --------- Scott D. Dorfman....................................... $ 196,977 -- Chairman, President and Chief Executive Officer David L. Ellin......................................... 136,849 $ 50,000 Senior Vice President, Chief Operating Officer and Secretary Larry C. Hanger........................................ 87,825 25,000 Vice President--Business Development
No options were granted by the Company to its executive officers during the year ended December 31, 1996 and none were exercised. None of the Company's executive officers or key personnel has an employment agreement with the Company. DIRECTORS COMPENSATION The Company pays its outside directors an annual fee of $10,000, and additional fees of $250 and $100, respectively, for each Board meeting and committee meeting attended. The Company reimburses all directors for their travel and other expenses incurred in connection with attending Board or committee meetings. In addition, on December 11, 1997, the Company granted options to purchase 20,000 shares of Common Stock to Mr. Benator at a price of $9.10. The Company has granted each outside director options to purchase 10,000 shares of Common Stock at the initial public offering price, effective as of the date of this Prospectus. 35 STOCK OPTION PLAN In November 1997, the Company adopted its Stock Option Plan to provide key employees, officers, directors, contractors and consultants an opportunity to own Common Stock of the Company and to provide incentives for such persons to promote the financial success of the Company. Awards under the Stock Option Plan may be structured in a variety of ways, including as "incentive stock options" as defined in Section 422 of the Internal Revenue Code, as amended ("IRC"), non-qualified stock options, restricted stock awards and stock appreciation rights ("SARs"). Incentive stock options may be granted only to full-time employees (including officers) of the Company, including its subsidiaries. Non-qualified options, restricted stock awards, SARs and other permitted forms of awards may be granted to any person employed by or performing services for the Company, including directors, contractors and consultants. The Stock Option Plan provides for the issuance of options and awards for up to 800,000 shares of Common Stock. Incentive stock options are also subject to certain limitations prescribed by the IRC, including the requirement that such options may not be granted to employees who own more than 10% of the combined voting power of all classes of voting stock of the Company, unless the option price is at least 110% of the fair market value of the Common Stock subject to the option, may be exercised for no more than five years from the grant date. The Board of Directors of the Company (or a committee designated by the Board) otherwise generally has discretion to set the terms and conditions of options and other awards, including the term, exercise price and vesting conditions, if any, to select the persons who receive such grants and awards, and to interpret and administer the Stock Option Plan. As of the date of this Prospectus, options to purchase an aggregate of 383,000 shares of Common Stock have been granted under the Stock Option Plan, including options for 155,000 and 25,000 shares of Common Stock issued to Messrs. Ellin and Hanger, respectively, having an exercise price of $9.10 per share. 36 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......... -- -- -- Martin J. Blank.......... -- -- -- Campbell B. Lanier, III.. 353,846(7) 5.4 3.9 William H. Scott, III.... 353,846(7) 5.4 3.9 All directors and executive officers as a group (9 persons)....... 6,555,000 100.0% 72.4%
- -------- * Denotes less than 1% (1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares that such person or group has the right to acquire within 60 days after the date of this Prospectus or with respect to which such person has or shares voting or investment power. For purposes of computing the percentages of outstanding shares held by each person or group of persons, shares which such person or group has the right to acquire within 60 days after such date are deemed to be outstanding for purposes of computing the percentage for such person or group but are not deemed to be outstanding for the purpose of computing the percentage of any other person or group. None of the options granted under the Company's Stock Option Plan is exercisable within 60 days from the date of this Prospectus. (2) Mr. Dorfman's address is 1828 Meca Way, Norcross, Georgia 30093. (3) Includes an aggregate of 160,060 shares owned by Mr. Dorfman's wife individually and as custodian and trusts for the benefit of his children and 32,500 shares subject to presently exercisable purchase options granted to Mr. Ellin. (4) ITC's and Messrs. Lanier and Scott's address is 1239 O.G. Skinner Drive, West Point, Georgia 31833. (5) ITC is entitled to receive shares of Common Stock in the Consolidation equal to 10% of $46.0 million divided by the initial public offering price. The other equity holders of the combining entities will own the remainder of the 6,500,000 shares that will be outstanding after the Consolidation. This formula is expected to result in 353,846 shares being issued to ITC, assuming an initial public offering price of $13.00. (6) Consists of 32,500 shares subject to presently exercisable options to purchase such shares from Mr. Dorfman and 55,000 shares subject to presently exercisable options from the Company. (7) Consists of the shares owned of record by ITC, with respect to which Messrs. Lanier and Scott, as principal shareholders and officers of such entity, may be deemed the beneficial owner. Messrs. Lanier and Scott disclaim beneficial ownership of such shares. 37 CERTAIN TRANSACTIONS Scott D. Dorfman, Chairman of the Board, Chief Executive Officer and majority shareholder of the Company, has guaranteed the Company's obligations under its credit facility with a bank, which consists of a $25,000,000 revolving line of credit and a $2,000,000 term loan, and the subordinated note in the principal amount of $3.5 million payable to ITC described below. The bank guarantee will terminate upon the completion of the Offering, and the subordinated note will be repaid with a portion of the proceeds from the Offering. In connection with the Consolidation, Mr. Dorfman, together with his children, and ITC, will receive distributions of $6.0 million and $400,000, respectively, from two pass-through entities that are parties to the Consolidation, which distributions represent a portion of these entities' accumulated earnings. In addition, each of the entities will reimburse Mr. Dorfman and ITC for estimated tax payments with respect to their earnings for 1997 and 1998. Two directors of the Company, Messrs. Lanier and Scott, are officers, directors and principal shareholders of ITC. See "Use of Proceeds." As a result of the Consolidation, and as consideration for their respective interests in the affiliated entities that are parties to the Consolidation, shares of Common Stock of the Company will be owned as follows: Mr. Dorfman-- 6,146,154 shares (including 493 shares beneficially owned by his wife, and 159,567 shares held by trusts or in custodianship for his children) and ITC-- 353,846 shares, assuming an initial public offering price of $13.00. ITC is entitled to receive shares of Common Stock in the Consolidation equal to 10% of $46.0 million divided by the initial public offering price. Prior to the closing of the Offering, the Company intends to redeem for approximately $390,000 from Arnold Dorfman, the father of Scott D. Dorfman, all of his shares of one of the entities that is a party to the Consolidation. In December 1998, the Company intends to redeem for approximately $590,000 from Arnold Dorfman all of his shares of a second affiliated entity that is a party to the Consolidation. ITC is a creditor of the Company with respect to a certain subordinated note in the principal amount of $3.5 million. The note bears interest at the prime rate plus 8.0% per annum and matures in April 1999. Upon the completion of the Offering, the Company intends to repay such note, plus accrued interest, in full. See "Use of Proceeds." From January 1, 1996 through October 1, 1997, the Company paid $145,914 in fees to Williams Benator & Libby, LLP, certified public accountants, for accounting and consulting services. Bruce V. Benator, a director of the Company, is a partner of Williams Benator & Libby, LLP. After consummation of the Offering, it is expected that Williams Benator & Libby, LLP will continue to provide accounting and consulting services for the Company. On December 11, 1997, the Board of Directors adopted a policy that any transactions between the Company and any of its officers, directors, or principal shareholders or affiliates must be on terms no less favorable than those that could be obtained from unaffiliated parties in comparable situations and must be approved by the Audit Committee of the Board of Directors. 38 SHARES ELIGIBLE FOR FUTURE SALE Upon completion of the Offering, the Company will have outstanding 9,000,000 shares of Common Stock (9,375,000 shares if the Underwriters' over-allotment option is exercised in full). Of such shares, the 2,500,000 shares sold in the Offering (2,875,000 shares if the Underwriters' over-allotment option is exercised in full) will be freely tradable without restrictions or further registration under the Securities Act, unless acquired by "affiliates" of the Company, as that term is defined in Rule 144 under the Securities Act ("Rule 144"), in which case these shares will be subject to the resale limitations of Rule 144. The outstanding shares of Common Stock not sold in the Offering were issued and sold by the Company in a private transaction in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and are restricted securities under Rule 144. These shares may not be sold unless they are registered under the Securities Act or are sold pursuant to an applicable exemption from registration, including the exemption pursuant to Rule 144. In general, under Rule 144 as currently in effect, beginning 90 days after the Offering, a person who has beneficially owned any such shares for at least one year, including "affiliates" of the Company, would be entitled to sell in broker's transactions or to market makers within any three-month period a number of shares that does not exceed the greater of one percent of the then outstanding shares of Common Stock (estimated to be 90,000 shares after completion of this Offering, or 93,750 shares if the Underwriters' over- allotment option is exercised in full) or the average weekly trading volume of the Common Stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the Commission. Sales under Rule 144 are also subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning the Company. A person (or persons whose shares are aggregated) who is not an "affiliate" of the Company at any time during the 90 days preceding a sale, and who has beneficially owned such shares for at least two years, would be entitled to sell such shares under Rule 144(k) without regard to the availability of current public information, volume limitations, manner of sale provisions, or notice requirements. The above is a summary of Rule 144 and is not intended to be a complete description thereof. The Company, its officers and directors, and all shareholders of the Company have agreed that they will enter into lock-up agreements generally providing that they will not, directly or indirectly, offer, pledge, sell, contract to sell, or otherwise dispose of or grant any options or other rights with respect to, any shares of Common Stock or any securities that are convertible into or exchangeable or exercisable for Common Stock owned by them for a period of 180 days after the date of this Prospectus, without the prior written consent of J.C. Bradford & Co. on behalf of Underwriters. If a shareholder should request J.C. Bradford & Co. to waive the 180 day lock-up period, J.C. Bradford & Co., consistent with past practice with regard to other issuing companies, would take into consideration the number of shares as to which such request relates, the identity of the requesting shareholder, the relative demand for additional shares of Common Stock in the market, the period of time since the completion of the Offering and the average trading volume and price performance of the Common Stock during such period. See "Underwriting." Prior to the Offering, there has been no market for the Common Stock and no prediction can be made as to the effect, if any, that sales of Common Stock by existing shareholders in reliance upon Rule 144 or otherwise will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of Common Stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price. Such sales may also make it more difficult for the Company to sell equity securities or equity-related securities in the future at a time and price that it deems appropriate. 39 DESCRIPTION OF CAPITAL STOCK The authorized capital stock of the Company consists of 50,000,000 shares of Common Stock, $0.10 par value per share, and 10,000,000 shares of preferred stock, $0.10 par value per share (the "Preferred Stock"), having such rights and privileges as the Board of Directors may from time to time determine. Giving effect to the Consolidation, 6,500,000 shares of Common Stock and no shares of Preferred Stock will be issued and outstanding immediately prior to the Offering. The following summary of the Company's capital stock does not purport to be complete and is qualified in its entirety by reference to the Amended and Restated Articles of Incorporation (the "Articles of Incorporation") and the Amended and Restated Bylaws (the "Bylaws") of the Company that are included as exhibits to the Registration Statement of which this Prospectus forms a part, and the applicable provisions of the Georgia Business Corporation Code. COMMON STOCK Holders of Common Stock are entitled to one vote per share on any issue submitted to a vote of the shareholders and do not have cumulative voting rights in the election of directors. Accordingly, the holders of a majority of the outstanding shares of Common Stock voting in an election of directors can elect all of the directors then standing for election, if they choose to do so. All shares of Common Stock are entitled to share equally in such dividends as the Board of Directors of the Company may, in its discretion, declare out of sources legally available therefor. See "Dividend Policy." Upon dissolution, liquidation, or winding up of the Company, holders of Common Stock are entitled to receive on a ratable basis, after payment or provision for payment of all debts and liabilities of the Company and any preferential amount due with respect to outstanding shares of Preferred Stock, all assets of the Company available for distribution, in cash or in kind. Holders of shares of Common Stock do not have preemptive or other subscription rights, conversion or redemption rights, or any rights to share in any sinking fund. All currently outstanding shares of Common Stock are, and the shares offered hereby (when sold in the manner contemplated by this Prospectus) will be, fully paid and nonassessable. PREFERRED STOCK Pursuant to the Company's Articles of Incorporation, the Board of Directors, from time to time, may authorize the issuance of shares of Preferred Stock in one or more series, may establish the number of shares to be included in any such series, and may fix the designations, powers, preferences and rights (including voting rights) of the shares of each such series and any qualifications, limitations, or restrictions thereon. No shareholder authorization is required for the issuance of shares of Preferred Stock unless imposed by then applicable law. Shares of Preferred Stock may be issued for any general corporate purposes, including acquisitions. The Board of Directors may issue one or more series of Preferred Stock with rights more favorable with regard to dividends and liquidation than the rights of holders of Common Stock. Any such series of Preferred Stock also could be used for the purpose of preventing a hostile takeover of the Company that is considered to be desirable by the holders of the Common Stock, could otherwise adversely affect the voting power of the holders of Common Stock, and could serve to perpetuate the Board of Directors' control of the Company under certain circumstances. Other than the issuance of the series of Preferred Stock previously authorized by the Board of Directors in connection with the Shareholder Rights Plan, described below, no transaction is now contemplated that would result in the issuance of any such shares of Preferred Stock. CERTAIN PROVISIONS OF THE COMPANY'S ARTICLES OF INCORPORATION AND BYLAWS Staggered Board of Directors; Removal; Filling Vacancies. The Articles of Incorporation provide that the Board of Directors will consist of between five and eleven directors. The Board currently consists of seven directors, four of whom are not employees of the Company. The Board of Directors is divided into three classes of directors serving staggered three-year terms. The classification of directors has the effect of making it more difficult for shareholders to change the composition of the Board of Directors. The Company believes, however, 40 that the longer time required to elect a majority of a classified Board of Directors will help to ensure the continuity and stability of the Company's management and policies. The classification provisions could also have the effect of discouraging a third party from accumulating large blocks of the Company's stock or attempting to obtain control of the Company, even though such an attempt might be beneficial to the Company and its shareholders. Accordingly, shareholders could be deprived of certain opportunities to sell their shares of Common Stock at a higher market price than might otherwise be the case. See "Risk Factors--Certain Anti-Takeover Provisions." The shareholders will be entitled to vote on the election or removal of directors, with each share entitled to one vote. The Bylaws provide that, unless the Board of Directors otherwise determines, any vacancies will be filled by the affirmative vote of a majority of the remaining directors, even if less than a quorum. A director may be removed only with cause by the vote of the holders of a majority of the shares entitled to vote for the election of directors at a meeting of the shareholders called for the purpose of removing such director. A vacancy resulting from an increase in the number of directors may be filled by action of the Board of Directors. Shareholder Rights Plan. On December 11, 1997, the Company's Board of Directors declared a dividend of one preferred share purchase right (a "Right") for each outstanding share of Common Stock of the Company. Each Right entitles the registered holder to purchase from the Company one one-hundredth (1/100) of a share of Series A Participating Cumulative Preferred Stock, par value $0.10 per share (the "Preferred Shares"), of the Company at a price of $60.00 per one one-hundredth of a Preferred Share (the "Purchase Price"), subject to adjustments to the exercise price and the number of Preferred Shares issuable upon exercise from time to time to prevent dilution. The Rights are not exercisable until the earlier to occur of (i) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 15% or more of the outstanding Common Stock or (ii) 10 business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding shares of Common Stock (the earlier of such dates being called the "Distribution Date"). In the event that the Company is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power is sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a Right will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the Right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the Right. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a Right, other than Rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise that number of shares of Common Stock having a market value of two times the exercise price of the Right. Preferred Shares purchasable upon exercise of the Rights will not be redeemable. Each Preferred Share will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of Common Stock. In the event of liquidation, the holders of the Preferred Shares will be entitled to a minimum preferential liquidation payment of $100.00 per share but will be entitled to an aggregate payment of 100 times the payment made per share of Common Stock. Each Preferred Share will have 100 votes, voting together with the shares of Common Stock. Finally, in the event of any merger, consolidation or other transaction in which shares of Common Stock are exchanged, each Preferred Share will be entitled to receive 100 times the amount received per share of Common Stock. These rights are protected by customary antidilution provisions. Prior to the Distribution Date, the Rights may not be detached or transferred separately from the Common Stock. The Rights will expire on , 2007 (the "Final Expiration Date"), unless the Final Expiration Date is extended or unless the Rights are earlier redeemed or exchanged by the Company, in each case, as described below. At any time prior to the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 15% or more of the outstanding Common Stock, the Board of Directors of the Company may redeem the Rights in whole, but not in part, at a price of $0.001 per Right (the "Redemption 41 Price"). Immediately upon any redemption of the Rights, the right to exercise the Rights will terminate and the only right of the holders of Rights will be to receive the Redemption Price. A more detailed description and terms of the Rights are set forth in a Rights Agreement (the "Rights Agreement") between the Company and Reliance Trust Company as Rights Agent (the "Rights Agent"). Ability to Consider Other Constituencies. The Articles of Incorporation permit the Board of Directors, in determining what is believed to be in the best interest of the Company, to consider the interests of the employees, customers, suppliers and creditors of the Company, the communities in which offices or other establishments of the Company are located and all other factors the directors consider pertinent, in addition to considering the effects of any actions on the Company and its shareholders. Pursuant to this provision, the Board of Directors may consider numerous judgmental or subjective factors affecting a proposal, including certain non-financial matters, and on the basis of these considerations may oppose a business combination or other transaction which, viewed exclusively from a financial perspective, might be attractive to some, or even a majority, of the Company's shareholders. INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS The Company's Bylaws provide for indemnification of directors to the fullest extent permitted by Georgia law. The Articles of Incorporation, to the extent permitted by Georgia law, eliminate or limit the personal liability of directors to the Company and its shareholders for monetary damages for certain breaches of fiduciary duty and the duty of care. Such indemnification may be available for liabilities arising in connection with this Offering. Insofar as indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling the Company pursuant to the foregoing provisions, the Company has been informed that, in the opinion of the Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Pursuant to its Bylaws, the Company may also indemnify its officers, employees, agents and other persons to the fullest extent permitted by Georgia law. The Company's Bylaws obligate the Company, under certain circumstances, to advance expenses to its directors and officers in defending an action, suit or proceeding for which indemnification may be sought. The Company has entered into Indemnification Agreements with its directors and executive officers. The Company's Bylaws also provide that the Company shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the Company, or who, while a director, officer, employee or agent, is or was serving as a director, officer, trustee, general partner, employee or agent of one of the Company's subsidiaries or, at the request of the Company, of any other organization, against any liability asserted against such person or incurred by such person in any such capacity, where the Company would have the power to indemnify such person against such liability under Georgia law. The Company intends to purchase and maintain insurance on behalf of all of its directors and executive officers. OTHER MATTERS The Company has filed an application for the Common Stock to be approved for quotation on The Nasdaq National Market under the symbol "INOC." The transfer agent and registrar for the Company's Common Stock is Reliance Trust Company, Atlanta, Georgia. 42 UNDERWRITING Pursuant to the Underwriting Agreement, and subject to the terms and conditions thereof, the Underwriters named below, acting through J.C. Bradford & Co. and Wheat, First Securities, Inc., as representatives of the several underwriters (the "Representatives"), have severally agreed to purchase from the Company the number of shares of Common Stock set forth below opposite their respective names:
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." 43 The Underwriting Agreement provides that the Company will indemnify the Underwriters and controlling persons, if any, against certain civil liabilities, including liabilities under the Securities Act, or will contribute to payments that the Underwriters or any such controlling persons may be required to make in respect thereof. In connection with the Offering, the Underwriters and other persons participating in the Offering may engage in transactions that stabilize, maintain or otherwise affect the price of Common Stock. Specifically, the Underwriters may over-allot in connection with the Offering, creating a short position in Common Stock for their own account. To cover over-allotments or to stabilize the price of Common Stock, the Underwriters may bid for, and purchase, shares of Common Stock in the open market. The Underwriters may also impose a penalty bid whereby they may reclaim selling concessions allowed to an underwriter or a dealer for distributing Common Stock in the Offering, if the Underwriters repurchase previously distributed Common Stock in transactions to cover their short position, in stabilization transactions or otherwise. Finally, the Underwriters may bid for, and purchase, shares of Common Stock in market making transactions. These activities may stabilize or maintain the market price of Common Stock above market levels that may otherwise prevail. The Underwriters are not required to engage in these activities and may end any of these activities at any time. LEGAL MATTERS Certain legal matters with respect to the validity of the shares of Common Stock offered hereby will be passed upon for the Company by Kilpatrick Stockton LLP, Atlanta, Georgia. Certain legal matters in connection with this Offering will be passed upon for the Underwriters by Nelson Mullins Riley & Scarborough, L.L.P., Atlanta, Georgia. EXPERTS The financial statements of the Company at December 31, 1995 and 1996, and for the nine months ended September 30, 1997, included in this Prospectus and elsewhere in the Registration Statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon such reports and upon the authority of said firms as experts in accounting and auditing. ADDITIONAL INFORMATION The Company has filed with the Commission a Registration Statement on Form S-1 under the Securities Act with respect to the Common Stock offered hereby. This Prospectus, which is a part of the Registration Statement, does not contain all of the information set forth in the Registration Statement and the exhibits thereto. For further information with respect to the Company and the Common Stock, reference is made to the Registration Statement, including the exhibits thereto. Statements contained in this Prospectus concerning the contents of any contract or any other document are not necessarily complete. With respect to each such contract or document filed as an exhibit to the Registration Statement, reference is made to such exhibit for a more complete description of the matters involved, and each statement shall be deemed qualified in its entirety by such reference to the copy of the applicable document filed with the Commission. A copy of the Registration Statement, including the exhibits thereto, may be inspected without charge at the Public Reference section of the commission at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549 and at the following regional offices of the Commission: New York Regional Office, 7 World Trade Center, 13th Floor, New York, New York 10048; and Chicago Regional Office, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration Statement and the exhibits and schedules thereto can be obtained from the Public Reference Section of the Commission upon payment of prescribed fees. The Commission maintains an Internet web site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the Commission. The address of that site is http://www.sec.gov. 44 Prior to filing the Registration Statement of which this Prospectus is a part, the Company was not subject to the reporting requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). Upon effectiveness of the Registration Statement, the Company will become subject to the informational and periodic reporting requirements of the Exchange Act, and in accordance therewith, will file periodic reports, proxy statements, and other information with the Commission. Such periodic reports, proxy statements, and other information will be available for inspection and copying at the public reference facilities and other regional offices referred to above. The Company intends to register the securities offered by the Registration Statement under the Exchange Act simultaneously with the effectiveness of the Registration Statement and to furnish its shareholders with annual reports containing audited financial statements and such other reports as may be required from time to time by law or the Nasdaq National Market. 45 INDEX TO THE FINANCIAL STATEMENTS OF INNOTRAC CORPORATION COMBINED FINANCIAL STATEMENTS Report of Independent Public Accountants.................................. F-2 Combined Balance Sheets as of September 30, 1997 and December 31, 1996.... F-3 Combined Statements of Operations for the Nine Months Ended September 30, 1997 and 1996 (unaudited) and for the Years Ended December 31, 1996 and 1995..................................................................... F-4 Combined Statements of Partners', Members' and Shareholders' Equity for the Nine Months Ended September 30, 1997 and for the Years Ended December 31, 1996 and 1995........................................................ F-5 Combined Statements of Cash Flows for the Nine Months Ended September 30, 1997 and 1996 (unaudited) and for the Years Ended December 31, 1996 and 1995..................................................................... F-6 Notes to Combined Financial Statements.................................... F-7 Unaudited Pro Forma Financial Data........................................ F-19 Unaudited Consolidated Pro Forma Statement of Operations for the Nine Months Ended September 30, 1997.......................................... F-20 Unaudited Consolidated Pro Forma Balance Sheet as of September 30, 1997... F-21
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 September 30, 1997 and December 31, 1996 and the related combined statements of operations, partners', members' and shareholders' equity and cash flows for the nine-month period ended September 30, 1997 and years ended December 31, 1996 and 1995. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the combined financial statements referred to above present fairly, in all material respects, the combined financial position of Innotrac Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. as of September 30, 1997 and December 31, 1996 and the results of their operations and their cash flows for the nine-month period ended September 30, 1997 and the years ended December 31, 1996 and 1995 in conformity with generally accepted accounting principles. /s/ Arthur Andersen LLP Atlanta, Georgia December 12, 1997 F-2 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTEL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. COMBINED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
ASSETS 1997 1996 ------ ----------- ----------- Current assets: Cash and cash equivalents............................. $ 425,624 $ 2,004,746 Accounts receivable, net (Note 3)..................... 21,672,839 25,460,016 Inventories........................................... 5,308,965 10,020,635 Deferred tax assets (Note 6).......................... 376,000 15,000 Prepaid expenses and other current assets............. 225,196 344,951 ----------- ----------- Total current assets.................................. 28,008,624 37,845,348 ----------- ----------- Property and equipment: Rental equipment...................................... 11,070,723 13,005,802 Computer, machinery and transportation equipment...... 1,429,182 1,368,471 Furniture, fixtures and leasehold improvements........ 720,097 732,182 ----------- ----------- 13,220,002 15,106,455 Less accumulated depreciation and amortization........ 4,971,353 4,167,937 ----------- ----------- 8,248,649 10,938,518 ----------- ----------- Other assets, net of amortization of $276,868 and $160,255 as of September 30, 1997 and December 31, 1996, respectively.................................... 130,211 252,656 ----------- ----------- Total assets.......................................... $36,387,484 $49,036,522 =========== ===========
PRO FORMA SHAREHOLDERS' EQUITY AT SEPTEMBER 30, 1997 1997 1996 ----------- ------------- ----------- LIABILITIES AND PARTNERS', MEMBERS', AND SHAREHOLDERS' EQUITY (NOTE 10) Current liabilities: Current portion of long-term debt (Note 4)............................ $ 736,249 $ 787,523 Line of credit (Note 4).............. 10,446,000 17,230,621 Accounts payable..................... 4,370,629 15,420,211 Distributions payable (Note 2)....... 3,509,960 300,229 Accrued expenses..................... 7,148,524 5,083,672 Other................................ 203,943 65,173 ----------- ----------- Total current liabilities............ 26,415,305 38,887,429 ----------- ----------- Noncurrent liabilities: Subordinated debt (Note 4)........... 3,500,000 3,500,000 Long-term debt (Note 4).............. 555,555 1,060,720 Deferred tax liabilities (Note 6).... 101,000 206,000 Other................................ 0 12,300 ----------- ----------- Total noncurrent liabilities......... 4,156,555 4,779,020 ----------- ----------- Total liabilities.................... 30,571,860 43,666,449 ----------- ----------- Commitments and contingencies (Note 5)................................... Redeemable capital stock (Note 7)..... 894,402 830,033 ----------- ----------- Partners', members' and shareholders' equity (Note 7): Partners' capital.................... 1,577,303 (2,422,697) 1,902,038 Members' deficit..................... (999,271) (999,271) (272,381) Common stock......................... 4,590 4,590 4,590 Additional paid-in capital........... 14,370 14,370 14,370 Retained earnings.................... 4,324,230 1,924,230 2,891,423 ----------- ---------- ----------- Total partners', members' and shareholders' equity................ 4,921,222 (1,478,778) 4,540,040 ----------- ---------- ----------- Total liabilities and partners', members' and shareholders' equity... $36,387,484 $49,036,522 =========== ===========
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
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------------ ------------------------ 1997 1996 1996 1995 ----------- ----------- ----------- ----------- (UNAUDITED) Revenues, net.............. $67,313,499 $53,230,767 $71,297,170 $44,886,334 Cost of revenues........... 51,799,309 39,232,114 55,519,503 30,658,112 ----------- ----------- ----------- ----------- Gross profit........... 15,514,190 13,998,653 15,777,667 14,228,222 ----------- ----------- ----------- ----------- Operating expenses: Selling, general and administrative expenses................ 9,072,142 8,007,071 10,390,817 6,510,069 Depreciation and amortization............ 453,609 230,659 429,170 292,609 ----------- ----------- ----------- ----------- Total operating expenses.............. 9,525,751 8,237,730 10,819,987 6,802,678 ----------- ----------- ----------- ----------- Operating income........... 5,988,439 5,760,923 4,957,680 7,425,544 ----------- ----------- ----------- ----------- Other (income) expense: Interest expense......... 1,422,302 954,607 1,456,508 1,089,853 Other.................... (1,715) 1,767 94,367 (72,645) ----------- ----------- ----------- ----------- Total other expense.... 1,420,587 956,374 1,550,875 1,017,208 ----------- ----------- ----------- ----------- Income before income taxes..................... 4,567,852 4,804,549 3,406,805 6,408,336 Income tax provision....... (75,300) (472,226) (211,494) (793,629) ----------- ----------- ----------- ----------- Net income............. $ 4,492,552 $ 4,332,323 $ 3,195,311 $ 5,614,707 =========== =========== =========== ===========
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).......... 2,940,265 (961,889) 0 0 2,514,176 4,492,552 Distributions to shareholders, members and partners.................. (3,265,000) 234,999 0 0 (1,017,000) (4,047,001) Accreted dividends on redeemable capital stock.. 0 0 0 0 (64,369) (64,369) ----------- --------- ------ ------- ----------- ----------- BALANCE, SEPTEMBER 30, 1997...................... $ 1,577,303 $(999,271) $4,590 $14,370 $ 4,324,230 $ 4,921,222 =========== ========= ====== ======= =========== ===========
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
NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31, ------------------------- ------------------------- 1997 1996 1996 1995 ----------- ------------ ----------- ------------ (UNAUDITED) Cash flows from operating activities: Net income.............. $ 4,492,552 $ 4,332,323 $ 3,195,311 $ 5,614,707 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization........... 453,609 230,659 429,170 292,609 Depreciation--rental equipment.............. 2,861,214 2,084,545 3,004,699 1,763,028 Loss on disposal of rental equipment....... 3,174,742 1,835,397 2,538,129 1,755,956 Subordinated debt accretion.............. 0 163,781 163,781 179,776 Deferred income taxes... (466,000) (254,000) (107,000) 227,000 Decrease (increase) in accounts receivable.... 3,787,177 (10,779,733) (6,753,077) (12,594,156) Decrease (increase) in inventories............ 4,711,670 (8,141,131) (7,683,173) (1,092,926) Decrease (increase) in prepaid expenses and other assets........... 119,755 (45,315) (327,074) 44,466 (Decrease) increase in accounts payable....... (9,687,582) 1,727,406 3,610,642 8,814,933 Increase in accrued expenses............... 2,064,852 3,213,546 2,484,253 1,397,043 Other................... 126,469 (151,867) (468,149) 12,119 ----------- ------------ ----------- ------------ Net cash provided by (used in) operating activities............ 11,638,458 (5,784,389) 87,512 6,414,555 ----------- ------------ ----------- ------------ Cash flows from investing activities: Accrued equipment purchases.............. (1,362,000) 0 (272,000) 0 Purchases of property and equipment.......... (3,677,250) (4,440,772) (7,699,769) (7,812,510) ----------- ------------ ----------- ------------ Net cash used in investing activities.. (5,039,250) (4,440,772) (7,971,769) (7,812,510) ----------- ------------ ----------- ------------ Cash flows from financing activities: Net (repayments) borrowings under lines of credit.............. (6,784,621) 9,868,876 13,168,781 3,164,848 Proceeds from long-term debt................... 0 2,027,000 2,096,000 0 Repayment of long-term debt................... (556,439) (156,123) (327,766) (397,401) Repayment of subordinated debt...... 0 (1,000,000) (1,000,000) 0 Loan commitment fees.... 0 (200,000) (200,000) 0 Proceeds from members' contributions.......... 0 2,000 2,000 0 Distributions to shareholders, members and partners........... (837,270) (3,822,861) (3,890,244) (2,179,797) ----------- ------------ ----------- ------------ Net cash (used in) provided by financing activities............ (8,178,330) 6,718,892 9,848,771 587,650 ----------- ------------ ----------- ------------ Net (decrease) increase in cash and cash equivalents............. (1,579,122) (3,506,269) 1,964,514 (810,305) Cash and cash equivalents, beginning of period............... 2,004,746 40,232 40,232 850,537 ----------- ------------ ----------- ------------ Cash and cash equivalents, end of period.................. $ 425,624 $ (3,466,037) $ 2,004,746 $ 40,232 =========== ============ =========== ============ Supplemental cash flow disclosures: Cash paid for interest.. $ 1,440,255 $ 740,826 $ 1,207,483 $ 846,010 =========== ============ =========== ============ Cash paid for income taxes, net of refunds received............... $ 251,931 $ 356,256 $ 891,552 $ 523,134 =========== ============ =========== ============ Non cash transactions: Accreted dividends on Redeemable Capital Stock.................. $ 64,369 $ 90,982 $ 111,392 $ 105,608 =========== ============ =========== ============
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., SellTel #1, Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. are all entities under common control and are collectively referred to herein as the "Companies." Each of these entities provides various forms of marketing support and distribution services. In conjunction with Innotrac's planned initial public offering, the Companies will reorganize as one consolidated entity. (See Note 10 for a description of the Companies' planned reorganization.) Innotrac provides marketing support services, including fulfillment, order processing, data processing, and teleservices. IELC, Inc. ("IELC") is owned by Innotrac's sole shareholder and provides employee-leasing services. RenTel #1, Inc. ("RenTel") is 90%-owned by Innotrac's sole shareholder and rents caller identification display devices ("Caller I.D. units") to consumers in Tennessee and South Carolina. RenTel #2, L.L.C. ("RenTel #2") is primarily owned by Innotrac's sole shareholder and rents Caller I.D. units to consumers in California. SellTel, Inc. ("SellTel") is 90%-owned by Innotrac's sole shareholder and sells Caller I.D. units and other telecommunications equipment on an installment basis to consumers in Tennessee and South Carolina. SellTel #2, L.L.C. ("SellTel #2") is primarily owned by Innotrac's sole shareholder and sells Caller I.D. units and other telecommunications equipment on an installment basis to consumers in California. HomeTel Systems, Inc. ("HomeTel") is primarily owned by Innotrac's sole shareholder and sells and rents various types of telecommunications equipment to consumers in the southeastern and western United States. HomeTel Providers, Inc. ("Providers Inc.") is wholly owned by Innotrac's sole shareholder and is the general partner of HomeTel Providers Partners, L.P. ("Providers, L.P."). Providers, L.P. rents and sells Caller ID units and other telecommunications equipment on an installment basis to consumers in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi and North Carolina. See Note 7 for a discussion of RenTel and SellTel debt and equity arrangements. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Combination The accompanying combined financial statements include the accounts of Innotrac, IELC, RenTel, SellTel, HomeTel, Providers Inc., RenTel #2, SellTel #2 and Providers, L.P. and are prepared on the accrual basis of accounting. Significant intercompany accounts and transactions have been eliminated in the combination. Combined financial statements are presented since the Companies have similar ownership and interrelated activities. The financial information included herein may not necessarily reflect the financial position, results of operations, or cash flows of the Companies in the future or what the financial position, results of operations, or cash flows of the Companies would have been if they were combined as a separate, stand- alone company during the periods presented. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the F-7 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Sources of Supplies In accordance with their agreements with certain telecommunications companies, the Companies primarily use two providers for the supply of telecommunications equipment. However, if these vendors were unable to meet the Companies' needs, management believes that other sources for this equipment exist on commensurate terms and that operating results would not be adversely affected. Concentration of Revenues Revenues earned under the Companies' agreement with a major telecommunications company to sell and rent certain telecommunications equipment to the customers of this company accounted for approximately 87%, 82% and 82% of total revenues for the nine month period ended September 30, 1997 and the years ended December 31, 1996 and 1995, respectively. If this agreement were terminated, it could have a material adverse affect on the future operating results and liquidity of the Companies (Note 5). Cash and Cash Equivalents The Companies consider all short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. Inventories Inventories, consisting primarily of telecommunications equipment, are stated at the lower of cost or market, with cost determined by the first-in, first-out method. Property and Equipment Property and equipment are stated at cost. Depreciation is determined using straight-line methods over the following estimated useful lives: 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 $3,175,000, $2,538,000 and $1,756,000 for the nine month period ended September 30, 1997 and for the years ended December 31, 1996 and 1995 respectively, and are included in "Cost of Revenues" on the accompanying statements of operations. Long-Lived Assets The Companies periodically review the values assigned to long-lived assets such as property and equipment to determine if any impairments are other than temporary. Management believes that the long-lived assets on the accompanying balance sheets are appropriately valued. Income Taxes Innotrac, IELC and SellTel, as C corporations, utilize the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. The shareholders of RenTel, Providers Inc. and HomeTel have elected to have the Companies treated as S corporations. The Internal Revenue Code of 1986, as amended (the "Code") and certain applicable state statutes provide that the income and expenses of an S corporation are not taxable separately to the corporation but rather accrue directly to the shareholders. Accordingly, no provisions for federal and certain state income taxes related to these entities have been made in the accompanying financial statements. The Code and certain applicable state statutes provide that the income and expenses of a partnership are not separately taxable to the partnership, but rather accrue directly to the partners. Accordingly, no provision for federal and certain state income taxes related to Providers, L.P. have been made in the accompanying financial statements. As limited liability companies, RenTel #2 and SellTel #2 are not subject to federal and state income taxes. The taxable income or loss of these entities are included in the federal and state income tax returns of their members. Accordingly, no provisions for income taxes have been reflected in the accompanying financial statements related to these entities. It is the policy of management to pay and accrue distributions primarily for income taxes that are required to be paid by the shareholders, members and partners due to the flow through of income of RenTel, RenTel #2, SellTel #2, HomeTel, Providers Inc., and Providers, L.P. During the nine-month period ended September 30, 1997 and the years ended December 31, 1996 and 1995, distributions of approximately $4,047,000, $1,741,000 and $3,938,000, respectively, were recorded, of which approximately $3,510,000 and $300,000 were accrued and unpaid as of September 30, 1997 and December 31, 1996, respectively. Additionally, in conjunction with the reorganization (Note 10), management anticipates distributing approximately $6,400,000 of the undistributed earnings of approximately $9,000,000 to the owners of HomeTel and Providers, L.P. Revenue Recognition Revenues are recognized on the accrual basis as services are provided to customers or as units are shipped or rentals are provided. Allowances are made for estimated billings that are not collectible and for estimates of product returns (Note 3). F-9 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Fair Value of Financial Instruments The carrying values of the Companies' financial instruments approximate their fair values. Advertising Costs The Companies expense all advertising costs as incurred. 3. ACCOUNTS RECEIVABLE The Companies' accounts receivable include amounts that are billed in installments over a five to twelve month period. Accounts receivable were composed of the following at September 30, 1997 and December 31, 1996:
1997 1996 ----------- ----------- Billed receivables................................. $18,112,282 $16,857,463 Unbilled installment receivables................... 9,156,565 12,844,916 ----------- ----------- Total receivables.................................. 27,268,847 29,702,379 Less allowances.................................... (5,596,008) (4,242,363) ----------- ----------- $21,672,839 $25,460,016 =========== ===========
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 September 30, 1997 and December 31, 1996 consisted of the following:
1997 1996 ----------- ----------- Borrowings under revolving credit agreement (up to $18,000,000 individually or in aggregate, except as to Rentel and SellTel, which combined borrowings cannot exceed $2,000,000 and Providers, L.P., which borrowings cannot exceed $12,000,000; the revolving advances owing by any one borrower cannot exceed an amount equal to the sum of 80% of the eligible accounts receivable plus 70% of the eligible installment receivables), interest payable monthly at the prime rate (8.5% at September 30, 1997 and December 31, 1996), matured on October 15, 1997, secured by all assets of the Companies and a personal guarantee of the sole shareholder of Innotrac........ $10,446,000 $17,230,621 Subordinated note payable to the limited partner of Providers, L.P., due April 1999; interest payable monthly at a variable rate of prime plus 8% (16.5% as of September 30, 1997) and a fixed rate of 14% as of December 31, 1996; secured by accounts receivable, inventories, rental equipment and the personal guarantee of the sole shareholder of the general partner of Providers, L.P.; subordinated to the line of credit............................................ 3,500,000 3,500,000 Note payable, due in monthly installments of principal of $55,556, plus interest at 8.95%, through July 1999; secured by accounts receivable, inventories, equipment and the personal guarantee of Innotrac's sole shareholder..................................... 1,222,222 1,722,222 Other................................................. 69,582 126,021 ----------- ----------- 15,237,804 22,578,864 Current portion....................................... 11,182,249 18,018,144 ----------- ----------- $ 4,055,555 $ 4,560,720 =========== ===========
Scheduled maturities of financing obligations are as follows: Through December 31, 1997....................................... $10,612,667 1998............................................................ 736,249 1999............................................................ 3,888,888 ----------- Total......................................................... $15,237,804 ===========
The revolving line of credit agreement and the term note contain various restrictive financial and change of ownership control covenants, with which the Company is currently in compliance. Subsequent to September 30, 1997, the Companies extended the maturity of the revolving line of credit from October 15, 1997 to November 15, 1999. Under the terms of the new agreement, the total borrowings available under the line will be increased from $18,000,000 to $25,000,000. The Companies paid a loan commitment fee of $125,000 associated with this agreement. F-11 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) 5. COMMITMENTS AND CONTINGENCIES Operating Leases Innotrac leases office and warehouse space and equipment under various operating leases. The primary office and warehouse operating leases provide for escalating payments over the lease term. Innotrac recognizes rent expense on a straight-line basis over the lease term and accrues the differences each month between the amount expensed and the amount actually paid. Aggregate future minimum lease payments under noncancellable operating leases with original periods in excess of one year as of September 30, 1997 are as follows: Three months ending December 31, 1997............................ $ 262,483 1998............................................................. 690,028 1999............................................................. 294,312 ---------- Total minimum lease payments..................................... $1,246,823 ==========
Rent expense under all operating leases totaled approximately $802,000, $770,000 and $393,000 during the nine-month period ended September 30, 1997 and the years ended December 31, 1996 and 1995, respectively. The Companies entered into an operating lease agreement to lease new facilities subsequent to September 30, 1997. Under the new agreement, which commences in July 1998, rental expense will increase by approximately $400,000 per year through 2008. Marketing Support Agreements The Companies have entered into a six-year agreement, which expires in March 2000, with a major telecommunications company to sell and rent certain telecommunications equipment to the customers of this company. The telecommunications company has agreed to provide billing, collection and referral services for the Companies. This agreement can be terminated upon 24 months written notice; however, in the event of termination, the telecommunications company must continue to provide billing and collections services for existing customers for four years after the termination of the agreements. Legal Proceedings The Companies are subject to legal proceedings and claims that arise in the ordinary course of business. There are no material pending legal proceedings to which the Companies are a party. 6. INCOME TAXES Details of the income tax provision for the nine-month period ended September 30, 1997 and the years ended December 31, 1996 and 1995 are as follows:
1997 1996 1995 --------- --------- -------- Current....................................... $ 541,300 $ 318,494 $566,629 Deferred...................................... (466,000) (107,000) 227,000 --------- --------- -------- $ 75,300 $ 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 September 30, 1997 and December 31, 1996 are as follows:
1997 1996 --------- --------- Noncurrent deferred tax (liabilities) assets: Property, plant, equipment basis differences....... $ 18,000 $ 16,000 Conversion from cash to accrual taxpayer method-- long term......................................... (119,000) (227,000) Other.............................................. 0 5,000 --------- --------- (101,000) (206,000) --------- --------- Current deferred tax (liabilities) assets: Reserves for uncollectable accounts................ 504,000 131,000 Conversion from cash to accrual taxpayer method-- current........................................... (143,000) (143,000) Other.............................................. 15,000 27,000 --------- --------- 376,000 15,000 --------- --------- Net deferred tax asset (liability)................... $ 275,000 $(191,000) ========= =========
Innotrac converted from the cash basis to the accrual basis for income tax purposes effective August 1995, with the accumulated difference to be added back to taxable income over a four-year period. A reconciliation of the income tax provision computed at statutory rates to the income tax provision for the periods presented is as follows:
SEPTEMBER 30 DECEMBER 31 ------------ ------------ 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)......... (34.1) (31.8) (24.9) Other........................................... 0.3 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 and equity in RenTel and SellTel. The subordinated debt required monthly payments of interest with the principal maturing at 60 months (September 1998). The subordinated debt was repaid in full in September 1996. Additionally, the related party received callable common stock representing 10 percent of the common stock in RenTel and SellTel. The terms of the callable common stock provide each of Rentel and SellTel the option to call the common stock at predetermined amounts on or before September 30, 1998. If the F-13 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Companies do not call the common stock interests, the Companies are obligated to issue the related party an additional 10 percent common stock interest in each of RenTel and SellTel. The related party does not have the right to require each of RenTel and SellTel to redeem the common stock. However, due to the related party nature of the transaction, the Companies are accounting for the callable common stock as redeemable equity. The Companies allocated the capital raised between "Subordinated Debt" and "Redeemable Capital Stock" at the respective fair market values based on discounted cash flow analyses (approximately $500,000 each to "Subordinated Debt" and "Redeemable Capital Stock") and then accreted to their redemption values over 36 months using the effective interest rate method (an approximate 30% return on both the subordinated debt and the callable common stock). The portion of the accretion attributable to Subordinated Debt is reflected as interest expense in the accompanying statements of operations. For the equity portion, the Companies have accreted via recording of dividends to the estimated redemption amounts at each balance sheet date and reflected such redemption amounts as "Redeemable Capital Stock" on the accompanying balance sheets. These dividends represent a 16% effective rate through September 1996 (the first trigger date as defined) and 10% thereafter. In conjunction with the proposed initial public offering (the "Offering") (see Note 10), the Companies anticipate calling the RenTel shares prior to or on the effective date of the Offering for $390,000 and the SellTel shares for $590,000 subsequent to the effective date of the Offering. 8. PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY Common stock and paid-in capital consisted of the following at September 30, 1997 and December 31, 1996:
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 10 for a description of the Companies' plan of consolidation. 9. EMPLOYEE RETIREMENT PLAN Employees of Innotrac may participate in an employee retirement defined contribution plan. The plan covers all employees of the participating entities who have at least one year of service (six months if hired before F-14 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) January 1, 1997) and are 18 years of age. Participants may elect to defer 15% of compensation up to a maximum amount determined annually pursuant to IRS regulations. Innotrac has elected to provide matching employer contributions equal to 15% of contributions for less than five years of service, 25% of contributions for five to nine years of service, and 35% of contributions for over nine years of service. Total matching contributions made to the plan and charged to expense by Innotrac for the nine-month period ended September 30, 1997 and the years ended December 31, 1996 and 1995 were $12,600, $9,400 and $6,000, respectively. 10. SUBSEQUENT EVENTS Initial Public Offering In the first quarter of 1998, Innotrac is planning an initial public offering of common stock. Innotrac plans to issue 2,500,000 shares (2,875,000 if the underwriters overallotment is exercised in full) at an estimated initial public offering price of between $12.00 and $14.00 per share. There can be, however, no assurance that the Offering will be completed at a per share price within the estimated range or at all. There are significant potential risks associated with this Offering as well as Innotrac's ability to compete profitability in this industry including, but not limited to, the following: RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES In connection with certain of its fulfillment services, the Company purchases the Caller ID and other equipment from third party vendors and, therefore, assumes the risks of inventory obsolescence, damage to leased units, theft and creditworthiness of purchasers. The ability of the Company to receive payment for sales or rentals of such equipment is dependent on the transmittal of correct customer invoices and remittance on a timely basis by BellSouth and Pacific Bell. The occurrence of any of these events could have a material adverse effect on the Company's business, results of operations and financial condition. The credit risk assumed by the Company is particularly significant because of the large number of customers, each of which owes a relatively small amount. The Company's allowance for bad debt was approximately $5.6 million at September 30, 1997. F-15 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) RELIANCE ON TELECOMMUNICATIONS INDUSTRY Caller ID is a relatively recent offering by telecommunications companies and there can be no assurance that it will gain or sustain wide acceptance in the marketplace. In addition, the provision of Caller ID services by telecommunications companies is regulated at both the federal and state level. Such regulations may have the effect of delaying the offering of Caller ID service in a market of one of the Company's clients. The Company is also dependent on the level of resources (financial and otherwise) expended by its clients to promote Caller ID service. There can be no assurance that the Company's telecommunications clients will sufficiently promote, or continue to promote, Caller ID service in their areas. Furthermore, there can be no assurance that the Company's telecommunications clients will achieve their estimated "market penetration" (the percentage of consumer telephone lines capable of receiving Caller ID services that actually receive such services) goals, upon which the Company, in part, plans its operations. In addition, at some time in the future, peak market penetration for Caller ID service may be achieved by the Company's clients or Caller ID service may be replaced by a different service or hardware. The occurrence of any of these factors could have a material adverse effect on the Company's business, results of operations and financial condition. RISKS OF BUSINESS INTERRUPTION; NEW FACILITY The Company's operations are dependent upon its ability to protect its distribution facilities, call center, computer and telecommunications equipment and software systems against damage from fire, power loss, telecommunications interruption or failure, natural disaster and other similar events. In the third quarter of 1998, the Company expects to move its corporate offices and four distribution facilities into a new facility. In the event the Company experiences a temporary or permanent interruption of its business, through casualty, operating malfunction, as a result of the move or otherwise, the Company's business, results of operations or financial condition could be materially adversely affected. The Company's property and business interruption insurance, may not adequately compensate the Company for all losses that it may incur. RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW SOFTWARE The Company's business is highly dependent on its computer and telecommunications equipment and software systems. The Company intends to use a portion of the net proceeds of the Offering to upgrade certain computer hardware and software, and, as a result, will convert certain existing programs to the new system. There can be no assurance that the Company can effectively or efficiently convert its programs to the new system. In addition, the Company's failure to maintain its technological capabilities or to respond F-16 INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS, INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) effectively to technological changes could have a material adverse effect on the Company's business, results of operations and financial condition. The Company's future success also will be highly dependent upon its ability to enhance existing services and develop applications to focus on its clients' needs and introduce new services and products to respond to changing technological developments. There can be no assurance that the Company can select, invest in and develop new and enhanced technology on a timely basis in the future in order to meet clients' needs and to maintain its own competitiveness, and the Company's failure to do so could have a material adverse effect on the Company's business, results of operations and financial condition. ABILITY TO CONTINUE AND MANAGE GROWTH Innotrac has recently experienced significant growth in its operations. The Company's success will depend upon its ability to initiate, develop and maintain existing and new client relationships; respond to competitive developments; develop its sales and marketing forces; attract, train, motivate and retain management and hourly personnel; and maintain the high quality of the services and products that it provides to its clients. In addition, the Company has entered into a long-term lease for a new facility, which will increase lease expenses by approximately $400,000 per year. The Company's continued rapid growth can be expected to place a significant strain on the Company's management, operations, employees and resources. There can be no assurance that the Company will be able to maintain or accelerate its current growth, effectively manage its expanding operations or achieve planned growth on a timely or profitable basis. If the Company is unable to manage its growth effectively, its business, results of operations and financial condition could be materially adversely affected. DEPENDENCE ON KEY PERSONNEL The Company's operations depend in large part on the abilities and continuing efforts of its executive officers and senior management. In order to support its growth the Company will be required to effectively recruit, develop and retain additional qualified management personnel. There can be no assurance that the Company will be able to (i) retain the services of its executive officers and key management, with whom the Company has no employment agreements or (ii) recruit, develop and retain additional qualified management personnel. The business and prospects of the Company could be adversely affected if these persons do not continue in their key roles and the Company is unable to attract and retain qualified replacements. Stock Options In November 1997, the Company adopted a Stock Option Plan to provide key employees, officers, directors, contractors, and consultants an opportunity to own Common Stock of the Company and to provide incentives for such persons to promote the financial success of the Company. Awards under the Stock Option Plan may be structured in a variety of ways, including as "incentive stock options" as defined in Section 422 of the Code, non-qualified stock options, restricted stock awards, and stock appreciation rights ("SARs"). Incentive stock options may be granted only to full-time employees (including officers) of the Company and its subsidiaries. Non-qualified options, restricted stock awards, SARs, and other permitted forms of awards may be granted to any person employed by or performing services for the Company, including directors, contractors, and consultants. The Stock Option Plan provides for the issuance of options to purchase up to an aggregate of 800,000 shares of Common Stock. F-17 INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC., SELLTEL #1, INC., HOMETEL SYSTEMS, INC., HOMETEL PROVIDERS INC., RENTAL #2, LLC, SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P. NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED) Incentive stock options are also subject to certain limitations prescribed by the Code, including the requirement that such options may not be granted to employees who own more than 10% of the combined voting power of all classes of voting stock of the Company, unless the option price is at least 110% of the fair market value of the Common Stock subject to the option. The Board of Directors of the Company (or a committee designated by the Board) otherwise generally has discretion to set the terms and conditions of options and other awards, including the term, exercise price, and vesting conditions, if any; to select the persons who receive such grants and awards; and to interpret and administer the Plan. As of December 12, 1997, stock options to purchase an aggregate of 343,000 shares at $9.10 per share of Common Stock have been granted under the Stock Option Plan. 55,000 of these options vest immediately at the effective date of the Offering; the remaining options vest 50%, 25% and 25% at two, three and four years, respectively, after the grant date and expire 10 years from the grant date. Additionally, the Company plans on granting options to purchase 40,000 shares to four non-employee members of the Board of Directors at a price equal to the initial public offering price which will vest immediately upon grant. Consolidation In conjunction with the proposed Offering, Innotrac plans to consolidate the eight affiliated entities (the "Consolidation") that had previously conducted the business of the Company as an integrated business unit. The Consolidation will be effected simultaneously with, and as a condition to, the Offering. Innotrac has authorized 50,000,000 shares of Common Stock, $0.10 par value, and 10,000,000 shares of Preferred Stock, $0.10 par value. On December 12, 1997, Innotrac effected a 70.58823 -for- 1 stock split resulting in 1,080,000 shares outstanding. In exchange for their previous ownership interests, 5,420,000 shares of $0.10 par value common stock will be issued to the owners pari-passu except for the minority stockholder of RenTel and SellTel, whose ownership interests will be repurchased as scheduled effective with the Offering and in the fourth quarter of 1998, respectively. In connection with the Consolidation as detailed in the pro forma shareholders' equity, two of the entities will make certain distributions of undistributed accumulated earnings (approximately $6,400,000) to their principals. No shares of Preferred Stock will be issued. F-18 UNAUDITED PRO FORMA FINANCIAL DATA As discussed in Note 1 to the combined financial statements, the historical combined financial statements include the financial statements of Innotrac Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, L.L.C., SellTel #2, L.L.C. and HomeTel Providers Partners, L.P. Effective simultaneous with the Offering, the Companies will be reorganized and consolidated. For accounting purposes, HomeTel Providers Partners, LP will be deemed to be the acquiring entity. See "The Consolidation." The pro forma adjustments to the statements of operations for the nine month period ended September 30, 1997 reflect (i) the Consolidation and (ii) the Offering and the use of net proceeds thereof, as if each of such transactions had occurred on January 1, 1997. The pro forma adjustments to the balance sheet reflect (i) the Consolidation and (ii) the Offering and the use of net proceeds thereof, as if each of such transactions had occurred on September 30, 1997. The pro forma financial information does not purport to represent what Innotrac's consolidated results of operations would have been if these transactions had in fact occurred on these dates, nor does it purport to indicate the future consolidated financial position or consolidated results of future operations of Innotrac. The pro forma adjustments are based on currently available information and certain assumptions that management believes to be reasonable. F-19 UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS)
PRO FORMA HISTORICAL PRO FORMA CONSOLIDATED COMBINED ADJUSTMENTS AS ADJUSTED ---------- ----------- ------------ Revenues net............................ $67,314 $ -- $67,314 Cost of revenues........................ 51,800 -- 51,800 ------- ------- ------- Gross profit............................ 15,514 -- 15,514 ------- ------- ------- Operating expenses: Selling, general and administrative expenses.............................. 9,072 -- 9,072 Depreciation and amortization.......... 454 -- 454 ------- ------- ------- Total operating expenses............ 9,526 -- 9,526 ------- ------- ------- Operating income........................ 5,988 -- 5,988 ------- ------- ------- Other (income) expense: Interest expense...................... 1,422 (1,417)(a) 5 Other................................. (2) -- (2) ------- ------- ------- Total other expense................. 1,420 (1,417) 3 ------- ------- ------- Income before income taxes.............. 4,568 1,417 5,985 Income tax provision.................... (75) (2,317)(b) (2,392) ------- ------- ------- Net income.............................. $ 4,493 $ (900) $ 3,593 ======= ======= ======= Weighted average number of shares....... 2,500 (c) 6,603 (d) 9,103 Net income per share.................... $ 0.39 (e) =======
- -------- (a) Reflects the elimination of interest expense on the line of credit, bank note, and subordinated debt borrowings assumed to be repaid with the net proceeds of the Offering. (b) Reflects the tax effect of HomeTel Systems, HomeTel Providers Inc., HomeTel Providers Partners, L.P., RenTel #1, Inc., RenTel #2 LLC and SellTel #2 LLC losing their non-C corporation status in conjunction with the Consolidation as well as the tax effects of (a) above. (c) Reflects 2,500,000 shares being offered hereby. (d) Reflects 1,080,000 shares of Innotrac (after the stock split) and 5,420,000 shares of the Company issued in conjunction with the Consolidation plus 102,900 shares granted under the Company's Stock Option Plans within the 12 months prior to the effective date of the initial public offering using the "treasury stock" method as if all shares had been outstanding for all periods. (e) Excludes the dividend accretion on redeemable capital stock of a subsidiary of approximately $64,000 or $(0.01) per share. F-20 UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET AS OF SEPTEMBER 30, 1997 (DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA PRO FORMA COMBINED ADJUSTMENTS CONSOLIDATED ---------- ----------- ------------ Cash and cash equivalents................ $ 426 $ 4,184 (b) $ 4,610 Restricted cash.......................... -- 3,332 (b) 3,332 Accounts receivable, net................. 21,673 -- 21,673 Inventory................................ 5,309 -- 5,309 Prepaids and other....................... 600 3,621 (a) 4,221 ------- -------- ------- Total current assets................. 28,008 11,137 39,145 ------- -------- ------- Property and equipment, net.............. 8,249 -- 8,249 ------- -------- ------- Other assets, net........................ 130 -- 130 ------- -------- ------- Total assets......................... $36,387 $ 11,137 $47,524 ======= ======== ======= Accounts payable......................... $ 4,371 $ -- $ 4,371 Accrued expenses......................... 10,658 -- 10,658 Current portion of debt.................. 736 (666)(b) 70 Line of credit........................... 10,446 (10,446)(b) 0 Other.................................... 204 -- 204 ------- -------- ------- Total current liabilities............ 26,415 (11,112) 15,303 ------- -------- ------- Subordinated debt........................ 3,500 (3,500)(b) 0 Long term debt........................... 556 (556)(b) 0 Deferred income taxes.................... 101 352 (a) 453 ------- -------- ------- Total non-current liabilities........ 4,157 (3,704) 453 ------- -------- ------- Total liabilities.................... 30,572 (14,816) 15,756 ------- -------- ------- Redeemable Capital Stock................. 894 (390)(b) 504 ------- -------- ------- Shareholders' equity: Partners' capital...................... 1,577 (1,577)(b) 0 Members' deficit....................... (999) 999 (b) 0 Common stock........................... 5 645 (b) 900 250 (b) Additional paid-in capital............. 14 (2,536)(b) 25,375 29,225 (b) (6,400)(b) Retained earnings...................... 4,324 3,268 (a) 4,989 (2,603)(b) ------- -------- ------- Total shareholders' equity........... 4,921 26,343 31,264 ------- -------- ------- Total liabilities and shareholders' equity.............................. $36,387 $ 11,137 $47,525 ======= ======== =======
- -------- (a) Reflects the recording of deferred tax assets and liabilities associated with the change in tax status to C corporation of HomeTel Systems, HomeTel Providers Inc., HomeTel Providers Partners, L.P., RenTel #1, Inc., RenTel #2 LLC and SellTel #2 LLC in conjunction with the Consolidation. See "The Consolidation" for discussion. (b) Reflects the Consolidation of the Company as described in "The Consolidation" including the reclassification of the portion of retained earnings attributable to the S corporation and to additional paid in capital and the issuance of 5,420,000 shares of $0.10 par value Innotrac Common Stock as well as the 1,080,000 shares of Innotrac after the stock split. Also reflects the issuance of 2,500,000 shares of common stock at an assumed offering price of $13.00 offered hereby and an increase in cash equal to the net proceeds less repayment of the borrowings under the line- of-credit facility ("LOC"), bank note, and the subordinated debt as well as the redemption of the redeemable capital stock of a subsidiary. Restricted cash represents the difference between borrowings under the LOC and the term note at September 30, 1997 and the anticipated amounts outstanding at closing. Remaining portion represents redeemable capital stock of a subsidiary (SellTel) to be redeemed in the fourth quarter of 1998. Reflects distribution of $6.4 million of the undistributed earnings of HomeTel Systems and HomeTel Providers Partners L.P. F-21 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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.......................................................... 14 Dividend Policy.......................................................... 15 Dilution................................................................. 15 Capitalization........................................................... 16 Selected Financial Data.................................................. 17 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 19 Business................................................................. 24 Management............................................................... 33 Principal Shareholders................................................... 37 Certain Transactions..................................................... 38 Shares Eligible for Future Sale.......................................... 39 Description of Capital Stock............................................. 40 Underwriting............................................................. 43 Legal Matters............................................................ 44 Experts.................................................................. 44 Additional Information................................................... 44 Index to Financial Statements............................................ F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE- QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 2,500,000 SHARES [LOGO] INNOTRAC CORPORATION COMMON STOCK ---------------- PROSPECTUS ---------------- J.C.Bradford&Co. Wheat First Butcher Singer , 1997 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- 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.................................... * Printing and Engraving Expenses............................... * Legal Fees and Expenses....................................... * Accounting Fees and Expenses.................................. * Transfer Agent Fees and Expenses.............................. * Miscellaneous................................................. * ---------- Total..................................................... $ * ==========
- -------- * To be provided by amendment. ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's Amended and Restated Articles of Incorporation provide that a director shall not be personally liable to the Registrant or its shareholders for monetary damages for breach of the duty of care or any other duty owed to the Registrant as a director to the fullest extent permitted by Georgia law. Under such law, corporations cannot limit the liability of a director (a) for any appropriation, in violation of his duties, of any business opportunity of the Registrant; (b) for acts or omissions which involve intentional misconduct or a knowing violation of law; (c) for unlawful corporate distributions or (d) for any transactions from which the director receives an improper benefit. Under Article VII of the Registrant's Amended and Restated Bylaws, the Registrant is required to indemnify its directors and officers to the fullest extent permitted by Georgia law. The Georgia Business Corporation Code provides that a corporation may indemnify its directors, officers and agents against judgments, fines, penalties, amounts paid in settlement and expenses, including attorneys' fees, resulting from various types of legal actions or proceedings if the actions of the party being indemnified meet the standards of conduct specified therein. Determinations concerning whether the applicable standard of conduct has been met can be made by (a) a majority of the disinterested directors; (b) a majority of a committee of disinterested directors; (c) independent legal counsel or (d) an affirmative vote of a majority of shares held by the disinterested stockholders. No indemnification may be made to or on behalf of a corporate director, officer, employee or agent (i) in connection with a proceeding by or in right of the Registrant in which such person was adjudged liable to the Registrant or (ii) in connection with any other proceeding in which said person was adjudged liable on the basis that personal benefit was improperly received by him. The Registrant has entered into Indemnification Agreements with certain of its directors and officers (the "Indemnified Parties"). Under the terms of the Indemnification Agreements, the Registrant is required to indemnify the Indemnified Parties against certain liabilities arising out of their service for the Registrant. The Indemnification Agreements require the Registrant (i) to indemnify each Indemnified Party to the fullest extent permitted by law; and (ii) to advance certain expenses incurred by an Indemnified Party. The Indemnification Agreements provide limitations on the Indemnified Party's rights to indemnification in certain circumstances. The Registrant's directors and officers are insured against losses arising from any claim against them as such for wrongful acts or omissions, subject to certain limitations. II-1 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 ---- ---------- Scott D. Dorfman 4,989,428 ITC Service Company 353,846 Susan Mary Trotochaud 493 Trust and custodianship for Bradley H. Dorfman 25,411 Trust and custodianship for Brent M. Dorfman 25,411 Trust and custodianship for Jesse E. Dorfman 25,411
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* 3.2 Amended and Restated By-laws of the Registrant* 4.1 Form of Common Stock Certificate of the Registrant** 4.2 Rights Agreement between Registrant and Reliance Trust Company as Rights Agent, dated as of ** 5 Opinion of Kilpatrick Stockton LLP** 10.1 Acquisition Agreement by and among the Registrant, SellTel #1, Inc., RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers Inc., Rentel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman And Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997* 10.2 Stock Option and Incentive Award Plan* 10.3 Amended and Restated Loan and Security Agreement by and among the Registrant, HomeTel Systems Inc., IELC, Inc., RenTel #1, Inc., RenTel #2, L.L.C., SellTel #1, Inc., SellTel #2, L.L.C., HomeTel Providers Partners, L.P. and SouthTrust Bank, N.A., dated December 5, 1997* 10.4 Equipment Negotiation and Referral Agreement between BellSouth Telecommunications, Inc. and the Registrant, effective May 1, 1995*+ 10.5 Form of Indemnification Agreements entered into as of December 11, 1997, by and between the Company and each of Messrs. Scott D. Dorfman, David L. Ellin, Donald L. Colter, Jr., John H. Nichols II, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III and William H. Scott, III* 10.6 Loan and Security Agreement by and between HomeTel Providers Partners, L.P. and ITC Holding Company, Inc. dated as of April 11, 1994* 10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant* 10.8 Lease, dated , by and between Weeks Development Partnership and the Registrant** 23.1 Consent of Kilpatrick Stockton LLP, included in Exhibit 5 23.2 Consent of Arthur Andersen LLP* 24 Power of attorney (on signature page) 27 Financial Data Schedule*
- -------- * Filed herewith ** To be filed by amendment + Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In accordance with Rule 406(b)(2), these confidential portions have been omitted from this exhibit and filed separately with the Commission. II-3 (B) FINANCIAL STATEMENT SCHEDULES Schedule II--Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Atlanta, State of Georgia, on the 16th day of December 1997. INNOTRAC CORPORATION /s/ Scott D. Dorfman By:__________________________________ SCOTT D. DORFMAN CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY Each person whose signature appears below hereby constitutes and appoints Scott D. Dorfman and David L. Ellin and either of them, his true and lawful attorneys-in-fact with full power of substitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this Registration Statement, and to sign a Registration Statement pursuant to Rule 462(b) under the Securities Act of 1933 and to cause the same to be filed, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, hereby granting to said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing whatsoever requisite or desirable to be done in and about the premises, as fully to all intents and purposes as the undersigned might or could do in person, hereby ratifying and confirming all acts and things that said attorneys-in-fact and agents, or their substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons on the 16th day of December 1997, in the capacities indicated. SIGNATURES POSITION /s/ Scott D. Dorfman Chairman, President and - ------------------------------------- Chief Executive Officer Scott D. Dorfman (Principal Executive Officer) /s/ David L. Ellin Senior Vice President, - ------------------------------------- Secretary, Chief Operating David L. Ellin Officer and Director /s/ Larry C. Hanger Vice President--Business - ------------------------------------- Development and Director Larry C. Hanger /s/ John H. Nichols, III Vice President and Chief - ------------------------------------- Financial Officer John H. Nichols, III (Principal Financial and Accounting Officer) SIGNATURES POSITION /s/ Bruce V. Benator Director - ------------------------------------- Bruce V. Benator /s/ Martin J. Blank Director - ------------------------------------- Martin J. Blank /s/ Campbell B. Lanier, III Director - ------------------------------------- Campbell B. Lanier, III /s/ William H. Scott, III Director - ------------------------------------- William H. Scott, III REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE We have audited, in accordance with generally accepted auditing standards, the combined financial statements of INNOTRAC CORPORATION (a Georgia corporation), IELC, INC. (a Georgia corporation), RENTEL #1, INC. (a Georgia corporation), SELLTEL #1, INC. (a Georgia corporation), HOMETEL SYSTEMS, INC. (a Georgia corporation), HOMETEL PROVIDERS, INC. (a Georgia corporation), RENTEL #2, LLC (a Georgia limited liability company), SELLTEL #2, LLC (a Georgia limited liability company) and HOMETEL PROVIDERS PARTNERS, L.P. (a Georgia limited partnership) included in this Registration Statement and have issued our report thereon dated December 12, 1997. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in Item 16(b) is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia December 12, 1997 SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS (AMOUNTS IN THOUSANDS)
ADDITIONS BALANCE ------------------ AT CHARGED CHARGES TO BEGINNING TO OTHER BALANCE AT END DESCRIPTION OF PERIOD INCOME ACCOUNTS DEDUCTIONS OF PERIOD ----------- --------- ------- ---------- ---------- -------------- Provision for uncollectible accounts 1997................... $4,242 $14,227 $0.00 $(12,873)(1) $5,596 1996................... $2,552 $9,377 $0.00 $(7,687) $4,242 1995................... $575 $3,043 $0.00 $(1,066)(1) $2,552
- -------- (1) Represents write-off of accounts considered to be uncollectible, less recoveries of amounts previously written off. (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* 3.2 Amended and Restated By-laws of the Registrant* 4.1 Form of Common Stock Certificate of the Registrant** 4.2 Rights Agreement between Registrant and Reliance Trust Company as Rights Agent, dated as of ** 5 Opinion of Kilpatrick Stockton LLP** 10.1 Acquisition Agreement by and among the Registrant, SellTel #1, Inc., RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers Inc., Rentel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman And Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997* 10.2 Stock Option and Incentive Award Plan* 10.3 Amended and Restated Loan and Security Agreement by and among the Registrant, HomeTel Systems Inc., IELC, Inc., RenTel #1, Inc., RenTel #2, L.L.C., SellTel #1, Inc., SellTel #2, L.L.C., HomeTel Providers Partners, L.P. and SouthTrust Bank, N.A., dated December 5, 1997* 10.4 Equipment Negotiation and Referral Agreement between BellSouth Telecommunications, Inc. and the Registrant, effective May 1, 1995*+ 10.5 Form of Indemnification Agreements entered into as of December 11, 1997, by and between the Company and each of Messrs. Scott D. Dorfman, David L. Ellin, Donald L. Colter, Jr., John H. Nichols II, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III and William H. Scott, III* 10.6 Loan and Security Agreement by and between HomeTel Providers Partners, L.P. and ITC Holding Company, Inc. dated as of April 11, 1994* 10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant* 10.8 Lease, dated , by and between Weeks Development Partnership and the Registrant** 23.1 Consent of Kilpatrick Stockton LLP, included in Exhibit 5 23.2 Consent of Arthur Andersen LLP* 24 Power of attorney (on signature page) 27 Financial Data Schedule
- -------- * Filed herewith ** To be filed by amendment + Confidential treatment has been requested for certain confidential portions of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In accordance with Rule 406(b)(2), these confidential portions have been omitted from this exhibits and filed separately with the Commission. EX-3.1 2 AMENDED & RESTATED ART. 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 EX-3.2 3 AMENDED & RESTATED BY-LAWS EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF INNNOTRAC CORPORATION ARTICLE I OFFICES ------- Section 1. Registered Office. The registered office shall be in the ----------------- State of Georgia, County of Gwinnett. Section 2. Other Offices. The corporation may also have offices at ------------- such other places both inside and outside the State of Georgia as the board of directors may from time to time determine and the business of the corporation may require or make desirable. ARTICLE II SHAREHOLDERS MEETINGS --------------------- Section 1. Annual Meetings. The annual meeting of the shareholders --------------- of the corporation shall be held at the principal office of the corporation or at such other place inside or outside the United States as may be determined by the board of directors, on such date and at such time as may be determined by the board of directors, for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. Section 2. Special Meetings. Special meetings of the shareholders ---------------- shall be held at the principal office of the corporation or at such other place inside or outside the United States as may be designated in the notice of said meetings, upon call of the chairman of the board of directors or the president and shall be called by the president or the secretary when so directed by the board of directors or at the request in writing of shareholders owning at least 25% of the issued and outstanding capital stock of the corporation entitled to vote thereat. Any such request shall state the purposes for which the meeting is to be called. Section 3. Notice of Meetings. Written notice of every meeting of ------------------ shareholders, stating the place, date and hour of the meetings, shall be given in a manner permitted by applicable law to each shareholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. Attendance of a shareholder at a meeting of shareholders shall constitute a waiver of notice of such meeting and of all objections to the place or time of meeting, or the manner in which it has been called or convened, except when a shareholder attends a meeting solely for the purpose of stating, at the beginning of the meeting, any such objection to the transaction of any business. Notice need not be given to any shareholder who signs a waiver of notice, in person or by proxy, either before or after the meeting. Section 4. Quorum. At all meetings of shareholders, any Voting ------ Group (as defined below) entitled to vote on a matter may take action on the matter only if a quorum of that Voting Group exists at the meeting, and if a quorum exists, the Voting Group may take action on the matter notwithstanding the absence of a quorum of any other Voting Group that may be entitled to vote separately on the matter. Unless the articles of incorporation, these by-laws or the Code provides otherwise, the presence (in person or by proxy) of shares representing a majority of votes entitled to be cast on a matter by a Voting Group shall constitute a quorum of the Voting Group with regard to that matter. Once a share is present at any meeting other than solely to object to holding the meeting or transacting business at the meeting, the share shall be deemed present for quorum purposes for the remainder of the meeting and for any adjournments of that meeting, unless a new record date for the adjourned meeting is or must be set pursuant to Article V, Section 4 of these by-laws. If a quorum is not present at any meeting of the shareholders, the holders of a majority of the shares present (in person or represented by proxy) and entitled to vote thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. Section 5. Voting. Unless otherwise provided by law, the articles of ------ incorporation, or board resolutions setting forth the preferences and other rights, restrictions or limitations of any class or series of preferred stock, each outstanding share, regardless of class or series, shall be entitled to one vote on each matter voted on at a shareholders meeting, and each class or series of the corporation's shares entitled to vote generally on a matter shall for that purpose be considered a single voting group (a "Voting Group"). Unless the articles of incorporation, these by-laws, a resolution of the board of directors or applicable law require a different vote, action on a matter presented for consideration at a meeting where a quorum is present, shall be approved as follows: (a) directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present; and (b) all other matters shall be approved if the votes cast within the applicable Voting Group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation, a provision of these by-laws that has been adopted pursuant to Section 14-2-1021 of the Code (or any successor provision), or applicable law requires a greater number of affirmative votes. If either the articles of incorporation or the Code requires separate voting by 2 two or more Voting Groups on a matter, action on that matter is taken only when voted upon by each such Voting Group separately. A shareholder may vote his shares in person or by proxy. A shareholder may appoint a proxy to vote or otherwise act for him by signing an appointment form. An appointment of a proxy is valid for eleven months unless a shorter or longer period is expressly provided in the appointment form. Section 6. Consent of Shareholders. Any action required or ----------------------- permitted to be taken at any meeting of the shareholders may be taken without a meeting if all of the shareholders consent thereto in writing, setting forth the action so taken. Such consent shall have the same force and effect as a unanimous vote of shareholders. Section 7. List of Shareholders; Inspection of Records. (a) The ------------------------------------------- corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving their names and addresses and the number, class and series, if any, of the shares held by each. (b) Shareholders are entitled to inspect the corporate records as and to the extent provided by the Code; provided, however, that only shareholders owning more than two percent (2%) of the outstanding shares of any class of the corporation's stock shall be entitled to inspect (1) the minutes from any board, board committee or shareholders meeting (including any records of action taken thereby without a meeting); (2) the accounting records of the corporation; or (3) any record of the shareholders. ARTICLE III DIRECTORS --------- Section 1. Powers. Except as otherwise provided by any legal ------ agreement among shareholders, the property, affairs and business of the corporation shall be managed and directed by its board of directors, which may exercise all powers of the corporation and do all lawful acts and things which are not by law, by any legal agreement among shareholders, by the articles of incorporation or by these by-laws directed or required to be exercised or done by the shareholders. Section 2. Number, Election, and Term. The board of directors shall -------------------------- consist of the number and shall be elected in the manner and serve the term as set forth in the Amended and Restated Articles of Incorporation. Except as provided in this Article with respect to filling vacancies on the board, the directors shall be elected by the shareholders as provided in Article II, and each director elected shall hold office until his successor is elected 3 and qualified or until his earlier resignation, removal from office, or death. Directors shall be natural persons who have attained the age of 21 years, but need not be residents of the State of Georgia or shareholders of the corporation. The board, from time to time, may designate persons to act as advisory directors. Section 3. Nominations. (a) If any shareholder intends to nominate ----------- or cause to be nominated any candidate for election to the board of directors (other than any candidate to be sponsored by and proposed at the instance of the management), such shareholder shall notify the president by first class registered mail sent not less than 14 nor more than 50 days before the scheduled meeting of the shareholders at which directors will be elected. However, if less than 21 days notice of the meeting is given to shareholders, such nomination shall be delivered or mailed to the president not later than the close of the seventh day following the date on which the notice of the shareholders' meeting was mailed. Such notification shall contain the following information with respect to each nominee, to the extent known to the shareholder giving such notification: (1) Name, address and principal present occupation; (2) To the knowledge of the shareholder who proposed to make such nomination, the total number of shares that may be voted for such proposed nominee; (3) The names and address of the shareholders who propose to make such nomination, and the number of shares of the corporation owned by each of such shareholders; and (4) The following additional information with respect to each nominee: age, past employment, education, beneficial ownership of shares in the corporation, past and present financial standing, criminal history (including any convictions, indictments or settlements thereof), involvement in any past or pending litigation or administrative proceedings (including threatened involvement), relationship to and agreements (whether or not in writing) with the shareholder(s) (and their relatives, subsidiaries and affiliates) intending to make such nomination, past and present relationships or dealings with the corporation or any of its subsidiaries, affiliates, directors, officers or agents, plans or ideas for managing the affairs of the corporation (including, without limitation, any termination of employees, any sales of corporate assets, any proposed merger, business combination or recapitalization involving the corporation, and any proposed dissolution or liquidation of the corporation), and all additional information relating to such person that would be required to be disclosed, or otherwise required, pursuant to Sections 13 or 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the 4 "Exchange Act"), in connection with any acquisition of shares by such nominee or in connection with the solicitation of proxies by such nominee for his election as a director, regardless of the applicability of such provisions of the Exchange Act. (b) Any nominations not in accordance with the provisions of this Section may be disregarded by the chairman of the meeting, and upon instruction by the chairman, votes cast for each such nominee shall be disregarded. In the event, however, that a person should be nominated by more than one shareholder, and if one such nomination complies with the provisions of this Section, such nomination shall be honored, and all shares voted for such nominee shall be counted. Section 4. Vacancies. (a) Subject to subsections 4(b), vacancies, --------- including vacancies resulting from any increase in the number of directors and vacancies resulting from removal from office by the shareholders, may be filled only by the board of directors or by a majority of the directors then in office (if the directors remaining in office constitute less than a quorum), and a director so chosen shall hold office until the expiration of the term and until his successor is duly elected and qualified, unless sooner displaced; provided, however, that if there are no directors in office, then vacancies shall be filled through election by the shareholders. (b) If any vacant office described in subsection 4(a) was held by a director elected by a particular Voting Group, only the remaining directors elected by that Voting Group shall be entitled to fill the vacancy; provided, however, that if the vacant office was held by a director elected by a particular Voting Group and there is no remaining director elected by that --- Voting Group, the other remaining directors or director (elected by another Voting Group or Groups) may fill the vacancy. Section 5. Meetings and Notice. The board of directors of the ------------------- corporation may hold meetings, both regular and special, either inside or outside the State of Georgia. Regular meetings of the board of directors may be held without notice at such time and place as shall from time to time be determined by resolution of the board. Special meetings of the board may be called by the chairman of the board or president or by any two directors upon one days notice given in a manner permitted by law. Such notice shall state a reasonable time, date and place of meeting, but the purpose need not be stated therein. A director may waive any notice required by the Code, the articles of incorporation, or these by-laws before or after the date and time of the matter to which the notice related, by a written waiver signed by the director and delivered to the corporation for inclusion in the minutes or filing with the corporate records. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting and waiver of all objections to the place and time of the meeting, or the manner in which it has been called or convened except when the director states, at the beginning of the meeting, any such objection or objections to the transaction of business. 5 Section 6. Quorum. At all meetings of the board of directors, a ------ majority of directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board, except as may be otherwise specifically provided by law, by the articles of incorporation, or by these by- laws. If a quorum shall not be present at any meeting of the board, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. Section 7. Conference Telephone Meeting. Unless the articles of ---------------------------- incorporation or these by-laws otherwise provide, members of the board of directors, or any committee designated by the board, may participate in a meeting of the board or committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other. Participation in the meeting shall constitute presence in person. Section 8. Consent of Directors. Unless otherwise restricted by the -------------------- articles of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, setting forth the action so taken, and the writing or writings are filed with the minutes of the proceedings of the board or committee. Such consent shall have the same force and effect as a unanimous vote of the board. Section 9. Committees. The board of directors may, by resolution ---------- passed by a majority of the whole board, designate from among its members one or more committees, each committee to consist of two or more directors. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of such committee. Any such committee, to the extent provided in the resolution, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the corporation except as limited by law. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. A majority of each committee may determine its action and may fix the time and places of its meetings, unless otherwise provided by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. Section 10. Removal of Directors. At any shareholders' meeting with -------------------- respect to which notice of such purpose has been given, any director may be removed from office, only for cause, by the vote of shareholders representing a majority of the issued and outstanding capital stock entitled to vote for the election of directors, provided that a director elected by a Voting Group may only be removed for cause by the vote of shareholders representing a majority of the issued and outstanding capital stock of the Voting Group that elected the particular director, and his successor may be elected at the same or any subsequent meeting of shareholders; provided that to the extent any vacancy created by such 6 removal is not filled by such an election within 60 days after such removal, the remaining directors shall, by majority vote, fill any such vacancy. Section 11. Compensation of Directors. Directors shall be entitled ------------------------- to such reasonable compensation for their services as directors or members of any committee of the board as shall be fixed from time to time by resolution adopted by the board, and shall also be entitled to reimbursement for any reasonable expenses incurred in attending any meeting of the board or any such committee. ARTICLE IV OFFICERS -------- Section 1. Number. The officers of the corporation shall be chosen ------ by the board of directors and shall be a president and a treasurer. The board of directors may also choose a chairman of the board, one or more vice- presidents, a secretary, assistant secretaries and assistant treasurers. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. Section 2. Compensation. The salaries of all officers and agents of ------------ the corporation shall be fixed by the board of directors or a committee or officer appointed by the board. Section 3. Term of Office. Unless otherwise provided by resolution -------------- of the board of directors, the principal officers shall be chosen annually by the board at the first meeting of the board following the annual meeting of shareholders of the corporation, or as soon thereafter as is conveniently possible. Subordinate officers may be elected from time to time. Each officer shall serve until his successor shall have been chosen and qualified, or until his death, resignation or removal. Section 4. Removal. Any officer may be removed from office at any ------- time, with or without cause, by the board of directors whenever in its judgment the best interest of the corporation will be served thereby, or if appointed at the authorization of the board of directors, by a senior officer at any time, with or without cause, whenever in the officer's judgment the best interest of the corporation will be served thereby. Section 5. Vacancies. Any vacancy in an office resulting from any --------- cause may be filled by the board of directors. 7 Section 6. Powers and Duties. Except as hereinafter provided, the ----------------- officers of the corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the board of directors. (a) Chairman of the Board. The chairman of the board (if --------------------- there be one) shall preside at and serve as chairman of meetings of the stockholders and of the board of directors. The chairman of the board shall perform other duties and have other authority as may from time to time be delegated by the board of directors. (b) Chief Executive Officer. The chief executive officer ----------------------- shall be charged with the general and active management of the corporation, shall see that all orders and resolutions of the board of directors are carried into effect, shall have the authority to select and appoint employees and agents of the corporation, and shall, in the absence or disability of the chairman of the board, perform the duties and exercise the powers of the chairman of the board. The chief executive officer shall also be responsible for the development, establishment, and implementation of the policy and strategic initiatives for the corporation. The chief executive officer shall perform any other duties and have any other authority as may be delegated from time to time by the board of directors, and shall be subject to the limitations fixed from time to time by the board of directors. (c) President. If there shall be no separate chief executive --------- officer of the corporation, then the president shall be the chief executive officer of the corporation, with the duties and authority provided in Section 6 (b). The president shall otherwise be the chief operating officer of the corporation and shall, consistent with the authority otherwise conferred upon the chief executive officer in Section 6 (b), have responsibility for the conduct and general supervision of the business operations of the corporation, including without limitation responsibility for the direction, supervision, and coordination of the activities of all operating subsidiaries and other business units of the corporation. The president shall perform such other duties and have such other authority as may from time to time be delegated by the board of directors. In the absence or disability of the chief executive officer, the president shall perform the duties and exercise the powers of the chief executive officer. (d) Vice President. The vice president (if there be one) -------------- shall, in the absence or disability of the president, perform the duties and exercise the powers of the president, whether the duties and powers are specified in these by-laws or otherwise. If the corporation has more than one vice president, the one designated by the board of directors shall act in the event of the absence or disability of the president. Vice presidents shall perform any other duties and have any other authority as from time to time may be delegated by the board of directors, the chief executive officer, or the president. 8 (e) Secretary. The secretary shall attend all meetings of --------- the board of directors and all meetings of the shareholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. (f) Assistant Secretary. The assistant secretary or if ------------------- there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. (g) Treasurer. The treasurer shall have the custody of the --------- corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. If required by the board of directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under this control belonging to the corporation. (h) Assistant Treasurer. The assistant treasurer, or if ------------------- there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such 9 other duties and have such other powers as the board of directors may from time to time prescribe. Section 7. Signatures. The signature of any officer, employee or ---------- agent upon any document of the corporation may be made by facsimile or machine signature under such limitations and circumstances as the board of directors or any appropriate committee of the board of directors may provide from time to time. Section 8. Voting Securities of Corporation. Unless otherwise -------------------------------- ordered by the board of directors, the chairman shall have full power and authority on behalf of the corporation to attend and to act and vote at any meetings of security holders of corporations in which the corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the corporation might have possessed and exercised if it had been present. The board of directors by resolution from time to time may confer like powers upon any other person or persons. ARTICLE V CERTIFICATE ----------- Section 1. Form of Certificate. Every holder of fully-paid stock in ------------------- the corporation shall be entitled to have a certificate in such form as the board of directors may from time to time prescribe. Section 2. Lost Certificates. The board of directors may direct ----------------- that a new certificate be issued in place of any certificate theretofore issued by the corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. Section 3. Transfers. (a) Transfers of shares of the capital stock --------- of the corporation shall be made only on the books of the corporation by the registered holder thereof, or by his duly authorized attorney, or with a transfer clerk or transfer agent appointed as provided in Section 5 of this Article, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. (b) The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such 10 owner, and for all other purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. (c) Shares of capital stock may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by separate written power of attorney to sell, assign and transfer the same, signed by the record holder thereof, or by his duly authorized attorney-in-fact, but no transfer shall affect the right of the corporation to pay any dividend upon the stock to the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the corporation as herein provided. (d) The board may, from time to time, make such additional rules and regulations as it may deem expedient, not inconsistent with these by-laws or the articles of incorporation, concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. Section 4. Record Date. In order that the corporation may determine ----------- the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 70 days and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of stockholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of and to vote at any meeting of shareholders, the record date shall be at the close of business on the day next preceding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. If no record date is fixed for other purposes, the record date shall be at the close of business on the day next preceding the day on which the board of directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the board of directors shall fix a new record date for the adjourned meeting. Section 5. Transfer Agent and Registrar. The board of directors ---------------------------- may appoint one or more transfer agents or one or more transfer clerks and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. ARTICLE VI GENERAL PROVISIONS ------------------ 11 Section 1. Distributions. Distributions upon the capital stock of ------------- the corporation, subject to the provisions of the articles of incorporation, if any, may be declared by the board of directors at any regular or special meetings, pursuant to law. Distributions may be paid in cash, in property, or in shares of the corporation's capital stock, subject to the provisions of the articles of incorporation. Before payment of any distribution, there may be set aside out of any funds of the corporation available for distributions such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing distributions, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. Section 2. Fiscal Year. The fiscal year of the corporation shall be ----------- fixed by resolution of the board of directors. Section 3. Seal. The corporate seal shall have inscribed thereon ---- the name of the corporation, the year of its organization and the words "Corporate Seal" and "Georgia". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. In the event it is inconvenient to use such a seal at any time, the signature of the corporation followed by the word "Seal" enclosed in parentheses shall be deemed the seal of the corporation. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS ----------------------------------------- Section 1. Indemnification of Directors and Officers. ----------------------------------------- corporation shall indemnify and hold harmless any person (an "Indemnified Person") who is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action or suit by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, against expenses (including, but not limited to, attorneys' fees and disbursements, court costs and expert witness fees), and against any judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; provided, in any case, that no indemnification shall be made in respect of expenses, judgments, fines and amounts paid in settlement attributable to circumstances as to which, under applicable provisions of the Code as in effect from time to time, such indemnification may not be authorized by action of the board of directors, the shareholders or otherwise. 12 Section 2. Indemnification of Directors and Officers for Derivative -------------------------------------------------------- Actions. The corporation shall indemnify and hold harmless any Indemnified - ------- Person who is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by or in the right of the corporation, by reason of the fact that he is or was a director or officer of the corporation, against expenses (including, but not limited to, attorneys' fees and disbursements, court costs and expert witness fees) actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. No indemnification shall be made pursuant to this Section for any claim, issue or matter as to which an Indemnified Person shall have been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation, or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which such action or suit was brought or other court of competent jurisdiction shall determine upon application that such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. Section 3. Indemnification of Employees and Agents. The board of --------------------------------------- directors shall have the power to cause the corporation to provide to any person who is or was an employee or agent of the corporation all or any part of the right to indemnification and other rights of the type provided under Sections 1, 2, 6 and 12 of this Article (subject to the conditions, limitations, obligations and other provisions specified herein), upon a resolution to that effect identifying such employee or agent (by position or name) and specifying the particular rights provided, which may be different for each employee or agent identified. Each employee or agent of the corporation so identified shall be an "Indemnified Person" for purposes of the provisions of this Article. Section 4. Subsidiaries and Other Organizations. The board of ------------------------------------ directors shall have the power to cause the corporation to provide to any person who is or was a director, officer, employee or agent of the corporation or who also is or was a director, officer, trustee, partner, employee or agent of a Subsidiary (as defined below), or is or was serving at the corporation's request in such a position with any other organization, all or any part of the right to indemnification and other rights of the type provided under Sections 1, 2, 6 and 12 of this Article (subject to the conditions, limitations, obligations and other provisions specified herein), with respect to service by such person in such position with a Subsidiary or other organization, upon a resolution identifying such person, the Subsidiary or other organization involved (by name or other classification), and the particular rights provided, which may be different for each person so identified. Each person so identified shall be an "Indemnified Person" for purposes of the provisions of this Article. As used in this Article, "Subsidiary" shall mean (i) another corporation, joint venture, trust, partnership or unincorporated business association more than 20% of the voting capital stock or other voting equity interest of which was, at or after the time of the circumstances giving rise to such action, suit or proceeding, owned, directly or indirectly, by the corporation; or (ii) a nonprofit corporation that receives its principal financial support from the corporation or its Subsidiaries. 13 Section 5. Determination. Notwithstanding any judgment, order, ------------- settlement, conviction or plea in any action, suit or proceeding of the kind referred to in Sections 1 and 2 of this Article, an Indemnified Person shall be entitled to indemnification as provided in such Sections 1 and 2 if a determination that such Indemnified Person is entitled to such indemnification shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who are not at the time parties to the proceeding; or (ii) if a quorum cannot be obtained under (i) above, by majority vote of a committee duly designated by the board of directors (in which designation interested directors may participate), consisting solely of two or more directors who are not at the time parties to the proceeding; or (iii) in a written opinion by special legal counsel selected as required by Section 14-2- 855(b)(3) of the Code or any successor provision. To the extent that an Indemnified Person has been successful on the merits or otherwise in defense of any action, suit or proceeding of the kind referred to in Sections 1 and 2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. Section 6. Advances. Expenses (including, but not limited to, -------- attorneys' fees and disbursements, court costs, and expert witness fees) incurred by an Indemnified Person in defending any action, suit or proceeding of the kind described in Sections 1 and 2 hereof (or in Section 4 hereof if applicable to such Indemnified Person) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding as set forth herein. The corporation shall promptly pay the amount of such expenses to the Indemnified Person, but in no event later than ten days following the Indemnified Person's delivery to the corporation of a written request for an advance pursuant to this Section, together with a reasonable accounting of such expenses; provided, however, that the Indemnified Person shall furnish the corporation a written affirmation of his good faith belief that he has met the standard of conduct set forth in the Code and a written undertaking and agreement, executed personally or on his behalf, to repay to the corporation any advances made pursuant to this Section if it shall be ultimately determined that the Indemnified Person is not entitled to be indemnified by the corporation for such amounts. The corporation shall make the advances contemplated by this Section regardless of the Indemnified Person's financial ability to make repayment. Any advances and undertakings to repay pursuant to this Section shall be unsecured and interest-free. Section 7. Non-Exclusivity. Subject to any applicable limitation --------------- imposed by the Code or the Articles of Incorporation, the indemnification and advancement of expenses provided by or granted pursuant to this Article shall not be exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any by-law, resolution or agreement specifically or in general terms approved or ratified by the affirmative vote of holders of a majority of the shares entitled to be cast thereon. Section 8. Insurance. The corporation shall have the power to --------- purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, or who, while a director, officer, employee, or agent of the corporation, is or was serving as a director, officer, trustee, general partner, employee or agent of a Subsidiary or, at the request of the corporation, of any other organization, against any liability asserted against 14 him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. Section 9. Notice. If any expenses or other amounts are paid by ------ way of indemnification, otherwise than by court order or action by the shareholders or by an insurance carrier pursuant to insurance maintained by the corporation, the corporation shall, not later than the next annual meeting of shareholders, unless such meeting is held within three months from the date of such payment, and in any event within 15 months from the date of such payment, send by first class mail to its shareholders of record at the time entitled to vote for the election of directors a statement specifying the persons paid, the amount paid and the nature and status at the time of such payment of the litigation or threatened litigation. Section 10. Security. The corporation may designate certain of its -------- assets as collateral, provide self-insurance or otherwise secure its obligations under this Article, or under any indemnification agreement or plan of indemnification adopted and entered into in accordance with the provisions of this Article, as the board of directors deems appropriate. Section 11. Amendment. Any amendment to this Article that limits or --------- otherwise adversely affects the right of indemnification, advancement of expenses, or other rights of any Indemnified Person hereunder shall, as to such Indemnified Person, apply only to claims, actions, suits or proceedings based on actions, events or omissions (collectively, "Post Amendment Events") occurring after such amendment and after delivery of notice of such amendment to the Indemnified Person so affected. Any Indemnified Person shall, as to any claim, action, suit or proceeding based on actions, events or omissions occurring prior to the date of receipt of such notice, be entitled to the right of indemnification, advancement of expenses and other rights under this Article to the same extent as if such provisions had continued as part of the by-laws of the corporation without such amendment. This Section cannot be altered, amended or repealed in a manner effective as to any Indemnified Person (except as to Post Amendment Events) without the prior written consent of such Indemnified Person. Section 12. Agreements. In addition to the rights provided in this ---------- Article, the corporation shall have the power, upon authorization by the board of directors, to enter into an agreement or agreements providing to any person who is or was a director, officer, employee or agent of the corporation indemnification rights substantially similar to, or greater than, those provided in this Article. Section 13. Continuing Benefits. The indemnification and ------------------- advancement of expenses provided by or granted pursuant to this Article shall, unless otherwise provided when authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. Section 14. Successors. For purposes of this Article, the terms ---------- "the corporation" or "this corporation" shall include any corporation, joint venture, trust, partnership or unincorporated business association that is the successor to all or substantially all of the 15 business or assets of this corporation, as a result of merger, consolidation, sale, liquidation or otherwise, and any such successor shall be liable to the persons indemnified under this Article on the same terms and conditions and to the same extent as this corporation. Section 15. Severability. Each of the sections of this Article, ------------ and each of the clauses set forth herein, shall be deemed separate and independent, and should any part of any such section or clause be declared invalid or unenforceable by any court of competent jurisdiction, such invalidity or unenforceability shall in no way render invalid or unenforceable any other part thereof or any other separate section or clause of this Article that is not declared invalid or unenforceable. Section 16. Additional Indemnification. In addition to the specific -------------------------- indemnification rights set forth herein, the corporation shall indemnify each of its directors and officers to the full extent permitted by action of the board of directors without shareholder approval under the Code or other laws of the State of Georgia as in effect from time to time. ARTICLE VIII AMENDMENTS ---------- The board of directors shall have power to alter, amend or repeal the by-laws or adopt new by-laws by majority vote of all of the directors, but any by-laws adopted by the board of directors may be altered, amended or repealed and new by-laws adopted, by the shareholders by majority vote of all of the shares having voting power. 16 EX-10.1 4 ACQUISITION AGREEMENT ACQUISITION AGREEMENT BY AND AMONG INNOTRAC CORPORATION SELLTEL #1, INC. RENTEL #1, INC. IELC, INC. HOMETEL SYSTEMS, INC. HOMETEL PROVIDERS INC. RENTEL #2, L.L.C. SELLTEL #2, L.L.C. HOMETEL PROVIDERS PARTNERS, L.P. ITC SERVICE COMPANY SCOTT D. DORFMAN SUSAN MARY TROTOCHAUD, as Custodian for Bradley H. Dorfman, Brent M. Dorfman and Jesse E. Dorfman AND SUSAN MARY TROTOCHAUD DECEMBER 15, 1997 1 ACQUISITION AGREEMENT THIS AGREEMENT is made and entered into as of the 15th day of December, 1997, by and among INNOTRAC CORPORATION, a Georgia corporation ("INNOTRAC"); SELLTEL #1, INC., a Georgia corporation ("SELLTEL #1"); RENTEL #1, -------- ---------- INC., a Georgia corporation ("RENTEL #1"); IELC, INC., a Georgia corporation --------- ("IELC"); HOMETEL SYSTEMS, INC., a Georgia corporation ("HOMETEL"); HOMETEL ---- ------- PROVIDERS INC., a Georgia corporation ("PROVIDERS"); RENTEL #2, L.L.C., a --------- Georgia limited liability company ("RENTEL #2"); SELLTEL #2, L.L.C., a Georgia --------- limited liability company ("SELLTEL #2"); HOMETEL PROVIDERS PARTNERS, L.P., a ---------- Georgia limited partnership ("HOMETEL PARTNERS"); ITC SERVICE COMPANY, a ---------------- Delaware corporation ("ITC"); SCOTT D. DORFMAN, an individual resident of the --- State of Georgia ("S. DORFMAN"); SUSAN MARY TROTOCHAUD, AS CUSTODIAN FOR EACH OF ---------- BRADLEY H. DORFMAN, BRENT M. DORFMAN AND JESSE E. DORFMAN, all individual residents of the State of Georgia (in such capacity, "CUSTODIAN"); and SUSAN --------- MARY TROTOCHAUD, an individual resident of the State of Georgia ("TROTOCHAUD"). ---------- IELC, HomeTel and Providers are sometimes collectively referred to herein as the "MERGING CORPORATIONS", and individually as a "MERGING CORPORATION". RenTel #1, -------------------- ------------------- RenTel #2, SellTel #1, SellTel #2 and HomeTel Partners are sometimes collectively referred to herein as the "CONTRIBUTED COMPANIES", and individually --------------------- as a "CONTRIBUTED COMPANY". The Merging Corporations, the Contributed Companies ------------------- and Innotrac are sometimes collectively referred to herein as the "ENTITIES", -------- and individually as an "ENTITY". S. Dorfman, ITC, Custodian and Trotochaud are ------ sometimes collectively referred to herein as the "EQUITY HOLDERS", and -------------- individually as an "EQUITY HOLDER". ------------- WITNESSETH: WHEREAS, each of the Entities is engaged in the business of providing customized, technology-based marketing support services (the "BUSINESS"); and -------- WHEREAS, the parties hereto believe it to be in their individual and collective best interests for the Business as currently conducted by each Entity other than Innotrac to be combined; and WHEREAS, to partially accomplish this objective, the Merging Corporations are to be merged with and into Innotrac, in a transaction qualifying as a plan of reorganization within the provisions of Section 368(a)(1)(A) of the Internal Revenue Code of 1986, as amended (the "CODE"); and ---- WHEREAS, to partially accomplish this objective, those of the Equity Holders who hold equity and ownership interests in the Contributed Companies desire to contribute to Innotrac all of their respective equity and ownership interests in the Contributed Companies in exchange for shares of the common stock of Innotrac in a transaction qualifying within the provisions of Section 351 of the Code; and WHEREAS, promptly following consummation of (i) the merger of the Merging Corporations with and into Innotrac and (ii) the contribution to Innotrac by the relevant Equity Holders of all of their respective equity and ownership interests in the Contributed Companies, Innotrac intends to offer a number of its shares of common stock to the public; NOW, THEREFORE, for and in consideration of the premises and the mutual covenants and agreements herein contained, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: ARTICLE 1 THE MERGER ---------- 1.1 THE MERGER. At the Effective Time (such term and other capitalized ---------- terms used herein being defined in this Agreement in either ARTICLE 12 or elsewhere in relevant portions of this Agreement) upon the terms and subject to the conditions contained herein, and in accordance with the Georgia Business Corporation Code as then in effect (the "ACT"), each of the Merging Corporations --- shall be merged (the "MERGER") with and into Innotrac, the separate existence of ------ each Merging Corporation shall cease, and Innotrac shall continue as the surviving corporation (as the surviving corporation in the Merger, the "SURVIVING CORPORATION"). - ---------------------- 1.2 EFFECT OF THE MERGER. At the Effective Time, Innotrac shall continue -------------------- its corporate existence under the Laws of the State of Georgia and shall succeed to all rights, privileges, immunities, franchises and powers, and be subject to all duties, liabilities, debts and obligations, of each of the Merging Corporations in accordance with the provisions of the Act. 1.3 ARTICLES OF INCORPORATION. The Articles of Incorporation of Innotrac ------------------------- as in effect immediately prior to the Effective Time shall be the Articles of Incorporation of the Surviving Corporation until thereafter amended in accordance with applicable Law and such Articles of Incorporation. 1.4 BY-LAWS. The By-Laws of Innotrac as in effect immediately prior to ------- the Effective Time shall continue to be the By-Laws of the Surviving Corporation until thereafter amended in accordance with applicable Law, the Articles of Incorporation of the Surviving Corporation, and such By-Laws. 1.5 BOARD OF DIRECTORS. The directors of the Surviving Corporation ------------------ immediately prior to the Effective Time shall continue to be the directors of the Surviving Corporation, each of such persons to serve until his or her successor is duly elected and qualified. 1.6 OFFICERS. The officers of the Surviving Corporation immediately prior -------- to the Effective Time shall continue to be the officers of the Surviving Corporation, each of such officers to serve until his or her successor is duly qualified. 2 ARTICLE 2 THE CONTRIBUTION OF EQUITY INTERESTS ------------------------------------ 2.1 CONTRIBUTION. At the Closing, each Equity Holder shall contribute, ------------ assign, transfer and convey to Innotrac all of their respective equity and ownership interests in the Contributed Companies (collectively, the "EQUITY ------ INTERESTS"), free and clear of any and all Liens, in exchange for that number of - --------- shares of Innotrac Common Stock determined in accordance with ARTICLE 3. 2.2 WAIVER. Each Equity Holder, Contributed Company and Innotrac, as ------ appropriate, hereby waives and/or acknowledges compliance with any and all requirements and limitations regarding the contribution, conveyance, transfer and assignment of the Equity Interests, that might apply to such transfer pursuant to that certain (i) Limited Partnership Agreement, dated April 11, 1994, between HomeTel Providers and ITC Holding Company, (ii) SellTel #2, L.L.C. Operating Agreement, dated June 12, 1996, between S. Dorfman and Trotochaud, and, (iii) RenTel #2, L.L.C. Operating Agreement, dated June 12, 1996, between S. Dorfman and Custodian. ARTICLE 3 FINANCIAL MATTERS AND CLOSING ----------------------------- 3.1 MERGER CONSIDERATION. At the Effective Time, by virtue of the Merger, -------------------- and without any action on the part of the shareholders of the Merging Corporations, all of the shares of capital stock of each Merging Corporation issued and outstanding immediately prior to the Effective Time (as defined in PARAGRAPH 3.5(B) below), including without limitation, all of the Stock (as defined in PARAGRAPH 4.2(A) below) of such Merging Corporation, and any and all rights and options granted by such Merging Corporation to acquire any of the capital stock of such Merging Corporation, shall be canceled, retired and converted into and become the right to receive the consideration (the "MERGER ------ CONSIDERATION") described in EXHIBIT A-1. - ------------- 3.2 CONTRIBUTION CONSIDERATION. On the Closing Date and against delivery -------------------------- of the certificates, if any, representing the Shares (as defined in PARAGRAPH 4.2(B) below) and the instruments, if any, representing the Partnership Interests (as defined in PARAGRAPH 4.2(C) below), Innotrac shall deliver and pay to each relevant Equity Holder the consideration (the "CONTRIBUTION ------------ CONSIDERATION"; and together with the Merger Consideration, the "CONSIDERATION") - ------------- ------------- described in EXHIBIT A-2. 3.3 FRACTIONAL SHARES. Notwithstanding any other provision herein, no ----------------- fractional shares of Innotrac Common Stock will be issued, and any Equity Holder who otherwise would be entitled hereunder to receive a fractional share of Innotrac Common Stock but for this PARAGRAPH 3.3 will be entitled to receive, in lieu thereof, a cash payment for and in the amount 3 (rounded up to the nearest whole cent) equal to that Equity Holder's fractional interest in a share of Innotrac Common Stock multiplied by the IPO Price. 3.4 CLOSING. The consummation (the "CLOSING") of the transactions ------- ------- contemplated in this Agreement (collectively, the "TRANSACTIONS") shall take ------------ place at the offices of Kilpatrick Stockton LLP, 1100 Peachtree Street, Suite 2800, Atlanta, Georgia, at 10:00 a.m., Atlanta Time, on the Business Day on which all the conditions set forth in ARTICLES 8 AND 9 hereof have been satisfied or waived (the "CLOSING DATE"). ------------ 3.5 TRANSACTIONS AT CLOSING. (a) Each Equity Holder shall deliver to ----------------------- Innotrac certificates representing the Stock, Shares or the Partnership Interests, if any, or such other documents or instruments of title, ownership and conveyance as Innotrac may require, duly endorsed for transfer, with all required transfer stamps affixed, in each case free and clear of any and all Liens. (b) Innotrac shall file a Certificate of Merger in substantially the form attached hereto as EXHIBIT B, with such changes therein as Innotrac shall reasonably determine and which are otherwise consistent with the terms and conditions of this Agreement, with the Office of the Secretary of the State of Georgia which shall become effective at the time so filed (the "EFFECTIVE --------- TIME"). - ---- (c) Innotrac shall issue, deliver and pay the relevant Contribution Consideration to each Equity Holder and the relevant Merger Consideration to each person or entity entitled to receive same. (d) All deliveries, payments and other transactions and documents relating to the Closing shall be interdependent and none shall be effective unless and until all are effective (except to the extent that the party entitled to the benefit thereof has waived in writing satisfaction or performance thereof as a condition precedent to Closing). (e) From time to time and at any time, at any party's reasonable request, whether on or after the Closing Date, and without further consideration, each party shall execute and deliver such further documents and instruments of conveyance, assignment, and transfer and shall take such further reasonable actions as may be reasonably necessary or desirable to carry out the intent of this Agreement. 3.6 SHARES OF INNOTRAC COMMON STOCK. Each certificate evidencing shares ------------------------------- of Innotrac Common Stock to be received as Consideration hereunder (and each replacement certificate therefor) shall bear a legend in substantially the form set forth below: THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 OR ANY STATE SECURITIES LAWS AND MAY NOT BE SOLD, TRANSFERRED, OR OTHERWISE DISPOSED OF 4 UNLESS THEY HAVE BEEN REGISTERED OR AN EXEMPTION FROM REGISTRATION IS AVAILABLE. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE ENTITIES ---------------------------------------------- To induce each other party to enter into and perform this Agreement, to consummate the Merger, to effect the contribution of the Equity Interests, and to deliver and pay the Consideration as provided herein, each Entity in respect of itself only, represents and warrants to, and covenants and agrees with, each other party hereto, as follows: 4.1 ORGANIZATION AND AUTHORITY. Entity is a corporation, limited -------------------------- liability company, or limited partnership, as appropriate, duly organized, validly existing and in good standing under the laws of the State of Georgia. Entity has all requisite power and authority and is entitled to own or lease its assets and to carry on its business as and in all places where such business is now conducted and such properties are owned or leased. Entity is duly authorized, licensed, qualified or domesticated as a foreign legal entity in the jurisdictions where the character of the property owned by it or the nature of the business transacted by it makes such authorization, license, qualification or domestication necessary. 4.2 CAPITAL; OWNERSHIP; SUBSIDIARIES. -------------------------------- (a) If Entity is a corporation, Entity has an authorized capital stock (the "STOCK") as set forth on Schedule 4.2. As of the date hereof, all ----- ------------ outstanding shares of the Stock are owned beneficially and of record by those Persons identified on Schedule 4.2 hereto in the amounts set forth opposite ------------ their respective names. All of the outstanding shares of the Stock are duly authorized, validly issued, fully paid and nonassessable and were authorized, offered, issued and sold in accordance with all applicable securities and other Laws and all rights of each Entity's shareholders and other Persons. No Person has any preemptive rights with respect to shares of Stock of Entity. Except as set forth on Schedule 4.2, there are no outstanding securities convertible into ------------ Stock or rights to subscribe for or to purchase, or any options for the purchase of, or any agreements or arrangements providing for the issuance (contingent or otherwise) of, or any Actions relating to, the Stock. There are no voting trusts, proxies or other agreements or understandings with respect to the voting of any of the Stock. Except as set forth on Schedule 4.2 or as otherwise ------------ provided in PARAGRAPH 6.6, Entity is not subject to any obligation to repurchase or otherwise acquire or retire any of its Stock, and Entity has no Liability for dividends declared or accrued, but unpaid, with respect to its Stock. Entity has not purchased or redeemed any of its Stock, and, except as set forth in Schedule 4.2, has not paid any dividend or made any other payment to any of the - ------------ Equity Holders or related or affiliated persons within the past year. (b) If Entity is a limited liability company, Entity is authorized to issue that number of shares (the "SHARES") as set forth on Schedule 4.2. As of ------ ------------ the date hereof, all 5 outstanding Shares are owned beneficially and of record by those Persons identified on Schedule 4.2 hereto as set forth opposite their respective names. ------------ All of the outstanding Shares are duly authorized, validly issued, fully paid and non-assessable and were authorized, offered, issued and sold in accordance with all applicable securities and other Laws and all rights of each Entity's members or shareholders and other Persons. No Person has any preemptive rights with respect to the Shares. Except as set forth on Schedule 4.2, there are no ------------ outstanding securities convertible into Shares or rights to subscribe for, or to purchase, or any options for the purchase of, or any agreements or arrangements providing for the issuance (contingent or otherwise) of, or any Actions relating to, the Shares. There are no voting trusts, proxies or other agreements or other understandings with respect to the voting of any of the Shares. Except as set forth on Schedule 4.2 or as otherwise provided in PARAGRAPH 6.6, Entity is ------------ not subject to any obligation to repurchase or otherwise acquire or retire any of the Shares, and has no Liability for distributions declared or accrued, but unpaid, with respect to its Shares. Except as set forth in Schedule 4.2, Entity ------------ has made no distribution nor any other payments to any of the Equity Holders or other Related Parties within the past year. (c) If Entity is a limited partnership, the partnership interests of Entity (the "PARTNERSHIP INTERESTS") are as set forth on Schedule 4.2. As of --------------------- ------------ the date hereof, all Partnership Interests are owned beneficially and of record by those Persons identified on Schedule 4.2 hereto as set forth opposite their ------------ respective names. All of the Partnership Interests were authorized, offered, issued and sold in accordance with all applicable securities and other Laws and all rights of each Entity's partners and other Persons. No Person has any preemptive right with respect to the Partnership Interests. Except as set forth on Schedule 4.2, there are no outstanding securities convertible into ------------ Partnership Interests or rights to subscribe for, or to purchase, or any options for the purchase of, or any agreements or arrangements providing for the issuance (contingent or otherwise) of, or any Actions relating to, the Partnership Interests. There are no voting trusts, proxies or other agreements or other understandings with respect to the voting of any of the Partnership Interests. Except as set forth on Schedule 4.2 or as otherwise provided in ------------ PARAGRAPH 6.6, Entity is not subject to any obligation to repurchase or otherwise acquire or retire any of the Partnership Interests, and has no Liability for distributions declared or accrued, but unpaid, with respect to its Partnership Interests. Except as set forth in Schedule 4.2, Entity has made no ------------ distribution nor any other payments to any of the Equity Holders or other Related Parties within the past year. (d) None of the Entities has any interest, direct or indirect, nor has any commitment to purchase or otherwise acquire any equity, ownership or participatory interest, or any rights or claims to same, direct or indirect, in any other Person. 4.3 AUTHORITY; INCONSISTENT OBLIGATIONS. (a) Entity has the full ----------------------------------- right, power and authority to execute and deliver and to perform and comply with this Agreement in accordance with its terms. All proceedings and actions required to be taken by Entity to authorize the execution, delivery and performance of this Agreement have been properly taken. This Agreement has been duly and validly executed and delivered on behalf of Entity by its duly authorized officers, agents or representatives. This Agreement constitutes the valid and legally binding obligation, subject to general equity principles, of Entity, enforceable in accordance with 6 its terms, except as the same may be limited by bankruptcy, insolvency, reorganization or similar Laws affecting the rights of creditors generally. (b) Neither the execution and delivery of this Agreement nor the consummation of the transactions contemplated herein will result in a violation or breach of, or constitute a default under, (i) the articles of incorporation, by-laws, articles of organization, operating agreement, certificate of limited partnership, or limited partnership agreement, as applicable, of Entity, (ii) any term or provision of any indenture, note, mortgage, bond, security agreement, loan agreement, guaranty, pledge or other agreement, instrument or document, (iii) any material Law, (iv) any other commitment or restriction, to which Entity is a party or by which Entity or any of its assets, property or business is subject or bound; nor will such actions result in (v) the creation of any Lien on any of the assets of Entity, (vi) the acceleration or creation of any obligation of Entity, or (vii) the forfeiture of any material right or privilege of Entity. 4.4 CONSENTS. The execution and delivery of this Agreement by Entity -------- and the consummation by it of the transactions contemplated by this Agreement (a) do not require the consent, approval or action of, or any filing with or notice to, any Person or Government, and (b) and do not impose any other term, condition or restriction on Innotrac or Entity pursuant to any business combination, takeover or other similar Law. 4.5 NO VIOLATION; COMPLIANCE WITH LAWS. Other than as described in ---------------------------------- the Private Placement Memorandum, Entity is not in default under or in violation of its articles of incorporation, by-laws, articles of organization, operating agreement, certificate of limited partnership, or limited partnership agreement, as applicable, and has complied with all applicable Laws, where the failure to comply would have a Material Adverse Effect on Entity or Innotrac (after giving effect to the transactions contemplated by and provided for in this Agreement). Entity has not received any notification of any asserted present or past failure by any Entity to comply with any Laws. 4.6 FINANCIAL STATEMENTS; DISCLOSURE. (a) Prior to the date hereof, -------------------------------- Entity has delivered to Innotrac copies of the financial statements and related documents as identified in Schedule 4.6 (collectively, the "FINANCIAL ------------ --------- STATEMENTS"). The Financial Statements are true and correct in all material respects, have been prepared in accordance with GAAP, present fairly the financial condition of Entity as at the respective dates thereof and the results of Entity's operations and cash flows for the periods then ended and are consistent in all material respects with the books and records of Entity. (b) As of the date hereof, all Information that has been made available by or on behalf of Entity prior to the date of this Agreement in connection with the transactions contemplated hereby is, taken together, true and correct in all material respects and does not contain, to the knowledge of Entity, any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not misleading in light of the circumstances under which those statements were made. Information that is made available by or on behalf of Entity after the date hereof from time to time prior to the Closing will be, when made available, true and correct in all material respects and will not contain any 7 untrue statement of a material fact or omit to state a material fact necessary in order to make the statements contained therein not materially misleading in light of the circumstances under which those statements were made. 4.7 LIABILITIES. Except as set forth in Schedule 4.7, Entity does ------------ ------------ not have any debt, liability or obligation of any kind, whether accrued, absolute, known or unknown, contingent or otherwise, except (i) those reflected on the latest balance sheet of Entity included within the Financial Statements, (ii) current liabilities incurred in the regular and ordinary course of business consistent with Entity's past practices in connection with the purchase of goods and services since the date of such last balance sheet and properly reflected in Entity's books and records, (iii) liabilities under or pursuant to the SouthTrust Credit Facility, (iv) executory commitments of Entity under or pursuant to any contract to which Entity is a party, and (v) as specifically disclosed in the Private Placement Memorandum, other than for those that would not have a Material Adverse Effect on Entity or Innotrac (after giving effect to the transactions contemplated by and provided for in this Agreement). 4.8 LITIGATION. No Action is pending or, to the knowledge of Entity, ---------- threatened to which Entity is or may become a party, which if adversely determined to Entity would have a Material Adverse Effect on Entity or Innotrac (after giving effect to the transactions contemplated by and provided for in this Agreement). 4.9 PRIVATE PLACEMENT MEMORANDUM AND REGISTRATION STATEMENT. The ------------------------------------------------------- descriptions in the Private Placement Memorandum and the Registration Statement of agreements and documents to which Entity is a party or by which Entity or its assets, properties or business are bound, including any such agreements or documents incorporated by reference or attached as exhibits to the Private Placement Memorandum or the Registration Statement, are accurate in all material respects and fairly present the subject matter thereof. ARTICLE 5 REPRESENTATIONS AND WARRANTIES OF THE EQUITY HOLDERS ---------------------------------------------------- To induce each other party to enter into and perform this Agreement, to consummate the Merger, to effect the contribution of the Equity Interests, and to deliver and pay the Consideration as provided herein, each Equity Holder, in respect of itself only, represents and warrants to, and covenants and agrees with, each other party hereto, as follows: 5.1 INVESTMENT INTENTIONS. Equity Holder (i) will be acquiring the --------------------- shares of Innotrac Common Stock to be issued pursuant to ARTICLE 3 to Equity Holder solely for Equity Holder's account, for investment purposes only and with no current intention or plan to distribute, sell, or otherwise dispose of any of those shares in connection with any distribution; (ii) is not a party to any agreement or other arrangement for the disposition of any shares of Innotrac Common Stock other than this Agreement; (iii) is an "accredited investor" as defined in Securities Act Rule 501(a); (iv) (A) is able to bear the economic risks of an investment in the Innotrac Common 8 Stock acquired pursuant to this Agreement, (B) can afford to sustain a total loss of that investment, (C) has such knowledge and experience in financial and business matters that the Equity Holder is capable of evaluating the merits and risks of the proposed investment in the Innotrac Common Stock, (D) has had an adequate opportunity to ask questions and receive answers from the officers of Innotrac concerning any and all matters relating to the transactions contemplated hereby, including the background and experience of the current and proposed officers and directors of Innotrac, the plans for the operations of the business of Innotrac, and the business, operations, and financial condition of the Entities, and (E) has asked all questions of the nature described in the preceding clause (D), and all those questions have been answered to Equity Holder's satisfaction; and (v) has received and carefully reviewed the Private Placement Memorandum. 5.2 OWNERSHIP. Equity Holder is the record and beneficial owner of --------- the Stock, Shares or Partnership Interest, as appropriate, set forth opposite Equity Holder's name in Schedule 4.2, free and clear of all Liens. ------------ 5.3 POWER OF THE EQUITY HOLDER; APPROVAL OF TRANSACTION. Equity --------------------------------------------------- Holder has the full power, legal capacity, and authority to execute and deliver this Agreement and to perform Equity Holder's obligations in this Agreement. This Agreement constitutes the legal, valid, and binding obligation of Equity Holder, enforceable against Equity Holder in accordance with its terms, except as that enforceability may be (i) limited by any applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws affecting the enforcement of creditors' rights generally and (ii) subject to general principles of equity (regardless of whether that enforceability is considered in a proceeding in equity or at law). In the case of ITC, ITC has obtained all necessary corporate approvals for the authorization, execution, delivery, and performance by the ITC of this Agreement, including without limitation, any required shareholder approval. In the case of Custodian, all actions on the part of Custodian and all other Persons (including any court) necessary for the authorization, execution, delivery, and performance by Custodian of this Agreement have been duly taken and the transactions contemplated herein have been duly authorized. 5.4 NO CONFLICTS OR LITIGATION. The execution, delivery, and -------------------------- performance in accordance with their respective terms by Equity Holder of this Agreement do not and will not (a) violate or conflict with any Law applicable to Equity Holder, (b) breach or constitute a default under any agreement or instrument to which Equity Holder is a party or by which Equity Holder or any of the Stock, Shares or Partnership Interests, as appropriate, owned by Equity Holder is bound, (c) result in the creation or imposition of, or afford any Person the right to obtain, any Lien upon any of the Stock, Shares or Partnership Interests owned by Equity Holder, or (d) if Equity Holder is ITC, violate ITC's articles of incorporation or by-laws. No Action is pending or, to the knowledge of Equity Holder, threatened to which Equity Holder is or may become a party that (i) questions or involves the validity or enforceability of any of Equity Holder's obligations under this Agreement or (ii) seeks (or reasonably may be expected to seek) (A) to prevent or delay the consummation by Equity Holder of the transactions contemplated by this Agreement to be consummated by Equity Holder or (B) damages or other relief in connection with any consummation by Equity Holder of the transactions contemplated by this Agreement. 9 5.5 NO BROKERS. Equity Holder has not, directly or indirectly, in ---------- connection with this Agreement or the transactions contemplated hereby (a) employed any broker, finder, or agent or (b) agreed to pay or incurred any obligation to pay any broker's or finder's fee, any sales commission, or any similar form of compensation. 5.6 PREEMPTIVE AND OTHER RIGHTS; WAIVER. Except for the rights of ----------------------------------- the Equity Holder to receive shares of Innotrac Common Stock in accordance with ARTICLE 3 as a result of the Transactions or to acquire Innotrac Common Stock pursuant to any written option granted by Innotrac to Equity Holder separate and apart from this Agreement, Equity Holder either (a) does not own or otherwise have any statutory or contractual preemptive or other right of any kind (including any right of first offer or refusal) to acquire any Stock, Shares, Partnership Interests or Innotrac Common Stock or (b) hereby irrevocably waives each right of that type the Equity Holder does own or otherwise has. ARTICLE 6 ADDITIONAL AGREEMENTS --------------------- 6.1 COOPERATION. The parties shall cooperate fully with each other ----------- and with their respective Representatives in connection with any steps required to be taken as part of their respective obligations under this Agreement, and all parties shall use their best commercial efforts to consummate the transactions contemplated herein and to fulfill their obligations hereunder, including, without limitation, causing to be fulfilled at the earliest practical date the conditions precedent to the obligations of the parties to consummate the transactions contemplated hereby. Without the prior written consent of the other parties, no party hereto may take any intentional action that would cause the conditions precedent to the obligations of the parties hereto to effect the transactions contemplated hereby not to be fulfilled, including, without limitation, taking or causing to be taken any action which would cause the representations and warranties made by such party herein not to be true, correct and complete as of the Closing. 6.2 OTHER POST-CLOSING COOPERATION. Each Equity Holder, severally ------------------------------ and not jointly, covenants and agrees that they shall cooperate fully and in good faith, and shall use their best efforts to cause any and all accountants, legal counsel, actuaries and other professional advisors employed or engaged by an Entity at any time prior to the Effective Time to cooperate fully and in good faith, with Innotrac in connection with the preparation and filing of any and all documents, agreements, instruments, certificates, consents, registration statements and other reports or papers required or permitted to be filed, registered or submitted in accordance with any Law, including, without limitation, the federal securities Laws. 6.3 PUBLICITY. All press releases and other public announcements --------- respecting the subject matter hereof shall be made only with the prior consent of Innotrac, such consent not to be unreasonably withheld. 10 6.4 CERTAIN GOVERNMENTAL FILINGS. The parties will make, or cause to ---------------------------- be made, all filings and submissions required to be made to any Government in connection with the transactions contemplated by this Agreement. Each of the parties will furnish to the other parties such necessary information and reasonable assistance as such other party may reasonably request in connection with their preparation of necessary filings or submissions to any governmental or other regulatory agency. 6.5 TAX MATTERS. The following provisions shall govern the allocation ----------- of responsibility as among Innotrac, the Contributed Companies and Equity Holders, for certain tax matters following the Closing Date: (a) Innotrac shall prepare or cause to be prepared and file or cause to be filed all federal, state or local income, sales, use, ad valorem or other Tax returns for the Entities for all periods ending on or prior to the Closing Date which are filed after the Closing Date. Innotrac shall issue to the Equity Holders or other appropriate persons or entities (collectively with the Equity Holders, the "TAXPAYERS") appropriate forms K-1 or other information returns --------- with respect to the Taxpayers' respective distributive shares of income, gain, loss, deduction and other income tax items of the Entities, if any. (b) Innotrac, the Entities and the Taxpayers shall cooperate fully, as and to the extent reasonably requested by any other party, in connection with the filing of tax returns pursuant to this PARAGRAPH 6.5 and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon another party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. Innotrac agrees to retain all books and records with respect to Tax matters pertinent to the Entities relating to any taxable period beginning before the Closing Date until the expiration of the statute of limitations (and, to the extent notified by the Equity Holders, any extensions thereof) of the respective taxable periods, and to abide by all record retention agreements entered into with any taxing authority. (c) Innotrac and the Taxpayers further agree, upon request, to use their best efforts to obtain any certificate or other document from any governmental authority or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). 6.6 DIVIDENDS AND DISTRIBUTIONS. The parties agree that various of the --------------------------- Entities will be making distributions to their equity holders, in such amounts as shall be approved by the Board of Directors or other governing body of such Entity and consistent with their respective organizational and other governing documents and applicable law. Such distributions shall be generally be in respect of (i) previously taxed but undistributed income, (ii) distributions to cover taxes for the relevant equity holder for taxable year 1997, (iii) distributions to cover taxes for the relevant equity holder for taxable year 1998 or any part thereof, and (iv) distributions in respect of other prior taxable years. It is further understood and agreed that these distributions will be declared but not paid, and are expressly made subject to, completion and 11 closing of the IPO. The aggregate distributions to be declared by HomeTel Partners, other than in respect of 1997 and 1998 income taxes, shall be $4,000,000, $3,600,000 of which shall be distributed to Providers, and $400,000 of which shall be distributed to ITC. ARTICLE 7 CONDUCT OF BUSINESS OF THE ENTITIES PENDING CLOSING --------------------------------------------------- Each Entity covenants and agrees, in respect of itself only, that, except as may otherwise be provided herein, without the prior written consent of Innotrac, between the date hereof and the Closing Date: 7.1 BUSINESS IN THE ORDINARY COURSE. The operations of Entity shall ------------------------------- be conducted only in the ordinary and usual course and consistent with prior practices, without the creation of any additional indebtedness for borrowed money, provided that Entity may continue to draw on the SouthTrust Credit Facility. Without limiting the generality of the foregoing: (a) Entity shall not enter into any contracts, agreements or other arrangements to provide, sell, rent, lease, license, distribute or supply goods or services to any customer or any third party except in the ordinary course of its operations at prices and on terms consistent with the prior operating practices of Entity. (b) Entity shall maintain, preserve and protect all of its assets in good condition, except for ordinary wear and tear and damage by fire or other casualty. (c) The books, records and accounts of Entity shall be maintained in the usual, regular and ordinary course of business on a basis consistent with prior practices and in accordance with GAAP. (d) Entity shall use its best efforts to preserve its operations, to keep available the services of its present employees, to preserve the goodwill of its suppliers, customers and others having business relations with it. 7.2 NO MATERIAL CHANGES. No action shall be taken by Entity or any ------------------- Equity Holder which shall materially alter the capitalization, or financial structure of the Business of Entity. Without limiting the generality of the foregoing: (a) No change shall be made in the articles of incorporation, by-laws, operating agreement, or limited partnership agreement, as applicable, of Entity. (b) No change shall be made in the authorized or issued capital stock, or membership interests or partnership interests, as applicable, of Entity. 12 (c) Neither Entity nor any Equity Holder shall issue or grant any right or option to purchase or otherwise acquire any Equity Interest or other security of any Entity, other than options granted by Innotrac pursuant to its Stock Option and Incentive Award Plan. (d) Except as provided in PARAGRAPH 6.6, no dividend or other distribution or payment shall be declared or made with respect to any of the Stock, Shares or Partnership Interests, as appropriate, of Entity, and Entity shall not, directly or indirectly, redeem, purchase or otherwise acquire any of same. (e) Entity shall not dissolve, liquidate or voluntarily declare bankruptcy or seek the appointment of a receiver, trustee or custodian. ARTICLE 8 CONDITIONS TO OBLIGATIONS OF INNOTRAC ------------------------------------- The obligations of Innotrac to consummate the Transactions and to pay the Consideration as set forth in ARTICLE 3, are subject to the fulfillment and satisfaction of each and every of the following conditions on or prior to the Closing, any or all of which may be waived in writing in whole or in part by Innotrac: 8.1 PROCEEDINGS AND DOCUMENTS SATISFACTORY. All proceedings taken in -------------------------------------- connection with the consummation of the Transactions and all documents and papers required in connection therewith shall be reasonably satisfactory to Innotrac and its counsel, and Innotrac and its counsel shall have timely received copies of such documents and papers, all in form and substance satisfactory to Innotrac and its counsel, as reasonably requested by Innotrac or its counsel in connection therewith. 8.2 REPRESENTATIONS AND WARRANTIES. The representations and ------------------------------ warranties contained in this Agreement and in any certificate, instrument, schedule, agreement or other writing delivered by or on behalf of any other Entity or any Equity Holder in connection with the transactions contemplated by this Agreement shall be true and correct as of the date when made and shall be deemed to be made again at and as of the Closing Date and shall be true and correct at and as of such time. 8.3 COMPLIANCE WITH AGREEMENTS AND CONDITIONS. Each other Entity and ----------------------------------------- each Equity Holder shall have performed and complied with all covenants, agreements and conditions required by this Agreement to be performed or complied with by each such party prior to or on the Closing Date. 8.4 CERTIFICATES. Each other Entity and each Equity Holder shall have ------------ delivered to Innotrac a certificate executed by a duly authorized representative, dated the Closing Date, certifying in such detail as Innotrac may reasonably request as to the fulfillment and satisfaction of the conditions specified in PARAGRAPHS 8.2 AND 8.3. 13 8.5 UNDERWRITING AGREEMENT. A counterpart execution original of the ---------------------- Underwriting Agreement shall have been executed and delivered by the representatives of the several underwriters named therein to Innotrac. 8.6 CONSENTS. Innotrac shall have received from any and all Persons -------- and Governments such consents, authorizations and approvals as are necessary for the consummation of the transactions contemplated by this Agreement and the conduct of the Business after the Effective Time, and the Registration Statement shall have been declared effective by the SEC. 8.7 NO INCONSISTENT REQUIREMENTS. No Action shall have been commenced ---------------------------- by any Government or Person seeking to enjoin, prohibit or delay the Transactions or the IPO. 8.8 MISCELLANEOUS. Innotrac and its counsel shall have received such ------------- other opinions, certifications and documents from any Entity, Equity Holder, Government or other Person as Innotrac and its counsel may reasonably request. ARTICLE 9 CONDITIONS TO OBLIGATIONS OF THE ENTITIES AND THE EQUITY HOLDERS ---------------------------------------------------------------- The obligations of the Entities (other than Innotrac) and the Equity Holders under this Agreement are subject to the fulfillment and satisfaction of each and every of the following conditions on or prior to the Closing, any or all of which may be waived in writing in whole or in part by the Entities and the Equity Holders, acting as a group: 9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties ------------------------------ contained in this Agreement shall be true and correct as of the date when made and shall be deemed to be made again at and as of the Closing Date and shall be true and correct at and as of such time. 9.2 COMPLIANCE WITH AGREEMENTS AND CONDITIONS. Innotrac shall have ----------------------------------------- performed and complied with all agreements and conditions required by this Agreement to be performed or complied with by Innotrac prior to or on the Closing Date. 9.3 CERTIFICATE OF INNOTRAC. Innotrac shall have delivered to the ----------------------- Entities and the Equity Holders a certificate, dated the Closing Date, certifying in such detail as the Entities and the Equity Holders may reasonably request the fulfillment and satisfaction of the conditions specified in PARAGRAPHS 9.1 AND 9.2. 9.4 RESOLUTIONS. Innotrac shall have delivered to the Entities and Equity ----------- Holders duly adopted resolutions of its Board of Directors, certified by the Secretary or an Assistant Secretary of Innotrac, dated as of the Closing Date, authorizing and approving the execution of this Agreement by Innotrac and all other action necessary to enable Innotrac to comply with the terms of this Agreement. 14 9.5 UNDERWRITING AGREEMENT. A counterpart execution original of the ---------------------- Underwriting Agreement shall have been executed and delivered by the representatives of the several underwriters named therein to Innotrac. 9.6 NO INCONSISTENT REQUIREMENTS. No Action shall have been commenced by ---------------------------- any Government or Person, seeking to enjoin, prohibit or delay the Transactions or the IPO. ARTICLE 10 TERMINATION ----------- 10.1 TERMINATION FOR CERTAIN CAUSES. This Agreement may be terminated at ------------------------------ any time prior to or on the Closing Date by the Entities (other than Innotrac) and the Equity Holders, on the one hand and acting as a group, or by Innotrac, on the other hand, upon written notice to the other parties as follows: (a) By Innotrac, if the terms, covenants or conditions of this Agreement to be complied with or performed by any or all of the other Entities and the Equity Holders at or before the Closing Date shall not have been complied with or performed and such noncompliance or nonperformance shall not have been waived by Innotrac. (b) By the other Entities and the Equity Holders, acting as a group, if the terms, covenants or conditions of this Agreement to be complied with or performed by Innotrac at or before the Closing Date shall not have been complied with or performed and such noncompliance or nonperformance shall not have been waived by all Entities and all Equity Holders. (c) By any party, if any Action shall have been instituted or threatened against any party to this Agreement to restrain, prohibit or delay, or to obtain substantial damages in respect of, this Agreement or the consummation of the Transactions or the IPO, which, in the reasonable and good faith opinion of any party, makes consummation of the transactions herein contemplated inadvisable. (d) By any party, if the Underwriting Agreement has not been executed and delivered by the several underwriters named therein on or before December 31, 1998. (e) By mutual written agreement of the parties. 10.2 PROCEDURE ON AND EFFECT OF TERMINATION. Pursuant to PARAGRAPH 10.1 -------------------------------------- hereof, written notice of termination shall be given to all other parties by the party electing to terminate, and this Agreement shall terminate upon the giving of such notice, without further action by any of the parties hereto, with the consequence and effect set forth in this PARAGRAPH 10.2. If for any reason on the Closing Date there has been nonfulfillment of an undertaking by or condition precedent for Innotrac, on the one hand, or the Entities and the Equity Holders, on the other hand, not waived in writing by or on behalf of the party in whose favor such undertaking or condition 15 or undertaking runs, the party in whose favor such undertaking or condition runs, in addition to any other right or remedy available to it, may refuse to consummate the transactions contemplated by this Agreement without liability or obligation on its part whatsoever. ARTICLE 11 MISCELLANEOUS ------------- 11.1 NOTICES. All notices, demands or other communications required or ------- permitted to be given or made hereunder shall be in writing and .(a) delivered personally, or (b) sent by pre-paid, first class, certified or registered air mail, return receipt requested, or (c) by an express courier service, or (d) by facsimile transmission to the intended recipient thereof, at its address or facsimile number set out below. Any such notice, demand or communication shall be deemed to have been duly given immediately (if given or made by confirmed facsimile), or three days after mailing or the second day after delivery to an express courier service, and in proving same it shall be sufficient to show that the envelope containing the same was duly addressed, stamped and posted (or that the envelope was delivered to the express courier service), or that receipt of a facsimile was confirmed by the recipient. The addresses and facsimile numbers of the parties for purposes of this Agreement are: (i) If to Innotrac c/o Innotrac Corporation or any Entity: 1828 Meca Way Norcross, Georgia 30093 Facsimile No.: (770) 717-2111 Attention: Scott D. Dorfman With a copy to: Kilpatrick Stockton LLP 1100 Peachtree Street Atlanta, Georgia 30309 Facsimile No.: 404-815-6555 Attention: David A. Stockton (ii) If to ITC: ITC Service Company 1239 O. G. Skinner Drive West Point, GA 31833 Facsimile No.: (706) 643-5067 Attention: Bryan W. Adams (iii) If to Scott D. Dorfman c/o Innotrac Corporation 1828 Meca Way Norcross, Georgia 30093 Facsimile No.: (770) 717-2111 16 (iv) If to Susan Mary Trotochaud, individually or as custodian for Bradley H. Dorfman, Brent M. Dorfman and Jesse E. Dorfman c/o Innotrac Corporation 1828 Meca Way Norcross, Georgia 30093 Facsimile No.: (770) 717-2111 Attention: Scott D. Dorfman Any party may change the address to which notices, requests, demands or other communications to such parties shall be delivered or mailed by giving notice thereof to the other parties hereto in the manner provided herein. 11.2 COUNTERPARTS. This Agreement may be executed in any number of ------------ counterparts, each of which shall be deemed an original, and all of which shall constitute one and the same instrument. 11.3 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions ---------------- and agreements between the parties with respect to the subject matter hereof, and this Agreement contains the sole and entire agreement among the parties with respect to the matters covered hereby. This Agreement shall not be altered or amended except by an instrument in writing signed by or on behalf of the party entitled to the benefit of the provision against whom enforcement is sought. 11.4 GOVERNING LAW. The validity and effect of this Agreement shall be ------------- governed by and construed and enforced in accordance with the laws of the State of Georgia, without regard to conflicts of laws principles. 11.5 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and ---------------------- shall inure to the benefit of the parties hereto and their respective heirs, executors, legal representatives, successors and assigns. 11.6 PARTIAL INVALIDITY AND SEVERABILITY. All rights and restrictions ----------------------------------- contained herein may be exercised and shall be applicable and binding only to the extent that they do not violate any applicable Laws and are intended to be limited to the extent necessary to render this Agreement legal, valid and enforceable. If any term of this Agreement, or part thereof, not essential to the commercial purpose of this Agreement shall be held to be illegal, invalid or unenforceable by a court of competent jurisdiction, it is the intention of the parties that the remaining terms hereof, or part thereof, shall constitute their agreement with respect to the subject matter hereof, and all such remaining terms, or parts thereof, shall remain in full force and effect. To the extent legally permissible, any illegal, invalid or unenforceable provision of this Agreement shall be replaced by a valid provision which will implement the commercial purpose of the illegal, invalid or unenforceable provision. 17 11.7 WAIVER. Any term or condition of this Agreement may be waived at any ------ time by the party which is entitled to the benefit thereof, but only if such waiver is evidenced by a writing signed by such party. No failure on the part of any party hereto to exercise, and no delay in exercising, any right, power or remedy created hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy by any such party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver by any party hereto of any breach of or default in any term or condition of this Agreement shall constitute a waiver of or assent to any succeeding breach of or default in the same or any other term or condition hereof. 11.8 HEADINGS. The headings of particular provisions of this Agreement -------- are inserted for convenience only and shall not be construed as a part of this Agreement or serve as a limitation or expansion on the scope of any term or provision of this Agreement. 11.9 NUMBER AND GENDER. Where the context requires, the use of the ----------------- singular form herein shall include the plural, the use of the plural shall include the singular, and the use of any gender shall include any and all genders. ARTICLE 12 CERTAIN DEFINITIONS ------------------- For purposes of this Agreement, the following capitalized terms shall have the meanings specified with respect thereto below (all terms used in this Agreement which are not defined in this ARTICLE 12, but are defined elsewhere in this Agreement, shall have for purposes of this Agreement the meanings set forth elsewhere in this Agreement): "ACTION" shall mean any action, suit, complaint, claim, counter-claim, ------ petition, set-off, inquiry, investigation, administrative proceeding, arbitration, or private dispute resolution proceeding, whether at law, in equity, by contract or agreement, or otherwise, and whether conducted by or before any Government, any Forum, or other Person. "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a day ------------ on which commercial banks in Atlanta, Georgia, are required or authorized to be closed. "FINAL PROSPECTUS" means the prospectus included in the Registration ---------------- Statement at the time it becomes effective, except that if the prospectus first furnished to the underwriters after the Registration Statement becomes effective for use in connection with the IPO differs from the prospectus included in the Registration Statement at the time it becomes effective (whether or not that prospectus so furnished is required to be filed with the SEC pursuant to Securities Act Rule 424(b)), the prospectus so furnished is the "Final Prospectus." "GAAP" shall mean generally accepted accounting principles, consistently ---- applied. 18 "GOVERNMENT" shall mean any federal, state, local, municipal, or foreign ---------- government or any department, commission, board, bureau, agency, instrumentality, unit, or taxing authority thereof. "HEREOF," "HEREIN," "HEREUNDER" and words of similar import when used in ------ ------ --------- this Agreement shall refer to this Agreement as a whole and not to any particular provision of this Agreement, and "ARTICLE", "PARAGRAPH", "SCHEDULE", "EXHIBIT" and like references are to this Agreement unless otherwise specified. "INFORMATION" shall mean written information, including without limitation, ----------- (a) data, certificates, reports, files, records, agreements, correspondence, plans, policies, practices, manuals, and statements, and (b) summaries of unwritten agreements, arrangements, contracts, plans, policies, programs, or practices or of unwritten amendments or modifications of, supplements to, or waivers under any of the foregoing. "INNOTRAC COMMON STOCK" shall mean the $0.10 par value per share Common --------------------- Stock of Innotrac. "IPO" means the initial public offering by Innotrac of shares of Innotrac --- Common Stock pursuant to the Registration Statement filed and declared effective under the Securities Act. "IPO PRICE" means the price per share of Innotrac Common Stock that is set --------- forth as the "Price to Public" on the cover page of the Final Prospectus. "LAW" shall mean all federal, state, local, municipal or foreign --- constitutions, statutes, rules, regulations, ordinances, acts, codes, legislation, treaties, conventions and similar laws and legal requirements, as in effect from time to time. "LIABILITY" shall mean shall mean any liability or obligation whether known --------- or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and whether due or to become due. "LIEN" shall mean any mortgage, pledge, hypothecation, security interest, ---- encumbrance, lien or charge of any kind, or any rights of others, however evidenced or created (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the Uniform Commercial Code of any jurisdiction). "MATERIAL ADVERSE EFFECT" shall mean, with respect to the consequences of ----------------------- any fact or circumstance (including the occurrence or non-occurrence of any event) to Entity (or after the Closing Date, the Surviving Corporation), that such fact or circumstance has caused, is causing, or may reasonably be expected to cause, directly, indirectly, or consequentially, singularly or in the aggregate with other facts and circumstances, any loss, damage, cost or expense in excess of $100,000. 19 "PERSON" shall mean and include an individual, a partnership, a joint ------ venture, a corporation, a limited liability company, a trust, an unincorporated association or organization, and a Government. "PRIVATE PLACEMENT MEMORANDUM" shall mean that certain Private Placement ---------------------------- Memorandum, dated December 11, 1997, relating to the shares of Innotrac Common Stock to be issued pursuant to this Agreement, as the same may be supplemented or amended. "REGISTRATION STATEMENT" shall mean that certain registration statement ---------------------- filed by Innotrac with the SEC subsequent to the date that this Agreement is entered into, to register shares of Innotrac Common Stock under the Securities Act for public offering and sale in the IPO, including (a) each preliminary prospectus included therein prior to the date on which that registration statement is declared effective under the Securities Act (including any prospectus filed with the SEC pursuant to Securities Act Rule 424(b)), (b) the Final Prospectus, and (c) any amendments thereof and all supplements and exhibits thereto. "REPRESENTATIVE" of a party shall mean such party's directors, officers, -------------- partners, employees, agents, accountants, lenders, lawyers, investment bankers, and other financial or professional advisors or consultants. "SECURITIES ACT" shall mean the Securities Act of 1933, as amended. -------------- "SEC" shall mean the Securities and Exchange Commission. --- "SOUTHTRUST CREDIT FACILITY" shall mean the credit facilities extended by -------------------------- SouthTrust Bank, N.A. to the Entities pursuant to that certain Amended and Restated Loan and Security Agreement, dated December 5, 1997, between the Entities and SouthTrust Bank, N.A. "TAXES" shall mean any past, present or future taxes, levies, imposts, ----- duties, fees, assessments, deductions, withholdings or other charges of whatever nature, including without limitation income, gross receipts, excise, property, sales, transfer, license, payroll, withholding, social security, and franchise taxes, now or hereafter imposed or levied by any Government, and all interest, penalties, additions to tax, and other similar liabilities with respect thereto. "UNDERWRITING AGREEMENT" shall mean the written agreement filed or to be ---------------------- filed as Exhibit 1 to the Registration Statement. [SIGNATURES APPEAR ON FOLLOWING PAGE] 20 IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and year first above written. INNOTRAC CORPORATION By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President SELLTEL #1, INC. By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President RENTEL #1, INC. By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President IELC, INC. By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President HOMETEL SYSTEMS, INC. By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President [SIGNATURES CONTINUED ON FOLLOWING PAGE] 21 [SIGNATURES CONTINUED FROM PRECEDING PAGE] HOMETEL PROVIDERS INC. By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President RENTEL #2, L.L.C. By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President SELLTEL #2, L.L.C. By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President HOMETEL PROVIDERS PARTNERS, L.P. By: HomeTel Providers Inc., its general partner By: /s/ Scott D. Dorfman ---------------------------------- SCOTT D. DORFMAN President ITC SERVICE COMPANY By: /s/ Bryan Adams ---------------------------------- Name: Title: [SIGNATURES CONTINUED ON FOLLOWING PAGE] 22 [SIGNATURES CONTINUED FROM PRECEDING PAGE] /s/ John H. Nichols, III /s/ Scott D. Dorfman (SEAL) - ------------------------------- ------------------------------------- Witness SCOTT D. DORFMAN /s/ John H. Nichols, III /s/ Susan Mary Trotochaud (SEAL) - ------------------------------- ------------------------------------- Witness SUSAN MARY TROTOCHAUD, as custodian for each of Bradley H. Dorfman, Brent M. Dorfman and Jesse E. Dorfman /s/ John H. Nichols, III /s/ Susan Mary Trotochaud (SEAL) - ------------------------------- ------------------------------------- Witness SUSAN MARY TROTOCHAUD 23 EXHIBIT A-1 MERGER CONSIDERATION In respect of HomeTel: The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares (as defined in ----- Exhibit A-2) multiplied by (iii) 63.8204% ------------- In respect of IELC: The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares (as defined in ----- Exhibit A-2) multiplied by (iii) 0.5244%% ------------- In respect of Providers.: The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) $46,000,000 divided by (ii) the IPO Price multiplied by ---------- ------------- (iii) 90% EXHIBIT A-2 CONTRIBUTION CONSIDERATION
Name of Equity Holder Number of Shares of Innotrac Common Stock - --------------------- ----------------------------------------- In respect of HomeTel Partners: ITC The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) $46,000,000 divided by (ii) the IPO Price ---------- multiplied by (iii) 10%. ------------- (The number of shares of Innotrac Common Stock to be received by ITC as Contribution Consideration and to be received by Providers as Merger Consideration as reflected on Exhibits A-2 and A-1, respectively, are referred to herein collectively as the "PARTNERSHIP SHARES"). ------------------ In respect of RenTel #1: S. Dorfman The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares (as ----- defined in Exhibit A-2) multiplied by (iii) 9.9625% ------------- In respect of RenTel #2: 1. S. Dorfman 1. The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares ----- (as defined in Exhibit A-2) multiplied by (iii) ------------- 2.6217% multiplied by (iv) 99% ------------- 2. Trotochaud 2. The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares ----- (as defined in Exhibit A-2) multiplied by (iii) ------------- 2.6217% multiplied by (iv) 1% -------------
In respect of SellTel #1: S. Dorfman The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares (as ----- defined in Exhibit A-2) multiplied by (iii) ------------- 15.2059% In respect of SellTel #2: 1. S. Dorfman 1. The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares ----- (as defined in Exhibit A-2) multiplied by (iii) ------------- 7.8651% multiplied by (iv) 85% ------------- 2. Trotochaud (as custodian for BHD) 2. The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares ----- (as defined in Exhibit A-2) multiplied by (iii) ------------- 7.8651% multiplied by (iv) 5% ------------- 3. Trotochaud (as custodian for BMD) 3. The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares ----- (as defined in Exhibit A-2) multiplied by (iii) ------------- 7.8651% multiplied by (iv) 5% ------------- 4. Trotochaud (as custodian for JED) 4. The right to receive, in the aggregate, a number of shares of Innotrac Common Stock equal to (i) 5,420,000 minus (ii) the Partnership Shares ----- (as defined in Exhibit A-2) multiplied by (iii) ------------- 7.8651% multiplied by (iv) 5% -------------
SCHEDULE 4.2
(a) ENTITY AUTHORIZED OUTSTANDING SHARE OWNERSHIP SHARES SHARES - ------------------------------------------------------------------------------------------------------------------------- INNOTRAC 50,000,000 1,080,000 Scott Dorfman 996,666 Shares Larry I. Dorfman, Trustee, The Bradley Harris Dorfman Accumulation Trust U/A 12/10/97 27,778 Shares Larry I. Dorfman, Trustee, The Brent Michael Dorfman Accumulation Trust U/A 12/10/97 27,778 Shares Larry I. Dorfman, Trustee, The Jesse Elyse Dorfman Accumulation Trust U/A 12/10/97 27,778 Shares
Any and all options, repurchase obligations and any other obligations with regard to Innotrac Common Stock are disclosed in that certain Form S-1 Registration Statement, a draft dated December 11, 1997, which has been delivered to the equity holders of each of the Entities.
IELC 1,000 1,000 Scott Dorfman 1,000 Shares; Certificate #1 - ------------------------------------------------------------------------------------------------------------------------ HOMETEL 10,000 100 Scott Dorfman 95.5 Shares; Certificate #5 Susan Mary Trotochaud, as custodian for Bradley H. Dorfman 1.5 Shares; Certificate #2 Susan Mary Trotochaud, as custodian for Brent M. Dorfman 1.5 Shares; Certificate #3 Susan Mary Trotochaud, as custodian for Jesse E. Dorfman 1.5 Shares; Certificate #4 - ------------------------------------------------------------------------------------------------------------------------ PROVIDERS 10,000 1,000 Scott Dorfman 1,000 Shares; Certificate #1 - ------------------------------------------------------------------------------------------------------------------------ RENTEL #1 1,000 1,000 SCOTT DORFMAN 90 SHARES; CERTIFICATE #1 ARNOLD DORFMAN 10 SHARES; CERTIFICATE #2
Pursuant to that certain Stock Redemption Agreement, dated December 15, 1997, by and among RenTel #1, Scott Dorfman and Arnold Dorfman, RenTel #1 agrees to redeem on the Closing Date all of Arnold Dorfman's shares of RenTel #1.
(a) ENTITY AUTHORIZED OUTSTANDING SHARE OWNERSHIP SHARES SHARES - ------------------------------------------------------------------------------------------------------------------------- IELC 1,000 1,000 Scott Dorfman 1,000 Shares; Certificate #1 SELLTEL #1 1,000 1,000 Scott Dorfman 90 Shares; Certificate #1 Arnold Dorfman 10 Shares; Certificate #2 - -------------------------------------------------------------------------------------------------------------------------- (b) ENTITY AUTHORIZED OUTSTANDING SHARE OWNERSHIP SHARES SHARES - -------------------------------------------------------------------------------------------------------------------------- RENTEL #2 100,000 1,000 Scott Dorfman 990 Shares Susan Mary Trotochaud 10 Shares - -------------------------------------------------------------------------------------------------------------------------- SELLTEL #2 100,000 1,000 Susan Mary Trotochaud, as custodian for Bradley H. Dorfman 50 Shares Susan Mary Trotochaud, as custodian for Brent M. Dorfman 50 Shares Susan Mary Trotochaud, as custodian for Jesse E. Dorfman 50 Shares Scott Dorfman 850 Shares
(c) ENTITY INTEREST OWNERSHIP HOMETEL PROVIDERS PARTNERS, L.P. HomeTel Providers Inc. 90% ITC Service Company 10% In Article 12 of that certain Limited Partnership Agreement, dated April 11, 1997, by and between HomeTel Providers Inc. and ITC Holding Company, Inc., an option to redeem all of the Limited Partner's interest was granted to the partnership, and a call option to purchase the General Partner's interest was granted to the Limited Partner and a call option to purchase the Limited Partner's interest was granted to both the Partnership and the General Partner. ________________________________________________________________________________ S. Dorfman has granted to David Ellin an option to acquire 1/2% of the total equity of all Entities in which an equity interest is owned by S. Dorfman. This option will be converted at the Closing Date to the right to obtain 32,500 Shares of Innotrac Common Stock. Each of the Entities has made various distributions over the last twelve months as disclosed in their respective financial statements. SCHEDULE 4.6 FINANCIAL STATEMENTS Those financial statements of the respective Entities attached to and referenced in the Private Placement Memorandum. SCHEDULE 4.7 LIABILITIES None. EX-10.2 5 STOCK OPTION & INCENTIVE AWARD PLAN EXHIBIT 10.2 INNOTRAC CORPORATION STOCK OPTION AND INCENTIVE AWARD PLAN NOVEMBER 24, 1997 INNOTRAC CORPORATION STOCK OPTION AND INCENTIVE AWARD PLAN TABLE OF CONTENTS ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION......................... 1 1.1 ESTABLISHMENT OF THE PLAN.......................................... 1 1.2 PURPOSES OF THE PLAN............................................... 1 1.3 DURATION OF THE PLAN............................................... 1 ARTICLE 2. DEFINITIONS.................................................. 1 ARTICLE 3. ADMINISTRATION............................................... 5 3.1 THE COMMITTEE...................................................... 5 3.2 AUTHORITY OF THE COMMITTEE......................................... 5 3.3 COMMITTEE DECISIONS BINDING........................................ 5 ARTICLE 4. SHARES SUBJECT TO THE PLAN................................... 5 4.1 NUMBER OF SHARES................................................... 5 4.2 LAPSED GRANTS OR AWARDS............................................ 6 4.3 ADJUSTMENTS IN NUMBER OF PLAN SHARES............................... 6 ARTICLE 5. ELIGIBILITY AND PARTICIPATION................................ 6 ARTICLE 6. STOCK OPTIONS................................................ 7 6.1 GRANT OF OPTIONS................................................... 7 6.2 OPTION AGREEMENT................................................... 7 6.3 OPTION PRICE....................................................... 7 6.4 DURATION OF OPTIONS................................................ 7 6.5 EXERCISE OF OPTIONS................................................ 8 6.6 PAYMENT............................................................ 8
-i- 6.7 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT... 8 6.8 TERMINATION OF EMPLOYMENT FOR OTHER REASONS........................ 9 6.9 NONTRANSFERABILITY OF OPTIONS...................................... 9 ARTICLE 7. STOCK APPRECIATION RIGHTS.................................... 9 7.1 GRANT OF SAR....................................................... 9 7.2 AWARD AGREEMENT.................................................... 10 7.3 EXERCISE OF SARS................................................... 10 ARTICLE 8 STOCK AWARDS - RESTRICTED AND UNRESTRICTED.................... 11 8.1 AWARD.............................................................. 11 8.2 RESTRICTED PERIOD; LAPSE OF RESTRICTIONS........................... 11 8.3 RIGHTS OF RESTRICTED STOCK HOLDER; LIMITATIONS THEREON............. 12 8.4 DELIVERY OF UNRESTRICTED SHARES.................................... 12 8.5 NONASSIGNABILITY OF RESTRICTED STOCK............................... 13 ARTICLE 9. PERFORMANCE SHARES........................................... 13 9.1 GRANT OF PERFORMANCE SHARES........................................ 13 9.2 VALUE OF PERFORMANCE SHARES........................................ 13 9.3 EARNING OF PERFORMANCE SHARES...................................... 14 9.4 FORM AND TIMING OF PAYMENT OF PERFORMANCE SHARES................... 14 9.5 TERMINATION OF EMPLOYMENT DUE TO DEATH, DISABILITY OR RETIREMENT OR BY THE COMPANY WITHOUT CAUSE.................................... 14 9.6 TERMINATION OF EMPLOYMENT FOR OTHER REASONS........................ 14 9.7 NONTRANSFERABILITY................................................. 15 ARTICLE 10. BENEFICIARY DESIGNATION..................................... 15 ARTICLE 11. DEFERRALS................................................... 15 ARTICLE 12. RIGHTS OF PARTICIPANTS...................................... 15 12.1 EMPLOYMENT........................................................ 15
-ii- 12.2 PARTICIPATION..................................................... 15 ARTICLE 13. CHANGE IN CONTROL........................................... 16 13.1 OCCURRENCE........................................................ 16 13.2 DEFINITION........................................................ 17 13.3 POOLING OF INTERESTS ACCOUNTING................................... 17 ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION..................... 18 14.1 AMENDMENT, MODIFICATION AND TERMINATION........................... 18 14.2 GRANTS OR AWARDS PREVIOUSLY GRANTED............................... 18 14.3 COMPLIANCE WITH CODE SECTION 162(m)............................... 18 ARTICLE 15. WITHHOLDING................................................. 18 15.1 TAX WITHHOLDING................................................... 18 15.2 SHARE WITHHOLDING................................................. 18 ARTICLE 16. SUCCESSORS.................................................. 19 ARTICLE 17. LEGAL CONSTRUCTION.......................................... 19 17.1 GENDER AND NUMBER................................................. 19 17.2 SEVERABILITY...................................................... 19 17.3 REQUIREMENTS OF LAW............................................... 19 17.4 REGULATORY APPROVALS AND LISTING.................................. 19 17.5 SECURITIES LAW COMPLIANCE......................................... 20 17.6 GOVERNING LAW..................................................... 20 17.7 DISPUTES AND EXPENSES............................................. 20
-iii- INNOTRAC CORPORATION STOCK OPTION AND INCENTIVE AWARD PLAN ARTICLE 1. ESTABLISHMENT, PURPOSE, AND DURATION 1.1 Establishment of the Plan. Innotrac Corporation, a Georgia corporation (hereinafter referred to as the "Company"), hereby establishes a stock option and incentive award plan known as the "Innotrac Corporation Stock Option and Incentive Award Plan" (the "Plan"), as set forth in this document. The Plan permits the grant of Non-qualified Stock Options and Incentive Stock Options, and the award of Stock Appreciation Rights, Stock Awards (restricted or unrestricted), and Performance Shares. The Plan shall become effective on November 24, 1997 (the "Effective Date") and shall remain in effect as provided in Section 1.3. The Plan and all action taken pursuant thereto gives effect to the 70.58823 for one stock split of the Company that was approved simultaneously with the the approval of the Plan. 1.2 Purposes of the Plan. The purposes of the Plan are to promote greater stock ownership in the Company by those Participants who are principally responsible for its future growth and continued success; to more closely link the personal interests of Participants to those of the Company's shareholders; and to provide flexibility to the Company in its ability to motivate, attract and retain the services of Participants upon whose judgment, initiative and special effort the continued success of the Company depends. 1.3 Duration of the Plan. The Plan shall commence on the Effective Date, and shall remain in effect, subject to the right of the Board of Directors to amend or terminate the Plan at any time pursuant to Article 14, until the day prior to the tenth (10th) anniversary of the Effective Date. ARTICLE 2. DEFINITIONS Whenever used in the Plan the following terms shall have the meanings set forth below and, when the meaning is intended, the initial letter of the word is capitalized: (a) "Award" means, individually or collectively, any award under this Plan of Stock Appreciation Rights, Stock Awards, or Performance Shares. (b) "Award Agreement" or "Option Agreement" means an agreement entered into by each Participant and the Company, setting forth as applicable, the terms and provisions applicable to Grants or Awards made to Participants under this Plan. (c) "Beneficial Owner" or "Beneficial Ownership" shall have the meaning ascribed to such term in Rule 13d-3 of the General Rules and Regulations under the Exchange Act. -1- (d) "Board" or "Board of Directors" means the Board of Directors of the Company. (e) "Cause" means: (i) with respect to the Company or any Subsidiary which employs the Participant or for which the Participant primarily performs services, the commission by the Participant of an act of fraud, embezzlement, theft or proven dishonesty, or any other illegal act or practice (whether or not resulting in criminal prosecution or conviction), or any act or practice which the Committee shall, in good faith, deem to have resulted in the Participant's becoming unbondable under the Company's or the Subsidiary's fidelity bond; (ii) the willful engaging by the Participant in misconduct which is deemed by the Committee, in good faith, to be materially injurious to the Company or any Subsidiary, monetarily or otherwise; or (iii) the willful and continued failure or habitual neglect by the Participant to perform his duties with the Company or the Subsidiary substantially in accordance with the operating and personnel policies and procedures of the Company or the Subsidiary generally applicable to all their employees. For purposes of this Plan, no act or failure to act by the Participant shall be deemed to be "willful" unless done or omitted to be done by the Participant not in good faith and without reasonable belief that the Participant's action or omission was in the best interest of the Company and/or the Subsidiary. Notwithstanding the foregoing, if the Participant has entered into an employment agreement that is binding as of the date of employment termination, and if such employment agreement defines "Cause," then the definition of "Cause" in such agreement shall apply to the Participant in this Plan. "Cause" under either (i), (ii) or (iii) shall be determined by the Committee. (f) "Change in Control" has the meaning set forth in Article 13 of this Plan. (g) "Code" means the Internal Revenue Code of 1986, as amended from time to time. (h) "Committee" means: (i) the committee appointed by the Board to administer the Plan with respect to Grants or Awards, as specified in Article 3; or (ii) in the absence of such appointment, the Board itself. (i) "Company" means Innotrac Corporation, a Georgia corporation, or any successor thereto, as provided in Article 16. (j) "Director" means any individual who is a member of the Board of Directors of the Company. (k) "Disability" shall have the meaning ascribed to such term in the Company's long-term disability plan covering the Participant, or in the absence of such plan, a meaning consistent with Section 22(e) (3) of the Code. (l) "Employee" means any full-time, salaried employee of the Company, or of any of the Company's Subsidiaries. -2- (m) "Effective Date" shall have the meaning ascribed to such term in Section 1.1. (n) "Exchange Act" means the Securities Exchange Act of 1934, as amended from time to time, or any successor act thereto. (o) "Fair Market Value" shall be determined as follows: (i) If, on the relevant date, the Shares are traded on a national or regional securities exchange or on The NASDAQ National Market System and closing sale prices for the Shares are customarily quoted, on the basis of the quoted closing sale price or, if there is no such sale on the relevant date, then on the last previous day on which a sale was reported; (ii) If, on the relevant date, the Shares are not listed on any securities exchange or traded on the NASDAQ National Market System but the Shares otherwise are publicly traded and reported by NASDAQ (but closing sale prices for the Shares are not customary quoted), on the basis of the mean between the closing bid and asked quotations in such other over-the-counter market as reported by NASDAQ; but if there are no bid and asked quotations in the over-the-counter market as reported by NASDAQ on that date, then the mean between the closing bid and asked quotations in the over-the-counter market as reported by NASDAQ on the last previous day such bid and asked prices were quoted; and (iii) If, on the relevant date, the Shares are not publicly traded as described in (i) or (ii), on the basis of the good faith determination of the Committee. (p) "Grant" means, individually or collectively, any grant under this Plan of Non-qualified Stock Options or Incentive Stock Options. (q) "Incentive Stock Option" or "ISO" means an option to purchase Shares granted under Article 6 which is designated as an Incentive Stock Option and is intended to meet the requirements of Section 422 of the Code. (r) "Insider" shall mean an Employee who is, on the relevant date, an officer or a Director; or a beneficial owner of ten percent (10%) or more of any class of the Company's equity securities that is registered pursuant to Section 12 of the Exchange Act, all as defined under Section 16 of the Exchange Act. (s) "Named Executive Officer" means a Participant who, as of the date of vesting and/or payout of an Award or Grant is one of the group of "covered employees," as defined in the regulations promulgated under Code Section 162(m), or any successor statute. -3- (t) "Non-qualified Stock Option" or "NQSO" means an option to purchase Shares granted under Article 6, and which is not intended to meet the requirements of Code Section 422. (u) "Option" means an Incentive Stock Option or a Non-qualified Stock Option. (v) "Option Price" means the price at which a Share may be purchased by a Participant Pursuant to an Option, as determined by the Committee. (w) "Participant" means any Director or Employee, independent contractor, adviser, or consultant to the Company who has an outstanding Grant or Award made under the Plan. (x) "Performance Share" means an Award granted to a Participant, as described in Article 9 hereof. (y) "Retirement," "Normal Retirement Age," and "Normal Retirement Date" shall have the meanings ascribed to such terms in the Innotrac Corporation Employee Retirement Plan, or any successor plan thereto. (z) "Restricted Stock" means restricted Shares awarded in accordance with the terms of Article 8 and the other provisions of the Plan. (aa) "SAR Award Value" means, as applied to a SAR granted independent of an Option, such amount which may be greater than 100% but not less than 100% of the Fair Market Value of a Share on the date the SAR is granted, as shall be fixed by the Committee. (ab) "Shares" means the shares of Common Stock of the Company. (ac) "Stock Award" means Shares (whether restricted or unrestricted) awarded under the provisions of Article 8 of the Plan. (ad) "Stock Appreciation Rights" or "SAR" means an Award of the right to receive an amount based upon an increase in the Fair Market Value of the Shares. (ae) "Subsidiary" means any corporation, partnership, limited liability company, joint venture or other entity in which the Company has a majority voting interest, either direct or indirect. With respect to a Participant, the term shall refer to the Subsidiary for which the Participant primarily performs services. -4- ARTICLE 3. ADMINISTRATION 3.1 The Committee. The Plan shall be administered by the Compensation Committee of the Board, or by any substitute Committee appointed by the Board that is granted authority to administer the Plan. Qualified members of the Committee shall be appointed from time to time by, and shall serve at the discretion of, the Board of Directors. In the absence of any such appointment or if no Compensation Committee is then empowered, the Plan shall be administered by the Board. 3.2 Authority of the Committee. Subject to the provisions of the Plan the Committee shall have full and exclusive power to select Participants who shall participate in the Plan (who may change from year to year); determine the size and types of Awards or Grants; determine the terms and conditions of Awards or Grants in a manner consistent with the Plan (including vesting provisions and the duration of the Awards or Grants); construe and interpret the Plan and any agreement or instrument entered into under the Plan; establish, amend or waive rules and regulations for the Plan's administration; and (subject to the provisions of Article 14) amend the terms and conditions of any outstanding Award or Grant to the extent such terms and conditions are within the discretion of the Committee as provided in the Plan. Further, the Committee shall make all other determinations which may be necessary or advisable in the Committee's opinion for the administration of the Plan. 3.3 Committee Decisions Binding. All determinations and decisions made by the Committee pursuant to Paragraph 3.2 above shall be final, conclusive and binding on the Company and the Participants, their estates and beneficiaries. ARTICLE 4. SHARES SUBJECT TO THE PLAN 4.1 Number of Shares. Subject to adjustment as provided in Section 4.3, the gross number of Shares available for Awards or Grants under the plan shall be Eight Hundred Thousand (800,000) Shares. These Shares may, in the discretion of the Company, be either authorized but unissued Shares or Shares purchased by the Company on the open market. The following rules shall apply for purposes of the determination of the number of Shares available for Grant or Award under the Plan: (a) The number of Shares underlying any outstanding Stock Option, SAR, or Stock Award shall be counted against the gross number of Plan shares authorized to be issued under the Plan regardless of its vested status. (b) The Committee shall determine the appropriate number of Shares to deduct against the gross number of authorized shares in connection with the award of Performance Shares. 4.2 Lapsed Grants or Awards . If any Award or Grant made under this Plan is canceled, terminates, expires or lapses for any reason, any Shares subject to such Award or Grant shall again -5- be available for issue under the Plan. However, in the event that prior to the Award's or Grant's cancellation, termination, expiration or lapse, the holder of the Award or Grant at any time received one or more "benefits of ownership" pursuant to such Award (as defined by the Securities and Exchange Commission, pursuant to any rule or interpretation promulgated under Section 16 of the Exchange Act), the Shares subject to such Award or Grant shall not be made available for issue under the Plan. 4.3 Adjustments in Number of Plan Shares. In the event of any change in corporate capitalization (such as a stock split or a corporate transaction, such as any merger, consolidation, separation, including a spin-off, or other distribution of stock or property of the Company, any reorganization [whether or not such reorganization comes within the definition of such term in Code Section 368] or any partial or complete liquidation of the Company) and to prevent dilution or enlargement of rights under this Plan, an adjustment, as the Committee shall in its sole discretion determine to be appropriate and equitable, shall be made in the number and class of Shares which may be delivered under the Plan and in the number and class of and/or price of Shares subject to outstanding Awards or Grants made under the Plan; provided however, -------- ------- that the number of Plan Shares subject to any Award or Grant shall always be a whole number and the Committee shall make such adjustments as are necessary to insure Awards or Grants of whole Shares. In no event will any such adjustment be made as a result of the consolidation of the Company with IELC, Inc., HomeTel Systems, Inc., SellTel #1, Inc., RenTel #1, Inc., HomeTel Providers, Inc., SellTel #2, LLC, RenTel #2, LLC, and HomeTel Providers Partners, L.P. that is contemplated to take place in connection with the Company's initial public offering of its securities. ARTICLE 5. ELIGIBILITY AND PARTICIPATION Any Director or key Employee of the Company, or of any Subsidiary, or any independent contractor, adviser, or consultant to the Company or any Subsidiary, whose judgment, initiative and efforts contribute or may be expected to contribute materially to the successful performance of the Company and its Subsidiaries shall be eligible to receive an Award or Grant under the Plan. In determining the Participants to whom such an Award or Grant will be made, the Committee shall take into account the duties and responsibilities of the respective Participants, their present and potential contributions to the success of the Company and its Subsidiaries, and such other factors as the Committee shall deem relevant in connection with accomplishing the purpose of the Plan. No person who is a member of the Committee shall be eligible to receive an Award or Grant under the Plan while so serving. ARTICLE 6. STOCK OPTIONS 6.1 Grant of Options. Subject to the terms and provisions of the Plan, Options may be granted to Participants from time to time, as determined by the Committee. The Committee shall have sole discretion in determining the number of Shares underlying each Option granted to a Participant; provided, however, that in the case of any ISO granted under the Plan, the aggregate Fair Market Value (determined at the time such Option is granted) of the Shares to which ISOs are -6- exercisable for the first time by the Participant during any calendar year (under the Plan and all other incentive stock option plans of the Company and any Subsidiary) shall not exceed One Hundred Thousand United States Dollars ($100,000). The Committee may grant a Participant ISOs, NQSOs or a combination thereof, and may vary such Grants among Participants. In no event however, shall any Participant who owns (within the meaning of Section 424(d) of the Code), at the time he would otherwise be granted an Option to purchase Shares, stock of the Company possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Company be eligible to receive an Incentive Stock Option to purchase Shares hereunder. The maximum number of Shares subject to Options which can be granted under the Plan during a 12-month period to any Participant including a Named Executive Officer is Two Hundred Thousand (200,000) Shares; provided, however, that the maximum number of Option Shares available for grant to a Participant during any 12-month period should be correspondingly reduced by the number of Shares underlying any SAR Awards made under Article 7 hereof to the Participant during the same period. 6.2 Option Agreement. Each Option granted under the Plan shall be evidenced by an Option Agreement that shall specify the Option Price, the duration of the Option, the number of Shares to which the Option pertains and such other provision as the Committee shall determine. The Option Agreement shall further specify whether the Option is intended to be an ISO within the meaning of Code Section 422, or an NQSO, which is not intended to fall under the provisions of Code Section 422. The failure to so specify shall not impair the treatment of an Option as an ISO if it otherwise so qualifies. 6.3 Option Price. The Option Price for each ISO granted under this Article 6 shall be not less than the Fair Market Value of a Share on the date the ISO is granted. The Option Price of each Share underlying a NQSO shall be established by the Committee, but in no event shall such price be less than eighty-five percent (85%) of the Fair Market Value (or such higher percentage of Fair Market Value as may be established by Internal Revenue Service rules or regulations as the limit for granting discounted stock options without causing immediate tax consequences to the Participant) of a Share on the date the Option is granted. 6.4 Duration of Options. Each Option shall expire at such time as the Committee shall determine at the time of grant; provided, however, that no Options shall be exercisable later than the tenth (10th) anniversary of its grant. Notwithstanding anything to the contrary herein or in any Option Agreement, if at the time of vesting of the Option, the Shares of the Company are not registered under the Exchange Act, or the Shares are not publicly traded on a national or regional securities exchange, on The NASDAQ Stock Market, or in the over-the-counter market, then such Option expires ninety days (90) after the date of vesting, unless the Shares are registered or become publicly traded within that ninety (90) day period. 6.5 Exercise of Options. Options granted under the Plan shall be subject to such vesting schedules and exercise periods, and other restrictions and conditions, as the Committee shall in -7- each instance approve, which need not be the same for each Grant or for each Participant. Except as the Committee may otherwise provide, Options granted under this Plan shall not generally be exercisable prior to six (6) months following the date of grant. 6.6 Payment. Options shall be exercised by the delivery of a written notice of exercise to the Company, setting forth the number of Shares with respect to which the Option is to be exercised, accompanied by full payment for the Shares. The Option Price upon exercise of any Option shall be payable to the Company in full either: (a) in cash, or (b) by tendering previously acquired Shares having an aggregate Fair Market Value at the time of exercise equal to the total Option Price (provided that the Shares which are tendered must have been held by the Participant for the period required by law, if any, prior to their tender to satisfy the Option Price), or (c) by a combination of (a) and (b). The Committee also may allow cashless exercises, subject to applicable securities law restrictions, or by any other means which the Committee determines to be consistent with the Plan's purpose and applicable law. As soon as practicable after receipt of a written notification of exercise and full payment, the Company shall deliver to the Participant, in the Participant's name, Share certificates in an appropriate amount based upon the number of Shares purchased under the Option(s). 6.7 Termination of Employment Due to Death, Disability or Retirement . Unless otherwise provided by the Committee in the Option Agreement, the following rules shall apply in the event of the Participant's termination of employment due to death, Disability or Retirement: (a) Termination by Death. In the event the Participant dies while actively employed, all outstanding unvested Options granted to that Participant shall immediately vest, and thereafter all vested Options shall remain exercisable at any time prior to their expiration date, or for two (2) years after the date of death, whichever period is shorter, by (i) such person(s) as shall have been named as the Participant's beneficiary, (ii) such person(s) that have acquired the Participant's rights under such Options by will or by the laws of descent and distribution, or (iii) the Participant's estate or representative of the Participant's estate. (b) Termination by Disability. In the event the employment of the Participant is terminated by reason of Disability, all outstanding unvested Options granted to the Participant shall immediately vest as of the date the Committee determines the definition of Disability to have been satisfied, and thereafter all vested Options shall remain exercisable at any time prior to their expiration date, or for one (1) year after the date that the Committee determines the definition of Disability to have been satisfied, whichever period is shorter. (c) Termination by Retirement. In the event the employment of the Participant is terminated by reason of Retirement the Participant shall be entitled to prorata vesting of all outstanding unvested Options. The prorata vesting -8- shall be determined by the Committee, in its sole discretion, and shall be based upon the length of time that the Participant held the unvested Options relative to the vesting period for each Grant of outstanding unvested Options. Upon Retirement vested Options shall remain exercisable at any time prior to their expiration date, or for one (1) year after the effective date of Retirement, whichever period is shorter. 6.8 Termination of Employment for Other Reasons. In the event a Participant's employment is terminated by the Company or Subsidiary for Cause, the Participant's right to exercise any then vested outstanding Options shall expire immediately upon termination of employment. If the Participant's employment is terminated by the Company or Subsidiary without Cause, or the Participant voluntarily terminates his employment, any Options vested as of his date of termination shall remain exercisable at any time prior to their expiration date or for three (3) months after his date of termination of employment, whichever period is shorter. 6.9 Nontransferability of Options. Unless the Committee provides otherwise in the Option Agreement, no Option granted under the Plan may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution, and any attempt to sell transfer, pledge, assign or otherwise alienate or hypothecate an Option shall be null and void and of no force or effect, and all Options granted to a Participant under the Plan shall be exercisable during his or her lifetime only by such Participant. ARTICLE 7. STOCK APPRECIATION RIGHTS 7.1 Grant of SAR. Stock Appreciation Rights or SARs may be awarded in conjunction with, or in addition to, any Options granted under the Plan, or may be awarded under the Plan independent of any Option. Nothing shall preclude the award on the same day an Option is granted (with or without related SARs) of SARs independent of an Option. SARs granted in conjunction with, or in addition to, an Option may be granted either at the time of the Grant of the Option or any time thereafter during the term of the Option. SARs awarded in conjunction with an Option shall entitle the holder of the related Option, upon exercise, in whole or in part, of the SARs, to surrender the Option, or any portion thereof, to the extent unexercised, and to receive a number of Shares determined pursuant to subsection 7.3 below. Such Option shall, to the extent so surrendered, cease to be exercisable. The maximum number of Shares underlying SARs which can be awarded under the Plan during any 12-month period to any Participant including a Named Executive Officer is Two Hundred Thousand (200,000) Shares; provided, however, that the maximum number of Shares available for award to a Participant during any 12- month period shall be correspondingly reduced by the number of Shares subject to Options granted to the Participant during the same period. 7.2 Award Agreement. SARs shall be subject to such terms and conditions not inconsistent with the Plan as shall from time to time be approved by the Committee and to the following: -9- (a) SARs granted in conjunction with an Option shall be exercisable at such time or times and to the extent, but only to the extent, that the Option to which they relate shall be exercisable. (b) SARs not granted in conjunction with an Option shall be exercisable at such time or times as may be determined by the Committee at the time of grant, but shall be subject to the same restrictions and other rules as to duration, transferability, and exercisability that are set out for Options in Article 6 above. 7.3 Exercise of SARs. (a) Upon exercise of SARs, the holder thereof shall be entitled to receive a number of Shares which have an aggregate Fair Market Value on the date of exercise equal to the amount by which the Fair Market Value per share of one Share on the date of such exercise shall exceed (i) in the case of SARs granted in conjunction with an Option or in addition to an Option, the Option price per Share of the related Option, or (ii) in the case of SARs unrelated to an Option, its SAR Grant Value, in each case multiplied by the number of Shares in respect of which the SARs shall have been exercised. (b) All or any part of the obligation arising out of an exercise of SARs, whether or not such rights are granted in conjunction with an Option, may in the sole discretion of the Committee (and consistent with the requirements of Rule 16b-3 of the Exchange Act) be settled by the payment of cash equal to the aggregate Fair Market Value of the Shares that would otherwise have been delivered under subsection (a) above. (c) To the extent that SARs granted in conjunction with an Option shall be exercisable and whether the obligation upon such exercise shall be discharged by the delivery of Shares or the payment of cash the Option in connection with which such SAR shall have been granted shall be deemed to have been exercised for the purpose of the maximum share limitation set forth in the Plan. (d) To the extent that SARs granted in addition to, or independent of, an Option shall be exercised and whether the obligation upon such exercise shall be discharged by the delivery of Shares or the payment of cash, the number of Shares in respect of which the SARs shall have been exercised shall be charged against the maximum share limitation set forth in the Plan. ARTICLE 8. STOCK AWARDS - RESTRICTED AND UNRESTRICTED 8.1 Award. The Committee may from time to time in its discretion make Stock Awards to Participants and may determine the number of Shares to be awarded. The Committee shall determine the terms and conditions of, and the amount of payment, if any, to be made by the Participant for such Stock Award. An Award of Restricted Stock may require the Participant to pay -10- for such Shares of Restricted Stock, but the Committee may establish a price below Fair Market Value at which the Participant can purchase the Shares of Restricted Stock. Each Award of Restricted Stock will be evidenced by an Award Agreement containing terms and conditions not inconsistent with the Plan as the Committee shall determine to be appropriate in its sole discretion. The maximum number of Shares that may be awarded under a Stock Award (whether restricted or unrestricted) to a Named Executive Officer during any 12- month period is Two Hundred Thousand (200,000) Shares. 8.2 Restricted Period; Lapse of Restrictions. At the time an Award of Restricted Stock is made, the Committee shall establish a period or periods of time (the "Restricted Period") applicable to such Award which, unless the Committee otherwise provides, shall not be less than six (6) months. Subject to the other provisions of this Section 8, at the end of the Restricted Period all restrictions shall lapse and the Restricted Stock shall vest in the Participant. At the time an Award is made, the Committee may, in its discretion, prescribe conditions for the incremental lapse of restrictions during the Restricted Period and for the lapse or termination of restrictions upon the occurrence of other conditions in addition to or other than the expiration of the Restricted Period with respect to all or any portion of the Restricted Stock. Such conditions may, but need not, include without limitation: (a) The death, Disability or Retirement of the Employee to whom Restricted Stock is awarded, or (b) The occurrence of a Change in Control. The Committee may also, in its discretion, shorten or terminate the Restricted Period, or waive any conditions for the lapse or termination of restrictions with respect to all or any portion of the Restricted Stock at any time after the date the Award is made. 8.3 Rights of Restricted Stock Holder; Limitations Thereon. Upon an Award of Restricted Stock, a stock certificate (or certificates) representing the number of Shares of Restricted Stock granted to the Participant shall be registered in the Participant's name and shall be held in custody by the Company or a bank selected by the Committee for the Participant's account. Following such registration, the Participant shall have the rights and privileges of a shareholder as to such Restricted Stock, including the right to receive dividends and to vote such Restricted Stock, provided that, the right to receive cash dividends shall be the right to receive such dividends either in cash currently or by payment in Restricted Stock, as the Committee shall determine, and provided further that the following restrictions shall apply: (a) The Participant shall not be entitled to delivery of a certificate until the expiration or termination of the Restricted Period for the Shares represented by such certificate and the satisfaction of any and all other conditions prescribed by the Committee; -11- (b) None of the Shares of Restricted Stock may be sold, transferred, assigned, pledged, or otherwise encumbered or disposed of during the Restricted Period and until the satisfaction of any and all other conditions prescribed by the Committee; and (c) All of the Shares of Restricted Stock that have not vested shall be forfeited and all rights of the Participant to such Shares of Restricted Stock shall terminate without further obligation on the part of the Company, unless the Participant has remained a full-time employee of the Company, or any of its Subsidiaries, until the expiration or termination of the Restricted Period and the satisfaction of any and all other conditions prescribed by the Committee applicable to such Shares of Restricted Stock. Upon the forfeiture of any Shares of Restricted Stock, such forfeited Shares shall be transferred to the Company without, further action by the Participant. With respect to any Shares received as a result of adjustments under Section 4.3 hereof and any Shares received with respect to cash dividends declared on Restricted Stock, the Participant shall have the same rights and privileges, and be subject to the same restrictions, as are set forth in this Section 8. 8.4 Delivery of Unrestricted Shares. Upon the expiration or termination of the Restricted Period for any Shares of Restricted Stock and the satisfaction of any and all other conditions prescribed by the Committee, the restrictions applicable to such Shares of Restricted Stock shall lapse and a stock certificate for the number of Shares of Restricted Stock with respect to which the restrictions have lapsed shall be delivered, free of all such restrictions except any that may be imposed by law, to the holder of the Restricted Stock. The Company shall not be required to deliver any fractional Share but will pay, in lieu thereof, the Fair Market Value (determined as of the date the restrictions lapse) of such fractional share to the holder thereof. Prior to or concurrently with the delivery of a certificate for Restricted Stock, the holder shall be required to pay an amount necessary to satisfy any applicable federal, state and local tax requirements as set out in Article 15 below. 8.5 Nonassignability of Restricted Stock. Unless the Committee provides otherwise in the Award Agreement, no Award of, nor any right or interest of a Participant in or to any Restricted Stock, or in any instrument evidencing any Award of Restricted Stock under the Plan, may be assigned, encumbered or transferred except, in the event of the death of a Participant, by will or the laws of descent and distribution. ARTICLE 9. PERFORMANCE SHARES 9.1 Grant of Performance Shares. Subject to the terms of the Plan, Performance Shares may be granted to Participants from time to time for no payment. The Committee shall have complete discretion in determining the number of Performance Shares granted to each Participant; provided, however, that unless and until the Company's shareholders vote to change the maximum -12- number of Performance Shares that may be earned by any one Named Executive Officer (subject to the terms of Article 14 hereof), none of the Named Executive Officers may earn more than Two Hundred Thousand (200,000) Performance Shares with respect to any performance period. 9.2 Value of Performance Shares. Each Performance Share shall have a value equal to the Fair Market Value of a Share on the date the Performance Share is earned. The Committee shall set performance goals in its discretion which, depending on the extent to which they are met, will determine the number of Performance Shares that will be earned by the Participants. The time period during which the performance goals must be met shall be called a "performance period." Performance periods shall, in all cases, equal or exceed two (2) years in length. The performance goals shall be established at the beginning of the performance period (or within such time period as is permitted by Code Section 162(m) and the regulations thereunder). The Committee will select one or more of the following performance measures for purposes of Awards under the Plan to Named Executive Officers: total shareholder return, average return on assets, average return on equity, average growth in assets, increase in operating earnings per share, increase in book value per share of Common Stock, and ratio of operating revenue to operating overhead. The Committee, in its sole discretion, may assign the relative weights to be given to each performance measure selected by it. For Participants other than Named Executive Officers, the Committee may, in its sole discretion, select such performance measures (from among those described above or other) as it may deem appropriate, and may assign the relative weights to be given to each performance measure selected by it. The Committee may, in its sole discretion, reserve the right to exclude the effect of extraordinary and non-recurring items from calculations involving any performance measure. In the event that applicable tax and/or securities laws (including, but not limited to, Code Section 162(m) and Section 16 of the Exchange Act) change to permit the Committee to alter the governing performance measures without obtaining shareholder approval of such changes, the Committee shall have sole discretion to make such changes without obtaining shareholder approval. 9.3 Earning of Performance Shares. After the applicable performance period has ended, the Committee shall certify the extent to which the established performance goals have been achieved. The Committee may increase or decrease the amount of any Performance Share Award otherwise payable to a Participant under this Article 9 if, in the Committee's view, the Company's financial performance during the relevant performance period justifies such adjustment, whether or not any one or more of the established performance goals has been achieved; provided, however, that the Committee shall have no discretion to increase the amount of any Performance Share Award otherwise payable to a Named Executive Officer under this Article 9. 9.4 Form and Timing of Payment of Performance Shares . Except as otherwise provided in Article 13 hereof payment of earned Performance Shares shall be made in a single lump sum as soon as practical after the end of the performance period to which the Award relates. The Committee, in its sole discretion, may pay earned Performance Shares in the form of cash or in -13- Shares (or in a combination thereof) which have, as of the last day of the performance period, an aggregate value equal to the Fair Market Value of the earned Performance Shares. 9.5 Termination of Employment Due to Death, Disability or Retirement or by the Company Without Cause. Unless the Award Agreement provides otherwise, in the event the employment of a Participant is terminated by reason of death, Disability or Retirement or by the Company without Cause during a performance period, the Participant shall be entitled to a prorated payout with respect to the unearned Performance Shares. The prorated payout shall be determined by the Committee, in its sole discretion, and shall be based upon the length of time that the Participant held the unearned Performance Shares during the performance period relative to the performance period, and shall be the greater of the target award prorated for the applicable time period, or the payout earned on the basis of actual performance, measured by the achievement of the established performance goals prorated to the time of his termination due to death, Disability or Retirement or by the Company without Cause. Payment of earned Performance Shares to Participants whose termination is due to Retirement or by the Company without Cause shall be made at the same time payments are made to Participants who did not terminate employment during the applicable performance period. Payment of earned Performance Shares to Participants whose termination is due to death or Disability shall be made as soon as practical after the Participant's termination. 9.6 Termination of Employment for Other Reasons. Except as provided in Article 13 and in the Award Agreement, in the event that a Participant's employment terminates during a performance period for any reason other than those reasons set forth in Section 9.5 hereof, all unearned Performance Shares shall be forfeited by the Participant to the Company. 9.7 Nontransferability. Performance Shares may not be sold, transferred, pledged, assigned or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. Further, a Participant's Performance Share rights under the Plan shall be exercisable during the Participant's lifetime only by the Participant or the Participant's legal representative. ARTICLE 10. BENEFICIARY DESIGNATION Each Participant under the Plan may, from time to time, name any beneficiary or beneficiaries (who may be named contingently or successively) to whom any benefit under the Plan is to be paid in case of his or her death before he or she receives any or all of such benefit. Each such designation shall revoke all prior designations by the same Participant, shall be in a form prescribed by the Company and shall be effective only when filed by the Participant in writing, with the Company during the Participant's lifetime. In the absence of any such designation, benefits remaining unpaid at the Participant's death shall be paid to the Participant's estate. ARTICLE 11. DEFERRALS -14- The Committee may permit a Participant to defer to another plan or program such Participant's receipt of Shares or cash that would otherwise be due to such Participant by virtue of the exercise of an Option or SAR, the vesting of Restricted Stock or the earning of Performance Shares. If any such deferral election is required or permitted, the Committee shall, in its sole discretion, establish rules and procedures for such payment deferrals. ARTICLE 12. RIGHTS OF PARTICIPANTS 12.1 Employment. Nothing in the Plan shall interfere with or limit in any way the right of the Company or a Subsidiary to terminate any Participant's employment at any time, nor confer upon any Participant any right to continue in the employ of the Company or a Subsidiary. For purpose of the Plan, transfer of employment of a Participant between the Company and any one of its Subsidiaries (or between Subsidiaries) shall not be deemed a termination of employment. 12.2 Participation. No Employee shall have the right to be selected to receive an Award or Grant under this Plan, or, having been so selected, to be selected to receive a future Award or Grant. ARTICLE 13. CHANGE IN CONTROL 13.1 Occurrence. If after the initial registration of the Company's Shares with the Securities and Exchange Commission pursuant to the Exchange Act, a Change in Control should occur, and except as provided in the Award Agreement or Section 13.3, or as prohibited by the terms of Article 17 hereof, then: (a) All outstanding, unvested Options and SARs granted or awarded to Participants hereunder (or, in the case of the termination of a Participant by the Company or Subsidiary other than for Cause, to the terminated Participant) shall become fully vested and immediately exercisable; (b) To the extent provided by the Committee in the Award Agreement, the earning of unearned Performance Shares will be based upon the target award levels or the actual performance compared with goals prorated to the date of the Change in Control or to the date of the Participant's termination by the Company or Subsidiary other than for Cause, whichever provides the greater amount. Unearned Performance Shares outstanding at the time of a Change in Control or at the time of a Participant's termination by the Company or Subsidiary other than for Cause will be fully vested (subject to the employment requirements in the next sentence) and will be payable in Shares or cash, or a combination thereof as determined by the Committee. The Participant will be entitled to payment of vested Performance Shares for a performance period only if (i) he remains employed by the Company or Subsidiary (or their respective successors) until the date that would have -15- been the last day of the performance period, at which time the payment of the Performance Shares shall be made, or (ii) prior to the end of the performance period, his employment is terminated by the Company or Subsidiary without Cause, he terminates employment for a reason other than Cause or he retires (whether early, normal or late) under the Innotrac Corporation Employee Retirement Plan or any successor plan thereto, dies or becomes Disabled. In any of these cases, payment of vested Performance Shares shall be made as soon as possible after the Participant ceases active employment. (c) Unless otherwise provided in the Award Agreement, all restrictions on an Award of Restricted Stock shall lapse and such Restricted Stock shall be delivered to the Participant in accordance with Section 8.4; and (d) Subject to Article 14 hereof the Committee shall have the authority to make any modifications to the Awards or Grants as determined by the Committee to be appropriate before the effective date of the Change in Control or the date of the Participant's termination by the Company or Subsidiary other than for Cause. 13.2 Definition. For purposes of the Plan, a "Change in Control" shall be deemed to have occurred if: (a) the Company consolidates or merges with or into another company, or is otherwise reorganized, if the Company is not the surviving company in such transaction, or, if after such transaction, any other company, association or other person, entity or group or the shareholders thereof that did not own fifty percent (50%) or more of the then outstanding Shares prior to such transaction, then own, directly and/or indirectly, more than fifty percent (50%) of the then outstanding Shares of the Company or more than fifty percent (50%) of the assets of the Company; or (b) more than 35% of the Shares of the Company are, in a single transaction or in a series of related transactions, sold or otherwise transferred to or are acquired by (except as collateral security for a loan) any other company, association or other person, entity or group, whether or not any such shareholder or any shareholders included in such group were shareholders of the Company prior to the Change in Control, provided however that a -------- ------- "Change in Control" shall not be deemed to have occurred as a result of any transaction wherein any person, entity or group that owns more than sixty-five percent (65%) of the then outstanding Shares prior to such transaction continues to own sixty-five percent (65%) or more after such transaction; or -16- (c) all or substantially all of the assets of the Company are sold or otherwise transferred to or otherwise acquired by any other company, association or other person, entity or group; or (d) the occurrence of any other event or circumstance which is not covered by (a) through (c) above which the Committee determines affects control of the Company and constitutes a Change in Control for purpose of the Plan. 13.3 Pooling of Interests Accounting. No Award or Grant made under this Plan shall have a scheduled vesting date which is earlier than the date that is two (2) years following the Effective Date. During the two (2) year period commencing on the Effective Date, the acceleration of vesting provided for in Section 13.1 shall not apply in a transaction involving a Change in Control if both of the following circumstances exist: (a) The provisions contained in Section 13.1 create conditions which would preclude the use of pooling of interests accounting, and (b) The completion of the transaction is subject to the use of pooling of interests accounting. ARTICLE 14. AMENDMENT, MODIFICATION AND TERMINATION 14.1 Amendment, Modification and Termination. The Board may, at any time and from time to time, alter, amend, suspend or terminate the Plan in whole or in part; provided, that, unless approved by the holders of a majority of the total number of Shares of the Company represented and entitled to vote at a meeting at which a quorum is present, no amendment shall be made to the Plan if such amendment would (a) materially modify the eligibility requirements provided in Article 5; (b) increase the total number of Shares (except as provided in Section 4.3) which may be granted or awarded under the Plan, as provided in Section 4. 1; (c) extend the term of the Plan; or (d) amend the Plan in any other manner which the Board, in its discretion, determines should become effective only if approved by the shareholders even though such shareholder approval is not expressly required by the Plan or by law. 14.2 Grants or Awards Previously Granted. No termination, amendment or modification of the Plan shall adversely affect in any material way any Award or Grant previously made under the Plan, without the written consent of the Participant holding such Award or Grant. The Committee shall, with the written consent of the Participant holding such Award or Grant, have the authority to cancel Awards or Grants outstanding and grant replacement Awards or Grants therefor. 14.3 Compliance With Code Section 162(m). It is the intent of the Board that all Awards or Grants made under this Plan shall comply with the requirements of Code Section 162(m). In the event changes are made to Code Section 162(m) to permit greater flexibility with respect to any Award or Grant under the Plan, the Committee may, subject to this Article 14, make any adjustments it deems appropriate in such Award or Grant. -17- ARTICLE 15. WITHHOLDING 15.1 Tax Withholding. The Company shall have the power and the right to deduct or withhold, or require a Participant to remit to the Company, an amount sufficient to satisfy Federal, state and local taxes (including the Participant's FICA obligation) required by law to be withheld with respect to any taxable event arising in connection with an Award or Grant under this Plan. 15.2 Share Withholding. With respect to withholding required upon the exercise of Options, or upon any other taxable event arising as a result of Awards or Grants made hereunder which are to be paid in the form of Shares, Participants may request subject to the approval of the Committee, to satisfy the withholding requirement, in whole or in part, by having the Company withhold Shares having a Fair Market Value on the date the tax is to be determined equal to the minimum statutory total tax which could be imposed on the Award or Grant. All such requests shall be irrevocable, made in writing, and signed by the Participant, and requests by Insiders shall additionally comply with all legal requirements applicable to Share transactions by such Participants. ARTICLE 16. SUCCESSORS All obligations of the Company under the Plan, with respect to Awards or Grants made hereunder, shall be binding on any successor to the Company, whether the existence of such successor is the result of a direct or indirect purchase, merger, consolidation or otherwise, of all or substantially all of the business and/or assets of the Company. ARTICLE 17. LEGAL CONSTRUCTION 17.1 Gender and Number. Except where otherwise indicated by the context, any masculine term used herein also shall include the feminine; the plural shall include the singular and the singular shall include the plural. 17.2 Severability. In the event any provision of the Plan shall be held illegal or invalid for any reason, the illegality or invalidity shall not affect the remaining parts of the Plan, and the Plan shall be construed and enforced as if the illegal or invalid provision had not been included. 17.3 Requirements of Law. The making of Awards or Grants and the issuance of Shares under the Plan shall be subject to all applicable laws, rules and regulations, and to such approvals by any governmental agencies or national securities exchanges as may be required. 17.4 Regulatory Approvals and Listing. The Company shall not be required to issue any certificate or certificates for Shares under the Plan prior to (i) obtaining any approval from any governmental agency which the Company shall, in its discretion, determine to be necessary or -18- advisable, (ii) the admission of such shares to listing on any national securities exchange on which the Company's Shares may be listed, and (iii) the completion of any registration or other qualification of such Shares under any state or federal law or ruling or regulations of any governmental body which the Company shall, in its sole discretion, determine to be necessary or advisable. Notwithstanding any other provision set forth in the Plan, if required by the then-current Section 16 of the Exchange Act, any "derivative security" or "equity security" offered pursuant to the Plan to any Insider may not be sold or transferred for at least six (6) months after the date of grant of such Award. The terms "equity security" and "derivative security" shall have the meanings ascribed to them in the then-current Rule 16(a) under the Exchange Act. The Committee may impose such restrictions on any Shares acquired pursuant to the Plan as it may deem advisable, including, without limitation, restrictions under applicable Federal securities laws, under the requirements of any stock exchange or market upon which such Shares are then listed and/or traded and under any blue sky or state securities laws applicable to such Shares. 17.5 Securities Law Compliance. With respect to Insiders, transactions under this Plan are intended to comply with all applicable conditions of Rule 16b-3 or its successors under the Exchange Act. To the extent any provisions of the Plan or action by the Committee fails to so comply, it shall be deemed null and void, to the extent permitted by law and deemed advisable by the Committee. 17.6 Governing Law. To the extent not preempted by Federal law, the Plan, and all agreements hereunder, shall be construed in accordance with and governed by the laws of the State of Georgia, without reference to its conflict of laws rules. 17.7 Disputes and Expenses. After a Change in Control, if a Participant affected by such Change in Control incurs legal fees or other expenses in seeking to obtain or enforce any rights to benefits under this Plan and is successful, in whole or in part, in obtaining or enforcing any such rights through settlement, litigation, arbitration or otherwise, the Company shall promptly pay the affected Participant's reasonable legal fees and expenses incurred in enforcing his rights under the Plan. -19- AS APPROVED BY THE SOLE MEMBER OF THE BOARD OF DIRECTORS AND THE SOLE SHAREHOLDER OF INNOTRAC CORPORATION ON NOVEMBER 24, 1997. INNOTRAC CORPORATION By: /s/ Scott Dorfman --------------------------- SCOTT DORFMAN PRESIDENT ATTEST: By: /s/ David Ellin ------------------------------- DAVID ELLIN VICE PRESIDENT -20- EX-10.3 6 AMENDED & RESTATED LOAN & SECURITY AGREEMENT EXHIBIT 10.3 AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT AMONG INNOTRAC CORPORATION, HOMETEL SYSTEMS, INC., IELC, INC., RENTEL #1, INC., RENTEL #2, L.L.C., SELLTEL #1, INC., SELLTEL #2, L.L.C. AND HOMETEL PROVIDERS PARTNERS, L.P. AS BORROWERS, AND SOUTHTRUST BANK, N.A. AS LENDER DATED AS OF DECEMBER 5, 1997 TABLE OF CONTENTS ----------------- PAGE ---- 1. DEFINITIONS, TERMS AND REFERENCES................................2 1.1 Certain Definitions...................................2 1.2 Use of Defined Terms.................................11 1.3 Accounting Terms.....................................11 1.4 UCC Terms............................................11 1.5 Terminology..........................................11 1.6 Exhibits.............................................12 2. THE FINANCING...................................................12 2.1 Revolving Line of Credit.............................12 2.2 Term Loan............................................13 2.3 Interest and Fees....................................13 2.4 Method of Making Payments............................14 2.5 Prepayments; Early Termination.......................14 2.6 Use of Proceeds......................................15 2.7 Increased Costs or Reduced Return....................15 2.8 Indemnification of Lender............................15 3. COLLECTIONS.....................................................16 3.1 Collateral Reserve Account; Lockbox Accounts.........16 4. SECURITY INTEREST -- COLLATERAL.................................16 5. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS RECEIVABLE COLLATERAL..................................17 5.1 Bona Fide Accounts...................................17 5.2 Good Title; No Existing Encumbrances.................17 5.3 Right to Assign; No Further Encumbrances.............17 5.4 Power of Attorney....................................17 6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INVENTORY COLLATERAL............................................17 6.1 Sale of Inventory Collateral.........................18 6.2 Insurance............................................18 6.3 Good Title; No Existing Encumbrances.................18 6.4 Right to Grant Security Interest; No Further Encumbrances.........................................18
6.5 Location of Inventory Collateral. 18 7. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO EQUIPMENT COLLATERAL............................................19 7.1 Sale of Equipment Collateral.........................19 7.2 Insurance............................................19 7.3 Good Title; No Existing Encumbrances.................19 7.4 Right to Grant Security Interest; No Further Encumbrances.........................................19 7.5 Location.............................................19 8. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO BALANCES COLLATERAL.............................................20 8.1 Ownership............................................20 8.2 Liens................................................20 9. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INTANGIBLES COLLATERAL..........................................20 9.1 Ownership............................................20 9.2 Lien.................................................20 9.3 Preservation.........................................20 10. GENERAL REPRESENTATIONS AND WARRANTIES.........................20 10.1 Existence and Qualification..........................21 10.2 Authority; Validity and Binding Effect...............21 10.3 No Material Litigation...............................21 10.4 Taxes................................................21 10.5 Capital Stock........................................22 10.6 Organization.........................................22 10.7 Insolvency...........................................22 10.8 Title................................................22 10.9 Margin Stock.........................................22 10.10 No Violations........................................23 10.11 ERISA................................................23 10.12 Financial Statements.................................23 10.13 Delivery of Certain Collateral.......................24 10.14 Purchase of Collateral...............................24 10.15 Pollution and Environmental Control..................24 10.16 Possession of Franchises, Licenses, Etc..............24 10.17 Disclosure...........................................24 10.18 Subsidiaries.........................................24 10.19 Ownership............................................25
ii 11. GENERAL AFFIRMATIVE COVENANTS..................................25 11.1 Records Respecting Collateral......................25 11.2 Further Assurances.................................25 11.3 Right to Inspect...................................25 11.4 Reports............................................26 11.5 Settlement Sheets..................................26 11.6 Periodic Financial Statements of Borrowers.........26 11.7 Annual Financial Statements of Borrowers...........27 11.8 Payment of Taxes...................................27 11.9 Maintenance of Insurance...........................27 11.10 Maintenance of Property............................27 11.11 Certificate of No Event of Default; Compliance Certificate; Notice of Default.....................28 11.12 Change of Principal Place of Business, Etc.........28 11.13 Waivers............................................28 11.14 Preservation of Corporate Existence................28 11.15 Compliance with Laws...............................28 11.16 ERISA..............................................29 11.17 Litigation.........................................29 11.18 Environmental Compliance...........................29 12. FINANCIAL COVENANTS............................................31 12.1 Debt/Tangible Net Worth Ratio......................31 12.2 Tangible Net Worth.................................31 12.3 Current Ratio......................................31 12.4 Fixed Charge Coverage Ratio........................31 12.5 Capital Expenditures and Leases....................32 12.6 Minimum Net Income.................................32 13. NEGATIVE COVENANTS.............................................32 13.1 No Liens.............................................32 13.2 Debt.................................................32 13.3 Contingent Liabilities...............................32 13.4 Distributions........................................33 13.5 Stock Redemptions, Etc...............................33 13.6 Restricted Investment................................33 13.7 Merger, Transfer, Etc................................33 13.8 ERISA................................................33 13.9 Transactions with Affiliates.........................33 13.10 Fiscal Year..........................................34 13.11 Certain Debts........................................34
iii 14. EVENTS OF DEFAULT..............................................34 14.1 Notes................................................34 14.2 Obligations..........................................34 14.3 Misrepresentations...................................34 14.4 Covenants............................................35 14.5 Damage, Loss, Theft or Destruction of Collateral.....35 14.6 Certain Debts........................................35 14.7 Other Debts..........................................35 14.8 Voluntary Bankruptcy.................................35 14.9 Involuntary Bankruptcy...............................36 14.10 Judgments............................................36 14.11 ERISA................................................36 14.12 Change of Control....................................36 14.13 Material Adverse Change..............................36 14.14 Certain Debts........................................37 14.15 Change of Management.................................37 15. REMEDIES.......................................................37 15.1 Acceleration of the Obligations......................37 15.2 Remedies of a Secured Party..........................38 15.3 Set Off..............................................38 15.4 Other Remedies.......................................38 16. MISCELLANEOUS..................................................38 16.1 Waiver...............................................38 16.2 Governing Law........................................39 16.3 Survival.............................................39 16.4 No Assignment by Borrowers...........................39 16.5 Counterparts.........................................39 16.6 Reimbursement........................................39 16.7 Successors and Assigns...............................40 16.8 Severability.........................................40 16.9 Notices..............................................40 16.10 Entire Agreement; Amendments.........................41 16.11 Time of the Essence..................................41 16.12 Interpretation.......................................42 16.13 Lender Not Joint Venturer............................42 16.14 Jurisdiction.........................................42 16.15 Acceptance...........................................42 16.16 Payment on Non-Business Days.........................42 16.17 UCC Terminations.....................................42 16.18 Cure of Default by Lender............................43
iv 16.19 Recitals.............................................43 16.20 Attorney-in-Fact.....................................43 16.21 Sole Benefit.........................................43 16.22 Termination of this Agreement........................43 16.23 Partition............................................44 16.24 Acknowledgment by Borrowers..........................44 17. CONDITIONS PRECEDENT...........................................44 17.1 Conditions to Initial Revolving Advance..............44
EXHIBIT DOCUMENT ------- -------- A.......Collateral Locations B.......Guaranty C.......Other Permitted Encumbrances D.......Revolving Note E.......Term Note F.......Trade Names and Trade Styles G.......Ownership H.......Form of Secretary's Certificate I.......Partnership Certificate v AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ------------------------------------------------ THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (hereinafter, as it may be modified, amended or supplemented from time to time, and together with all Exhibits attached hereto, called this "AGREEMENT"), made, entered into and --------- effective as of the 5th day of December, 1997, by and among INNOTRAC CORPORATION, a Georgia corporation ("INNOTRAC"); IELC, INC., a Georgia -------- corporation ("IELC"); HOMETEL SYSTEMS, INC., a Georgia corporation ("HOMETEL"); ---- ------- RENTEL #1, INC., a Georgia corporation ("RENTEL"); RENTEL #2, L.L.C., a Georgia ------ limited liability company ("RENTEL #2"); SELLTEL #1, INC., a Georgia corporation --------- ("SELLTEL"); SELLTEL #2, L.L.C., a Georgia limited liability company ("SELLTEL ------- ------- #2"); and HOMETEL PROVIDERS PARTNERS, L.P., a Georgia limited partnership - -- ("HPP", HPP, SellTel, SellTel #2, RenTel, RenTel #2, HomeTel, IELC and Innotrac --- called collectively herein the "BORROWERS" and, individually, a "BORROWER"), as --------- -------- borrowers; and SOUTHTRUST BANK, N.A., a national banking association ("LENDER"), ------ as lender; W I T N E S S E T H: - - - - - - - - - - WHEREAS, Borrowers and Lender are parties to that certain Loan and Security Agreement, dated as of January 19, 1995, as heretofore amended (the "PRIOR ----- VERSION LOAN AGREEMENT"), pursuant to which Lender has previously established - ---------------------- for the benefit of the Borrowers a revolving line of credit in the maximum aggregate principal amount of Eighteen Million Dollars ($18,000,000) and has extended to Borrowers a term loan in the initial principal amount of Two Million Dollars ($2,000,000); and WHEREAS, Borrowers have requested Lender to increase the maximum aggregate principal amount of such revolving line of credit to Twenty-Five Million Dollars ($25,000,000), and subject to the terms and conditions set forth herein, Lender is willing to do so; and WHEREAS, Borrowers and Lender wish to enter into this Agreement in order to memorialize their mutual understandings in respect to such revolving line of credit increase and the other financial accommodations made by Lender to the Borrowers; WHEREAS, Lender is willing to extend such financial accommodations to Borrowers in accordance with the terms hereof upon the execution of this Agreement by Borrowers, compliance by Borrowers with all of the terms and provisions of this Agreement, and fulfillment by Borrowers of all conditions precedent to Lender's obligations herein contained; and NOW, THEREFORE, in consideration of the sum of TEN DOLLARS ($10.00), the foregoing premises, to induce Lender to extend the financial accommodations provided for herein, and for other good and valuable consideration, the sufficiency and receipt of all of which are acknowledged, Borrowers and Lender agree as follows: 1 1. DEFINITIONS, TERMS AND REFERENCES. ---------------------------------- 1.1 Certain Definitions. ------------------- In addition to such other terms as elsewhere defined herein, as used in this Agreement and in any Exhibits, the following capitalized terms shall have the following meanings, unless the context requires otherwise: "Accounts Receivable Collateral" shall mean all rights of each Borrower to ------------------------------ payment for goods sold or leased, or to be sold or to be leased, or for services rendered or to be rendered, howsoever evidenced or incurred, including, without limitation, all accounts, all contract rights, all instruments, all leases, rental contracts and other chattel paper and all general intangibles arising therefrom or relating thereto, all sales orders, all returned or repossessed goods and all books, records, computer tapes, programs and ledger books arising therefrom or relating thereto, all whether now owned or hereafter acquired or arising. "Account Debtor" shall mean any Person who is or may become obligated on -------------- any of the Accounts Receivable Collateral of such Borrower. "A. Dorfman Buyout" shall mean any transaction or series of transactions ----------------- pursuant to which the capital stock of RenTel #1, Inc. and SellTel #1, Inc. owned by Arnold Dorfman are purchased, redeemed or otherwise acquired by any Borrower or Scott Dorfman for an aggregate consideration not exceeding $1,000,000. "Affiliate" shall mean, with respect to any Person, any other Person --------- Controlling, Controlled by or under common Control with, such Person. "Agreement" shall have the meaning given to such term in the foregoing --------- recitals to this Agreement. "Balances Collateral" shall mean all property of each Borrower left with ------------------- Lender or in its possession now or hereafter, all deposit accounts of each Borrower now or hereafter opened with Lender, including, particularly, but without limitation, any Collateral Reserve Account required to be established with Lender pursuant to Section 3.1 hereof, all certificates of deposit issued by Lender to each Borrower, and all drafts, checks and other items deposited in or with Lender by each Borrower for collection now or hereafter. "Bankruptcy Code" shall mean Title 11 of the United States Code, as amended --------------- from time to time. "Base Rate" shall mean that interest rate so denominated and set by Lender --------- from time to time as an interest rate basis for borrowings from Lender. The Base Rate is one of 2 several interest rate bases which may be used by Lender. Lender lends at interest rates above and below the Base Rate. Any change in any rate of interest charged hereunder as a result of any change in the Base Rate shall become effective as of the opening of business on each date on which such change in the Base Rate occurs. "Borrower" and "Borrowers" shall have the meanings given to such terms in -------- --------- the foregoing recitals to this Agreement; provided, that with effect from and -------- after consummation of the Consolidation Transaction, "Borrower" shall mean Innotrac and its permitted successors and assigns. "Business Day" shall mean any day on which each Lender is open for the ------------ conduct of banking business at its respective main office. "Capital Expenditures" shall have the meaning given to such term in -------------------- accordance with GAAP, and shall specifically include, in any event, any current expenditure made by any Borrower for the acquisition, construction, repair, maintenance or replacement of fixed or capital assets which, under GAAP, would be expected to be capitalized on the books of such Borrower; provided, however, -------- ------- that the purchase or other acquisition of caller identification equipment or other telecommunications equipment used for sale, rental or lease purposes shall not be considered a Capital Expenditure for any purpose whatsoever under this Agreement or any of the other Loan Documents. "Closing Date" shall mean that date on which the initial disbursement of ------------ funds being made available to Borrowers under the Revolving Line of Credit. "Collateral" shall mean the property of Borrowers described in Article 4, ---------- or any part thereof, as the context shall require, in which Lender has, or is to have, a security interest pursuant hereto, as security for payment of the obligations. "Collateral Locations" shall mean (i) the Executive Office, (ii) those -------------------- locations specified in Exhibit "A" attached hereto and (iii) such other ----------- locations of Collateral as to which Lender shall be notified hereafter by Borrowers pursuant to Section 11.12. "Collateral Reserve Account" shall mean, individually and collectively, any -------------------------- non-interest bearing, demand deposit account (or series of such accounts, as the case may be) which is or may be required to open and maintain with Lender pursuant to the requirements of Section 3.1. "Consolidation Transaction" shall mean any transaction or related series of ------------------------- transactions pursuant to which (i) any or all of the Borrowers other than Innotrac is merged (whether initially or subsequent thereto) with and into Innotrac, (ii) any or all of the Borrowers other than Innotrac become subsidiaries, either wholly or partially owned, of Innotrac, or (iii) any other business combination wherein the business of such Borrowers is combined with that of Innotrac; provided, that Innotrac or any other required Person has then executed any and all 3 agreements, documents and instruments which Lender may reasonably require hereunder in order to preserve its secured position hereunder or under the other Loan Documents with respect to the Borrower or Borrowers merging with and into Innotrac. "Control," "Controlled," or "Controlling" shall mean, with respect to any ------- ---------- ----------- Person, the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities or otherwise; provided, however, that, in any event, any Person who owns directly or - -------- ------- indirectly twenty percent (20%) or more of the securities having ordinary voting power for the election of directors or other governing body of a corporation shall be deemed to "control" such corporation for purposes of this Agreement. "Debt" means all liabilities, obligations and indebtedness of each Borrower ---- and its consolidated Subsidiaries to any Person, of any kind or nature, now or hereafter owing, arising, due or payable, howsoever evidenced, created, incurred, acquired or owing, whether primary, secondary, direct, contingent, fixed or otherwise, and including, without in any way limiting the generality of the foregoing: (i) each Borrower's or any such Subsidiary's liabilities and obligations to trade creditors; (ii) all Debt for borrowed funds; (iii) all obligations and liabilities of any Person secured by any Lien on each Borrower's or any such Subsidiary's Property, even though such Borrower or such Subsidiary shall not have assumed or become liable for the payment thereof; (iv) all accrued pension fund and other employee benefit plan obligations and liabilities; (v) all Guaranteed Obligations; and (vi) deferred taxes. "Default Condition" shall mean the occurrence of any event which, after ----------------- satisfaction of any requirement for the giving of notice or the lapse of time, or both, would become an Event of Default. "Default Rate" shall mean that interest rate per annum equal to two percent ------------ (2%) plus the stated interest rate effective under each Note from time to time. "EBITDA" shall mean the net earnings of each Borrower and its consolidated ------ Subsidiaries for any fiscal period before interest, income taxes, depreciation and amortization expense for such period, determined under GAAP. "Eligible Accounts" shall mean that portion of the Accounts Receivable ----------------- Collateral of each Borrower consisting of the net billed dollar amount of accounts owing to such Borrower by its Account Debtors subject to no counterclaim, defense, setoff or deduction, excluding, however, in any event, ------------------ but without limitation, unless otherwise waived in writing by Lender, any account: which is owing by any Account Debtor having any past due accounts with any Borrower, except for commercial accounts of Innotrac and IELC, and, in the case of commercial accounts of Innotrac and IELC only, any account of an Account Debtor which is either more than ninety (90) days past invoice date or as to which twenty-five percent (25%) or more of the accounts of any Account Debtor are more than ninety (90) days past invoice date; (ii) as to which Lender does not have a first priority security interest; or (iii) which has been excluded by Lender 4 for purposes hereof, which it reserves the right to do, in its sole discretion, exercised in a commercially reasonable manner. "Eligible Installment Sales Orders" shall mean that portion of each --------------------------------- Borrower's Accounts Receivable Collateral consisting of the net unbilled dollar amount of installment sales made by such Borrower for its products or services to its Account Debtors subject to no counterclaim, defense, setoff or deduction, excluding, however, in any event, but without limitation, unless otherwise - ------------------ waived in writing by Lender, any such purchase order: (i) which is owing by any Account Debtor having any past due accounts with any Borrower, except for commercial accounts of Innotrac and IELC, and, in the case of commercial accounts of Innotrac and IELC only, any account of an Account Debtor which is either more than ninety (90) days past invoice date or as to which twenty-five percent (25%) or more of the accounts of any Account Debtor are more than ninety (90) days past invoice date; (ii) as to which Lender does not have a first priority security interest; or (iii) which has been excluded by Lender for purposes hereof, which it reserves the right to do, in its sole discretion, exercised in a commercially reasonable manner. "Eligible Inventory" shall mean the Inventory Collateral of the respective ------------------ Borrower, provided that such Inventory Collateral (i) is located at one of the locations set forth on Exhibit A; (ii) is subject to a valid and perfected first priority security interest in favor of Lender; and (iii) is not obsolete, slow moving, a custom item, defective, irregular, discontinued good or "seconds." "Employee Benefit Plan" shall mean any employee welfare benefit plan or any --------------------- employee pension benefit plan, as those terms are defined in Section 3(l) and 3(2) of ERISA, for the benefit of employees of any Borrower or any Subsidiary or any other entity which is a member of a "controlled group" or under "common control" with Parent, as such terms are defined in Section 4001(a)(14) of ERISA. "Equipment Collateral" shall mean all equipment of each Borrower, or in -------------------- which it has rights, whether now owned or hereafter acquired, wherever located, including, without limitation, all machinery, fixtures, furniture, furnishings, leasehold improvements, rolling stock, motor vehicles, plant equipment, computers and other office equipment and office furniture, together with any and all attachments and accessions, substitutes and replacements, and tools, spare parts, and repair parts used or useful in connection therewith. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as ----- may be amended from time to time. "Event of Default" shall mean any of the events or conditions described in ---------------- Article 14, provided that any requirement for the giving of notice or the lapse of time, or both, has been satisfied. 5 "Executive Office" shall mean the chief executive office of each Borrower ---------------- which is located at 1828 Meca Way, Norcross, Gwinnett County, Georgia 30093. "Fiscal Year" shall mean the fiscal year of each Borrower concluding as of ----------- December 31 in each calendar year. "Fixed Charge Coverage Ratio" shall mean, for any fiscal period, on a --------------------------- combined basis, the ratio which the sum of Net Income of Borrowers and their respective consolidated Subsidiaries for such period plus total depreciation and ---- amortization expense, lease expense and interest expense of such Borrowers and their consolidated Subsidiaries for such period bears to the sum of total lease expense, interest expense, capitalized interest and the current maturities of the long-term debt of all such Borrowers and their consolidated Subsidiaries for such period, all as determined under GAAP. "GAAP" shall mean generally accepted accounting principles, consistently ---- applied. "General Partner" shall mean HomeTel Providers, Inc., a Georgia --------------- corporation. "Guaranteed Obligations" shall mean, with respect to any Person, all ---------------------- obligations of such Person which in any manner directly or indirectly guarantee or assure, or in effect guarantee or assure, the payment or performance of any indebtedness, dividend or other obligation of any other Person or assure or in effect assure the holder of any such obligations against loss in respect thereof, including, without limitation, any such obligations incurred through an agreement, contingent or otherwise: (a) to purchase such obligations or any property constituting security therefor; (b) to advance or supply funds for the purchase or payment of such obligations or to maintain a working capital or other balance sheet condition; or (c) to lease Property or to purchase any debt or equity securities or other Property or services. "Guarantor" shall mean, initially, Scott Dorfman, individually, a resident --------- of the State of Georgia. The term "Guarantor" shall extend to and include, however, any other Person which, now or hereafter, guarantees or becomes surety for, any of the Obligations of any Borrower. "Guaranty" shall mean the Amended and Restated Guaranty, dated as of the -------- date hereof, from Scott Dorfman to Lender in the form of Exhibit "B" attached ----------- hereto evidencing his guaranty of the Obligations, as the same has been or may be amended, modified, supplemented or reaffirmed from time to time. "HomeTel" shall have the meaning given to such term in the foregoing ------- recitals to this Agreement. 6 "HPP" shall have the meaning given to such term in the foregoing recitals --- to this Agreement. "Innotrac" shall have the meaning given to such term in the foregoing -------- recitals to this Agreement. "Intangibles Collateral" shall mean all general intangibles of each ---------------------- Borrower, whether now existing or hereafter acquired or arising, including, without limitation, all copyrights, royalties, trademarks, trade names, tax refunds, rights to tax refunds, service marks, patent and proprietary rights, permits, licenses, sublicenses, leases, subleases, usufructs, trade secrets, diagrams and all customer lists. "Interest Expense" for any fiscal period of each Borrower, shall mean ---------------- interest expense of such Borrower during such period on that portion of the Debt of such Borrower consisting of Debt for borrowed funds, including, without limitation, the Obligations. "Interest Period" shall mean, in the case of the determination of any --------------- LIBOR-based rate, a one-, two-or three-month period as determined by the applicable Borrower. "Inventory Collateral" shall mean all inventory of each Borrower, or in -------------------- which it has rights, whether now owned or hereafter acquired, wherever located including goods in transit, including, without limitation, all goods of such Borrower held for sale or lease or furnished or to be furnished under contracts of service, all goods held for display or demonstration, goods on lease or consignment, returned or repossessed goods, all raw materials, work-in-process, finished goods and supplies used or consumed in such Borrower's business, together with all documents, documents of title, dock warrants, dock receipts, warehouse receipts, bills of lading or orders for the delivery of all, or any portion, of the foregoing. "ITC" shall mean ITC Service Company, a Georgia corporation. --- "ITC Lien" shall mean the Lien granted to ITC by HPP in HPP's Collateral, -------- or portions thereof, pursuant to the ITC Loan Security as security for the ITC Loan. "ITC Loan" shall mean the term loan in the original principal amount of -------- Three Million Five Hundred Thousand Dollars ($3,500,000) made by ITC to HPP pursuant to the ITC Loan Agreement. "ITC Loan Agreement" shall mean the Loan Agreement, dated as of April 11, ------------------ 1994, between ITC and Borrower, pursuant to which ITC made the ITC Loan to HCC, and HCC granted the ITC Lien to ITC in all or portions of the Collateral as security for the payment of the ITC Loan. 7 "Lender" shall have the meaning given to such term in the initial recitals ------ to this Agreement. "Leverage Ratio" shall mean, for any fiscal period, as to the Borrowers on -------------- a combined basis, the ratio of the sum of total Debts minus Subordinated Debt to the sum of combined Tangible Net Worth plus Subordinated Debt plus (through the earlier of June 30, 1998 or the consummation of an initial public offering as contemplated by Section 10.19 of this Agreement) any and all deferred tax assets of Borrower, all as determined under GAAP. "LIBOR" shall mean, for any Interest Period, the rate per annum at which ----- deposits in United States dollars for such Interest Period, and for the amount of the requested LIBOR Advance, are offered in the London interbank market at approximately 11:00 a.m. (London time) two Business Days before the first day of such Interest Period, as published or reprinted through the Reuter's Screen or such other recognized quote service as is acceptable to the Lender; provided, that, at the Lender's sole option, such rate may be adjusted by dividing such rate by a percentage equal to one (1) minus the then average stated maximum rate (stated as a decimal) of all reserve requirements applicable to any member of the Federal Reserve System in respect of Eurocurrency liabilities as defined in Regulation D of the Board of Governors of the Federal Reserve System (or any successor categories for such liabilities under such Regulation D). "LIBOR Advance" shall mean any borrowing hereunder which bears interest ------------- based on LIBOR. "Lien" shall mean any deed to secure debt, deed of trust, mortgage or ---- similar instrument, and any lien, security interest, preferential arrangement which has the practical effect of constituting a security interest, security title, pledge, charge, encumbrance or servitude of any kind, whether by consensual agreement or by operation of statute or other law, and whether voluntary or involuntary, including, without limitation, any conditional sale or other title retention agreement or lease in the nature thereof. "Loan Documents" shall mean this Agreement, any Notes, any financing -------------- statements covering the Collateral, and any and all other documents, instruments, certificates and agreements executed and/or delivered by a Borrower in connection herewith, or any one, more, or all of the foregoing, as the context shall require. "Margin" shall mean, as to each Borrower, an amount equal to the sum of (i) ------ eighty-five percent (85%) of the face dollar amount, as at the date of determination, of Eligible Accounts of such Borrower, plus (ii) seventy percent ---- (70%) of the face dollar amount, as at the date of determination, of Eligible Installment Sales Orders of such Borrower, plus (iii) the lesser of forty ---- percent (40%) of the net book value of Eligible Inventory of such Borrower or $2,500,000. 8 "Margin Requirement" shall have the meaning ascribed to such term in ------------------ Section 2.1(a). "Margin Stock" shall have the meaning ascribed to such term in Section ------------ 221.2(h) (or any successor provision) of Regulation U of the Board of Governors of the Federal Reserve System. "MPPAA" shall mean the Multiemployer Pension Plan Amendments Act of 1980, ----- amending Title IV of ERISA. "Multiemployer Plan" shall have the meaning set forth in Section 4001(a)(3) ------------------ of ERISA. "Net Income" shall mean, for any fiscal period of any Person, the net ---------- income (or loss), after provisions for taxes (either actual, accrued or deemed, in the case of a pass-through entity determined as if the highest marginal individual income tax rate were applicable), of such Person on a consolidated basis for such period (taken as a single accounting period) determined in conformity with GAAP, minus (to the extent otherwise included therein and ----- without duplication) (i) any gains or losses, together with any related provisions for taxes, realized by such Person upon any sale of its assets other than in the ordinary course of business, (ii) any other non-recurring gains or losses, and (iii) any income or loss of any other Person acquired prior to the date such other Person becomes a Subsidiary of the Person whose "Net Income" is being measured or is merged into or consolidated with the Person whose "Net Income" is being measured or all or substantially all of such other Person's assets are acquired by the Person whose "Net Income" is being measured. "Notes" shall mean, collectively, the Revolving Note, the Term Note and any ----- other promissory notes or other instruments at an time or from time to time evidencing any Obligations. "Obligations" shall mean any and all Debts, liabilities and obligations of ----------- each and every Borrower to Lender, including without limiting the generality of the foregoing, any indebtedness, liability or obligation of any Borrower to Lender arising hereunder or as a result hereof, whether evidenced by the Notes, the other Loan Documents or otherwise, any and all extensions or renewals thereof in whole or in part; any indebtedness,, liability or obligation of any Borrower to Lender under any later or future advances or loans made by Lender to such Borrower, and any and all extensions or renewals thereof in whole or in part; any and all present and future indebtedness of any Borrower to other creditors which is purchased by Lender from such other creditors; and any and all future or additional indebtednesses, liabilities or obligations of any Borrower to Lender whatsoever and in any event, whether existing as of the date hereof or hereafter arising, whether arising under a loan, lease, credit card arrangements, line of credit, letter of credit or other type of financing, and whether direct, indirect, absolute or contingent, as maker, endorser, guarantor, surety or otherwise, and whether evidenced by, arising out of, or 9 relating to, a promissory note, bill of exchange, check, draft, bond, letter of credit, guaranty agreement, bankers, acceptance, foreign exchange contract, commitment fee, service charge or otherwise. "PBGC" shall mean the Pension Benefit Guaranty Corporation. ---- "Permitted Encumbrances"shall mean (i) Liens for taxes not yet due and ---------------------- payable or being contested as permitted by Section 11.8; (ii) carriers', warehousemen's, mechanics', materialmen's, repairmen's or other, like Liens arising in the ordinary course of business, payment for which is not yet due or which are being contested in good faith and by appropriate proceedings; (iii) pledges or deposits in connection with worker's compensation, unemployment insurance and other social security legislation; (iv) deposits to secure the performance of utilities, leases, statutory obligations and surety and appeal bonds and other obligations of a like nature incurred in the ordinary course of business; (v) bankers, Liens arising by statute or under customary terms regarding depository relationships on deposits held by financial institutions; (vi) restrictions imposed by licenses and leases; (vii) any Liens in favor of Lender, whether in respect of the Collateral or otherwise; (viii) the ITC Lien; (ix) rights of rental and lease customers; (xi) purchase money Liens on purchase money Debt permitted hereunder; and (xii) those other Liens (if any) described on Exhibit "C" attached hereto. ----------- "Person" shall mean any individual, sole proprietorship, partnership, joint ------ venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party or government (whether territorial, national, federal, state, county, city, municipal or otherwise, including, without limitation, any instrumentality, division, agency, body or department thereof). "Plan" shall mean any employee benefit plan or other plan for any employees ---- of Borrower and any employees of any Subsidiary or any other entity which is a member of a controlled group or under common control with Borrower, as such terms are defined in Section 4001(a)(14) of ERISA, and which is subject to the provisions of Title IV of ERISA. "Property" shall mean any interest in any property or asset of any kind, -------- whether real, personal or mixed, or tangible or intangible. "RenTel" shall have the meaning given to such term in the foregoing ------ recitals to this Agreement. "RenTel #2" shall mean RenTel #2, L.L.C., a Georgia limited liability --------- company. "Reportable Event" shall mean any of the events described in Section ---------------- 4043(b) of ERISA. 10 "Restricted Investment" means any acquisition of Property by a Borrower in --------------------- exchange for cash or other Property, whether in the form of an acquisition of stock, debt security, or other indebtedness or obligation, or the purchase or acquisition of any other Property, or by loan, advance, capital contribution, or subscription, except acquisitions of the following: (a) fixed assets to be used ------ in the business of a Borrower so long as the costs thereof constitute Capital Expenditures permitted hereunder; (b) goods held for sale or rental or to be used in the provision of services by a Borrower in the ordinary course of business; (c) current assets arising from the sale or rental of goods or the rendition of services in the ordinary course of business of a Borrower; (d) direct obligations of the United States of America, or any agency thereof, or obligations guaranteed by the United States of America, provided, however, that ----------------- such obligations mature within one (1) year from the date of acquisition thereof; (e) certificates of deposit maturing within one (1) year from the date of acquisition, or overnight bank deposits, in each case issued by, created by, or with a bank or trust company organized under the laws of the United States or any state thereof having capital and surplus aggregating at least One Hundred Million Dollars ($100,000,000); and (f) commercial paper given the highest rating by a national credit rating agency and maturing not more than two hundred seventy (270) days from the date of creation thereof. "Revolving Advance" shall mean an advance made to any Borrower by Lender ----------------- under the Revolving Line of Credit, which shall be evidenced by the Revolving Note. "Revolving Line of Credit" shall refer to the committed revolving line of ------------------------ credit opened by the Lender in favor of Borrowers, pursuant to the provisions of Section 2.1. "Revolving Note" shall mean the Amended and Restated Revolving Promissory -------------- Note, dated of even date herewith, made by Borrowers to the order of Lender, in the principal amount of the Revolving Line of Credit, evidencing the Revolving Line of Credit, together with any renewals or extensions thereof, in whole or in part, and any amendments, supplements, replacements or substitutions thereof. The Revolving Note shall be substantially in the form of Exhibit "D" attached ----------- hereto. "SellTel" shall have the meaning given to such term in the initial recitals ------- to this Agreement. "SellTel #2" shall mean SellTel #2, L.L.C., a Georgia limited liability ---------- company. "Subsidiary" shall mean any corporation, partnership, business association ---------- or other entity (including any Subsidiary of any of the foregoing) of which a Borrower owns at any time during the term of this Agreement, directly or indirectly, fifty percent (50%) or more of the capital stock or equity interest having ordinary power for the election of directors or others performing similar functions. Any representation, warranty or covenant contained in this Agreement which includes the term "Subsidiaries" shall mean and refer to any Subsidiary which 11 was such as of the date of determination for purposes of such representation, warranty or covenant. "Subordinated Debt" shall mean any Debt which has been subordinated, in ----------------- right of payment and claim, to the rights and claims of Lender in respect of the obligations in a form and substance satisfactory to Lender. For purposes hereof, the ITC Loan shall be considered as Subordinated Debt upon the execution and delivery of the Subordination Agreements described more particularly in Section 17.1(g) below and subject to continuing compliance with the terms thereof by ITC. "Tangible Net Worth" shall mean the combined net worth of all Borrowers, ------------------ determined as of the end of any fiscal period of Borrowers under GAAP, minus, any and all assets, on a combined basis, of Borrowers constituting (i) goodwill, patents, copyrights, trademarks, trade names and other intangible assets, (ii) write-ups of assets, (iii) unamortized debt discount and expense, (iv) long-term deferred charges, (v) any Debt owing by any Affiliate to such Borrower (excluding, for this purpose, any Debt owing by any Borrower to any other Borrower). "Termination Date" shall mean (i) as to the Revolving Line of Credit, ---------------- November 15, 1999, and (ii) as to the Term Loan, July 19, 1999; provided, -------- however, that, at Lender's election, by the giving of written notice to - ------- Borrowers to such effect prior to such termination date or, if such termination date is extended pursuant hereto, any subsequent anniversary of such termination date, Lender may extend the "Termination Date" as to either or both of the Revolving Line of Credit or the Term Loan from year-to-year, in which case the "Termination Date" shall be the termination date then in effect that is applicable to the respective loan facility. "Term Loan" shall mean the loan made by Lender to Borrowers pursuant to --------- Section 2.2 of this Agreement. "Term Note" shall mean the Term Note, dated as of July 19, 1996, made by --------- Borrowers to the order of Lender, evidencing the Term Loan, (a copy of which is attached hereto as Exhibit "E") together with any renewals or extensions ----------- thereof, in whole or in part, and any amendments or supplements thereto. "UCC" shall mean the Uniform Commercial Code--Secured Transactions of --- Georgia (O.C.G.A. Title 11, Article 9), as amended. 1.2 Use of Defined Terms. --------------------- All terms defined in this Agreement and the Exhibits shall have the same defined meanings when used in any other Loan Documents, unless the context shall require otherwise. 1.3 Accounting Terms. ---------------- 12 All accounting terms not specifically defined herein shall have the meanings generally attributed to such terms under GAAP. 1.4 UCC Terms. --------- The terms "accounts", "chattel paper", "instruments", "general intangibles", "inventory", "equipment", "fixtures", "documents", "products" and "proceeds", as and when used in the Loan Documents, shall have the same meanings given to such terms under the UCC. 1.5 Terminology. ----------- All personal pronouns used in this Agreement, whether used in the masculine, feminine or neuter gender, shall include all other genders; the singular shall include the plural, and the plural shall include the singular. Titles of Articles and Sections in this Agreement are for convenience only, and neither limit nor amplify the provisions of this Agreement, and all references in this Agreement to Articles, Sections, Subsections, paragraphs, clauses, subclauses or Exhibits shall refer to the corresponding Article, Section, Subsection, paragraph, clause, subclause of, or Exhibit attached to, this Agreement, unless specific reference is made to the articles, sections or other subdivisions divisions of, or Exhibit to, another document or instrument. Each reference to any document, agreement, instrument or other paper shall be a reference to each such document, agreement, instrument or paper as it shall be amended, modified, supplemented, extended, renewed or replaced from time to time. 1.6 Exhibits. -------- All Exhibits attached hereto are by reference made a part hereof. 2. THE FINANCING. ------------- Upon execution of this Agreement and compliance with its terms, including, without limitation, the conditions precedent set forth in Section 17.1 hereof, Lender agrees to make available to Borrowers the Revolving Line of Credit and the Term Loan on the following terms and conditions: 2.1 Revolving Line of Credit. ------------------------ (a) Lender agrees to open a committed revolving line of credit (the "REVOLVING --------- LINE OF CREDIT" or "REVOLVING CREDIT") in favor of Borrowers in the maximum - -------------- ---------------- aggregate principal amount of Twenty-Five Million Dollars ($25,000,000) so that during the period commencing on the date hereof and ending on the Termination Date or the earlier termination of the Revolving Line of Credit pursuant to Section 2.5 or Article 15 below, each Borrower may borrow and repay and re- borrow Revolving Advances up to a maximum aggregate principal amount equal, in the 13 aggregate, as to all Borrowers, to Twenty-Five Million Dollars ($25,000,000), and, as to HPP only, the sum of Twelve Million Dollars ($12,000,000); subject, ------- however, to the further requirement that at no time shall the aggregate - ------- principal amount of Revolving Advances owing by any one Borrower under the Revolving Line of Credit exceed the Margin applicable to such Borrower (such requirement being referred to herein as the "MARGIN ------ REQUIREMENT"). If at any time hereafter the Margin Requirement is not satisfied - ----------- by any one Borrower, then such Borrower agrees to repay immediately the then principal balance of the Revolving Advances owing by it by that amount necessary to satisfy the Margin Requirement applicable to it. The Debt arising from the disbursement of any and all Revolving Advances shall be evidenced by the Revolving Note, which shall be executed and delivered by each Borrower simultaneously herewith. Each request for a Revolving Advance shall be made by Innotrac, as agent for the Borrowers, to Lender in such manner as Lender may request from time to time hereafter (including, without limitation, by telephone or facsimile transmission), or, as Lender and Innotrac, acting in its agency capacity, may mutually agree hereafter, by pre-approved automatic disbursement. Borrowers shall report to Lender in a writing in form satisfactory to Lender, by the twentieth (20th) day of each calendar month, for the calendar month then ended, as to the allocation of Revolving Advances among the Borrowers made during such calendar month then ended; provided, however, that Lender shall have -------- ------- the right at any time hereafter, by notice to Borrowers, to require more frequent reporting or, if Lender so elects, to require that Innotrac identify the Borrower to whom each Revolving Advance is to be made at the request for such Revolving Advance (in which event Borrowers' right to receive pre-approved automatic disbursements, if in effect, shall be terminated). With respect to the total Revolving Advances from time to time outstanding, each Borrower shall be liable only for the payment of all outstanding Revolving Advances disbursed to, and owing by, it from time to time; but no Borrower shall be liable for the payment of any Revolving Advances disbursed to, and owing by, any other Borrower, notwithstanding that each Borrower is a co-maker of the Revolving Note and a co-borrower pursuant to this Agreement, unless and except to the extent that, subsequently hereto, either (i) such Borrower executes a guaranty in respect thereof or (ii) such Borrower becomes a successor in interest to another Borrower, whether pursuant to a Consolidation Transaction or otherwise. Without limitation of the preceding provisions, the principal amount of the Revolving Note shall be due and payable from collections and other proceeds of Collateral in ac cordance with the provisions of Article 3 below and shall be due and payable in full on the Termination Date or on the date of any earlier termination of the Revolving Line of Credit pursuant to Section 2.5 or Article 15 below. 2.2 Term Loan. --------- Borrowers acknowledge and agree that: (i) the Lender, in reliance upon the representations and warranties made in, this Agreement, has extended to the Borrowers a term loan in an amount equal to Two Million Dollars ($2,000,000) (the "TERM LOAN"); (ii) the Term Loan is evidenced by the Term Note; (iii) the --------- Term Loan shall mature on the applicable Termination Date; (iv) the Term Loan shall bear interest at the rates specified in Section 2.3(a); (v) the Term Loan is payable in accordance with the terms of the Term Note and this Agreement; 14 and (vi) the proceeds of the Term Loan have been used solely to finance equipment and improvements to Borrowers' leased facilities located at Meadowbrook Parkway and Meca Way, Norcross, Georgia and Sacramento, California and certain related expenditures. 2.3 Interest and Fees. ----------------- Subject to Section 15.1 of this Agreement, interest and fees shall be charged on Revolving Advances and the Term Loan (in each case computed based on a 360- day year and the actual number of days elapsed) in accordance with the following provisions: (a) Interest. (i) All Revolving Advances shall bear interest at a -------- fluctuating rate per annum equal to the Base Rate, as in effect from time to time, calculated on the basis of a 360-day year and actual days elapsed; provided, however, that, so long as no Event of Default then exists, Borrower - -------- ------- may, by a written notice delivered to Lender not later than 10:00 a.m. (Atlanta, Georgia time) on the second (2nd) Business Day prior to the first (1st) day of each calendar month (commencing in December 1997) direct that interest accrue on the principal of any particular Revolving Advance outstanding from time to time during the Interest Period designated by the Borrower in such notice at a rate per annum equal to LIBOR plus the number of basis points in excess thereof set ---- forth below corresponding to the applicable Leverage Ratio requirement (the "LIBOR MARGIN") and for such Interest Period as is selected by Borrower with - ------------- respect to each such Revolving Advances: If Leverage Ratio Is: Then the LIBOR Margin Is: -------------------- ------------------------ Greater than 2.25 to 1.0 but not greater than 2.5 to 1.0 225 basis points Greater than 2.0 to 1.0 but not greater than 2.25 to 1.0 200 basis points Greater than 1.5 to 1.0 but not greater than 2.0 to 1.0 175 basis points Up to 1.5 to 1.0 150 basis points Each such designation by Borrower of the interest rate based on LIBOR and of an Interest Period shall be irrevocable and shall remain in effect throughout such Interest Period. In the event Borrower selects an Interest Period in excess of one (1) month in length, such Interest Period and the interest rate based on LIBOR related thereto shall remain in effect hereunder for each full calendar month thereafter which is covered by such Interest Period. Upon determining the interest rate based on LIBOR for an Interest Period requested by Borrower, Lender shall promptly notify Borrower by telephone (confirmed in writing) of such determination, and such determination shall, absent manifest error, be final, conclusive and binding for all purposes. Borrower's selection of the interest rate based on LIBOR for a particular Interest Period shall not affect Borrower's ability to borrow hereunder during such Interest Period, subject to the terms of this Agreement. Upon the expiration of an applicable Interest Period, the applicable Revolving Advance bearing a LIBOR-based rate shall thereafter bear interest at the Base Rate unless the Borrower provides other instructions to the Lender in accordance herewith, and (ii) the Term 15 Loan from time to time outstanding shall be payable at a fixed rate per annum equal to eight and 95/100ths percent (8.95%). (b) Payment of Interest and Fees. All interest payable on the ---------------------------- Revolving Advances, the Term Loan and the commitment fee shall be payable monthly in arrears on the first day of each month hereafter (for the preceding calendar month or portion thereof, as the case may be). 2.4 Method of Making Payments. ------------------------- All payments owing under or pursuant to this Agreement, whether of principal, interest, fees or otherwise, shall be made without defense, set-off or counterclaim to Lender not later than 2:00 p.m. Atlanta, Georgia time on the date when due and shall be made in lawful money of the United States of America in immediately available funds at the head office of Lender in Atlanta, Georgia. If and to the extent that any such payment is not made by a Borrower when due or if such Borrower and Lender then have mutually agreed to a pre-approved automatic advance to make such payment, each Borrower hereby authorizes and directs Lender to charge any demand deposit account maintained by such Borrower with Lender for the amount of such payment or, in lieu thereof or in addition thereto, as necessary, to debit any such payment as a Revolving Advance (whether or not an over-advance is created thereby). Whenever any payment to be made hereunder or pursuant hereto shall be stated to be due on a day which is not a Business Day, the due date thereof shall be extended to the next succeeding Business Day and, with respect to payments of principal, interest thereon shall be payable at the applicable rate during such extension. 2.5 Prepayments; Early Termination. ------------------------------ (a) Revolving Advances may be repaid and, subject to borrowing availability, re-borrowed at any time and from time to time by any Borrower up to, but not including, the Termination Date; provided, however, that if any -------- ------- Revolving Advance is prepaid at a time when it bears interest at a LIBOR-based rate before the expiration of the applicable Interest Period, Borrower shall pay to Lender any and all reasonable costs which Lender must pay as a result of such prepayment which the Lender would not otherwise have paid if the Revolving Advance, as the case may be, were paid at the end of the applicable Interest Period. (b) In addition to the foregoing, any Borrower, individually, may at any time prior to the Termination Date, and whether or not a Default Condition or Event of Default then exists, terminate this Agreement as to itself without affecting the rights of any other Borrower hereunder, provided however, that: -------- ------- (1) any such termination by any one Borrower must be preceded by at least ten (10) days written notice to the Lender; (2) such Borrower shall be required to pay in full both (A) all outstanding Revolving Advances owing by it, together with all accrued and un paid interest thereon and all accrued and unpaid fees and expense which are then due and payable by such Borrower hereunder and un der any other Loan Document (including, 16 without limitation, for this purpose, such Borrower's pro rata share of any fees and expenses then owing by Borrowers jointly to Lender hereunder, based on its average borrowings under the Revolving Line of Credit over the preceding six months, period, or any shorter period if such termination occurs less than six months after the Closing Date) and (B) all Debt of such Borrower to any other Borrower arising from the receipt of intercompany loans or advances from any other Borrower, together with all accrued and unpaid interest thereon and (3) notwithstanding such termination, no Collateral of such Borrower shall be released and all Collateral of such Borrower shall continue to secure all Obligations of such Borrower then and thereafter outstanding unless and until all such Obligations of such Borrower are fully paid and satisfied. 2.6 Use of Proceeds. --------------- All proceeds of Revolving Advances shall be used for working capital purposes in the ordinary course of each Borrower's business. 2.7 Increased Costs or Reduced Return. --------------------------------- If, due to either (a) the introduction of or any change in or in the interpretation of any U.S. law or regulation, or (b) the compliance with any guideline or request from any governmental authority, there shall be any increase in the cost to Lender of maintaining its commitments hereunder or agreeing to make or making, funding or maintaining Revolving Advances or Term Loan to any one, or more, or all Borrowers, or any reduction in the rate of return on Lender's capital as a consequence of its obligations hereunder to a level below that which Lender would have achieved but for such events described in clauses (a) and (b) above, each affected Borrower shall, from time to time, upon demand by Lender, pay to Lender additional amounts sufficient to compensate Lender for such increased costs or reduced return within ten (10) Business Days of receipt of the receipt of the certificate referred to below. A certificate identifying with reasonable specificity the basis for and the amount of such increased costs or reduced return shall be submitted to Borrowers by Lender and shall be conclusive and binding for all purposes, absent manifest error. In determining such amount, Lender shall use reasonable averaging and attribution methods. 2.8 Indemnification of Lender. ------------------------- At all times prior to and after the consummation of the transactions contemplated by this Agreement, Borrowers, jointly and severally, agree to hold Lender, its directors, officers, employees, agents, Affiliates, successors and assigns harmless from and to indemnify Lender and its directors, officers, employees, agents, Affiliates, successors and assigns against, any and all losses, damages, costs and expenses (including, without limitation, attorney's fees, costs and expenses) incurred by any of the foregoing, whether direct, indirect or consequential, as a result of or arising from or relating to any "Proceedings" (as defined below) by any Person, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any Person 17 under any statute, case or regulation, including, without limitation, any federal or state securities laws or under any common law or equitable case or otherwise, arising from or in connection with this Agreement, and any other of the transactions contemplated by this Agreement except to the extent such losses, damages, costs or expenses are due to the wilful misconduct or gross negligence of Lender. As used herein, "Proceedings" shall mean actions, suits or ----------- proceedings before any court, governmental or regulatory authority. Each Borrower, jointly and severally, further agrees to indemnify any Person to whom Lender transfers or sells all or any portion of its interest in the Obligations or participations therein on terms substantially similar to the terms set forth above. Lender shall not be responsible or liable to any Person for consequential damages which may be alleged as a result of this Agreement or any of the transactions contemplated hereby. The obligations of Borrowers under this Section 2.8 shall survive the termination of this Agreement and payment of the Obligations but shall terminate upon expiration of the applicable statute or period of limitations. 3. COLLECTIONS. ----------- 3.1 Collateral Reserve Account; Lockbox Accounts. -------------------------------------------- On the Closing Date, each Borrower shall establish, and thereafter shall maintain, with Lender, a separate Collateral Reserve Account, or series thereof, as Lender may permit or require, into which such Borrower shall be obliged to transfer and deliver all cash, checks, drafts, items and other instruments for the payment of money which such Borrower has received or may at any time hereafter receive in full or partial payment for its Inventory Collateral or otherwise as proceeds of its Accounts Receivable Collateral and any other Collateral; and pending such transfer and delivery, such Borrower shall be deemed to hold any such funds in trust for the benefit of Lender. All collected balances in each Borrower's Collateral Reserve Account shall be applied by Lender on a daily basis in payment of such Borrower's Revolving Advances. No Borrower shall be entitled to draw on its Collateral Reserve Account without the prior written consent of Lender; provided, however, that, at any time during -------- ------- which collected balances exist in the Collateral Reserve Account, if there are no Revolving Advances then owing by such Borrower and no other Obligations are then due and payable by such Borrower, and provided that no Default Condition or Event of Default is in existence, a Borrower may withdraw such collected balances, or any portion thereof, therefrom for use in its business operations. Lender may, additionally, at any time after the occurrence and during the continuance of an Event of Default, in its sole discretion, direct Account Debtors to make payments on the Accounts Receivable Collateral, or portions thereof, of one, or more, or all Borrowers directly to Lender, and the Account Debtors are hereby authorized and directed to do so by Borrowers upon Lender's direction, and the funds so received shall also be deposited in each Borrower's Collateral Reserve Account, and applied as aforesaid. 18 4. SECURITY INTEREST -- COLLATERAL. ------------------------------- As security for the payment of the Revolving Advances and Term Loan owing by it and all other obligations whatsoever of each Borrower to Lender and the performance by each Borrower of all covenants and requirements hereunder and under the other Loan Documents, each Borrower hereby grants to Lender a continuing, general lien upon and security interest and title in and to the following described Property, wherever located, whether now existing or hereafter acquired or arising (herein, the "COLLATERAL"), namely: (a) the ---------- Accounts Receivable Collateral; (b) the Inventory Collateral; (c) the Equipment Collateral; (d) the Intangibles Collateral; (e) the Balances Collateral; and (f) all products and/or proceeds of any and all of the foregoing, including, without limitation, insurance or condemnation proceeds, all Property received wholly or partly in trade or exchange for any of the foregoing, and all rents, revenues, issues, profits and proceeds arising from the sale, lease, license, encumbrance, collection or any other temporary or permanent disposition of any of the foregoing or any interest therein. 5. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO ACCOUNTS ------------------------------------------------------- -------- RECEIVABLE COLLATERAL. --------------------- With respect to the Accounts Receivable Collateral, each Borrower hereby represents, warrants and covenants to Lender as set forth in Section 5.1 through 5.4, inclusive. 5.1 Bona Fide Accounts. ------------------ Each item of the Accounts Receivable Collateral arises or will arise under a contract between such Borrower and the Account Debtor, or from the bona fide sale, rental or delivery of goods to or performance of services for, the Account Debtor. 5.2 Good Title; No Existing Encumbrances. ------------------------------------ Each Borrower has good title to its Accounts Receivable Collateral free and clear of all Liens thereon other than any Permitted Encumbrances, and no financing statement covering the Accounts Receivable Collateral is on file in any public office other than any evidencing Permitted Encumbrances. 5.3 Right to Assign; No Further Encumbrances. ---------------------------------------- Each Borrower has full right, power and authority to make this assignment of the Accounts Receivable Collateral and hereafter will not pledge, hypothecate, grant a security interest in, sell, assign, transfer, or otherwise dispose of the Accounts Receivable Collateral, or any interest therein. 19 5.4 Power of Attorney. ----------------- Each Borrower irrevocably designates and appoints Lender its true and lawful attorney either in the name of Lender or in the name of such Borrower to ask for, demand, sue for, collect, compromise, compound, receive, receipt for and give acquittances for any and all sums owing or which may become due upon any items of the Accounts Receivable Collateral and, in connection therewith, to take any and all actions as Lender may deem necessary or desirable in order to realize upon the Accounts Receivable Collateral, including, without limitation, power to endorse in the name of such Borrower, any checks, drafts, notes or other instruments received in payment of or on account of the Accounts Receivable Collateral, but Lender shall not be under any duty to exercise any such authority or power or in any way be responsible for the collection of the Accounts Receivable Collateral. Lender hereby agrees that it will not exercise the foregoing power of attorney except after the occurrence of, and during the continuation of, an Event of Default. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INVENTORY ----------------------------------------------------------------- COLLATERAL. ----------- With respect to the Inventory Collateral, each Borrower hereby represents, warrants and covenants to Lender as set forth in Sections 6.1 through 6.5, inclusive. 6.1 Sale of Inventory Collateral. ---------------------------- Each Borrower will not sell, lease, rent, exchange, or otherwise dispose of any of the Inventory Collateral without the prior written consent of Lender, except in the ordinary course of business for cash or on open account or on terms of payment ordinarily extended to its customers. Upon the sale, lease, exchange, rental or other disposition of any Inventory Collateral, the security interest and lien created and provided for herein, without break in continuity and without further formality or act, shall continue in and attach to any proceeds thereof, including, without limitation, accounts, contract rights, shipping documents, documents of title, bills of lading, warehouse receipts, dock warrants, dock receipts and cash or non-cash proceeds, and in the event of any unauthorized sale, shall continue in the Inventory Collateral itself. 6.2 Insurance. --------- Each Borrower agrees that it will obtain and maintain insurance on the Inventory Collateral, in such amounts and against such risks as Lender may reasonably request, with insurers having a Best's rating of at least "A-" (unless otherwise approved by Lender), with loss payable to Lender and reflecting Lender as an additional insured as its interest may appear. Such insurance shall not be cancelable by Borrowers, unless with the prior written consent of Lender, or by Borrowers, insurer, unless with at least thirty (30) days advance written notice to Lender. 20 6.3 Good Title; No Existing Encumbrances. ------------------------------------ Except with respect to any Permitted Encumbrances, each Borrower owns the Inventory Collateral free and clear of any Lien, and no financing statements or other evidences of the grant of a security interest respecting the Inventory Collateral exist on the public records as of the date hereof other than any evidencing any Permitted Encumbrances. 6.4 Right to Grant Security Interest; No Further Encumbrances. --------------------------------------------------------- Each Borrower has the right to grant a security interest in the Inventory Collateral. Each Borrower will pay all taxes and other charges against the Inventory Collateral, and such Borrower will not use the Inventory Collateral illegally or allow the Inventory Collateral to be encumbered except for the security interest in favor of Lender granted herein and except for any Permitted Encumbrances. 6.5 Location of Inventory Collateral. -------------------------------- Each Borrower hereby represents and warrants to Lender that, as of the date hereof, the Inventory Collateral (except for certain portions thereof in transit or located upon the premises of a rental or lease customer) of such Borrower is situated only at one or more of the Collateral Locations and such Borrower covenants with Lender not to locate the Inventory Collateral at any location other than a Collateral Location or the premises of a rental or lease customer without at least thirty (30) days prior written notice to Lender. In addition, to the extent any Borrower should warehouse any of the Inventory Collateral at any time hereafter, such Borrower acknowledges and agrees that such warehousing may be conducted only by Innotrac or warehousemen who have been pre-approved by Lender and who, in any event, shall issue non-negotiable warehouse receipts in Lender's name to evidence any such warehousing of goods constituting Inventory Collateral. In any event, no Borrower will consign any Inventory Collateral to any Person other than Innotrac except upon first obtaining Lender's prior written consent thereto. 7. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO EQUIPMENT ------------------------------------------------------- --------- COLLATERAL. ---------- With respect to the Equipment Collateral, each Borrower hereby represents, warrants and covenants to Lender as set forth in Section 7.1 through 7.5, inclusive. 7.1 Sale of Equipment Collateral. ---------------------------- No Borrower will sell, lease, rent, exchange, or otherwise dispose of any of the Equipment Collateral other than in the ordinary course of such Borrower's business without the prior written consent of Lender. 21 7.2 Insurance. --------- Each Borrower agrees that it will obtain and maintain insurance on its Equipment Collateral with such companies and in such amounts and against such risks as Lender may reasonably request, with loss payable to Lender and reflecting Lender as an additional insured as its interests may appear. Such insurance shall not be cancelable by Borrower, unless with the prior written consent of Lender, or by Borrower's insurer, unless with at least thirty (30) days advance written notice to Lender. 7.3 Good Title; No Existing Encumbrances. ------------------------------------ Each Borrower owns its Equipment Collateral free and clear of any prior Lien thereon other than with respect to any Permitted Encumbrances and no financing statements or other evidences of the grant of a security interest respecting the Equipment Collateral exist on the public records as of the date hereof other than any evidencing any Permitted Encumbrances. 7.4 Right to Grant Security Interest; No Further Encumbrances. --------------------------------------------------------- Each Borrower has the right to grant a security interest in its Equipment Collateral. Each Borrower will pay all taxes and other charges against its Equipment Collateral. No Borrower will use any Equipment Collateral illegally or allow any Equipment Collateral to be encumbered except for the security interest in favor of Lender granted herein and except for any Permitted Encumbrances. 7.5 Location. -------- As of the date hereof, the Equipment Collateral is located only at one or more of the Collateral Locations or the premises of a rental or lease customer and, hereafter, each Borrower covenants with Lender not to locate Equipment Collateral at any location other than a Collateral Location without at least thirty (30) days advance written notice to Lender. 8. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO BALANCES ---------------------------------------------------------------- COLLATERAL. ---------- With respect to the Balances Collateral, each Borrower hereby represents, warrants and covenants to Lender as set forth in Section 8.1 through 8.2, inclusive. 8.1 Ownership. --------- Each Borrower owns its Balances Collateral free and clear of any Liens, except in favor of Lender and except for Permitted Encumbrances. 22 8.2 Liens. ----- Hereafter, no Borrower will incur, create or suffer to exist any Lien upon its Balances Collateral or sell, convey, hypothecate, pledge or assign its right, title or interest therein, without the prior written consent of Lender thereto other than for the Lien created hereunder and the Permitted Encumbrances. 9. REPRESENTATIONS, WARRANTIES AND COVENANTS APPLICABLE TO INTANGIBLES ------------------------------------------------------------------- COLLATERAL. ---------- With respect to the Intangibles Collateral, each Borrower hereby represents, warrants and covenants to Lender as set forth in Sections 9.1 through 9.3, inclusive. 9.1 Ownership. --------- Each Borrower owns its Intangibles Collateral free and clear of any Liens thereon other than with respect to any Permitted Encumbrances and no financing statements or other evidences of the grant of a security interest respecting the Intangibles Collateral exist on the public records as of the date hereof other than any evidencing any Permitted Encumbrances. 9.2 Liens. ----- Hereafter, no Borrower will incur, create or suffer to exist any Lien upon the Intangibles Collateral, except for the security interest granted herein and except for any Permitted Encumbrances, or sell, convey, hypothecate, pledge or assign its right, title or interest therein. 9.3 Preservation. ------------ Hereafter, each Borrower will take all necessary and appropriate measures to obtain, maintain, protect and preserve the Intangibles Collateral including, without limitation, registration thereof with the appropriate state or federal governmental agency or department. 10. GENERAL REPRESENTATIONS AND WARRANTIES. -------------------------------------- In order to induce Lender to enter into this Agreement, each Borrower hereby represents and warrants to Lender (which representations and warranties, together with the representations and warranties of each Borrower contained in Articles 5, 6, 7, 8 and 9 shall be deemed to be renewed as of the date of the making of each Revolving Advance and after giving effect to all transactions and actions permitted by this Agreement, including without limitation, the Consolidation Transaction) as set forth in Sections 10.1 through 10.19, inclusive. 10.1 Existence and Qualification. --------------------------- 23 Each Borrower (except HPP) is a corporation duly organized and validly existing under, and has filed its certified statement of annual registration and paid all fees due for the current year under, the laws of the State of Georgia. HPP is a limited partnership duly organized and validly existing under, and has filed all required notices, registrations and certifications and has paid all fees due for the current year under, the laws of the State of Georgia. Each Borrower has its principal place of business, chief executive office and office where it keeps all of its books and records at the Executive Office and is duly qualified as a foreign corporation in good standing in any other state wherein the conduct of its business or the ownership of its Property requires such qualification and the failure to so qualify would result in a material forfeiture. Except as may be set forth on Exhibit "F" attached hereto, no ----------- Borrower does business under any name or trade style other than the name first inscribed hereinabove in the recitals hereto. 10.2 Authority; Validity and Binding Effect. -------------------------------------- Each Borrower has the power to make, deliver and perform under the Loan Documents, and to borrow hereunder, and has taken all necessary and appropriate corporate or partnership action to au thorize the execution, delivery and performance of the Loan Documents. This Agreement constitutes, and the remainder of the Loan Documents, when executed and delivered for value received, will constitute, the valid obligations of each Borrower, legally binding upon it and enforceable against it in accordance with their respective terms, except as may be limited by bankruptcy, insolvency or other, similar laws affecting the enforcement of creditor's rights generally. The undersigned officers or representatives of each Borrower are duly authorized and empowered to execute, attest and deliver this Agreement and the remainder of the Loan Documents for and on behalf of each Borrower, and to bind each Borrower accordingly thereby. 10.3 No Material Litigation. ----------------------- There are no proceedings pending or, so far as each Borrower or its officers know, threatened, before any court or administrative agency which in such Borrower's present opinion could reasonably be expected to materially and adversely affect the financial condition or operations of such Borrower. 10.4 Taxes. ----- Each Borrower has filed or caused to be filed all tax returns required to be filed by it and have paid all taxes shown to be due and payable by it on said returns or on any assessments made against them. 24 10.5 Capital Stock. ------------- All capital stock, limited partnership interests, debentures, bonds, notes or other securities of each Borrower presently issued and outstanding are validly and properly issued in accordance with all applicable laws, including, but not limited to, the "blue sky" laws of all applicable states and the federal securities laws. 10.6 Organization. ------------ The articles of incorporation of and bylaws of each Borrower (except HPP) are in full force and effect under the laws of the State of Georgia and all amendments (if any) thereto have been duly and properly made under and in accordance with all applicable laws. The limited partnership certificate and limited partnership agreement of HPP is in full force and effect under the laws of the State of Georgia and all amendments thereto have been duly and properly made under and in accordance with all applicable laws. 10.7 Insolvency. ---------- After giving effect to the funding of the initial Revolving Advances to be made on the Closing Date, and the other transactions contemplated by this Agreement and the uses by Borrowers of the proceeds of the such loans and advances as provided hereunder, (a) the fair value and present fair saleable value of each Borrower's assets are in excess of the total amount of such Borrower's liabilities, including known contingent liabilities; (b) each Borrower will not have incurred debts, nor will it intend to incur debts, beyond its ability to pay such debts as they mature; and (c) each Borrower does not have unreasonably small capital to carry on such Borrower's business as theretofore operated and all businesses in which such Borrower is about to engage. As used in this Section 10.7, "debt" means any liability on a claim, and "claim" means (i) the right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured or unsecured, or (ii) the right to an equitable remedy for breach of performance if such breach gives rise to a right to payment, whether or not such right to an equitable remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed, undisputed, secured or unsecured. 10.8 Title. ----- Each Borrower owns all of its Properties subject to no Lien of any kind except as otherwise disclosed in writing to Lender and, as to the Collateral, except ------ for the Permitted Encumbrances. 10.9 Margin Stock. ------------ 25 No Borrower is engaged principally, or as one of its important activities, in the business of purchasing or carrying any Margin Stock and no part of the proceeds of any borrowing made pursuant hereto will be used to purchase or carry any Margin Stock or to extend credit to others for the purpose of purchasing or carrying any Margin Stock, or be used for any purpose which violates, or which is inconsistent with, the provisions of Regulation X of the Board of Governors of the Federal Reserve System. In connection herewith, if requested by Lender, each Borrower will furnish to each Lender a statement in conformity with the requirements of Federal Reserve Form F.R. U-1 referred to in Regulation U of said Board to the foregoing effect. 10.10 No Violations. ------------- The execution, delivery and performance by each Borrower of this Agreement and the Loan Documents have been duly authorized by all necessary corporate or partnership action and do not and will not require any consent or approval of the shareholders or any partner of any Borrower which will not have been obtained prior to the Closing Date, violate any provision of any material law, rule, regulation (including, without limitation,, Regulation X of the Board of Governors of the Federal Reserve System), order, writ, judgment, injunction, decree, determination or award presently in effect having applicability to such Borrower or of the articles of incorporation or bylaws or partnership agreement of such Borrower, or result in a breach of or constitute a default under any indenture or loan or credit agreement or any other agreement, lease or instrument to which such Borrower is a party or by which it or its properties may be bound or affected; and no Borrower is in default under any such material law, rule, regulation, order, writ, judgment, injunction, decree, determination or award or any such indenture, agreement, lease or instrument. 10.11 ERISA. ----- Each Borrower is in substantial compliance with the requirements of ERISA with respect to each Employee Benefit Plan. No fact, including, but not limited to, any Reportable Event exists in connection with any Plan which, more likely than not, would constitute grounds for the termination of any such Plan by the PBGC or for the appointment by the appropriate United States district court of a trustee to administer any such Plan. No Borrower maintains or contributes to any Plan which has an "accumulated funding deficiency" (as defined in Section 412 of the Internal Revenue Code). No Borrower maintains or contributes to any Plan which has incurred any material liability to the PBGC (other than for premium payments due in the ordinary course of business, which premiums will be paid when due and payable). No Borrower maintains or contributes to any Plan which has insufficient assets to qualify for a standard termination pursuant to Section 4041 of ERISA. No Borrower is required pursuant to the terms of any applicable collective bargaining agreement to pay or accrue any contributions with respect to any Plan which is a Multiemployer Plan and there has been no complete or partial withdrawal by any Borrower from any such Multiemployer Plan within the contemplation of MPPAA. Except as concurrently herewith disclosed to Lender in writing, (A) no Borrower maintains or contributes to any Employee Benefit Plan which provides medical benefits, life insurance ben- 26 efits or other welfare benefits as defined in Section 3(l) of ERISA (excluding severance pay and benefits required under Section 601 of ERISA) for former employees of such Borrower, and (B) no Borrower maintains or contributes to any non-qualified, unfunded deferred compensation plan. Neither any Borrower nor any fiduciary with respect to any Employee Benefit Plan has engaged in a "Prohibited transaction" within the meaning of Section 4975 of the Internal Revenue Code or Section 406 of ERISA with respect to any Employee Benefit Plan. 10.12 Financial Statements. -------------------- The unaudited financial statements of each Borrower for its most recently completed fiscal year, together with the unaudited financial statements of each Borrower for that portion ended September 30, 1994 of its current fiscal year, copies of which have heretofore been furnished to Lender, are complete and accurately and fairly represent the financial condition of each Borrower, the results of its operations and the transactions in its equity accounts as of the date and for the periods referred to therein, and have been prepared in accordance with GAAP throughout the period involved. There is no material Debt of any Borrower as of the date of such financial statements which is not reflected therein or in the notes thereto. There has been no material adverse change in the financial conditions or operations of any Borrower since the respective dates of the balance sheets contained in such financial statements. 10.13 Delivery of Certain Collateral. ------------------------------ [INTENTIONALLY DELETED] 10.14 Purchase of Collateral. ---------------------- No Borrower has purchased any of the Collateral in a bulk transfer or in a transaction which was outside the ordinary course of the business of Borrower's seller. 10.15 Pollution and Environmental Control. ----------------------------------- Each Borrower has obtained all permits, licenses and other authorizations which are required under, and is in material compliance with all Environmental Laws the noncompliance with which would or might have a material adverse effect on its business, financial condition or Property. 10.16 Possession of Franchises, Licenses, Etc. --------------------------------------- Each Borrower possesses all franchises, certificates, licenses, permits and other authorizations from governmental political subdivisions or regulatory authorities, and all patents, trademarks, service marks, trade names, copyrights, licenses and other rights, free from burdensome restrictions, that are necessary for the ownership, maintenance and operation of any of their respective material Property and assets, and no Borrower is in violation of any thereof 27 which would or might have a material ad verse effect on its business, financial condition or Property. 10.17 Disclosure. ---------- To each Borrower's knowledge, neither this Agreement nor any other document, certificate or statement furnished to Lender by or on behalf of any Borrower in connection herewith contain any untrue statement of a material fact or omits to state a material fact necessary in order to make the statements contained herein and therein not misleading. To each Borrower's knowledge, there is no fact peculiar to such Borrower which materially adversely affects or in the future may (so far as such Borrower can now reasonably foresee) materially adversely affect the business, Property or assets, or financial condition of such Borrower which has not been set forth in this Agreement or in the other documents, certificates and statements furnished to Lender by or on behalf of such Borrower prior to the date hereof in connection with the transactions contemplated hereby, when taken as a whole. 10.18 Subsidiaries. ------------ No Borrower has any Subsidiaries except pursuant to or as may result from a consummated Consolidation Transaction. 10.19 Ownership. --------- The shareholders of each Borrower (except HPP) and the General Partner are as shown on Exhibit "G" attached hereto. The General Partner is the sole general ----------- partner of HPP, and ITC is the sole limited partner of HPP. Lender agrees that nothing in this Agreement shall prohibit the consummation by Borrowers of a Consolidation Transaction or an initial public offering transaction by Innotrac of its capital stock as a result of which such capital stock becomes publicly traded on the New York Stock Exchange, the American Stock Exchange or the NASDAQ National Market Reporting System, and further that upon the occurrence of any such initial public offering, this Section 10.19 shall have no further force or effect. 11. GENERAL AFFIRMATIVE COVENANTS. ----------------------------- Each Borrower covenants to Lender that from and after the date hereof, and until such time as Lender shall have terminated this Agreement in writing, each Borrower will comply with and cause each Subsidiary to comply with the covenants set forth in Sections 11.1 through 11.18, inclusive. 11.1 Records Respecting Collateral. ----------------------------- 28 All records of each Borrower with respect to the Collateral will be kept at the Executive Office (as it may be changed pursuant to Section 11.12) and will not be removed from such address without the prior written consent of Lender. 11.2 Further Assurances. ------------------ Each Borrower shall duly execute and/or deliver (or cause to be duly executed and/or delivered) to Lender any instrument, invoice, document, document of title, dock warrant, dock receipt, warehouse receipt, bill of lading, order, financing statement, assignment, waiver, consent or other writing which may be reasonably necessary to Lender to carry out the terms of this Agreement and any of the other Loan Documents and to perfect its security interest in and facilitate the collection of the Collateral, the proceeds thereof, and any other property at any time constituting security to Lender. Each Borrower shall perform or cause to be performed such acts as Lender may reasonably request to establish and maintain for Lender a valid and perfected Lien on the Collateral, free and clear of any Liens other than in favor of Lender and other than the Permitted Encumbrances. 11.3 Right to Inspect. ---------------- Lender (or any person or persons designated by it) shall, in its sole discretion, have the right to call at any place of business of a Borrower or any of its Subsidiaries at any reasonable time during normal business hours upon advance notice reasonable under the circumstances), and, without hindrance or delay, inspect the Collateral and inspect, audit, check and make extracts from such Borrower's or such Subsidiary's books, records, journals, orders, receipts and any correspondence and other data relating to the Collateral, to such Borrower's or such Subsidiaries, business or to any other transactions between the parties hereto. Without limiting the foregoing, Lender shall be entitled to perform peri odic field audits of each Borrower's operations. Lender shall hold in confidence each Borrower's and its Subsidiaries, confidential or proprietary information obtained pursuant to this Agreement and shall not disclose the same to any third party, except: (i) as required by law or by judicial or ------- administrative process or to appropriate regulatory authorities and (ii) to Lender's attorneys and accountants, who have previously or contemporaneously therewith been advised of the confidential and proprietary nature of such information, and who have agreed to maintain the confidential nature thereof. 11.4 Reports. ------- Each Borrower shall, as soon as practicable, but in any event on or before the respective dates specified below furnish or cause to be furnished to Lender: (i) within twenty (20) days after the end of each calendar month, a status report, certified by a duly authorized officer on behalf of each Borrower, showing the aggregate dollar value of the items comprising the Accounts Receivable Collateral of each Borrower and the age of each individual item thereof from invoice date as of the last day of the preceding calendar month (segregating such items in such manner and to such degree as Lender may reasonably request), and (ii) within twenty (20) days after the end of 29 each calendar month, the aggregate dollar value of the items comprising the accounts payable of each Borrower, and the age of each individual item thereof as of the last day of the preceding calendar month (segregating such items in such manner and to such degree as Lender may reasonably request). Additionally, Lender may, at any time, request that each Borrower verify the individual account balances of the individual Account Debtors by such means as each Borrower and Lender then mutually agree, provided that, after any Event of Default has continued and while it is continuing Lender shall have the further right to verify such balances directly. In any event, upon request from Lender, made at any time hereafter, each Borrower shall furnish Lender with a then current Account Debtor address list. 11.5 Settlement Sheets. ----------------- By the twentieth (20th) day of each calendar month for the calendar month just ended, or more frequently if requested by Lender, each Borrower shall prepare and deliver to Lender a settlement report with respect to satisfaction of the Margin Requirement as of the date of report submission (to include a calculation of Eligible Accounts) to be in such form as Lender may deliver for such purpose to each Borrower from time to time hereafter, the statements in which, in each instance, shall be certified as to truth and accuracy by a duly authorized officer on behalf of each Borrower. 11.6 Periodic Financial Statements of Borrowers. ------------------------------------------ Each Borrower shall, as soon as practicable, and in any event within: (i) thirty (30) days after the end of each calendar month, furnish to Lender, unaudited financial statements of each Borrower and its consolidated Subsidiaries, on a consolidating basis, including balance sheets and income statements, for the calendar month then ended, and for the fiscal year to date; and (ii) thirty (30) days after the end of each fiscal quarter, furnish to Lender, unaudited financial statements of each Borrower and its consolidated Subsidiaries, on a consolidating and consolidated basis, including balance sheets and income statements, for the fiscal quarter then ended, and for the fiscal year to date; in each case, certified as to truth and accuracy by each Borrower's chief executive officer or chief financial officer. 11.7 Annual Financial Statements of Borrowers. ---------------------------------------- Each Borrower shall, as soon as practicable, and in any event within one hundred twenty (120) days after the end of each Fiscal Year, furnish to Lender the annual audit report of Borrowers and their consolidated Subsidiaries, on a combined basis, including a balance sheet, and statement of cash flow, as appropriate (but, for the current fiscal year being a balance sheet only), certified without material qualification, by Williams, Benator & Libby or such other independent certified public accountants selected by each Borrower but acceptable to Lender, and prepared in accordance with GAAP. Each Borrower shall cause said accountants to furnish Lender, together with the aforesaid audit report, a statement that, in the normal course of making their examination of such financial statements, they obtained no knowledge of any Event of 30 Default or Default Condition relating to this Agreement or the Notes, or, in lieu thereof, a statement specifying the nature and period of existence of any such Event of Default or Default Condition disclosed by their examination. 11.8 Payment of Taxes. ---------------- Each Borrower shall pay and discharge all taxes, assessments and governmental charges upon them, their income and their Property the non-payment of which could reasonably be expected to have a material adverse effect on a Borrower's financial condition or business operations prior to the date on which penalties attach thereto, unless and to the extent only that (x) such taxes, assessments and governmental charges are being contested in good faith and by appropriate proceedings by Borrower or its applicable Subsidiary and (y) such Borrower maintains reasonable reserves on its books therefor in accordance with GAAP. 11.9 Maintenance of Insurance. ------------------------ In addition to and cumulative with any other requirements imposed herein or in any Loan Document on each Borrower with respect to insurance, each Borrower shall maintain insurance with responsible insurance companies on such of its Property, in such amounts and against such risks as is customarily maintained by similar businesses operating in the same vicinity, but in any event to include public liability, worker's compensation, loss, damage, flood, windstorm, fire, theft, extended coverage and product liability insurance in amounts reasonably satisfactory to Lender, which such insurance shall not be cancellable by any Borrower, unless with the prior written consent of Lender, or by any Borrower's insurer, unless with at least thirty (30) days advance written notice to Lender thereof. Each Borrower shall file with Lender on or before the Closing Date and annually upon Lender's request thereafter copies of insurance policies, certified by an officer of Borrower's insurance company, to Lender's satisfaction, of such insurance then in effect stating the names of the insurance companies, the amounts and rates of insurance, the date of expiration thereof, the properties and risks covered thereby and the insured with respect thereto, and, within thirty (30) days after notice in writing from Lender, obtain such additional insurance as Lender may reasonably request. 11.10 Maintenance of Property. ----------------------- Each Borrower shall maintain its Properties in good working condition, ordinary wear and tear excepted. 11.11 Certificate of No Event of Default; Compliance Certificate; ----------------------------------------------------------- Notice of Default. ----------------- Each Borrower shall, on a quarterly basis not later than forty-five (45) days after the close of each of its first three (3) fiscal quarters and not later than one hundred twenty (120) days after the close of its Fiscal Year, certify to Lender, in a statement executed by each Borrower's or the 31 General Partner's chief executive officer or chief financial officer, as appropriate, that no Event of Default and no Default Condition exists or has occurred and is existing, or, if an Event of Default or Default Condition exists, specifying the nature and period of existence thereof and setting forth the action which each Borrower proposes to take with respect thereto. Such certificate shall be accompanied by the certificate of such officer on behalf of each Borrower showing, in reasonable detail, compliance with Sections 12.1 through 12.5, inclusive, by each Borrower for the immediately preceding fiscal quarter. In addition, promptly upon its becoming aware of the occurrence of any Default Condition or Event of Default, each Borrower will notify Lender thereof in writing, specifying the nature and period of existence thereof and the action which each Borrower proposes to take with respect thereto. 11.12 Change of Principal Place of Business, Etc. ------------------------------------------ Each Borrower hereby understands and agrees that if, at any time hereafter, it elects either (i) to move its Executive Office, (ii) to change its name, identity or its structure to other than a corporate structure, or (iii) to add any Collateral Location, such Borrower will notify Lender in writing at least thirty (30) days prior thereto and take such action in regard thereto as Lender may reasonably request to continue the perfection of the Lender's security interest in the Collateral in respect of such change. 11.13 Waivers. ------- With respect to each of the Collateral Locations, each Borrower will obtain such waivers of lien, estoppel certificates or subordination agreements as Lender may reasonably require to insure the priority of its security interest in that portion of the Collateral situated at such locations. 11.14 Preservation of Corporate Existence. ----------------------------------- Each Borrower shall preserve and maintain its corporate or partnership existence, rights, franchises and privileges in the respective jurisdictions of incorporation or organization, and qualify and remain qualified as a foreign corporation or partnership (if applicable) in each Collateral Location state and each jurisdiction in which such qualification is necessary or desirable in view of their respective businesses and operations or the ownership of their Property to avoid a material forfeiture. 11.15 Compliance with Laws. -------------------- Each Borrower shall comply in all material respects with the requirements of all applicable laws, rules, regulations and orders of any governmental authority, noncompliance with which would ma terially adversely affect any of their respective businesses or credit. Without limiting the foregoing, each Borrower shall obtain and maintain all permits, licenses and other authorizations which are required under, and otherwise comply with, all Environmental Laws (as 32 defined in Section 11.18(a)(i)), and all laws pertaining to consumer credit, privacy and telephonic transmissions. 11.16 ERISA. ----- Each Borrower shall: (i) make prompt payments of contributions required by the terms of each Employee Benefit Plan or to meet the minimum funding standards set forth under ERISA with respect to each Employee Benefit Plan to which such standards apply; (ii) notify Lender immediately of any fact, including, but not limited to, any Reportable Event, arising in connection with any Plan which, more likely than not, would constitute grounds for the termination thereof by the PBGC or for the appointment by the appropriate United States district court of a trustee to administer the Plan; (iii) notify Lender immediately of Borrower's or any Subsidiary's intent to terminate any Plan; (iv) notify Lender immediately of the adoption of an amendment to any Plan (or of any other Event) which causes any Plan to fail to have sufficient assets to qualify for a standard termination under Section 4041 of ERISA; (v) notify Lender immediately if the aggregate unfunded liability with regard to all Plans increases to an amount in excess of One Hundred Thousand Dollars ($100,000); (vi) notify Lender immediately such if such Borrower obtains information indicating that the aggregate withdrawal liability with regard to all Plans increases to an amount in excess of One Hundred Thousand Dollars ($100,000); (vii) notify Lender immediately of any filing of a request for a waiver of the minimum funding standard with regard to any Employee Benefit Plan to which such standard applies; (viii) promptly after receipt thereof, furnish to Lender a copy of any notice received by such Borrower or any of its Subsidiaries from the PBGC relating to the intention of the PBGC to terminate any Plan or to appoint a trustee to administer any Plan; (ix) promptly after receipt thereof furnish to Lender a copy of any notice received by such Borrower or any Subsidiary of such Borrower from the Internal Revenue Service relating to the intention of the Internal Revenue Service to disqualify any Employee Benefit Plan or to refuse to grant a favorable determination letter with regard to any Employee Benefit Plan; (x) notify Lender immediately of any lawsuit, claim for damages or administrative proceeding in which an Employee Benefit Plan or a fiduciary with respect thereto is a defendant, wherein the amount of damages claimed exceeds, either alone or in the aggregate with all other such lawsuits, claims and administrative proceedings, One Hundred Thousand Dollars ($100,000); and (xi) furnish to Lender, promptly upon its request therefor, such additional information concerning each and every Employee Benefit Plan, including, but not limited to, the annual report required to be filed under ERISA, as may be reasonably requested. 11.17 Litigation. ---------- Promptly, upon its receipt of notice or knowledge thereof, each Borrower will report to Lender any lawsuit or administrative proceeding in which Borrower or any of its Subsidiaries is a defendant wherein the amount of damages claimed against Borrower or any of its Subsidiaries exceeds One Hundred Thousand Dollars ($100,000). 33 11.18 Environmental Compliance. ------------------------ (a) Definitions. The following definitions shall apply for purposes of this Section 11.18: (i) "Environmental Law" shall mean any federal, state or local statute, regulation or ordinance or any judicial or administrative decree or decision now or hereafter promulgated with respect to any "Hazardous Substance" (as hereinafter defined), drinking water, ground water, landfills, open dumps, storage tanks, underground storage tanks, solid waste, waste water, storm water runoff, waste emissions, or wells. Without limiting the generality of the foregoing, the term Environmental Law shall encompass each of the following statutes, as may be amended from time to time, and all regula tions from time to time promulgated thereunder: the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (codified in scattered sections of 26 U.S.C.; 33 U.S.C.; 42 U.S.C. and 42 U.S.C. (S) 9601 et seq.), the Clean ------ Water Act of 1977 (33 U.S.C. (S) 1251 et seq.), the Clean Air Act (42 U.S.C. (S) ------ 7401 et seq.), the Resource Conservation and Recovery Act of 1976 (42 U.S.C. 9 ------ 6901 et seq.), the Safe Drinking Water Act (21 U.S.C. (S) 349; 42 U.S.C. (S)(S) ------ 201 and 300f through 300j-9) and the Toxic Substances Control Act (15 U.S.C. (S) 2601 et seq.). ------ (ii) "Release" shall mean any spilling, leaking, pumping, emitting, emptying, discharging, injecting, storing, escaping, leaching, dumping, or discharging, burying, abandoning, or disposing into the environment by any Borrower or any Subsidiary or any predecessor in interest of any Borrower. (iii) "Hazardous Substance" shall mean each and every ------------------- element, compound, chemical mixture, petroleum and gas product, substance, contaminant, pollutant including, without limitation, substances which are toxic, carcinogenic, ignitable, corrosive or otherwise dangerous to human, plant or animal health or well-being, and any other substance defined as a "hazardous substance," "hazardous waste," "hazardous material," "toxic material," "toxic waste," or "special waste" under any Environmental Law and any other substance which by law requires special handling in its collection, storage, treatment or disposal. (b) Indemnity for Liabilities. Each Borrower shall indemnify ------------------------- Lender and hold Lender harmless from and against any and all claims, demands, losses, liabilities, strict liabilities, damages, sanctions, penalties, fines, injuries, expenses, costs (including attorney's fees), settlements, or judgments of any and every kind whatsoever paid incurred or suffered by, or asserted against, Lender by any Person arising out of, in connection with or related in any way to (a) the Release or presence at, from, on, in or under any Collateral Location of any Hazardous Substance, or (b) any act, omission, condition, conduct, transaction or occurrence at, from, on or under any Collateral Location in violation of any Environmental Law, in each case, if and to the extent caused by or within the control of any Borrower or any Subsidiary. 34 (c) Notice to Lender. If any Borrower receives any notice of (i) ---------------- Release of any Hazardous Substance, notification of which must be given to any governmental agency under any Environmental Law, or notification of which has, in fact, been given to any governmental agency, or (ii) any complaint, order, citation or notice with regard to air emissions, water discharges, or any other environmental health or safety matter affecting any Borrower or any Collateral Location from any person or entity (including, without limitation, the Environmental Protection Agency), then such Borrower shall immediately notify Lender orally and in writing of said Release, complaint, order, citation or notice. (d) Environmental Audit. Lender shall have the right, after the ------------------- occurrence of any event required to be reported to Lender pursuant to Section 11.18(c) hereof which is caused by or within the control of any Borrower, in its sole discretion, exercised in a commercially reasonable manner, to require such Bor rower to perform, at such Borrower's expense using an environmental consultant selected by such Borrower and acceptable to Lender, an environmental audit and, if deemed necessary by Lender, an environmental risk assessment, each of which must be satisfactory to Lender. Should any such Borrower fail to order any such environmental audit or risk assessment within thirty (30) days after Lender's written request, Lender shall have the right but not the obligation to retain an environmental consultant to perform any such environmental audit or risk assessment. All costs and expenses incurred by Lender in the exercise of such rights may be charged by Lender as Revolving Advances. (e) Survival. Assignability, and Transferability. The indemnity -------------------------------------------- set forth in subsection (a) of this Section 11.18 shall survive any exercise by Lender or Lender of any remedies under this Agreement or any Loan Document, including without limitation any power of sale, and shall not merge with any deed or bill of sale given by Borrower to Lender in lieu of foreclosure or any deed or bill of sale given pursuant to a foreclosure. It is agreed and intended by Borrowers and Lender that the indemnity set forth above in subsection (a) of this Section 11.18 may be assigned or otherwise transferred by Lender to its successors and assigns and to any subsequent purchasers of all or any portion of any Collateral by, through or under Lender, without notice to Borrowers and without any further consent of any other Person. To the extent consent to any such assignment or transfer is required by applicable law, advance consent to any such assignment or transfer is hereby given by Borrower in order to maximize the extent and effect of the warranties, representations, and indemnity given hereby. 12. FINANCIAL COVENANTS. -------------------- From and after the date hereof, and until such time as Lender shall have terminated this Agreement in writing, the covenants set forth in Sections 12.1 and 12.5, inclusive, shall apply to Borrowers on a combined basis in respect of their financial condition and performance. 12.1 Debt/Tangible Net Worth Ratio. ----------------------------- 35 On a combined basis, Borrowers shall have at all times a Leverage Ratio of not more than 4:1. 12.2 Tangible Net Worth. ------------------ The sum of the combined Tangible Net Worth plus Subordinated Debt of all Borrowers shall be at least Seven Million Dollars ($7,000,000), all as determined under GAAP, during the Fiscal Year ending in 1997 and thereafter shall be equal to the required amount for the preceding year increased by forty percent (40%) of Net Income. 12.3 Current Ratio. ------------- Borrowers, on a combined basis, shall at all times maintain a ratio of their combined current assets to their combined current liabilities, all as determined under GAAP, of at least .75:1, determined in respect of each fiscal quarter. 12.4 Fixed Charge Coverage Ratio. --------------------------- Borrowers, on a combined basis, shall maintain as of the end of each fiscal quarter in each Fiscal Year a Fixed Charge Coverage Ratio of at least 2.5:1, as determined under GAAP on a rolling four (4) quarters' basis. 12.5 Capital Expenditures and Leases. ------------------------------- Borrowers, on a combined basis, will not expend, for the applicable Fiscal Year, in Capital Expenditures or contract for any future Capital Expenditures, which in the aggregate represent an amount exceeding the sum of $5,000,000 during any Fiscal Year. 12.6 Minimum Net Income. ------------------ Borrowers, on a combined basis, shall achieve an Adjusted Net Income of at least $500,000 for the Fiscal Year ending in 1997 and each Fiscal Year thereafter. 13. NEGATIVE COVENANTS. ------------------ Each Borrower covenants to Lender that from and after the date hereof and until such time as Lender shall have terminated this Agreement in writing, such Borrower will not, without the prior written consent of Lender, do or permit to be done by any Subsidiary any of the things or acts set forth in Sections 13.1 through 13.11, inclusive. 13.1 No Liens. -------- Create, assume, or suffer to exist any Lien of any kind in or on any of its Property except for Permitted Encumbrances. ------ --- 36 13.2 Debt. ---- Incur, assume, or suffer to exist any Debt, except for: (i) the ------ --- Obligations, the ITC Loan and any other Debt for borrowed funds existing on the date of this Agreement; (ii) Debt for borrowed funds incurred pursuant to financial contractual agreements made and entered into, and disclosed in writing to Lender, prior to the date of this Agreement; (iii) Debt for borrowed funds owing to Lender, whether hereunder or otherwise; (iv) trade payables and contractual obligations to suppliers and customers incurred in the ordinary course of business; (v) accrued pension fund and other employee benefit plan obligations and liabilities (provided, however, that such Debt does not result in the existence of any Event of Default or Default Condition under any other provision of this Agreement); (vi) deferred taxes; (vii) Debt resulting from endorsements of negotiable instruments received in the ordinary course of its business; (viii) Debt arising in respect of "Permitted Encumbrances"; (ix) Debt arising from the receipt of intercompany loans or advances from any other Borrower; and (x) purchase money Debt not exceeding at any one time, in the aggregate, Five Hundred Thousand Dollars ($500,000). 13.3 Contingent Liabilities. ---------------------- Guarantee, endorse, become surety with respect to or otherwise become directly or contingently liable for or in connection with the obligations of any other Person, except guarantees in favor of Lender and endorsements of negotiable instruments for collection in the ordinary course of business. 13.4 Distributions. ------------- Except as otherwise provided herein and in Section 13.5, pay any dividend, make any distribution or take any action which would have an effect equivalent to any of the foregoing; provided, however, that, notwithstanding the foregoing -------- ------- (i) if any Borrower, because of its organization or election, does not itself pay taxes on its income, then such Borrower may make distributions to its shareholders or partners (as the case may be) responsible for the payment of such taxes in amounts sufficient to permit such taxes to be paid by such Persons on Borrower's behalf, and each Borrower making such distributions shall provide Lender with an annual accounting thereof; and (ii) in addition to the foregoing, so long as no Event of Default then exists or would be caused by or result from the making of such payment, any Borrower may pay dividends and make distributions from time to time in an amount not in excess of forty percent (40%) of such Borrower's Net Income. 37 13.5 Stock Redemptions, Etc. ---------------------- Except for the A. Dorfman Buyout, purchase, redeem, or otherwise acquire for value any shares of any class of capital stock or any partnership interests if (i) any Event of Default then exists or would be caused by or result from the making of such payment or (ii) such Borrower is then prohibited from doing so by applicable law. 13.6 Restricted Investment. --------------------- Except for a Consolidation Transaction, make any Restricted Investment, except that any Borrower may make loans and advances to any other Borrower or any of its subsidiaries at any time or from time to time. 13.7 Merger, Transfer, Etc. --------------------- Except for a Consolidation Transaction, dissolve or otherwise terminate its corporate or partnership status; or enter into any merger, reorganization or consolidation; make any substantial change in the basic type of business conducted by it as of the date hereof; or sell, assign, lease or otherwise dispose of (whether in one transaction or a series of transactions) all, substantially all or a substantial part of its property or assets, other than sales in the ordinary course of business. 13.8 ERISA. ----- Permit any Plan to become underfunded such that it would not have sufficient assets in order to quality for a standard termination under Section 4041 of ERISA. 13.9 Transactions with Affiliates. ---------------------------- Except for a Consolidation Transaction or the A. Dorfman Buyout, enter into, or be a party to, any transaction with any Affiliate of any Borrower, except in the ordinary course of and pursuant to the reasonable requirements of its business and upon fair and reasonable terms that are no less favorable to a Borrower or said Subsidiary than would be obtained in a comparable arm's length transaction with a Person not an Affiliate or as otherwise may be approved in writing by Lender from time to time hereafter, upon full disclosure to Lender, or has been disclosed to Lender on or before the date hereof. 13.10 Fiscal Year. ----------- Change its Fiscal Year end from that in effect on the Closing Date, except that Innotrac may change its Fiscal Year to December 31, consistent with the other Borrowers. 13.11 Certain Debts. ------------- 38 Either: (i) make, consent to, or acquiesce in, any amendment or modification to any of the following: (A) the ITC Loan Agreement, which would have the effect of increasing the principal amount of, the effective interest rate thereon or the frequency of the payment of principal or interest thereon; or (ii) prepay the ITC Loan; or (iii) make any payment on the ITC Loan in violation of the Subordination Agreements executed with respect thereto, as described more particularly in Section 17.1(g) below. 14. EVENTS OF DEFAULT. ----------------- The occurrence of any events or conditions described in Sections 14.1 through 14.14 shall constitute an Event of Default hereunder, provided that any requirement for the giving of notice or the lapse of time, or both, has been satisfied. 14.1 Notes. ----- Any Borrower shall fail to make any payment of principal of or interest on the Revolving Note or any Note within five (5) calendar days after the date when due. 14.2 Obligations. ----------- Any Borrower shall fail to make any payments of principal of or interest on any of the Obligations (other than the Notes) or any other Obligations to Lender, within five (5) calendar days after receipt of notice from Lender of such failure to make payment (or after satisfaction of any shorter or longer requirement for the giving of notice or the lapse of time, or both, contained in the applicable agreement pertaining to such Obligations). 14.3 Misrepresentations. ------------------ Any Borrower shall make any representations or warranties in any of the Loan Documents or in any certificate or statement furnished at any time hereunder or in connection with any of the Loan Documents which, when taken as a whole, proves to have been untrue or misleading in any material respect when made or furnished. 14.4 Covenants. --------- Any Borrower shall default in the observance or performance of any covenant or agreement contained herein or in any of the other Loan Documents (other than a failure described in Sections 14.1 or 14.2), unless such default is cured within ten (10) calendar days after Borrower's receipt of notice from Lender of such Default Condition. 14.5 Damage, Loss, Theft or Destruction of Collateral. ------------------------------------------------ 39 There shall have occurred material uninsured damage to, or loss, theft or destruction of, any part of the Collateral of any Borrower, or all Borrowers considered as a whole, having a then current value in excess of One Hundred Thousand Dollars ($100,000), unless such default is cured within ten (10) days after Borrowers, receipt of notice from Lender of such Default Condition. 14.6 Certain Debts. ------------- An "event of default" (or event having similar effect, whether or not denominated as such) shall occur under, or in respect of, the ITC Loan Agreement and such default shall continue, without waiver or cure, beyond any cure or grace period prescribed therein. 14.7 Other Debts. ----------- Any Borrower shall default in connection with any agreement evidencing, securing or relating to any other Debt to, or under any operating lease with, either Lender or, with respect to any Debt of One Hundred Thousand Dollars ($100,000) or more with any creditor other than a Lender, unless such default is cured within thirty (30) days after Borrowers' receipt of notice from Lender of such Default Condition. 14.8 Voluntary Bankruptcy. -------------------- Any Borrower, the General Partner or any Guarantor shall file a voluntary petition in bankruptcy or a voluntary petition or answer seeking liquidation, reorganization, arrangement, readjustment of its debts, or for any other relief under the Bankruptcy Code, or under any other act or law pertaining to insolvency or debtor relief, whether state, federal, or foreign, now or hereafter existing; any Borrower, the General Partner or any Guarantor shall enter into any agreement indicating its consent to, approval of, or acquiescence in, any such petition or proceeding; any Borrower,, the General Partner or any Guarantor shall apply for or permit the appointment by consent or acquiescence of a receiver, custodian or trustee of any Borrower, the General Partner or any Guarantor for all or a substantial part of its Property; any Borrower, the General Partner or any Guarantor shall make an assignment for the benefit of creditors; or any Borrower, the General Partner or any Guarantor shall be unable or shall fail to pay its debts generally as such debts become due; or any Borrower, the General Partner or any Guarantor shall admit, in writing, its inability or failure to pay its debts generally as such debts become due. 14.9 Involuntary Bankruptcy. ---------------------- There shall have been filed against any Borrower, the General Partner or any Guarantor an involuntary petition in bankruptcy or seeking liquidation, reorganization, arrangement, readjustment of its debts or for any other relief under the Bankruptcy Code, or under any other act or law pertaining to insolvency or debtor relief,, whether state, federal or foreign, now or hereafter existing, which has not been dismissed within ninety (90) days of the date the petition 40 is filed; any Borrower, the General Partner or any Guarantor shall suffer or permit the involuntary appointment of a receiver, custodian or trustee of any Borrower, the General Partner or any Guarantor or for all or a substantial part of its Property; or any Borrower, the General Partner or any Guarantor shall suffer or permit the issuance of a warrant of attachment, execution or similar process against all or any substantial part of the Property of any Borrower, the General Partner or any Guarantor. 14.10 Judgments. --------- Final judgments or orders for the payment of money are rendered against any Borrower the aggregate amount of One Hundred Thousand Dollars ($100,000) or more (exclusive of amounts covered by insurance) which are not satisfied within sixty (60) days after their being rendered. 14.11 ERISA. ----- The occurrence of any of the following events: (i) the termination of any Plan in a distress termination under Section 4041(c) of ERISA or an involuntary termination under Section 4042 of ERISA; (ii) the filing of a request for a waiver of the minimum funding standard with regard to any Employee Benefit Plan: (iii) the occurrence of any event which causes any Plan to cease to have sufficient assets at all times so as to qualify for a standard termination under Section 4041 of ERISA; (iv) the occurrence of any event which causes the unfunded liability with regard to all such Plans in the aggregate to become an amount in excess of One Hundred Thousand Dollars ($100,000); (v) the occurrence of any event which causes the withdrawal liability with regard to all Plans to become an amount in excess of One Hundred Thousand Dollars ($100,000); (vi) the appointment of a trustee by an appropriate United States district court to administer any Plan; or (vii) the institution of any proceedings by the PBGC to terminate any such Plan or to appoint a trustee to administer any such Plan; unless, in each case, such default is cured within thirty (30) days after Borrowers' receipt of notice from Lender of such Default Condition. 14.12 Change of Control. ----------------- Prior to the occurrence of an initial public offering as contemplated by Section 10.19 either: (i) Scott Dorfman shall cease to own, beneficially and of record with unlimited power to vote, at least fifty-one percent (51%) of the issued and issued capital stock of each Borrower (except HPP) and of the General Partner; or (ii) the General Partner or Innotrac shall cease to be the sole general partner of HPP. 14.13 Material Adverse Change. ----------------------- The occurrence of any material change in the business, financial condition or results of operations of any Borrower which Lender reasonably determines, in good faith, materially and adversely affects the ability of such Borrower to pay and perform its Obligations to Lender 41 unless such default is cured within thirty (30) days after Borrowers' receipt of notice from Lender of such Default Condition. Without limitation of the foregoing, the loss, revocation, cancellation or material diminution or impairment of any of the material Bell South contracts described in Section 17.1(n) hereof shall be deemed to be a material adverse change for purposes hereof unless such contracts are reinstated or replaced within thirty (30) days after Borrowers' receipt of notice from Lender of such Default Condition. 14.14 Certain Debts. ------------- Either ITC shall default in the observance or performance of any term of their Subordination Agreements described more particularly in Section 17.1(g) below. 14.15 Change of Management. -------------------- If Scott Dorfman shall cease to serve as the Chief Executive Officer of Innotrac or, if another officer of Innotrac is given such title, to hold a position with Innotrac in which he would nevertheless be entitled to exercise the authority of the highest executive officer of Innotrac. 15. REMEDIES. -------- Upon the occurrence and during the continuation of any Default Condition or Event of Default, Lender's obligation to extend financing under the Revolving Line of Credit shall immediately cease and the Revolving Line of Credit shall terminate; provided, however, that if such obligations have ceased and -------- ------- commitments terminated due to the occurrence of a Default Condition, and such Default Condition does not become an Event of Default due to its having been cured or waived before it has matured into an Event of Default, then such obligation shall be reinstated as of the date such Default Condition is cured or waived. Upon the occurrence or existence of any Event of Default, or at any time thereafter, without prejudice to the rights of Lender to enforce its claims against Borrowers for damages for failure by Borrowers to fulfill any of its obligations hereunder, subject only to prior receipt by Lender of payment in full of all Obligations then outstanding in a form acceptable to Lender, Lender shall have all of the rights and remedies described in Sections 15.1 through 15.4, inclusive, and Lender may exercise any one, more, or all of such remedies, in its sole discretion, without thereby waiving any of the others. 15.1 Acceleration of the Obligations. ------------------------------- 42 Lender, at its option, may by written notice, effective upon receipt, declare all of the obligations (including but not limited to that portion thereof evidenced by any Notes) to be immediately due and payable (and in the event a voluntary or involuntary case is commenced under the Bankruptcy Code by or against any Borrower as a debtor, all Obligations automatically will be due and payable without any notice or declaration by Lender), whereupon the same shall become immediately due and payable without presentment, demand, protest, notice of nonpayment or any other notice required by law relative thereto, all of which are hereby expressly waived by each Borrower, anything contained herein to the contrary notwithstanding and, in connection therewith, Lender shall have the right to increase the rate of interest charged on the Notes, without further notice, to a rate per annum equal to the Default Rate. Thereafter, Lender, at its option, may, but shall not be obligated to, accept less than the entire amount of Obligations due, if tendered, provided, however, that unless then agreed to in writing by Lender, no such acceptance shall or shall be deemed to constitute a waiver of any Event of Default or a reinstatement of any commitments of Lender hereunder. 15.2 Remedies of a Secured Party. --------------------------- Lender shall thereupon have the rights and remedies of a secured party under the UCC in effect on the date thereof (regardless of whether the same has been enacted in the jurisdiction where the rights or remedies are asserted), including, without limitation, the right to take the Collateral or any portion thereof into its possession, by such means (without breach of the peace) and through agents or otherwise as it may elect (and, in connection therewith, demand that each Borrower assemble the Col lateral owned by it at a place or places and in such manner as the Lender shall prescribe), and sell, lease or otherwise dispose of the Collateral or any portion thereof in its then condition or following any commercially reasonable preparation or processing, which disposition may be by public or private proceedings, by one or more contracts, as a unit or in parcels, at any time and place and on any terms, so long as the same are commercially reasonable. Lender may apply the proceeds of any such sale or disposition of any Borrower's Collateral to any of the obligations of such Borrower in such order as Lender, in its sole discretion, may elect. Lender shall give the affected Borrowers written notice of the time and place of any public sale of the Collateral or the time after which any other intended disposition thereof is to be made, except where the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market. The requirement of sending reasonable notice shall be met if such notice is given to Borrowers pursuant to Section 16.9 at least ten (10) calendar days before such disposition. Expenses of retaking, holding, insuring, preserving, protecting, preparing for sale or selling or the like with respect to the Collateral shall include, in any event, reasonable attorneys' fees and other legally recoverable collection expenses, all of which shall constitute Obligations. 15.3 Set Off. ------- In addition to such other rights and remedies with respect to the Balances Collateral as may exist from time to time hereafter in favor of Lender, whether by way of setoff, banker's lien, 43 consensual security interest or otherwise, upon the occurrence of any Event of Default hereunder, each Lender may charge any part or all of the obligations of such Lender to any Borrower represented by items constituting the Balances Collateral in the possession and control of Lender against the Obligations of such Borrower without prior notice to or demand upon such Borrower. 15.4 Other Remedies. -------------- Unless and except to the extent expressly provided for to the contrary herein, the rights of Lender specified herein shall be in addition to, and not in limitation of, Lender's rights under the UCC, as amended from time to time, or any other statute or rule of law or equity, or under any other provision of any of the Loan Documents, or under the provisions of any other document, instrument or other writing executed by any Borrower or any third party in favor of Lender, all of which may be exercised successively or concurrently. 16. MISCELLANEOUS. -------------- 16.1 Waiver. ------ Each and every right granted to Lender under this Agreement, or any of the other Loan Documents, or any other document delivered hereunder or in connection herewith or allowed it by law or in equity, shall be cumulative and may be exercised from time to time. No failure on the part of Lender to exercise, and no delay in exercising, any right shall operate as a waiver thereof, nor shall any single or partial exercise by Lender of any right preclude any other or future exercise thereof or the exercise of any other right. No waiver by Lender of any Default Condition or Event of Default shall constitute a waiver of any subsequent Default Condition or Event of Default. 16.2 Governing Law. ------------- This Agreement and the other Loan Documents, and the rights and obligations of the parties hereunder and thereunder, shall be governed by, and construed and interpreted in accordance with, the laws of the State of Georgia. 16.3 Survival. -------- All representations, warranties and covenants made herein shall survive the execution and delivery of all of the Loan Documents. 16.4 No Assignment by Borrowers. -------------------------- No assignment hereof shall be made by any Borrower without the prior written consent of Lender. Lender may assign, or sell participations and undivided ownership interests in, its rights, 44 title and interest herein and in the Loan Documents at any time hereafter with written notice to, but without necessity of consent from, any Borrower. 16.5 Counterparts. ------------ This Agreement may be executed in two or more counterparts, each of which when fully executed shall be an original, and all of said counterparts taken together shall be deemed to constitute one. and the same agreement. 16.6 Reimbursement. ------------- Borrowers, jointly and severally, agree to pay to the Lender on demand all reasonable out-of-pocket costs and expenses that Lender may pay or incur in connection with the negotiation, preparation, consummation, enforcement and termination of this Agreement and the other Loan Documents, including, without limitation: (a) reasonable attorneys, fees and disbursements; (b) costs and expenses (including reasonable attorneys, fees and disbursements) for any amendment, supplement, waiver, consent or subsequent closing in connection with the Loan Documents and the transactions contemplated thereby; (c) costs and expenses of lien and title searches and title insurance; (d) taxes, fees and other charges for recording any deeds to secure debt, deeds of trust, mortgages,, filing financing statements and continuations, and other actions to perfect, protect and continue the Lien of Lender in the Collateral; (e) sums paid or incurred to pay for any amount or to take any action required of any Borrower under the Loan Documents that any such Borrower fails to pay or take; (f) costs of appraisals, inspections, and verifications of the Collateral, including, without limitation, reasonable costs of travel, lodging, and meals for inspections of the Collateral and Borrowers' operations by Lender; (g) costs and expenses of preserving and protecting the credit or the Collateral; and (h) costs and expenses (including reasonable attorneys, and paralegals, fees and disbursements) paid or incurred to obtain payment of the Obligations, enforce the Lien in the Collateral, sell or otherwise realize upon the Collateral, and otherwise enforce the provisions of the Loan Documents or to defend any claims made or threatened against Lender or either Lender arising out of the transactions contemplated hereby. Borrowers further agree, jointly and severally, to reimburse Lender for its actual out-of-pocket costs and expenses incurred in conducting field examinations and inspections of Borrowers and their Properties in addition to the foregoing. The foregoing shall not be construed to limit any other provisions of the Loan Documents regarding costs and expenses to be paid by Borrower. All of the foregoing costs and expenses may, in the discretion of Lender, be charged to each Borrower's loan account as Revolving Advances. Borrowers will also pay all expenses incurred by them in this transaction. In the event any Borrower becomes a debtor under the Bankruptcy Code, Lender's secured claim in such case shall include interest on the Obligations and all fees, costs and charges provided for herein (including, without limitation, reasonable attorneys' fees) all for the extent allowed by the Bankruptcy Code. 16.7 Successors and Assigns. ---------------------- 45 This Agreement shall be binding upon and inure to the benefit of the successors and permitted assigns of the parties hereto. 16.8 Severability. ------------ If any provision of any of the Loan Documents or the application thereof to any party thereto or circumstances shall be invalid or unenforceable to any extent, the remainder of such Loan Documents and the application of such provisions to any other party thereto or circumstances shall not be affected thereby and shall be enforced to the greatest extent permitted by law. 16.9 Notices. ------- All notices, requests and demands to or upon the respective parties hereto shall be deemed to have been properly given or made when personally delivered or five (5) calendar days after being deposited in the mail, registered or certified mail, return receipt requested, with sufficient postage prepaid, addressed as follows or to such other address as may be designated hereafter in writing by the respective parties hereto: Borrowers: Innotrac Corporation, as Agent for the Borrowers 1828 Meca Way Norcross, Georgia 30093 Attn: Scott Dorfman, President With a copy to: Kilpatrick Stockton LLP Suite 2800 1100 Peachtree Street Atlanta, Georgia 30309-4530 Attn: Gregory K. Cinnamon, Esq. Lender: SouthTrust Bank, N.A. One Georgia Center 22nd Floor 600 West Peachtree Street Atlanta, Georgia 30308 Attn: Ronald Fontenot, V.P. 46 With a copy to: Smith, Gambrell & Russell, LLP Suite 3100, Promenade II 1230 Peachtree Street, N.E. Atlanta, Georgia 30326 Attn: L. Brett Lockwood, Esq. except in cases where it is expressly provided herein or by applicable law that such notice, demand or request is not effective until received by the party to whom it is addressed in which instance rejection or other refusal to accept or the inability to deliver because of changed address of which no notice was given shall be deemed to be receipt of the notice, demand or request sent. By giving at least thirty (30) days written notice thereof, Borrowers, or Lender shall have the right from time to time and at any time to change their respective addresses and each shall have the right to specify any other address within the continental United States of America. 16.10 Entire Agreement; Amendments. ---------------------------- This Agreement, together with the Loan Documents executed in connection therewith, collectively constitute the entire agreement between the parties hereto with respect to the subject matter hereof. Neither this Agreement or any Loan Document nor any provision hereof or thereof may be changed, waived, discharged, modified or terminated orally, but only by an instrument in writing signed by the party against whom enforcement is sought. 16.11 Time of the Essence. ------------------- Time is of the essence in this Agreement and the other Loan Documents. 16.12 Interpretation. -------------- No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority by reason of such party having or being deemed to have structured or dictated such provision. 16.13 Lender Not Joint Venturer. ------------------------- Neither this Agreement nor any agreements, instruments, documents or transactions contemplated hereby (including the Loan Documents) shall in any respect be interpreted, deemed or construed as making Lender a partner or joint venturer with Borrower or as creating any similar relationship or entity, and Borrower agrees that it will not make any contrary assertion, contention, claim or counterclaim in any action, suit or other legal proceeding involving either Lender or any Borrower. 47 16.14 Jurisdiction. ------------ Each Borrower agrees that any legal action or proceeding with respect to this Agreement or any Loan Document may be brought in the courts of the State of Georgia or the United States District Court, Northern District of Georgia, Atlanta Division. By execution of this Agreement, each Borrower hereby submits to each such jurisdiction, hereby expressly waiving whatever rights may correspond to it by reason of its present or future domicile. Nothing herein shall affect the right of Lender to commence legal proceedings or otherwise proceed against each Borrower in any other jurisdiction or to serve process in any manner permitted or required by law. 16.15 Acceptance. ---------- This Agreement, together with the other Loan Documents, shall not become effective unless and until delivered to Lender at its office in Atlanta, Georgia and accepted in writing by Lender thereafter at such office as evidenced by its execution hereof (notice of which delivery and acceptance is hereby waived by Borrower). 16.16 Payment on Non-Business Days. ---------------------------- Whenever any payment to be made hereunder or under any Note shall be stated to be due on a day which is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of payment of interest hereunder or under the Notes. 16.17 UCC Terminations. ---------------- Each Borrower agrees that Lender shall not be required to execute any such UCC termination statements with respect to any Collateral unless and until all Obligations have been paid in full and Lender shall have terminated this Agreement in writing, which Lender shall do within a reasonable amount of time after the Obligations have been paid in full. 16.18 Cure of Default by Lender. ------------------------- If, hereafter, any Borrower defaults in the performance of any duty or obligation to Lender hereunder or under any Loan Document or to any other Person (including, without limitation, any lessor, licensor, vendor, processor, shipper, carrier or warehouseman), Lender may, at its option, but without obligation, in order to protect or preserve Lender's credit or the Collateral, Cure such default and any costs, fees and expenses incurred by Lender in connection therewith including, without limitation, for the purchase of insurance, the payment of taxes and the removal or settlement of liens and claims, shall be deemed to be Revolving Advances, made to such Borrower, whether or not this creates an over-advance hereunder, and shall be payable in accordance with its terms. 48 16.19 Recitals. -------- All recitals contained herein are hereby incorporated by reference into this Agreement and made part thereof. 16.20 Attorney-in-Fact. ---------------- Each Borrower hereby designates, appoints and empowers Lender irrevocably as its attorney-in-fact, at such Borrower's cost and expense, to do in the name of such Borrower from and after the occurrence of, and during the continuation of, any Event of Default, any and all actions which Lender may deem reasonably necessary or advisable to carry out the terms hereof upon the failure, refusal or inability of such Borrower to do so, and such Borrower hereby agrees to indemnify and hold Lender harmless from any costs., damages, expenses or liabilities arising against or actually incurred by Lender in connection therewith, except those arising from the willful misconduct or gross negligence of Lender. This power of attorney, being coupled with an interest, shall be irrevocable, shall continue until all obligations have been satisfied in full and this Agreement has been terminated by Lender in writing and shall be in addition to Lender's other rights, powers and remedies. 16.21 Sole Benefit. ------------ The rights and benefits set forth in this Agreement and in all the other Loan Documents are for the sole and exclusive benefit of the parties thereto and may be relied upon only by them. 16.22 Termination of this Agreement. ----------------------------- This Agreement, together with all Loan Documents, shall continue in full force and effect as to each Borrower notwithstanding (i) the passage of the Termination Date, (ii) the early termination of this Agreement by any one Borrower pursuant to Section 2.5(b) or (iii) the termination of the Revolving Line of Credit pursuant to Article 15, unless and until such Borrower has complied fully and in all respects with Section 2.5(b), in the case of any voluntary early termination of this Agreement by such Borrower, or such Borrower has made full payment and satisfaction of all Obligations of such Borrower to Lender after termination of the Revolving Line of Credit, on or after the Termination Date or prior thereto in the case of any early involuntary termination. When all Borrowers have so complied with this Section, this Agreement will terminate. 16.23 Partition. --------- Borrowers acknowledge and agree that it may be necessary hereafter, in order for Lender to accommodate the desires of ITC in their exercise of subrogation rights against certain of the Borrowers, that Lender subdivide or partition this Agreement (and the Loan Documents) into one or more separate agreements, in substantially identical form to this Agreement (and the Loan 49 Documents). In such event., the Borrowers affected will cooperate with Lender in executing all agreements, documents, instruments and necessary certificates to effect such subdivision or partition promptly at Lender's request at Borrowers' expense. 16.24 Acknowledgment by Borrowers. --------------------------- Each of the Borrowers hereby acknowledges and agrees that this Agreement is intended to be an integrated amendment and restatement of the Prior Version Loan Agreement, and this Agreement is not intended as a forgiveness or novation of the indebtedness heretofore outstanding under the Prior Version Loan Agreement, and that the Obligations under this Agreement are entitled in all respects to the benefit of the security intended to be afforded by the Collateral and the other Loan Documents whether heretofore executed or otherwise executed in connection with this Agreement. 17. CONDITIONS PRECEDENT. -------------------- 17.1 Conditions to Initial Revolving Advance. --------------------------------------- The conditions precedent set forth below shall constitute express conditions precedent to any obligation of Lender to make Revolving Advance hereunder. (a) Resolutions and Incumbency Certificate of Each Borrower. Receipt by ------------------------------------------------------- Lender of resolutions and incumbency certificates from the Secretary or Assistant Secretary of each Borrower that is a corporation or limited liability company, to be substantially in the form of Exhibit "H" attached hereto. ----------- (b) Partnership Certificate of HPP. Receipt by Lender of a certificate ------------------------------ from the General Partner of HPP, to be substantially in the form of Exhibit "I", ----------- attached hereto. (c) Subordination Agreements. ITC shall have executed and delivered a lien ------------- ---------- subordination agreement, or acknowledgment of subordination, in favor of Lender, in form and substance satisfactory to Lender. (d) Opinion of Counsel. Receipt by Lender of an opinion of counsel from ------------------ independent legal counsel to Borrowers, in form and substance acceptable to Lender. (e) Loan Documents. Receipt by Lender of any and all other Loan Documents, -------------- duly executed in form and substance acceptable to Lender. (f) Other Documents. Receipt by Lender of any and all other documents, --------------- agreements and instructs that Lender may reasonably request in connection with the transactions contemplated by this Agreement. (g) No Default. No Default Condition or Event of Default shall have ---------- occurred and be continuing. 50 (h) Representations and Warranties. All representations and warranties ------------------------------ contained in the Agreement shall be true and correct in all material respects on the date of each Revolving Advance. (i) Guaranty. Scott Dorfman shall have extended and delivered in favor of -------- Lender an Amended and Restated Guaranty, in form and substance satisfactory to Lender. (j) Loan Arrangement Fee. Borrowers shall have paid to Lender a loan -------------------- arrangement fee of $125,000 in respect of the Commitment to be under the Revolving Line of Credit available hereunder, the receipt which is hereby acknowledged by Lender. (k) Subordination Agreement. Lender shall have received an amendment or ----------------------- reaffirmation to that certain Subordination Agreement, dated as of January 19, 1995, among Borrower, Lender, ITC (as successor in interest to certain rights and obligations of ITC Holding Company, Inc.) and Scott Dorfman, in form and substance satisfactory to Lender and its counsel. [SIGNATURES APPEAR ON FOLLOWING PAGES] 51 IN WITNESS WHEREOF, each Borrower and Lender have set their hands, and each Borrower has affixed its seal, all as of the day and year first above written. "BORROWERS" "INNOTRAC" INNOTRAC CORPORATION (SEAL) By: /s/ Scott Dorfman --------------------------------------------- Scott Dorfman, President Attest: /s/ David Ellin ----------------------------------------------------------------- Name: David Ellin ------------------------------------------- Title: Senior Vice President ------------------------------------------ "IELC" IELC, INC. (SEAL) By: /s/ Scott Dorfman --------------------------------------------- Scott Dorfman, President Attest: /s/ Gregory Cinnamon ----------------------------------------- Gregory Cinnamon, Assistant Secretary "HOMETEL" HOMETEL SYSTEMS, INC. (SEAL) By: /s/ Scott Dorfman --------------------------------------------- Scott Dorfman, President Attest: /s/ Gregory Cinnamon ----------------------------------------- Gregory Cinnamon, Assistant Secretary 52 "RENTEL" RENTEL #1, INC. (SEAL) By: /s/ Scott Dorfman --------------------------------------------- Scott Dorfman, President Attest: /s/ Gregory Cinnamon ----------------------------------------- Gregory Cinnamon, Assistant Secretary "RENTEL #2" RENTEL #2, L.L.C. (SEAL) By: /s/ Scott Dorfman -------------------------------------------- Scott Dorfman, President Attest: /s/ Gregory Cinnamon ---------------------------------------- Name: Gregory Cinnamon ------------------------------------------ Title: Assistant Secretary ----------------------------------------- "SELLTEL" SELLTEL #1, INC. (SEAL) By: /s/ Scott Dorfman -------------------------------------------- Scott Dorfman, President Attest: /s/ Gregory Cinnamon ---------------------------------------- Gregory Cinnamon, Assistant Secretary 53 "SELLTEL #2" SELLTEL #2, L.L.C. (SEAL) By: /s/ Scott Dorfman -------------------------------------------- Scott Dorfman, President Attest: /s/ Gregory Cinnamon ---------------------------------------- Name: Gregory Cinnamon ------------------------------------------ Title: Assistant Secretary ----------------------------------------- "HPP" HOMETEL PROVIDERS PARTNERS, L.P. (SEAL) By: HOMETEL PROVIDERS, INC., its General Partner By: /s/ Scott Dorfman -------------------------------------------- Scott Dorfman, President By: /s/ Gregory Cinnamon -------------------------------------------- Gregory Cinnamon, Assistant Secretary "LENDER" SOUTHTRUST BANK, N.A. By: /s/ Ronald Fontenot -------------------------------------------- Ronald Fontenot, Vice President 54 EX-10.4 7 EQUIPMENT NEGOTIATION & REFERRAL AGREEMENT EXHIBIT 10.4 C O N F I D E N T I A L T R E A T M E N T ------------------------------------------- Portions of this Exhibit (Exhibit 10.4) have been omitted pursuant to a request for confidential treatment filed with the Securities and Exchange Commission (the "Commission"). The omitted portions, which are designated by an asterisk (*), were filed separately with the Commission. EQUIPMENT NEGOTIATION AND REFERRAL AGREEMENT BETWEEN BELLSOUTH TELECOMMUNICATIONS, INC. AND INNOTRAC CORPORATION, as agent of HomeTel Systems, Inc. - CONFIDENTIAL - NOTICE THE INFORMATION CONTAINED HEREIN SHOULD NOT BE DISCLOSED TO UNAUTHORIZED PERSONS. IT IS MEANT FOR USE OF THE PARTIES CONTRACTING HEREIN IN CONNECTION WITH PERFORMANCE UNDER THIS AGREEMENT. 1 NEGOTIATION AND REFERRAL AGREEMENT ---------------------------------- This Equipment Negotiation and Referral Agreement is by and between INNOTRAC Corporation as agent for HomeTel Systems, Inc. ("INNOTRAC"), a Georgia corporation, with offices at 1828 Meca Way, Norcross, GA 30093, and BellSouth Telecommunications, Inc. ("BST"), a Georgia corporation, with an office at 3535 Colonnade Parkway, Birmingham, Alabama 35243. This Agreement replaces and supercedes an agreement between the partners dated March 29, 1994. WHEREAS, BST desires to make more convenient for its customers the ordering of BST Network Services, particularly Calling Line Identification, by facilitating the installment purchase and/or rental of telephone sets or apparatus that are compatible with, complement and are used in connection with, the Network Services, particularly Calling Line Identification display devices ("Sets"); and WHEREAS, INNOTRAC wishes to engage the services of BST to directly negotiate the installment sale and/or rentals of the Sets with new or existing Network Services subscribers, as agents of INNOTRAC, through its Service Representatives; and WHEREAS, BST wishes to engage the services of INNOTRAC to accept telephone referrals of new or existing Network Services subscribers, where direct negotiation of Sets may not be feasible, and to offer Sets for installment sale and/or rental to these new subscribers; and WHEREAS, both parties recognize that these referrals are likely to increase installment sales and/or rentals of the Sets and to advance subscriptions for Network Services, particularly Calling Line Identification, and Sets; NOW, THEREFORE, in consideration of Ten and 00/l00th Dollars ($10.00) in hand paid, the above premises, and the covenants, terms and conditions contained herein, the receipt, adequacy and sufficiency of all such consideration being hereby acknowledged, the parties agree as follows: 1. TERM OF AGREEMENT The term of this Agreement shall commence on May 1, 1995 and shall, except as otherwise provided herein, continue in effect thereafter through March 14, 2000, inclusive. 2 2. TERRITORY This Agreement applies to negotiation with subscribers, or referrals of subscribers,. exclusively in association with INNOTRAC, in the Territory described in Appendix A (the "Territory"). 3. BST OBLIGATIONS Service Representatives of BST and/or the Affiliated Companies communicating with existing or prospective Network Services subscribers, particularly existing or prospective Calling Line Identification subscribers, will directly negotiate, as agents of INNOTRAC, the installment sale or rental of appropriate complementary Sets. Where such direct negotiation may not be feasible, these same Service Representatives will also offer the subscribers referral to INNOTRAC for the sale and/or rental of appropriate complementary Sets. If the subscribers indicate an interest in such referral, the BST service representative shall on-line transfer, or refer, the subscriber or prospective subscriber to a telephone number designated by INNOTRAC, subject to the provisions of Section 9. (b). This agreement affords INNOTRAC the right to this agency agreement, and to receive such referrals, for Calling Line Identification equipment, except as provided by separate Letter(s) of Agreement, to be negotiated on an "as required" basis. 4. INNOTRAC OBLIGATIONS (a) INNOTRAC agrees to accept toll-free telephone calls between the hours of 8:00 a.m. and 12:00 a.m. Eastern Time, Monday through Friday and from 9:00 a.m. to 6:00 p.m. on Saturdays, except on holidays recognized by BST, from subscribers and prospective subscribers who are on-line transferred, or referred, by BST service representatives, as provided in Section 3. The foregoing hours can be modified by mutual agreement of the parties. (b) INNOTRAC agrees to train, to the reasonable satisfaction of BST, all of its Call Center and Customer Service telemarketing specialists who will be handling all forms of inquiries from BST subscribers. These inquiries include, but are not limited to, referrals and sales, product function, installation, billing, delivery and return. Minimum training standards shall be reasonably determined and supplied by BST to INNOTRAC in writing. Training of Call Center telemarketing specialists will be of sufficient duration and detail to enable the telemarketing specialists to accurately and fully understand the function of the Sets, particularly Calling Line Identification display units; to explain the Sets to subscribers and prospective subscribers; and to explain INNOTRAC terms and conditions. Training of Customer Service telemarketing specialists will be of sufficient duration and detail to enable the telemarketing specialists to accurately and fully understand the function of the Sets, particularly Calling Line Identification display units; to assist BST's subscriber in troubleshooting; to assist with billing; to assist with product delivery inquiries; and to assist with product returns. All costs of such training will be borne by INNOTRAC; provided, however, BST shall provide INNOTRAC training 3 guidelines, materials and other assistance as is necessary to assist INNOTRAC to adequately train its telemarketing specialists. A maximum of two (2) BST employees will be permitted to observe any or all training sessions to ensure the accuracy and completeness of the training. (c) INNOTRAC shall make all reasonable efforts to ensure that all subscriber calls transferred or referred from BST to INNOTRAC, as well as all subsequent customer service calls associated with BST subscribers, are handled in a prompt, helpful and courteous manner. INNOTRAC will utilize its best efforts to maintain a monthly average of answering [ * ] of customer calls in [ * ] seconds or less, for both the Sales and Service Centers. BST may place test calls to INNOTRAC, visit INNOTRAC's premises, observe the handling of calls from subscribers, assess the courtesy, knowledge, and promptness of INNOTRAC's telemarketing specialists, and discuss the results of such calls and observations with INNOTRAC management. INNOTRAC agrees to remove from its work group that handles subscriber calls any telemarketing specialist who does not perform to a level of courtesy, promptness and knowledge reasonably satisfactory to BST and INNOTRAC; provided, however, removal of any such telemarketing specialist from the work group handling subscriber calls shall be BST's sole remedy for the failure of a telemarketing specialist to perform to a level of courtesy, promptness and knowledge. INNOTRAC agrees to allow representatives of BST, at BST's discretion with no provision for advance notice, to observe calls taken by INNOTRAC telemarketing specialists for the purpose of ensuring compliance to this Section. INNOTRAC agrees to place signs in conspicuous places in the workplace notifying its employees that calls taken by telemarketing specialists are subject to periodic monitoring for quality control purposes. (d) INNOTRAC agrees to keep in service, solely at its expense, sufficient telecommunications facilities dedicated to answering customer calls, including but not limited to, toll-free lines and telephone sets, to ensure adequate access to INNOTRAC's Sales and Call Centers as described in Section 3(c). If, at any time, the incoming subscriber calls become too numerous to be handled by the then prevailing numbers of telecommunications facilities and/or telemarketing specialists allocated by INNOTRAC, INNOTRAC agrees to increase the number of telecommunications facilities and/or telemarketing specialists to handle the increased volume of calls to comply with the access provisions of Section 3(c). When all telecommunications facilities and/or telemarketing specialists become busy and incoming calls encounter a busy or hold condition, INNOTRAC shall be relieved of its normal responsibility of handling each Sales or Customer Service call to conclusion and make commitments to call subscribers back within four (4) working hours of the time the subscriber's call was originally received by INNOTRAC. (e) INNOTRAC will purchase and own the inventory of Sets that it sells and/or rents to subscribers, and will maintain an inventory adequate to fill orders placed by subscribers within a reasonable time. INNOTRAC agrees to purchase the Sets from distributor(s) designated by BST. BST will assist INNOTRAC in obtaining Sets at a price per unit comparing favorably to the price being offered to other purchasers of Sets, taking into consideration volume discounts. All Sets marketed and sold by INNOTRAC pursuant to this Agreement shall be BellSouth Sets. BST shall utilize its best efforts to assist INNOTRAC in its efforts to obtain from designated distributors in a timely manner the quantities of Sets ordered and required by INNOTRAC to fulfill its obligations to subscribers and BST under this Agreement. If any designated distributor fails 4 to deliver timely the quantities of Sets ordered by INNOTRAC, INNOTRAC shall be relieved of its duty to perform under this Agreement to the extent that its performance becomes impossible or delayed because of said failure by designated distributor(s). In addition, BST shall ensure that any manufacturer of the Sets delivers the Sets to INNOTRAC in good condition and that the Sets function properly and are reasonably suited for their intended purpose. No Sets, apparatus, equipment, devices, materials or products acquired in any manner from any other sources, supplier, distributor or manufacturer may be advertised, marketed, promoted, or sold in any way to subscribers referred to INNOTRAC pursuant to this Agreement, without the prior written consent of BST. (f) Following direct negotiation or referral by BST, INNOTRAC agrees to handle all necessary communications with subscribers, including but not limited to, post-sale calls, in connection with the sale and/or rental of the Sets. INNOTRAC shall provide the Sets to subscribers on an "as-ordered" basis only, and to the extent that INNOTRAC's inventory permits. INNOTRAC will ship, bill and collect payment for all sets sold and/or rented except to the extent such billing and collection is assumed by BST. A credit card order will be shipped by INNOTRAC to the subscriber within two (2) working business days of the order being placed. An order to be paid by personal check will be shipped by INNOTRAC to the subscriber within five (5) business days of INNOTRAC's receipt of the check. (g) Notwithstanding any contrary provision of this Agreement, if any of the material obligations of INNOTRAC are not performed to the reasonable satisfaction of BST, other than services assumed and performed by BST, in BST's reasonable discretion, then BST may terminate this Agreement, provided that BST shall provide INNOTRAC with thirty (30) days written notice of its intention to terminate and INNOTRAC shall have those thirty (30) days to satisfy BST that it has improved its performance to levels reasonably acceptable to BST. Notwithstanding the foregoing, if INNOTRAC commences efforts to cure any breach of its obligations to perform any material duty required of it by this Agreement within the thirty (30) day grace period and such breach cannot be completely cured within said thirty (30) day grace period, the cure/grace period herein shall be extended from day to day for a period of up to thirty (30) additional days so long as INNOTRAC pursues efforts with diligence to cure the breech. (h) The billing and collection of monies for all Sets sold via installment and/or rented by INNOTRAC to subscribers directly negotiated by BST as agents of INNOTRAC or referred by BST to INNOTRAC shall be handled in accordance with that certain Billing and Collection Services Agreement between BST and INNOTRAC dated March 29, 1994. (i) INNOTRAC agrees to compensate BST for those Sets directly negotiated by BST telemarketing specialists per the terms found in Appendix E, "Part X Settlements." (j) INNOTRAC will bill BST subscribers who obtain Sets by direct negotiation or referral in accordance with the subscriber's purchase selection. These rates are exclusive of any special offers which may prevail at the time of the subscriber's order. INNOTRAC will ship Sets to subscriber using United Parcel Service (UPS) Two-Day Air Service or U.S. Mail Priority Mail. Such special offers will be mutually agreed to by INNOTRAC and BST at least thirty 5 (30) days in advance of any special offer. INNOTRAC agrees to provide at least sixty (60) days' advance notice of any pricing, shipping or shipping method changes. 5. NONCOMMITMENT AGREEMENT (a) This Agreement is a noncommitment agreement as to levels of installment sales and rentals of Sets and in no way implies any promise on the part of BST that any number of Sets will be purchased and/or rented as a result of equipment negotiations or referrals made pursuant to this Agreement. (b) It is expressly understood and agreed that this Agreement does not grant to INNOTRAC an exclusive privilege to market and sell the Sets, but does grant to INNOTRAC the exclusive right to the BST agency arrangement in the territory and referrals of subscribers from BST in the Territory seeking to purchase and/or rent Sets, as defined in Part 3. "BST Obligations". It is expressly understood and agreed that this Agreement does not grant to INNOTRAC an exclusive privilege to the BST agency arrangement and to receive referrals from subscribers except in the Territory. However, the parties also understand and agree that INNOTRAC may market and sell and/or rent Sets to end-users other than subscribers negotiated by BST for INNOTRAC, or referred by BST to INNOTRAC, pursuant to this Agreement. BST shall determine, at its own discretion, the extent to which BST and the Affiliated Companies (as hereinafter defined) will assist INNOTRAC by marketing, advertising, promoting, supporting or otherwise assisting in offering the Sets and the extent to which BST will refer subscribers to INNOTRAC except as expressly provided in this Agreement. This Agreement does not represent, and should in no way imply, a commitment on the part of BST to purchase any products or services of INNOTRAC except as expressly provided herein. 6. SPECIAL RECOGNITION (a) INNOTRAC expressly recognizes that BST is both a seller and reseller of products and services and that nothing agreed to herein is intended to limit, prohibit or restrict BST's merchandising activities in any way, except as provided in this Agreement. (b) INNOTRAC expressly recognizes that BST is a communications common carrier licensed and regulated by the Federal Communications Commission and various state regulatory commissions. This Agreement may be subject to such changes or modifications as any such regulatory body may from time to time direct in the exercise of its jurisdiction. This Agreement is also subject to modification under the continuing jurisdiction of the U.S. District Court for the District of Columbia in United States v. Western Electric, C.A. No. 82-0192 ("Modification of Final Judgment") or under the jurisdiction of other judicial authorities. In the event of a substantial change or deviation from the state of facts or the degree of regulation from that existing at the time of the execution of this Agreement which materially and adversely alters the obligations of either party under this Agreement, the adversely affected party shall have the option (i) to continue in full force and effect this Agreement, as modified by any regulatory or judicial change, or (ii) terminate any and all future obligations contemplated under this Agreement. 6 7. AFFILIATES AND SUCCESSORS For purposes of this Agreement, an "Affiliated Company" shall be defined as any company that is owned in whole or in part by BellSouth Corporation ("BellSouth") or by one or more of its direct or indirect subsidiaries. This Agreement shall be binding upon INNOTRAC and BST, and their respective successors and affiliates and shall inure to the benefit of INNOTRAC and BST, and their respective successors and affiliates, including the Affiliated Companies. INNOTRAC shall take all steps reasonably necessary to ensure that its successors, assigns, representatives, agents and affiliates comply with this Agreement. BST shall take all steps reasonably necessary to ensure that its successors, assigns, representatives, agents and affiliates, including the Affiliated Companies, comply with this Agreement. 8. ASSIGNMENT The rights and obligations of either party hereto may not be assigned or assumed without the prior written consent of the other party, which consent shall not be unreasonably withheld; provided, however, that BST, may, without INNOTRAC's consent, assign this Agreement and may subcontract the performance of any of its obligations hereunder to any of the Affiliated Companies. Notwithstanding the foregoing, BST hereby consents: (i) to INNOTRAC's assignment of this Agreement, in whole or in part, to any corporation wholly owned by Scott David Dorfman ("Dorfman") or any partnership or corporation having Dorfman or a corporation wholly owned by Dorfman as a majority shareholder or general partner, and (ii) to INNOTRAC's conveyance of a security interest in and to any monies due from BST to INNOTRAC under this Agreement. 9. OWNERSHIP AND USE OF MARKS (a) BST authorizes INNOTRAC to use the BellSouth Telecommunications name, the BellSouth Telecommunications mark, and any other trademark associated with the Sets (collectively the "Marks") solely in conjunction with the advertising, sale and/or rental of the Sets pursuant to terms hereof and the Billing Agreement of even date herewith (the "Billing Agreement"). INNOTRAC shall strictly comply with all graphic standards as referenced in Appendix B and any such other graphic standards for the Marks which may be furnished from time to time, and shall place appropriate trademark notices on the Marks as instructed, unless impossible. Any use of the Marks which is not authorized herein or by an authorized representative of BST shall be strictly prohibited. INNOTRAC admits the value of, the popularity of, and the good will associated with the Marks. INNOTRAC acknowledges that said good will is a property right belonging to BellSouth and that, as between the parties hereto, BellSouth is the owner of all trademark and other rights in said Marks worldwide. INNOTRAC recognizes that nothing contained in this Agreement is intended as an assignment or grant to INNOTRAC of any right, title or interest in or to said Marks or to any other marks of BellSouth or the good will attached thereto, except that INNOTRAC may use the Marks as provided in this Agreement and/or the Billing Agreement. Any use of the Marks shall inure to the benefit of and be on behalf of BellSouth and its Affiliated Companies, except that INNOTRAC may use and receive the benefit of the Marks as provided in this Agreement and/or the Billing Agreement. 7 INNOTRAC further recognizes that this Agreement does not confer any right on INNOTRAC to use the Marks in any manner outside of the United States, or to grant sublicenses, and is not assignable except as provided in Section 8. INNOTRAC will do nothing inconsistent with BellSouth's ownership of the Marks. INNOTRAC acknowledges that in the event, after a thirty (30) day notice has been issued to INNOTRAC and INNOTRAC remains in breach of Section 9 or 10 hereof and continues to act in any manner which materially and negatively impacts on the reputation of BST, its Marks or its Affiliated Companies, BST shall have the right to (1) bring an action against INNOTRAC at law or in equity to protect the Marks and to recover damages as the result of any misuse or unauthorized use thereof and/or (2) terminate this Agreement for any such misuse or unauthorized use by INNOTRAC. (b) During the term of this Agreement INNOTRAC's employees will be permitted to answer calls from referred subscribers with the phrase, "BellSouth Phones." INNOTRAC may continue to use the In-WATS number 1-800-XXX-XXXX; provided, however, that INNOTRAC hereby agrees and warrants that it shall immediately cease any and all current and future use of any alphabetical and/or alpha/numeric equivalent of said In-WATS number, including but not limited to 1-800-XXX-XXXX, and that it shall, promptly destroy any and all materials and other tangible items which reflect any alphabetical and/or alpha/numeric equivalent of said In-WATS number, it being understood that INNOTRAC may retain for internal use only and for so long as is necessary any INNOTRAC business records reflecting any alphabetical and/or alpha/numeric equivalent of said In- WATS number. The parties will cooperate in every reasonable manner in determining whether any specific material which reflects the alphabetical and/or alpha/numeric equivalent is being used in violation of or in noncompliance with this paragraph. INNOTRAC acknowledges that in the event, after a thirty (30) day notice has been issued to INNOTRAC and INNOTRAC continues to utilize in a manner inconsistent with the foregoing an alphabetical and/or alpha/numeric equivalent of said In-WATS number, BST shall have the right to (1) bring an action against INNOTRAC at law or in equity to enjoin INNOTRAC's use of the alphabetical and/or alpha/numeric equivalent of said In-WATS number and to recover damages as the result of any such misuse or unauthorized use thereof, and/or (2) terminate this Agreement for any such misuse by INNOTRAC of the alphabetical and/or alpha/numeric equivalent of said In-WATS number. (c) Upon the expiration, termination or cancellation of this Agreement for any reason whatsoever, INNOTRAC shall, except as otherwise provided in this Agreement and the Billing Agreement, immediately (i) cease answering calls with the phrase, "BellSouth Phones"; (ii) cease any uses of the Marks, and (iii) cease its use of all materials and other tangible items bearing the Marks. INNOTRAC shall certify compliance with this paragraph in writing to BST within thirty (30) days of the expiration, termination or cancellation date. Upon the expiration, termination or cancellation of this Agreement, INNOTRAC will be allowed to sell and/or rent any remaining Sets in its possession independently of this Agreement so long as the Marks used on or in connection with the sale and/or rental of the Sets are (i) removed or (ii) comply with the graphic standards set forth in this Agreement. 8 10. RESTRICTION ON BST MERCHANDISING BST and its Affiliated Companies shall not engage in any marketing or merchandising activities that (i) diminish the pool of customer referrals to INNOTRAC pursuant to the Referral Agreement, (ii) cause or might cause purchasers and/or lessees of Sets to terminate their use of and/or payment for the Sets under the Program (as defined in the Billing Agreement) and switch to another BellSouth-related marketing or merchandising program for the delivery or marketing of telephone company services, including caller identification services, which services are identical or similar to those that are the subject of this Agreement and which do not materially involve INNOTRAC as a service provider upon not less favorable terms, or (iii) cause or might cause potential purchasers and/or lessees of Sets to choose another BST marketing or merchandising program for telephone company services, including caller identification services, which services are identical or similar to those that are the subject of this Agreement and do not materially involve INNOTRAC as a service provider upon not less favorable terms; provided, however, that during the calendar years 1995 and 1996, BST shall have the right in its sole discretion to conduct a one month Caller Identification promotion involving the distribution of Caller Identification-display units in each year in each of its nine states. The parties agree that the terms of this Section 10 shall be subject to good faith negotiations concerning desired changes by either party beginning after January 1, 1997. Either party desiring such negotiations shall provide a thirty (30) day notification to the other party pursuant to Section 15 of this Agreement. 11. ADVERTISING AND PUBLICITY (a) All media advertising and printed material in which the Marks are to be used shall be prepared consistent with Appendix B and with such other guidelines as may provide to INNOTRAC by BST. BST shall prepare an approved boilerplate for such advertising and printed materials consistent with said guidelines for use by INNOTRAC. All media advertising and printed material using the Marks other than in conformance with the BST boilerplate shall be submitted to BST for review in advance and shall not be distributed or used in any manner without the prior written approval of BST, not to be unreasonably withheld. (b) INNOTRAC agrees not to identify BST or any other Affiliated Companies in any advertising or publicity without the prior written consent of BST, except as expressly provided herein. INNOTRAC agrees that the Marks shall not be used in any advertising or publicity without the prior written consent of BST, except as expressly provided herein. 12. INDEMNITY (a) In the event of any infringement or claim of infringement of any patent, trademark, copyright, trade secret or other proprietary interest based on the sale of any Sets pursuant to this Agreement or in contemplation hereof, INNOTRAC shall indemnify and hold harmless BST and the Affiliated Companies from any loss, damage, expense or liability, including costs and reasonable attorney's fees, that may result by reason of any such infringement by or claim of infringement against INNOTRAC, except that this indemnity shall not apply to infringements by or claims of infringement against INNOTRAC or BST, and/or the Affiliated Companies which infringement arises out of the action of BST and/or the Affiliated companies. 9 (b) The parties agree that BST and the Affiliated Companies except as provided by law, shall not be responsible for providing any warranty on any Sets purchased by subscribers pursuant to this Agreement. INNOTRAC agrees to indemnify and hold BST and the Affiliated companies harmless from any claim, suit, action or proceeding arising by or on behalf of any subscriber with respect to the failure of INNOTRAC to comply with any INNOTRAC warranty on the Sets. BST and the Affiliated Companies hereby assign to INNOTRAC any and all warranties of the manufacturer(s) of the Sets. (c) INNOTRAC agrees to indemnify and hold harmless BST and the Affiliated Companies, and their respective officers, employees and agents, from any and all claims, liabilities, or loss, and all damages, direct or consequential, incurred by BST, the Affiliated Companies, or any other person or entity, and all costs and expenses including reasonable attorney's fees, arising in any manner, directly or indirectly, from the negligent or unlawful conduct of INNOTRAC arising out of or in connection with or incident to this Agreement. (d) BST and the Affiliated Companies agree to indemnify and hold harmless INNOTRAC and its affiliates, and their respective officers, employees and agents, from any and all claims, liabilities, or loss, and all damages, direct or consequential, incurred by INNOTRAC, its affiliates and/or any other person or entity, and all costs and expenses including reasonable attorney's fees, arising in any manner, directly or indirectly, from the negligent and/or unlawful conduct of BST arising out of or in connection with or incident to this Agreement. (e) The foregoing indemnifications shall survive the termination, cancellation or expiration of this Agreement. 13. CHOICE OF LAW The validity, construction, interpretation, and performance of this Agreement shall be governed by and construed in accordance with the law of the State of Georgia. 14. INNOTRAC RELATIONSHIP Persons furnished by INNOTRAC shall be considered solely the employees or agents of INNOTRAC, under the sole and exclusive direction of control of INNOTRAC, and shall not be considered employees of BST or the Affiliated Companies for any purpose. INNOTRAC shall be responsible for compliance with all employment-related laws, rules and regulations involving, but not limited to, employment of labor, hours of labor, health and safety, working conditions and payment including federal, state and local taxes chargeable or assessed with respect to its employees, such as social security, unemployment, worker's compensation, disability insurance and federal and state withholding. 15. NOTICES (a) Any notices or demands that are required by law or under the terms of this Agreement shall be given or made by BST or INNOTRAC in writing and shall be 10 given by hand delivery, telegram or similar communication, or by certified or registered mail, or by courier or telecopier, and addressed to the respective parties set forth below. Such notices shall be deemed to have been given in this case of telegrams or similar communications when sent, and in the case of certified or registered mail when deposited in the United States mail with postage prepaid. To BST: BellSouth Telecommunications, Inc. [ * ] South S4IA 3535 Colonnade Parkway Birmingham, Alabama 35235 FAX (205) 977-0979 To INNOTRAC: INNOTRAC Corporation Mr. Scott Dorfman 1828 Meca Way Norcross, GA 30093 FAX (404) 717-2111 (b) The above addresses may be changed at any time by giving written notice as above provided. (c). In addition to the foregoing, any notices of a legal nature shall be copied to: BellSouth Telecommunications, Inc. Legal Department 3535 Colonnade Parkway South E9D1 Birmingham, Alabama 35243 and Scott Dorfman President INNOTRAC Corporation 1828 Meca Way Norcross, Georgia 30093 11 16. DAMAGES LIMITATIONS IN NO EVENT SHALL BST OR INNOTRAC, OR THEIR PARENT CORPORATIONS, AFFILIATES OR SUPPLIERS, BE LIABLE FOR SPECIAL, CONSEQUENTIAL OR INDIRECT DAMAGES. 17. CONFIDENTIALITY BST and INNOTRAC agree that they will keep the terms of this Agreement, and any communications, business dealings and transactions pursuant thereto, confidential and will not disclose such terms, communications, dealings or transactions ("Information") to any person or entity not employed by, affiliated with or otherwise under the control of, the parties with a need to know such Information, except to the extent that disclosure (i) may be reasonably necessary for performance hereunder, (ii) may be necessary in order to obtain enforcement of the terms of this Agreement, or (iii) may be required be applicable law or regulation or by order of a court of competent jurisdiction. In the event any such disclosure is required by law, regulation or court order, the party making the disclosure shall promptly inform the other party. Notwithstanding the foregoing, BST consents to INNOTRAC's disclosure of this Agreement, and any communications, business dealings and transactions pursuant thereto to any entity that has received an assignment of this Agreement pursuant to Section 8 above, and professionals, including attorneys and accountants, employed by any of the persons or entities referenced in this Section 17. 18. TERMINATION Either party may terminate this Agreement, without cause, upon not less than twenty-four (24) months prior written notice given in accordance with Section 15. 19. NONDISCRIMINATION COMPLIANCE INNOTRAC agrees to comply with the applicable provisions of the "NONDISCRIMINATION COMPLIANCE AGREEMENT" set forth in Appendix C. 20. CONFLICT OF INTEREST INNOTRAC acknowledges BST's "CONFLICT OF INTEREST" statement shown in Appendix D, and further stipulates no officer or employee of BST has been employed, retained, induced, or directed by INNOTRAC to solicit or secure this Agreement with BST upon agreement, offer, understanding, or implication involving any form of remuneration whatsoever. INNOTRAC agrees, in the event of an allegation of substance (the determination of which will be made solely by BST ) that there has been a violation hereof, INNOTRAC will cooperate in every reasonable manner with BST in establishing whether the allegation is true. Notwithstanding any provisions of this Agreement to the contrary, if a violation of this provision is found to have occurred and is deemed material by BST, BST may cancel this Agreement. If BST, in its sole discretion, believes that any 12 such violation can be cured, BST agrees to provide INNOTRAC a thirty (30) period in which to effect such a cure. 21. SEVERABILITY If any part of this Agreement is determined to be invalid, illegal or unenforceable, such determination shall not affect the validity, legality or enforceability of any other part of this Agreement, and the remaining parts of this Agreement shall be enforced as if such invalid, illegal or unenforceable part were not contained herein. 22. SECTION HEADINGS The headings of the sections included in this Agreement are inserted for convenience only and are not intended to affect the meaning or interpretation of this Agreement. 23. ENTIRE AGREEMENT This Agreement embodies the entire agreement and understanding between the parties hereto relating to the subject matter hereof and supersedes all prior agreements and understandings relating to such subject matter. The parties acknowledge that they have read this Agreement, understand it and agree to be bound by its terms and conditions. The provisions of this Agreement may be amended, waived or discharged only by an instrument in writing signed by both parties. A waiver at any time of compliance with any of the terms and conditions of this Agreement shall not be considered a modification, cancellation or waiver of such terms and conditions, or of an preceding or waiver of such terms and conditions, or of an preceding or succeeding breach thereof, unless expressly so stated in a writing signed by both parties. Appendices A through E, referred to herein and attached hereto, are integral parts of this Agreement and are incorporated herein by this reference. 24. SUPERCEDES PREVIOUS AGREEMENT This Agreement supercedes, it its entirety, any prior Referral agreements between the parties. 13 IN WITNESS WHEREOF, the parties have hereunto placed their hands and seals. INNOTRAC CORPORATION, as agent for BELLSOUTH TELECOMMUNICATIONS, INC., HomeTel Systems, Inc. for itself. By: /s/ Scott Dorfman By: [_______________*_______________] (signature) (signature) By: Scott Dorfman By: [_______________*_______________] (printed name) (printed name) Title: President Title: [____________*_______________] Date: 6-17-95 Date: 6/22/95 14 APPENDIX A --------- TERRITORY The Territory of this Agreement shall be the states of Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, North Carolina, South Carolina, and Tennessee. 15 APPENDIX B ---------- TRADENAME AND TRADEMARK USAGE REQUIREMENTS - BELLSOUTH AND BELL SYMBOL The standards of usage for the BellSouth name and logo will be as follows: (1) The legal name of the Company is BellSouth Products, Inc. "BellSouth" is always one word with the "B" and "S" capitalized. The work "Products" is initial cap only. A trademark notice should appear after the word Products in the first or most prominent usage of the BellSouth Products Mark (BellSouth Products) (2) The Bell Symbol must be used with the geographic modifier BellSouth Products. The Bell Symbol may not be used alone, or in a different proporation to the names as shown in the sample logos. (3) Color for the logo may be used in one of three ways: - PANTONE* 300 blue for the Bell Symbol with black for BellSouth Products. - Print the entire logo in black or a color dark enough to provide strong contrast between logo and background. - Reverse the entire logo out of color background in all white. The background color should be dark enough to provide strong contrast between it and the logo. (4) The Bell Symbol shall be constructed of solid heavy lines and shall not be constructed out of any other graphic elements (such as dots, stripes, or patterns). (5) Whenever the Bell Symbol is depicted in print advertising, it shall always appear a distance of at least one-half its diameter away from all edges. (6) No text, illustration, work, name, symbol or graphic element shall touch any part of the Bell Symbol or appear in the space surrounding and extending from the outermost perimeter of the Bell Symbol in all directions a distance of one-half the diameter of any depiction of the Bell Symbol. (7) The two elements that make up the Bell Symbol (the bell and a surrounding circle) are a single unit and shall not be used separately. (8) The Bell Symbol shall not be displayed or placed against a background containing a strong texture or pattern or multiple colors such that the Bell Symbol is not clearly distinguishable from the background. * Pantone, Inc.'s check-standard trademark for color reproduction and color reproduction materials. 16 APPENDIX C ---------- NONDISCRIMINATION COMPLIANCE AGREEMENT Contractor shall comply with the applicable provisions of the following: Exec. Order No. 11246, Exec. Order No. 11625, Section 8 of the Small Business Act as amended, Railroad Revitalization and Regulatory Reform Act of 1976, Exec. Order No. 11701, Exec. Order No. 11758, Exec. Order No. 12138 Section 503 of the Rehabilitation Act of 1973 as amended by PL93-516, Vietnam Era Veterans' Readjustment Assistance Act of 1974 and the rules, regulations and relevant Orders of the Secretary of Labor pertaining to the Executive Orders and Statutes listed above. For contracts of or which aggregate to S2,500 or more annually, the following table describes the clause which are included in the contract: 1. Inclusion of the Equal Employment clause in all contracts and orders; 2. Certification of non-segregated facilities; 3. Certification that an affirmative action program has been developed and is being followed; 4. Certification that an annual Employers Information Report (EEO-1 Standard Form 100) is being followed; 5. Inclusion of the "Utilization of Minority and Women's Business Enterprises" clause in all contracts and orders; 6. Inclusion of the "Minority and Women's Business Subcontraction Program" clause in all contracts and orders; 7. Inclusion of the "Listing of Employment Openings" clause in all contracts and orders; 8. Inclusion of the "Employment of the Handicapped" clause in all contracts and orders; $2,500 to $10,000 $10,000 to $50,000 $50,000 or more 8 1, 2, 5, 6, 7, 8 1, 2, 3*, 4*, 5, 6, 7, 8 *Applies only for business with 50 or more employees 1. Equal Employment Opportunity Provisions 17 In accordance with Exec. Order No. 1246, dated September 24, 1965 and Part 60-1 of Title 41 of the codes of Federal Regulations (Public Contracts and Property Management, Office of Federal Contract Compliance, Obligations of Contracts and Subcontractors), as may be amended from time to time, the parties incorporated herein by this reference the regulations and contract clauses required by those provisions to be made a part of Government contracts and subcontracts. 2. Certification of Non-segregated Facilities The Contractor certifies that it does not and will not maintain any facilities it provides for its employees in a segregated manner or permit its employees to perform their services at any location under its control where segregated facilities are maintained and that it will obtain a similar certification prior to the award of any nonexempt subcontract. 3. Certification of Affirmative Action Program The Contractor affirms that it has developed and is maintaining an affirmative action plan as required by Part 60-2 of Title 41 of the Code of Federal Regulations. 4. Certification of Filing of Employers Information Reports The Contractor agrees to file annually on or before the 31st day of March complete and accurate reports on Standard Form 100 (EEO-1) or such forms as may be promulgated in its place. 5. Utilization of Minority and Women's Business Enterprises (a) It is the policy of the Government and us, as a Government contractor, that minority and women's business enterprises shall have the maximum practicable opportunity to participate in the performance of contracts. (b) The Contractor agrees to use his or her best efforts to carry out this policy in the award of his or her subcontracts to the fullest extent consistent with the efficient performance of this contract. As used in this contract, the term "minority or women's business enterprise" means a business with at least 50 percent of which is owned by minority or women group members or in case of publicly owned businesses, at least 51 percent of the stock of which is owned by minority or women's group members. For purposes of this definition minority group members are American Blacks, Hispanics, Asians, Pacific Islanders, American Indians and Alaskan Natives. Contractor may rely on written representation by subcontractors regarding their status as minority or women's business enterprises in lieu of an independent investigation. 18 6. Minority and Women's Business Enterprises Subcontracting Program (a) The Contractor agrees to establish and conduct a program which will enable minority and women's business enterprises (as defined in paragraph 5 above) to be considered fairly as subcontractors and suppliers under the contract. In this connection, the Contractor shall: (1) Designate a liaison officer who will administer the Contractor's minority and women's business enterprises program; (2) Provide adequate and timely consideration of the potentialities of known minority and women's business enterprise in all "make- or-buy" decisions; (3) Assure that known minority and women's business enterprises will have an equitable opportunity to compete for subcontracts, particularly by arranging solicitations, time for the preparation of bids, quantities, specifications, and delivery schedules so as to facilitate the participation of minority and women's business enterprises; (4) Maintain records showing (I) procedures which have been adopted to comply with the policies set forth in this clause, including the establishment of a source list of minority and women's business enterprises (II) awards to minority and women's business enterprises on the source list, and (III) specific efforts to identify and award contracts to minority and women's business enterprises; (5) Include the utilization of Minority and Women's Business Enterprises clause in subcontracts which offer substantial minority and women's business enterprises subcontracting opportunities; (6) Cooperate with the Government's Contracting Officer for us in any studies and surveys of the contractor's minority and women's business enterprises procedures and practices that the Contracting Officer may from time to time conduct; (7) Submit periodic reports of subcontracting to known minority and women's business enterprises with respect to the records referred to in subparagraph (4) above, in such form and manner and at such time (not more than quarterly) as the Government's Contracting Officer for us may prescribe. (a) The Contractor further agrees to insert, in any subcontract hereunder which may exceed $5,000,000 (or in the case of WBE $1,000,000 in the case of contracts for the construction of any public facility and which offer substantial subcontracting possibilities) provisions which shall conform substantially to the language of this agreement, including this paragraph; and 19 (b) to notify the Contracting Officer of the names of such subcontractors. 7. List of Employment Openings for Veterans In accordance with Exec. Order 11701, dated January 24, 1973, and part 60- 250 of Title 41 of the Code of Federal Regulations, as it may be amended from time to time, the parties incorporated herein by this reference and regulations and contract clauses required by those provisions to be made a part of Government contracts and subcontracts. 8. Employment of the Handicapped In accordance with Exec. Order 11758, dated January 15, 1974, and Part 60- 741 of Title 41 of the Code of Federal Regulations, as may be amended from time to time, the parties incorporated herein by this reference the regulations and contract clauses required by those provisions to be made a part of Government contracts and subcontracts. 20 APPENDIX D ---------- CONFLICT OF INTEREST BellSouth does business with thousands of contractors and suppliers. It is a fundamental policy of BellSouth that such dealings shall be conducted on a fair and impartial basis, free from improper influences, so that all participating contractors and suppliers may be considered on the basis of the quality and cost of their product or service. We are also committed to doing business with contractors and suppliers in an atmosphere that is in keeping with the highest standards of business ethics. Although we recognize that the exchange of gifts and entertainment is customary in some businesses, we believe this practice often raises embarrassing questions about the motives of both the giver and receiver. Therefore, this company has for some time followed a policy that its employees shall not accept from customers, suppliers of property, goods or services, or from any other persons, any gifts, benefits or unusual hospitality that may in any way tend to influence them, or have the appearance of influencing them, in the performance of their jobs. Employees of BellSouth who are authorized to make purchases or negotiate contracts are aware of this policy. We believe that firm adherence to this policy will help establish better business relationships between BellSouth and its contractors and suppliers. We solicit your cooperation in achieving that objective. 21 APPENDIX E ---------- CPE NEGOTIATION TRIAL AND PART X COMPENSATION BST and INNOTRAC agree that it is in the mutual best interest of both parties to enable BST service representatives to directly negotiate the sale of Caller ID display units and other telecommunications devices directly with the customer. In concept, this would largely eliminate the need for BST service representatives to "refer" customers desiring such equipment to INNOTRAC to complete the sale. To that extent, BST and INNOTRAC agree to conduct a trial to ascertain the effectiveness of such a program. At the end of the trial period, it shall be BST's sole discretion to continue the trial in the trial locations; to terminate the trial altogether; or to judge the trial a success. It will be BST's sole discretion as to the extent to which locations are added should the trial be a success. TRIAL TIMING AND DURATION The trial will begin May 1, 1995 and will run for a period of ninety (90) days. TRIAL LOCATION(S) The trial will encompass all BST Marketing and Service Business Offices and their associated Service Representatives in the states of Georgia (GA), Louisiana (LA) and Tennessee (TN). BST COMPENSATION INNOTRAC agrees to compensate BST for the appropriate Part X charges as provided by the formula provided below. PART X COMPENSATION FORMULA INNOTRAC compensation to BST will be calculated based on the number of sales directly negotiated by BST Service Representatives, multiplied by the average time spent negotiating the Caller ID or other display equipment, multiplied by the BST determined compensation rate per minute of service representative negotiation time. AVERAGE NEGOTIATION TIME The average time spent negotiating Caller ID and other display equipment is established at [ * ]. 22 COMPENSATION RATE The per minute rate by which BST will be compensated by INNOTRAC is [ * ]. ADJUSTMENT BST will perform periodic timing and costing studies which may result in adjustments to the average negotiation time or compensation rate or both. BST shall implement such adjustments at its sole discretion, provided, however, that INNOTRAC is provided with thirty (30) days' advance notification of any such adjustment. BILLING INNOTRAC will be billed monthly by BST based on the previous month's sales activity. 23 EX-10.5 8 INDEMNIFICATION AGREEMENT EXHIBIT 10.5 INDEMNIFICATION AGREEMENT THIS AGREEMENT is made this 11th day of December, 1997, by and between INNOTRAC CORPORATION, a Georgia corporation (the "CORPORATION"), and _____________________ (the "INDEMNIFIED PARTY"). W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Indemnified Party currently serves as a director, officer, or both of the Corporation, and in such capacity is performing a valuable service; and WHEREAS, pursuant to the Corporation's Articles of Incorporation and Bylaws, each as amended to date (collectively the "CHARTER"), the Corporation may indemnify its directors and officers to the fullest extent authorized by applicable law; and WHEREAS, Section 14-2-851 of the Georgia Business Corporation Code, as amended to date (the "STATE STATUTE"), provides the statutory basis for the indemnification of directors and officers of a Georgia corporation; and WHEREAS, in order to induce the Indemnified Party to continue to serve, the Corporation has determined and agreed to enter into this Agreement with the Indemnified Party; NOW, THEREFORE, in consideration of Indemnified Party's continued service on behalf of the Corporation after the date hereof, the parties hereto agree as follows: 1. INDEMNITY. The Corporation hereby agrees to hold harmless and --------- indemnify the Indemnified Party to the fullest extent authorized or permitted by the provisions of the State Statute with respect to the indemnification of directors and officers, or by any amendment thereof or other statutory provision authorizing or permitting such indemnification that is adopted after the date hereof. 2. ADDITIONAL INDEMNITY. Subject only to the exclusions set forth in -------------------- SECTION 3 hereof, the Corporation hereby further agrees to hold harmless and indemnify Indemnified Party against any and all expenses (including reasonable attorneys' fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by Indemnified Party in connection with any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (including an action by or in the right of the Corporation) to which Indemnified Party is, was or at any time becomes a party, or is threatened to be made a party, by reason of the fact that Indemnified Party is, was or at any time becomes a director, officer, employee, or agent of the Corporation, or is or was serving or at any time serves at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust or other enterprise. 3. LIMITATIONS ON ADDITIONAL INDEMNITY. No indemnity pursuant to ----------------------------------- SECTIONS 1 or 2 hereof shall be paid by the Corporation: (a) In respect of expenses, judgments, fines, and settlement amounts to the extent attributable to remuneration paid or other financial benefit provided to the Indemnified Party by the Corporation if it shall be determined by a final judgment or other final adjudication that such remuneration or financial benefit was paid or provided in violation of the Indemnified Party's duties and obligations to the Corporation; (b) On account of any suit in which judgment is rendered against Indemnified Party for an accounting of profits, made from the purchase or sale by the Indemnified Party of securities of the Corporation, pursuant to the provisions of Section 16(b) of the Securities Exchange Act of 1934, as amended, or similar provisions of any federal or state law, or on account of any payment by the Indemnified Party to the Corporation in respect of any claim for such accounting; (c) On account of the Indemnified Party's conduct if it shall be determined by a final judgment or other final adjudication to have been knowingly fraudulent, deliberately dishonest, or grossly negligent, or to have constituted willful misconduct; or (d) If a final decision by a court having jurisdiction in the matter shall determine that such indemnification is not lawful. 4. CONTRIBUTION. (a) If the indemnification provided in SECTIONS 1 OR 2 ------------ is unavailable and may not be paid to the Indemnified Party for any reason (other than pursuant to SECTIONS 3(A), (B), (C) AND (D)), then in respect of any threatened, pending, or completed action, suit, or proceeding in which the Corporation is jointly liable with the Indemnified Party (or would be if joined in such action, suit, or proceeding), the Corporation shall contribute to the amount of expenses, judgments, fines, penalties, and settlements paid or payable by the Indemnified Party in such proportion as is appropriate to reflect (i) the relative benefits received by the Corporation on the one hand and the Indemnified Party on the other from the transaction from which such action, suit, or proceeding arose, and (ii) the relative fault of the Corporation on the one hand and of the Indemnified Party on the other in connection with the events that resulted in such expenses, judgments, fines, penalties, or settlement amounts, as well as any other relevant equitable considerations. The relative fault of the Corporation on the one hand and of the Indemnified Party on the other shall be determined by reference to, among other things, the parties' relative intent, knowledge, access to information, and opportunity to correct or prevent the circumstances resulting in such expenses, judgments, fines, penalties, or settlement amounts. The Corporation agrees that it would not be just and equitable if contribution pursuant to this SECTION 4 were determined by pro rata allocation or any other method of allocation that does not take account of the foregoing equitable considerations. -2- (b) The determination as to the amount of the contribution, if any, shall be made by: (i) a court of competent jurisdiction upon the application of both the Indemnified Party and the Corporation (if an action or suit had been brought in, and final determination had been rendered by, such court); (ii) the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding; or (iii) regular outside counsel of the Corporation, if a quorum is not obtainable for purposes of clause (ii) above, or, even if obtainable, a quorum of disinterested directors so directs. 5. CONTINUATION OF OBLIGATIONS. All agreements and obligations of the --------------------------- Corporation contained herein shall continue during the period the Indemnified Party is a director, officer, employee, or agent of the Corporation (or is serving at the request of the Corporation as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, employee benefit plan, or other enterprise), and shall continue thereafter for so long as the Indemnified Party shall be subject to any possible claim or threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative, by reason of the fact that the Indemnified Party was serving in any such capacity on behalf of the Corporation. 6. ADVANCEMENT OF EXPENSES. Expenses (including attorneys' fees), ----------------------- judgments, fines, penalties, and amounts paid in settlement actually and reasonably incurred by the Indemnified Party with respect to any action, suit, or proceeding referred to in SECTIONS 1 or 2 shall be advanced by the Corporation prior to the time of the disposition of such action, suit, or proceeding promptly upon the receipt of a (a) written affirmation from the Indemnified Party of his good faith belief that he is entitled to be indemnified by the Corporation for such expenses, judgments, fines, penalties, or amounts paid in settlement under the provisions of the State Statute, the Charter, this Agreement, or otherwise, and (b) written undertaking to return promptly any amounts advanced hereunder if it shall ultimately be determined that the Indemnified Party is not entitled to indemnification from the Corporation for such amounts under the provisions of the State Statute, the Charter, this Agreement, or otherwise. 7. NOTIFICATION AND DEFENSE OF CLAIM. Promptly after receipt by the --------------------------------- Indemnified Party of notice of the commencement of any action, suit, or proceeding, the Indemnified Party will, if a claim in respect thereof is to be made against the Corporation under this Agreement, notify the Corporation of the commencement thereof, but the failure to notify the Corporation will not relieve it from any liability that it may have to the Indemnified Party otherwise than under this Agreement. With respect to any such action, suit, or proceeding as to which the Indemnified Party so notifies the Corporation: (a) The Corporation will be entitled to participate at its own expense; (b) Except as otherwise provided below, the Corporation may assume the defense thereof, with counsel reasonably satisfactory to the Indemnified Party. After notice from the Corporation to the Indemnified Party of its election to assume such defense, the Corporation will not be liable to the Indemnified Party under this Agreement for any legal or other expenses subsequently incurred by the Indemnified Party in connection with the defense thereof, other than reasonable costs of investigation or as otherwise provided below. The Indemnified Party shall have -3- the right to employ its own counsel in such action, suit, or proceeding, but the fees and expenses of such counsel incurred after notice from the Corporation of its assumption of the defense thereof shall be at the expense of the Indemnified Party, unless (i) the employment of counsel by the Indemnified Party has been ------ authorized by the Corporation, (ii) counsel to the Indemnified Party shall have reasonably concluded that there may be a conflict of interest between the Corporation and the Indemnified Party in the conduct of the defense of such action and has advised the Indemnified Party in writing that such a conflict of interest exists, or (iii) the Corporation shall not in fact have employed counsel to assume the defense of such action, in each of which cases the fees and expenses of counsel for the Indemnified Party shall be at the expense of the Corporation. The Corporation shall not be entitled to assume the defense of any action, suit, or proceeding brought by or on behalf of the Corporation or as to which the Indemnified Party shall have made the conclusion provided for in clause (ii) above; and (c) The Corporation shall have no obligation to indemnify the Indemnified Party under this Agreement for any amounts paid in settlement of any action or claim effected without the Corporation's prior written consent. The Corporation shall not settle any action or claim in any manner that would impose any penalty or limitation on the Indemnified Party without the Indemnified Party's prior written consent. Neither the Corporation nor the Indemnified Party will unreasonably withhold their consent to any proposed settlement. 8. REPAYMENT OF EXPENSES. The Indemnified Party agrees to reimburse the --------------------- Corporation for all reasonable expenses, judgments, fines, penalties, and settlement amounts paid by the Corporation in defending any civil, criminal, administrative, or investigative action, suit, or proceeding against the Indemnified Party or advanced by the Corporation to the Indemnified Party in such event, but only to the extent that it shall be ultimately determined that the Indemnified Party is not entitled to be indemnified by the Corporation for such expenses, judgments, fines, penalties, or amounts paid in settlement under the provisions of the State Statute, the Charter, this Agreement, or otherwise. 9. ENFORCEMENT. (a) The Corporation expressly confirms and agrees that ----------- it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce the Indemnified Party to continue to serve on behalf of the Corporation, and acknowledges that the Indemnified Party is relying upon this Agreement in continuing to serve in such capacity. (b) If the Indemnified Party is required to bring any action to enforce rights or to collect moneys due under this Agreement and is successful in such action, then the Corporation shall reimburse the Indemnified Party for all of the Indemnified Party's reasonable fees and expenses in bringing and pursuing such action. 10. SEVERABILITY. Each of the provisions of this Agreement is a separate ------------ and distinct agreement and independent of the others, so that if any provision hereof shall be held to be invalid or unenforceable in whole or in part for any reason, such invalidity or unenforceability shall not affect the validity or enforceability of the other provisions hereof. -4- 11. GENERAL AND MISCELLANEOUS. (a) This Agreement shall be governed by ------------------------- and construed and enforced in accordance with the laws of the State of Georgia, without regard to its conflicts of laws rules. (b) This Agreement shall be binding upon the Indemnified Party, his heirs, personal representative, and assigns and upon the Corporation and its successors and assigns, and shall inure to the benefit of and be enforceable by the Indemnified Party, his heirs, personal representatives, and assigns, and by the Corporation and its successors and assigns. (c) No amendment, modification, termination, or cancellation of this Agreement shall be effective unless in a writing signed by both parties hereto. 12. NO DUPLICATION OF PAYMENTS. The Corporation shall not be liable under -------------------------- this Agreement to make any payment to the extent the Indemnified Party has otherwise actually received payment (under any insurance policy, Charter provision, or otherwise) of the amounts otherwise indemnifiable hereunder. IN WITNESS WHEREOF, the parties hereto have executed this Agreement on and as of the day and year first above written. CORPORATION: ------------ INNOTRAC CORPORATION By: ----------------------------------- Name: ------------------------------ Title: ----------------------------- INDEMNIFIED PARTY: ----------------- -------------------------------------- -5- EX-10.6 9 LOAN & SECURITY AGREEMENT EXHIBIT 10.6 LOAN AND SECURITY AGREEMENT by and between HOMETEL PROVIDERS PARTNERS, L.P. and ITC HOLDING COMPANY, INC. dated as of April 11, 1994 TABLE OF CONTENTS ----------------- Page ---- SECTION 1. GENERAL DEFINITIONS ------------------- 1.1. Defined Terms............................................... 1 ------------- 1.2. Accounting Terms............................................ 4 ---------------- 1.3. Other Terms................................................. 4 ----------- 1.4. Certain Matters of Construction............................. 4 ------------------------------- SECTION 2. LOAN FACILITY ------------- 2.1. Loan Facility............................................... 5 ------------- 2.2. Availability and Drawing.................................... 5 ------------------------ 2.3. Loan Account................................................ 5 ------------ SECTION 3. SUBORDINATION PROVISIONS ------------------------ 3.1. Agreement to Subordinate..................................... 5 ------------------------ SECTION 4. INTEREST AND REPAYMENT ---------------------- 4.1. Interest and Charges........................................ 6 -------------------- 4.2. Repayment................................................... 6 --------- 4.3. Prepayment.................................................. 6 ---------- SECTION 5. COLLATERAL: GENERAL TERMS -------------------------- 5.1. Security Interest in Collateral............................. 6 ------------------------------- 5.2. Representations, Warranties and Covenants -- Collateral..... 7 ------------------------------------------------------- 5.3. Financing Statements........................................ 8 -------------------- 5.4. Insurance of Collateral..................................... 8 ----------------------- SECTION 6. REPRESENTATIONS AND WARRANTIES ------------------------------ 6.1. Borrower's General Representations and Warranties........... 8 ------------------------------------------------- 6.2. Lender's Representations and Warranties..................... 10 --------------------------------------- -i- 6.3. Survival of Representations and Warranties.................. 11 ------------------------------------------ SECTION 7. COVENANTS AND CONTINUING AGREEMENTS ----------------------------------- 7.1. Affirmative Covenants........................................ 11 --------------------- 7.2. Negative Covenants........................................... 13 ------------------ SECTION 8. CONDITIONS PRECEDENT -------------------- 8.1. Documentation............................................. 14 ------------- 8.2. Other Conditions.......................................... 15 ---------------- 8.3. Conditions to Subsequent Advances......................... 15 --------------------------------- SECTION 9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES -------------------------------------- ON DEFAULT ---------- 9.1. Events of Default......................................... 16 ----------------- 9.2. Acceleration of the Obligations........................... 17 ------------------------------- 9.3. Remedies.................................................. 17 -------- 9.4. Remedies Cumulative; No Waiver............................ 18 ------------------------------ SECTION 10. MISCELLANEOUS ------------- 10.1. Modification of Agreement................................. 19 ------------------------- 10.2. Waivers................................................... 19 ------- 10.3. Severability.............................................. 19 ------------ 10.4. Successors and Assigns.................................... 19 ---------------------- 10.5. Cumulative Effect; Conflict of Terms...................... 19 ------------------------------------ 10.6. Execution in Counterparts................................. 20 ------------------------- 10.7. Notice.................................................... 20 ------ 10.8. Time of Essence........................................... 20 --------------- 10.9. Entire Agreement.......................................... 20 ---------------- 10.10. Governing Law............................................. 20 ------------- SIGNATURES............................................................... 18 Exhibit A - Term Loan Note with Guarantee endorsed thereon Exhibit B - Form of Draw Notice Exhibit C - Principal Place of Business and Other Addresses Exhibit D - Form of Legal Opinion -ii- LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT is made as of the 11th day of April, 1994, by and between ITC HOLDING COMPANY, INC., a corporation organized and existing under the laws of the State of Georgia ("Lender"), and HOMETEL PROVIDERS PARTNERS, L.P., a limited partnership organized and existing under the laws of the State of Georgia ("Borrower"). SECTION 1. GENERAL DEFINITIONS - ---------- ------------------- 1.1. DEFINED TERMS . When used herein, the following terms shall have the ------------- following meanings (terms defined in the singular to have the same meaning when used in the plural and vice versa): ACCOUNTS - all accounts, accounts receivable for Inventory sold or -------- rented or to be sold or rented or for services performed or to be performed, contract rights, Chattel Paper, instruments and documents, whether now owned or hereafter created or acquired by Borrower or in which Borrower now has or hereafter acquires any interest. ADJUSTMENT DATE - the third anniversary of the date of this Agreement. --------------- AGREEMENT - this Loan and Security Agreement, as the same may be --------- modified or amended from time to time in accordance with its terms. ASSIGNMENT - an Assignment of a to-be-issued Life Insurance Policy ---------- insuring the life of Scott Dorfman in the face amount of $3,500,000. BUSINESS DAY - a day on which the Federal Reserve Bank of Atlanta is ------------ open for business in Atlanta, Georgia. CHATTEL PAPER - all chattel paper, whether now owned or hereafter ------------- created or acquired by Borrower or in which Borrower now has or hereafter acquires any interest. CLOSING DATE - the date hereof. ------------ CODE - the Uniform Commercial Code as adopted and in force in the ---- State of Georgia, as from time to time in effect. COLLATERAL - all of the Property and interests in Property described ---------- in Section 5 hereof, and all other Property and interests in Property that now or hereafter secure the payment and performance of any of the Obligations. 1 DEFAULT - an event or condition the occurrence of which would, with ------- the lapse of time or the giving of notice, or both, become an Event of Default. DEFAULT RATE - as defined in Section 4.1.(B) of this Agreement. ------------ EVENT OF DEFAULT - as defined in Section 9.1 of this Agreement. ---------------- GAAP - generally accepted accounting principles in the United States ---- of America in effect from time to time. GUARANTOR - Scott Dorfman and any other Person who may hereafter --------- guarantee payment or performance of the whole or any part of the Obligations. GUARANTEE - the Guarantee which is to be endorsed on the Term Loan --------- Note by Guarantor in favor of Lender in the form appearing at the foot of Exhibit A. --------- INITIAL ADVANCE - the initial drawing in an amount equal to --------------- $1,000,000. INTEREST PAYMENT DATE - the 1st day of each calendar month, commencing --------------------- on May 1, 1994, and continuing through and including the Maturity Date. INTEREST RATE - (i) for the period from the date hereof through and ------------- including the Adjustment Date, fourteen percent (14%) per annum, and (ii) from and after the Adjustment Date through and including the Maturity Date, an annual rate equal to the sum of (A) the Prime Rate as announced from time to time by the Reference Bank plus (B) eight percent (8%). ---- INVENTORY - all inventory owned by Borrower, including, but not --------- limited to, all goods intended for sale or lease by Borrower, or for display or demonstration; all work in process; all raw materials and other materials and supplies of every nature and description used or which might be used in connection with the manufacture, printing, packing, shipping, advertising, selling, leasing or furnishing of such goods or otherwise used or consumed in Borrower's business (including, without limitation, all of the above which may be located on Borrower's premises or upon the premises of any carriers, forwarding agents, truckers, warehousemen, vendors, selling agents, or other third parties who may have possession, temporary or otherwise, thereof); and all documents evidencing and general intangibles relating to any of the foregoing, whether now owned or hereafter acquired by Borrower. LEASES - all leases or rental contracts pursuant to which Borrower ------ rents, leases or rents Inventory. LIEN - any interest in Property securing an obligation owed to, or a ---- claim by, a Person other than the owner of the Property, whether such interest is based on the common law, statute or contract, and including, but not limited to, the security interest, security title or lien arising -2- from a security agreement, mortgage, deed of trust, deed to secure debt, encumbrance, pledge, hypothecation, assignment, conditional sale or trust receipt or a lease, consignment or bailment for security purposes. LOAN - so much of the term loan credit facility as is drawn upon by ---- Borrower from time to time pursuant to Section 2.2 of this Agreement. LOAN ACCOUNT - the loan account established on the books of Lender ------------ pursuant to Section 2.3 hereof and in which Lender will record the Loan, repayments and prepayments made on the Loan and other appropriate debits and credits as provided by this Agreement. LOAN DOCUMENTS - this Agreement, the Other Agreements and the Security -------------- Documents. MATURITY DATE - 5:00 p.m., Atlanta time, on the day that is the fifth ------------- anniversary of the date of this Agreement. OBLIGATIONS - all loans and all other advances, debts, liabilities and ----------- obligations arising, due or payable from Borrower to Lender in its capacity as Lender evidenced by and arising under this Agreement or any other Loan Document. OTHER AGREEMENTS - any and all agreements, instruments and documents ---------------- (other than this Agreement and the Security Documents), heretofore, now or hereafter executed by Borrower or delivered to Lender in respect to the transactions contemplated by this Agreement, including, without limitation, the Assignment and the Term Loan Note. PERSON - an individual, partnership, association, corporation, joint ------ stock company, trust or unincorporated organization, or a government or agency or political subdivision thereof. PRIME RATE - the rate of interest announced or quoted by the Reference ---------- Bank from time to time as its Prime Rate, whether or not such rate is the lowest rate charged by the Reference Bank to its most preferred borrowers; and, if the Prime Rate is discontinued by the Reference Bank as a standard, a comparable reference rate designated by the Reference Bank as a substitute therefor shall be the Prime Rate. Such rate shall be increased or decreased, as the case may be, by an amount equal to any increase or decrease in the Reference Bank's Prime Rate, with such adjustments to be effective as of the opening of business on the day that any such change in the Reference Bank's Prime Rate becomes effective. PROPERTY - any interest in any kind of property or asset, whether -------- real, personal or mixed, or tangible or intangible. REFERENCE BANK - NationsBank of Georgia, N.A., or its successor. -------------- -3- SECURITY DOCUMENTS - the Guarantee and all other instruments and ------------------ agreements now or at any time hereafter securing the whole or any part of the Obligations. SENIOR LENDER - any bank, savings and loan, or other financial ------------- institution or lender that Borrower designates in writing to Lender as a Senior Lender and that makes available to Borrower at any time and from time to time one or more credit facilities of any type or character, and any renewals, modifications, replacements or extensions thereof, which includes by way of illustration only, a revolving credit facility, a term loan facility, an equipment purchase facility or a letter of credit facility, evidencing the Senior Obligations. SENIOR OBLIGATIONS - all liabilities and other obligations of ------------------ Borrower, whether direct or indirect, absolute or contingent, now or hereafter existing, or due or to become due, to a Senior Lender, and any renewals, modifications, replacements or extensions thereof, in an aggregate amount not to exceed SEVEN MILLION DOLLARS ($7,000,000). SUBORDINATION DOCUMENT - each and every agreement, document and ---------------------- instrument which evidences the senior status of the Senior Obligations and perfects or prioritizes the Senior Lender's rights in respect of the Senior Obligations vis-a-vis the Obligations, which shall be on such terms and conditions as the Senior Lender may request or require. TERM LOAN NOTE - the Term Loan Note to be executed by Borrower on the -------------- Closing Date in favor of Lender to evidence the Loan, which shall be in the form of Exhibit A attached hereto, as the same may be modified or amended --------- from time to time after execution and delivery thereof. 1.2. ACCOUNTING TERMS. All accounting terms not specifically defined ---------------- herein shall be construed in accordance with GAAP. 1.3. OTHER TERMS. All other terms contained in this Agreement shall ----------- have, when the context so indicates, the meanings provided for by the Code to the extent the same are used or defined therein. 1.4. CERTAIN MATTERS OF CONSTRUCTION. The terms "herein", "hereof" and ------------------------------- "hereunder" and other words of similar import refer to this Agreement as a whole and not to any particular section, paragraph or subdivision. As used herein, the singular number shall include the plural, the plural the singular, and any pronoun used shall be deemed to cover all genders, as the context may require. The section titles, table of contents and list of exhibits appear as a matter of convenience only and shall not affect the interpretation of this Agreement. -4- SECTION 2. LOAN FACILITY - ---------- ------------- 2.1. LOAN FACILITY. Subject to the terms and conditions of, and in ------------- reliance upon the representations and warranties made by Borrower in, this Agreement and the other Loan Documents, Lender has made a total term loan credit facility of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000) to Borrower, available as provided in Section 2.2. 2.2. AVAILABILITY AND DRAWING. (a) Subject to SECTION 8.3 hereof, from ------------------------ and after the date hereof through and including the first anniversary of the date hereof, Borrower shall be entitled to draw upon the term loan credit facility, in an amount not to exceed the difference between (A) $3,500,000 and (B) the total amount of all amounts drawn by Borrower as of the date of such draw notice. To draw under such term loan credit facility, at least two (2) Business Days prior to the date of borrowing Borrower shall deliver to Lender by facsimile transmission a draw notice in the form of that attached hereto as Exhibit B. Upon receipt of such draw notice, Lender shall wire transfer on the - --------- date specified in the draw notice (and if such day is not a Business Day, on the next succeeding Business Day) to the account specified in the draw notice the amount drawn by Borrower pursuant thereto. (b) If by 5:00 p.m., Atlanta time, on the first anniversary of the date hereof, Borrower has not fully drawn all amounts available to it under the term loan credit facility, the term loan credit facility shall be permanently reduced by an amount equal to the difference between (A) $3,500,000 and (B) the total amount of all amounts drawn by Borrower as of such date and time. Once so reduced, Borrower shall have no right to borrow, and Lender shall have no obligation to make available or lend, such amount. 2.3. LOAN ACCOUNT. Lender shall enter the Loan as debits to the Loan ------------ Account and shall also record in the Loan Account all payments made by Borrower on the Loan and all proceeds of Collateral which are finally paid to Lender. SECTION 3. SUBORDINATION PROVISIONS - ---------- ------------------------ 3.1. AGREEMENT TO SUBORDINATE. Lender covenants and agrees that the ------------------------ Obligations and the Liens granted to Lender pursuant to this Agreement and the other Loan Documents, at Borrower's written request, shall be subordinated and made inferior to the Senior Obligations, which Senior Obligations are to be acquired in the future by Borrower from the Senior Lender(s). Promptly upon the request of Borrower and of the Senior Lender(s), at any time and from time to time, Lender shall execute and deliver each and every Subordination Document required to make the Obligations and the Liens granted to Lender pursuant to this Agreement and the other Loan Documents subordinate, inferior and subject to the Senior Obligations. Borrower shall reimburse Lender for reasonable legal fees and related costs and expenses incurred by Lender in connection with Lender's execution and delivery of the Subordination Documents. -5- SECTION 4. INTEREST AND REPAYMENT - ---------- ---------------------- 4.1. INTEREST AND CHARGES. -------------------- (A) Interest shall accrue on the principal amount of the Loan outstanding at the end of each day in accordance with the terms of the Term Loan Note. Interest shall be calculated on the Loan on a daily basis (computed on the actual number of days elapsed over a year of 360 days), commencing on the date hereof, and shall be payable monthly, in arrears, on each Interest Payment Date. If an Interest Payment Date occurs on a day that is not a Business Day, the payment of interest shall be payable on the next succeeding Business Day. (B) Upon and after the occurrence of an Event of Default, and during the continuation thereof, the principal amount of all of the Obligations shall bear interest, calculated daily (computed on the actual days elapsed over a year of 360 days), at a fluctuating rate per annum equal to one percentage point (1.00%) above the Interest Rate then in effect (the "Default Rate"). (C) In no contingency or event whatsoever shall the aggregate of all amounts deemed interest hereunder or under the Term Loan Note and charged or collected pursuant to the terms of this Agreement or pursuant to the Term Loan Note exceed the highest rate permissible under any law which a court of competent jurisdiction shall, in a final determination, deem applicable hereto. In the event that such a court determines that Lender has charged or received interest hereunder in excess of the highest applicable rate, Lender shall promptly refund such excess interest to Borrower and such rate shall automatically be reduced to the maximum rate permitted by such law. 4.2. REPAYMENT. Borrower shall repay the then outstanding principal --------- amount of the Loan in a single payment on the Maturity Date. 4.3. PREPAYMENT. From and after the Adjustment Date, Borrower shall ---------- have the right to prepay the Loan in whole or in part at any time and from time to time, without penalty, premium or notice. Prior to the Adjustment Date, Borrower shall not have the right to prepay all or any portion of the Loan. SECTION 5. COLLATERAL: GENERAL TERMS - ---------- -------------------------- 5.1. SECURITY INTEREST IN COLLATERAL. Subject to the provisions of ------------------------------- Section 3.1 (and any Subordination Documents entered into by Lender), to secure the prompt payment and performance to Lender of the Obligations Borrower hereby grants to Lender a continuing security interest in and Lien upon all the following Property and interests in Property of Borrower, whether now owned or existing or hereafter created, acquired or arising and wheresoever located: (A) Accounts; -6- (B) Inventory; (C) Chattel Paper; (D) Leases; (E) All accessions to, substitutions for and all replacements (including, but not limited to, all goods returned, repossessed, or acquired by Borrower by way of substitution or replacement), products and cash and non-cash proceeds of any of the Collateral described in (A), (B), (C) or (D) above, including, without limitation, proceeds of and unearned premiums with respect to insurance policies insuring any of the Collateral; and (F) All books and records (including, without limitation, customer lists, credit files, computer programs, print-outs, and other computer materials and records) of Borrower pertaining to any of the Collateral described in (A), (B), (C) or (D) above. 5.2. REPRESENTATIONS, WARRANTIES AND COVENANTS -- COLLATERAL. To induce ------------------------------------------------------- Lender to enter into this Agreement, Borrower represents, warrants, and covenants to Lender: (A) Subject to Lender's obligation to subordinate the Liens granted to Lender pursuant to Section 3.1 (and any Subordination Documents entered into by Lender), (i) the Collateral is now, and will be so long as the Obligations are outstanding, owned solely by Borrower, (ii) no other Person has or will have any right, title, interest, claim, or Lien therein, thereon or thereto, other than for the rights of rental or lease customers, and (iii) Borrower has good and marketable title to the Collateral, other than for the rights of rental or lease customers. (B) Subject to Lender's obligation to subordinate the Liens granted to Lender pursuant to Section 3.1 and the other Loan Documents and as may be otherwise specifically consented to in writing by Lender (and any Subordination Documents entered into by Lender), the Liens granted to Lender are now and shall be first and prior on the Collateral. Except for the filing of appropriate financing statements (which financing statements have been filed in the State of Georgia), no further action need be taken to perfect the Liens granted to Lender, other than the filing of continuation statements under the Code or other applicable law at appropriate times and continued possession by Lender of that portion of the Collateral constituting instruments (other than instruments which constitute part of Chattel Paper) or documents. (C) Borrower shall pay and discharge when due or within any period when payment may be made without penalty all taxes, levies, and other charges upon said Collateral and upon the goods evidenced by any documents constituting Collateral, unless being contested by or on behalf of Borrower in good faith. 5.3. FINANCING STATEMENTS. Borrower agrees to execute and deliver, -------------------- in form and content satisfactory to Lender, any financing, continuation, termination or security interest filing statement, security agreement or other document as Lender may reasonably request in order to perfect, preserve, -7- maintain or continue the perfection of Lender's security interest in the Collateral and/or its priority (subject to Section 3.1. hereof and any Subordination Documents entered into by Lender). Borrower shall pay the costs of filing of any such financing, continuation, termination or security interest filing statement as well any recordation or transfer tax required by law to be paid in connection with the filing or recording of any such statement. Unless prohibited by applicable law, Borrower hereby authorizes Lender to execute and file any such financing statement on Borrower's behalf. The parties agree that a carbon, photographic or other reproduction of this Agreement shall be sufficient as a financing statement and may be filed in any appropriate office in lieu thereof. 5.4. INSURANCE OF COLLATERAL. Borrower agrees to cause to be maintained ----------------------- and paid for insurance upon all Collateral (other than for Collateral in the possession of rental or lease customers) wherever located, in storage or in transit in vehicles, including goods evidenced by documents, covering casualty, hazard, public liability and such other risks and in such amounts and with such insurance companies as is customary in Borrower's business. SECTION 6. REPRESENTATIONS AND WARRANTIES - ---------- ------------------------------ 6.1. BORROWER'S GENERAL REPRESENTATIONS AND WARRANTIES. To induce Lender ------------------------------------------------- to enter into this Agreement and to make advances hereunder, Borrower warrants, represents and covenants to Lender that: (A) Organization and Qualification. Borrower is a limited partnership ------------------------------ duly organized, validly existing and in good standing under the laws of the State of Georgia. Borrower has duly qualified and is authorized to do business and is in good standing as a foreign limited partnership in all states and jurisdictions where the character of its properties or the nature of its activities make such qualification necessary and in which the failure to be so qualified would have a material adverse affect on Borrower's business operations or financial condition. (B) Power and Authority. Borrower has the right and power and is duly ------------------- authorized and empowered to enter into, execute, deliver and perform this Agreement and each of the other Loan Documents to which it is a party. The execution, delivery and performance of this Agreement and each of the other Loan Documents have been duly authorized by all necessary action and do not and will not (i) require any consent or approval of the partners of Borrower or of any other Person which has not been obtained prior to the date hereof; (ii) contravene Borrower's certificate of limited partnership or limited partnership agreement; (iii) violate, or cause Borrower to be in default under, any provision of any law, rule, regulation, order, writ, judgment, injunction, decree, determination or award in effect having applicability to Borrower; (iv) result in a breach of or constitute a default under any material agreement, lease or instrument to which Borrower is a party or by which it or its Properties may be bound or affected; or (v) result in, or require, the creation or imposition of any Lien (other than Liens arising under or pursuant to this Agreement) upon or with respect to any of Collateral now owned or hereafter acquired by Borrower. -8- (C) Legally Enforceable Agreement. This Agreement is, and each of the ----------------------------- Other Agreements when delivered under this Agreement will be, a legal, valid and binding obligation of Borrower enforceable against it in accordance with their respective terms, except to the extent that such enforcement may be limited by applicable bankruptcy, insolvency and other similar laws affecting creditors' rights generally or by principles of equity pertaining to the availability of equitable remedies. (D) Governmental Consents. Borrower has, and is in good standing with --------------------- respect to, all governmental consents, approvals, authorizations, permits, certificates, inspections, and franchises necessary to continue to conduct its business as heretofore or proposed to be conducted by it and to own or lease and operate its Properties as now owned or leased by it. (E) Restrictions. Borrower is not a party or subject to any contract, ------------ agreement, or restriction, whether oral or otherwise, which materially and adversely affects its business or the use or ownership of any of its Properties. Borrower has not agreed or consented to cause or permit in the future (upon the happening of a contingency or otherwise) any of its Property, whether now owned or hereafter acquired, to be subject to a Lien other than for Liens arising under or pursuant to, or otherwise permitted by, this Agreement. (F) Litigation. There are no actions, suits, proceedings or ---------- investigations pending, or to the knowledge of Borrower, threatened, against or affecting Borrower, or the business, operations, Properties, prospects, profits or condition of Borrower, in any court or before any governmental authority or arbitration board or tribunal. Borrower is not in default with respect to any order, writ, injunction, judgement, decree or rule of any court, governmental authority or arbitration board or tribunal which materially and adversely affects the Properties, business, profits or condition (financial or otherwise) of Borrower. (G) Title to Properties. Borrower has good title to all of its ------------------- Property, in each case, free and clear of all Liens other than for Liens arising under or pursuant to, or otherwise permitted by, this Agreement. (H) Compliance With Laws. Borrower has complied with, and its -------------------- Properties, business operations and leaseholds are in compliance with, in all material respects, the provisions of all federal, state and local laws, rules and regulations applicable to Borrower, its Properties or the conduct of its business, and there have been no citations, notices or orders of material noncompliance issued to Borrower under any such law, rule or regulation. (I) No Defaults. No event has occurred and no condition exists which ----------- would, upon the execution and delivery of this Agreement or Borrower's performance hereunder, constitute a Default or an Event of Default. Borrower is not in default, and no event has occurred and no condition exists which constitutes, or which with the passage of time or the giving of notice or both would constitute, a default in the payment of any indebtedness of Borrower to any Person. -9- 6.2. LENDER'S REPRESENTATIONS AND WARRANTIES. To induce Borrower to --------------------------------------- enter into this Agreement and to deliver the Term Loan Note, Lender warrants, represents and covenants to Borrower that: (A) Exemptions from Registration. The Term Loan Note will be issued ---------------------------- in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act of 1933, as amended (the "Securities Act"), and the Term Loan Note will or may also be issued in reliance upon the exemptions from registration contained in Sections 10-5-9(13) and (14) of the Georgia Securities Act of 1973, as amended, and/or other exemptions contained in the applicable securities or blue sky laws of other states, and that the transfer of the Term Loan Note may be restricted or limited as a condition to the availability of such exemptions. (B) Investment Intent. Lender is acquiring the Term Loan Note for ----------------- its own account with the intent of holding the same for investment and without the intent or a view to participating directly or indirectly in any distribution or resale of such Term Loan Note, and it does not intend to divide its participation with others, or to resell, assign or otherwise dispose of all or any part of the Term Loan Note. In making such representation, Borrower acknowledges that a purchase now with an intent to resell by reason of any foreseeable specific contingency, some predetermined event or an anticipated change in market value, or in the condition of Borrower, is inconsistent with such intent. (C) Access to Information. Lender has been supplied with, or has had --------------------- access to, all information, including financial information, of Borrower to which a reasonable investor would attach significance in making investment decisions, and has had the opportunity to ask questions of, and receive answers from, knowledgeable individuals concerning Borrower and the Term Loan Note. (D) No Offering Materials. Other than the Newtel Systems, Inc. --------------------- Confidential Memorandum dated November 1993 (the "Memorandum"), no offering statement, prospectus or offering circular containing information with respect to Borrower or the Term Loan Note has been or is to be prepared, and Lender has made its own inquiry and analysis with respect to Borrower and the Term Loan Note. Lender understands that the information contained in the Memorandum, including the Projected Financial Statements of Newtel Systems, Inc. for the three years ended January 31, 1997 contained therein (the "Projections"), were prepared as of November 1993 and that they have not been updated since that time. Various of the statements contained in the Memorandum and various estimates and assumptions underlying the Projections have changed as a result of the passage of time and the restructuring of the business transaction contemplated by the Memorandum. Some of such changes are material and would result in materially different disclosures if the Memorandum and the Projections were to be updated through the date of this Agreement. (E) Sophistication and Experience. Lender is an "accredited ----------------------------- investor" as defined in Rule 501(a) of Regulation D promulgated pursuant to the Securities Act, and that it personally, or together with its purchaser representative, has such knowledge and experience in financial and business matters to be capable of evaluating the merits and risks of its investment in -10- Borrower and the Term Loan Note. Further, it is financially able to bear the economic risk of its investment, can afford to hold the Term Loan Note for an indefinite period, and can afford a complete loss of its investment. 6.3. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower covenants, ------------------------------------------ warrants and represents to Lender that all representations and warranties of Borrower contained in this Agreement or any of the other Loan Documents shall be true at the time of Borrower's execution of this Agreement and the other Loan Documents in all material respects, and shall survive the execution, delivery and acceptance thereof by Lender and the parties thereto and the closing of the transactions described therein or related thereto. SECTION 7. COVENANTS AND CONTINUING AGREEMENTS - ---------- ----------------------------------- 7.1. AFFIRMATIVE COVENANTS. For so long as there are any Obligations to --------------------- Lender, Borrower covenants that, unless otherwise consented to by Lender in writing, it shall: (A) Taxes and Liens. Pay and discharge all taxes, assessments, --------------- levies, license fees and other impositions and governmental charges upon it, its income and Properties as and when such taxes, assessments, levies, license fees and other impositions and governmental charges are due and payable, or within any period prior to the imposition of penalties, except and to the extent that such taxes, assessments, levies, license fees and other impositions and governmental charges are being contested in good faith. Subject to the provisions of Section 3 (and any Subordination Documents entered into by Lender), Borrower shall also pay and discharge any lawful claims which, if unpaid, would materially and adversely affect the priority of the Lien granted to Lender hereunder. (B) Tax Returns. File all federal, state and local tax returns and ----------- other reports Borrower is required by law to file, and maintain adequate reserves for the payment of all taxes, assessments, governmental charges, levies, license fees and other impositions levied upon the Collateral, Borrower, Borrower's income or profits, or upon any Property belonging to it. (C) Business and Existence. Preserve and maintain its existence and ---------------------- all rights, privileges, and franchises in connection therewith, and maintain its qualification and good standing in all states in which such qualification is necessary and in which the failure to so qualify would materially and adversely affect its business operations or financial condition. (D) Care of Collateral. Borrower will maintain the Collateral in its ------------------ possession in good condition (reasonable wear and tear excepted) and will not do or permit anything to be done to the Collateral that may impair its value or that may violate the terms of any insurance covering the Collateral or any part thereof. (E) Compliance with Laws. Comply with all laws, ordinances, -------------------- governmental rules and regulations, in all material respects, to which it or its Properties are subject, and obtain and keep in force any and all governmental licenses, permits, franchises, or other governmental authorizations necessary to -11- the ownership of its Properties or to the conduct of its business, which violation or failure to obtain might materially and adversely affect the business, prospects, profits, Properties, or condition (financial or otherwise) of Borrower. (F) Further Assurances. At Lender's reasonable request, promptly ------------------ execute or cause to be executed and deliver to Lender any and all documents, instruments and agreements deemed reasonably necessary by Lender to give effect to or carry out the terms or intent of this Agreement or any of the other Loan Documents. Borrower shall defend its title to the Collateral against all Persons other than Senior Lender(s), Lender and sale or rental customers. (G) Financial Statements, Books and Records. Borrower will: (a) at --------------------------------------- all times maintain, in accordance with GAAP, accurate and complete books and records pertaining to the operation, business and financial condition of Borrower; (b) at all times maintain accurate and complete books and records pertaining to the Collateral and any contracts and collections relating to the Collateral; (c) furnish to Lender promptly upon request and in the form and content and at the intervals reasonably specified by Lender, such financial statements, reports, schedules and other information with respect to the operation, business, affairs and financial condition of Borrower as Lender may from time to time reasonably require and as are customarily provided to lenders; (d) with prior notice, at all reasonable times and without hindrance and delay, permit Lender or any person designated by Lender to enter any place of business of Borrower or any other premises where any books, records and other data concerning Borrower and/or the Collateral may be kept and to examine, audit, inspect and make extracts from, and photocopies of, any such books, records and other data; (e) furnish to Lender promptly upon request and in the form and content reasonably specified by Lender lists of purchasers or lessees of inventory, aging of accounts, aggregate cost or wholesale market value of inventory and other data concerning the Collateral as Lender may from time to time specify; and (f) mark its books and records in a manner reasonably satisfactory to Lender so that Lender's rights in and to the Collateral as it may appear from time to time will be shown. (H) Place(s) of Business and Location of Collateral. The address of ----------------------------------------------- Borrower's primary place of business and the address of each other place of business of Borrower are as shown on Exhibit C attached hereto. The Collateral --------- (other than for that in the possession of rental or lease customers) and all books and records pertaining to the Collateral are and will be located as specified on such Exhibit C. Borrower will immediately advise Leader in writing --------- of the opening of any new place of business or the closing of any of its existing places of business, and of any change in the location of the places where the Collateral (other than for that in the possession of rental or lease customers), or any part thereof, or the books and records concerning the Collateral, or any part thereof, are kept. (I) Insurance. Borrower will insure the portion of the Collateral --------- comprising Inventory (other than that portion in a rental or lease customer's possession) against risk of loss or damage by accident, theft and other casualties in commercially reasonable amounts. All policies or certificates of such insurance (or copies thereof or binders with respect thereto) shall be furnished to Lender. Borrower will pay all premiums due or to become due for such insurance. -12- (J) Performance by Lender. If Borrower fails to perform, observe, or --------------------- comply with any of the conditions, terms or covenants contained in this Agreement, Lender, without waiving or releasing any of the Obligations or any default, may (but shall be under no obligation to) at any time thereafter perform such conditions, terms or covenants for the account and at the expense of Borrower, and may enter upon any premises of Borrower for that purpose and take all such action thereon as Lender may consider necessary, or appropriate, for such purpose. All sums paid or advanced by Lender in connection with the foregoing and all court costs and costs and expenses of collection (including, without limitation, reasonable attorney's fees and expenses) incurred in connection therewith shall be paid by Borrower to Lender on demand and shall constitute and become a part of the Obligations secured hereby. (K) Relations with Third Parties. Partnership agrees to enforce its ---------------------------- rights under and otherwise to deal with the other party to both the Assignment and Management Agreement between Partnership and HomeTel Systems, Inc. and the Services Agreement between Partnership and Innotrac Corporation, each dated as of April 11, 1994, in a manner which is intended to further the best interests of Partnership and as if the other party to each such agreement were an unaffiliated third party. 7.2. NEGATIVE COVENANTS. For so long as there are any Obligations to ------------------ Lender, Borrower covenants that, unless Lender has first consented thereto in writing, it will not: (A) Mergers; Consolidations; Acquisitions. Merge or consolidate with ------------------------------------- any Person or acquire all or any substantial part of the Properties of any Person. (B) Loans. Make any loans or other advances of money (other than for ----- salary, travel advances, advances against commissions and other similar advances in the ordinary course of business) to any Person, except as otherwise permitted herein. (C) Partnerships or Joint Ventures. Become or agree to become a ------------------------------ general or limited partner in any general or limited partnership or a joint venturer in any joint venture. (D) Adverse Transactions. Subject to the provisions of Section 3 (and -------------------- any Subordination Documents entered into by Lender), enter into any transaction which (i) may materially and adversely affect, or (ii) materially and adversely affects, the Collateral or Borrower's ability to repay the Obligations. (E) Limitation on Liens. Subject to the provisions of Section 3 (and ------------------- any Subordination Documents entered into by Lender), create or suffer to exist any Lien upon any of its Property, income or profits, whether now owned or hereafter acquired, except: (i) Liens at any time granted in favor of Lender; (ii) Liens for taxes not yet due or being contested as permitted by Section 7.1.(A) hereof; (iii) Liens securing the claims or demands of materialmen, mechanics, carriers, warehousemen, landlords and other like Persons for labor, materials, supplies or rentals incurred in the ordinary course of Borrower's business, but only if the payment thereof is not at the time required (or if payment is required, only if and for so long as the execution or other enforcement of such Liens is and continues to be stayed and bonded, the validity -13- and amount of the claims secured thereby are being contested in good faith, and such Liens do not, in the aggregate, materially detract from the value of the Property of Borrower or materially impair the use thereof in the operation of Borrower's business) and only if such Liens are junior to the Liens in favor of Lender; and (iv) such other Liens as Lender may hereafter approve in writing. (F) Change of Business. Enter into any new business or make any ------------------ material change in any of Borrower's business objectives and purposes. (G) Disposition of Assets. Sell, lease, transfer, exchange or --------------------- otherwise dispose of any of its Properties, including any disposition of Property as part of a sale and leaseback transaction, to or in favor of any Person, except (i) sales or leases of Inventory in the ordinary course of Borrower's business, or (ii) dispositions expressly authorized by this Agreement. SECTION 8. CONDITIONS PRECEDENT - ---------- -------------------- Notwithstanding any other provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other Sections of this Agreement, it is understood and agreed that Lender will not make the Initial Advance unless and until each of the conditions set forth in SECTIONS 8.1 AND 8.2 has been satisfied at the time of the Initial Advance, all in form and substance satisfactory to Lender: 8.1. DOCUMENTATION. Lender shall have received the following documents, ------------- each to be in form and substance satisfactory to Lender and its counsel: (A) Copies of all filing receipts or acknowledgments issued by any governmental authority to evidence any and all filings or recordations necessary to perfect the Liens of Lender in the Collateral and evidence in a form acceptable to Lender that such Liens constitute valid and perfected security interests and Liens, having the Lien priority specified in Section 5.2.(B) hereof; (B) Copies of the Certificate of Limited Partnership of Borrower and the Articles of Incorporation of HomeTel Providers Inc., each as certified by the Secretary of State of the State of Georgia on April 7, 1994; (C) A Draw Notice in the form of Exhibit B; --------- (D) The Security Documents duly executed, accepted, acknowledged and delivered by or on behalf of each of the signatories thereto; (E) The Other Agreements (other than the Assignment) duly executed and delivered by Borrower; -14- (F) The legal opinion of Kilpatrick & Cody substantially in the form of Exhibit D attached hereto; and --------- (G) Such other documents, instruments and agreements as Lender shall reasonably request in connection with the foregoing matters. 8.2. OTHER CONDITIONS. The following conditions have been and shall ---------------- continue to be satisfied: (A) No Default or Event of Default shall exist; (B) Each of the conditions precedent set forth in the other Loan Documents shall have been satisfied; and (C) No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby or which, in Lender's sole discretion, would make it inadvisable to consummate the transactions contemplated by this Agreement or any of the other Loan Documents. 8.3. CONDITIONS TO SUBSEQUENT ADVANCES. Notwithstanding any other --------------------------------- provision of this Agreement or any of the other Loan Documents, and without affecting in any manner the rights of Lender under the other Sections of this Agreement, it is understood and agreed that Lender will not make any advance or permit any drawing under Section 2 of this Agreement, other than the Initial Advance, unless and until each of the following conditions has been satisfied at the time of any subsequent advance or draw, all in form and substance satisfactory to Lender: (A) The Assignment shall have been executed and delivered by Guarantor to Lender and acknowledged by the company issuing such life insurance policy; (B) Copies shall have been delivered to Lender of all filing receipts or acknowledgments issued by any governmental authority to evidence any and all filings or recordations necessary to perfect the Liens of Lender in the Collateral and evidence in a form acceptable to Lender that such Liens constitute valid and perfected security interests and Liens, having the Lien priority specified in Section 5.2.(B) hereof; (C) No Default or Event of Default shall exist; (D) Each of the conditions precedent set forth in the other Loan Documents shall have been satisfied; -15- (E) No action, proceeding, investigation, regulation or legislation shall have been instituted, threatened or proposed before any court, governmental agency or legislative body to enjoin, restrain or prohibit, or to obtain damages in respect of, or which is related to or arises out of this Agreement or the consummation of the transactions contemplated hereby or which, in Lender's sole discretion, would make it inadvisable to consummate the transactions contemplated by this Agreement or any of the other Loan Documents; (F) Borrower shall have delivered evidence to Lender that Borrower has qualified and is in good standing as a foreign limited partnership in those states where the conduct of Borrower's business activities or the ownership of its Properties necessitates qualification in order to avoid a material forfeiture or liability or a material adverse consequence; and (G) A Draw Notice in the form of Exhibit B. --------- SECTION 9. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT - ---------- ------------------------------------------------- 9.1. EVENTS OF DEFAULT. Subject to Section 3 (and any Subordination ----------------- Documents entered into by Lender), the occurrence of any one or more of the following events shall constitute an "Event of Default": (A) Payment of Obligations. Borrower shall fail to pay any of the ---------------------- Obligations within five (5) days of the due date thereof (whether due at stated maturity, on demand, upon acceleration or otherwise). (B) Misrepresentations. Any warranty, representation, or other ------------------ statement made or furnished to Lender by or on behalf of Borrower in this Agreement or in any instrument or certificate furnished in compliance with or in reference to this Agreement or any of the other Loan Documents proves to have been false or misleading in any material respect when made or furnished (including without limitation, by omitting to state any material fact or facts necessary to make such representation, warranty or other statement not misleading). (C) Breach of Covenants. Borrower shall fail or neglect to perform, ------------------- keep or observe (i) any covenant contained in Sections 5.2, 5.3, 5.4, 7.1(F)(second sentence), 7.1(G), 7.1(H), 7.2(D)(clause (ii)), or 7.2(G) of this Agreement or (ii) any other covenant contained in this Agreement (other than a covenant a default in the performance or observance of which is dealt with specifically elsewhere in this Section 9.1) and the breach of such other covenant is not cured to Lender's reasonable satisfaction within thirty (30) days after Borrower's receipt of notice of such breach from Lender. (D) Default Under Other Agreements. Any event of default shall occur ------------------------------ under, or Borrower shall default in the performance or observance of any term, -16- covenant, condition or agreement contained in, any of the Other Agreements and such default shall continue beyond any applicable period of grace. (E) Default Under Senior Obligations. Senior Lender shall have -------------------------------- declared an event of default in respect of, and shall have accelerated, the Senior Obligations. (F) Default Under Security Documents. Any event of default shall -------------------------------- occur under, or Borrower shall default in the performance or observance of any term, covenant, condition or agreement contained in, any of the Security Documents and such default shall continue beyond any applicable period of grace. (G) Bankruptcy. The death of, insolvency of, appointment of a ---------- receiver, trustee, custodian or similar fiduciary for any part of the Property or property of, assignment for the benefit of creditors by, or the commencement of any proceedings under any federal or state bankruptcy or insolvency laws by or against (if instituted against Borrower, such proceeding shall continue for sixty (60) days), or the making of any offer of settlement, extension or composition to their respective unsecured creditors by, Borrower or Guarantor. 9.2. ACCELERATION OF THE OBLIGATIONS. Subject to Section 3 (and any ------------------------------- Subordination Documents entered into by Lender), upon and after the occurrence of an Event of Default as above provided, all or any portion of the Obligations due or to become due from Borrower to Lender under this Agreement, or any of the other Loan Documents, shall, at the option of Lender, become at once due and payable and Borrower shall forthwith pay to Lender, in addition to any and all sums and charges due, the entire principal of and interest accrued on the Obligations. 9.3. REMEDIES. Subject to Section 3 (and any Subordination Documents -------- entered into by Lender), upon and after the occurrence of an Event of Default, Lender shall have and may exercise from time to time the following rights and remedies: (A) All of the rights and remedies of a secured party under the Code or under other applicable law, and all other legal and equitable rights to which Lender may be entitled, all of which rights and remedies shall be cumulative, and none of which shall be exclusive, and shall be in addition to any other rights or remedies contained in this Agreement or any of the other Loan Documents. (B) The right to take immediate possession of the Collateral (other than that in the possession of a rental or lease customer), and (i) to require Borrower to assemble the Collateral (other than that in the possession of a rental or lease customer), at Borrower's expense, and make it available to Lender at a place designated by Lender which is reasonably convenient to both parties, and (ii) to enter any of the premises of Borrower and to keep and store the same on said premises until sold. (C) The right to sell or otherwise dispose of all or any of the Collateral in its then condition at public or private sale or sales, with such notice as may be required by law, in lots or in bulk, for cash or on credit, all -17- as Lender may deem advisable. Borrower agrees that ten (10) days written notice to Borrower of any public or private sale or other disposition of such Collateral shall be reasonable notice thereof, and such sale shall be at such locations as Lender may designate in said notice; provided, however, that Lender -------- ------- need not provide Borrower with advance notice if any portion of the Collateral will rapidly decline in value or is of a type normally sold on a recognized market. Lender shall have the right to sell, lease or otherwise dispose of such Collateral, or any part thereof, for cash, credit or any combination thereof, and Lender may purchase all or any part of such Collateral at public or, if permitted by law, private sale and, in lieu of actual payment of such purchase price, may set off the amount of such price against the Obligations. (D) The proceeds realized from the sale of any Collateral may be applied, after allowing two (2) Business Days for collection, first to the reasonable costs, expenses and attorneys' fees and expenses actually incurred by or on behalf of Lender for collection and for acquisition, completion, protection, removal, storage, managing, sale and delivery of the Collateral (including, but not limited to, any and all taxes incurred in connection with any such sale of the Collateral); secondly, to interest due upon any of the Obligations; and thirdly, to the principal of the Obligations. If any deficiency shall arise, Borrower and the Guarantor shall remain liable to Lender therefor; and any surplus shall be paid to Borrower. 9.4. REMEDIES CUMULATIVE; NO WAIVER. All covenants, conditions, ------------------------------ provisions, terms, warranties, guaranties, indemnities, agreements and other undertakings of Borrower contained in this Agreement and the other Loan Documents, or in any document referred to herein or contained in any agreement supplementary hereto or in any Guarantee given to Lender, heretofore, concurrently, or hereafter entered into, shall be deemed cumulative to and not in derogation or substitution of any of the terms, covenants, conditions, provisions, warranties, guaranties, indemnities, undertakings or agreements of Borrower herein contained. Each right, power and remedy of Lender as provided for in this Agreement or in the Loan Documents or now or hereinafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in the Agreement or in the Loan Documents or now or hereinafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by Lender of any one or more of such rights, powers or remedies shall not preclude the simultaneous or later exercise by Lender of any or all such other rights, powers or remedies. SECTION 10. MISCELLANEOUS - ----------- ------------- 10.1. MODIFICATION OF AGREEMENT. This Agreement may not be modified, ------------------------- altered or amended, except by an agreement in writing signed by Borrower and Lender. 10.2. WAIVERS. Lender's failure, at any time or times hereafter, to ------- require strict performance by Borrower of any provision of this Agreement shall not waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Lender of an Event of Default by Borrower under this Agreement or any of the other Loan -18- Documents shall not suspend, waive or affect any other Event of Default by Borrower under this Agreement or any of the other Loan Documents, whether the same is prior or subsequent thereto and whether of the same or of a different type. None of the undertakings, agreements, warranties, covenants and representations of Borrower contained in this Agreement or any of the other Loan Documents and no Event of Default by Borrower under this Agreement or any of the other Loan Documents shall be deemed to have been suspended or waived by Lender, unless such suspension or waiver is by an instrument in writing specifying such suspension or waiver and is signed by a duly authorized representative of Lender and directed to Borrower. Borrower waives presentment, notice of dishonor and notice of non-payment with respect to Accounts, contract rights and Chattel Paper. 10.3. SEVERABILITY. Wherever possible, each provision of this Agreement ------------ shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement. 10.4. SUCCESSORS AND ASSIGNS. This Agreement, the Other Agreements and ---------------------- the Security Documents shall be binding upon and inure to the benefit of the respective successors and permitted assigns of Borrower and Lender; provided, -------- however, neither Borrower nor Lender shall sell, assign, transfer or otherwise - ------- dispose of all or any part of their respective interest in this Agreement or any of the other Loan Documents hereunder or thereunder without the prior written consent of the other party. 10.5. CUMULATIVE EFFECT; CONFLICT OF TERMS. The provisions of the Other ------------------------------------ Agreements and the Security Documents are hereby made cumulative with the provisions of this Agreement. Except as otherwise provided in any of the other Loan Documents by specific reference to the applicable provision of this Agreement, if any provision contained in this Agreement is in direct conflict with, or inconsistent with, any provision in any of the other Loan Documents, the provision contained in this Agreement shall govern and control. 10.6. EXECUTION IN COUNTERPARTS. This Agreement may be executed in any ------------------------- number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which counterparts taken together shall constitute but one and the same instrument. 10.7. NOTICE. Except as otherwise provided herein, all notices, ------ requests and demands to or upon a party hereto to be effective shall be in writing (and, if sent by mail, shall be sent by certified or registered mail, return receipt requested) or by telegraph or telex or telecopy and, unless otherwise expressly provided herein, shall be deemed to have been validly served, given or delivered when delivered against receipt or one Business Day after deposit in the mail, postage prepaid, or, in the case of telegraphic notice, when delivered to the telegraph company, or, in the case of telex notice, when sent, answerback received, or, in the case of telecopy notice, when telecopied, addressed as follows: -19- (A) If to Lender: ITC Holding Company, Inc. 910 First Avenue P.O. Box 510 West Point, Georgia 31833 Attn: Chief Financial Officer Telecopier No.: (706) 645-8614 (B) If to Borrower: 1828 Meca Way Norcross, Georgia 30093 Attn: President Telecopier No.: (404) 233-9462 or to such other address as each party may designate for itself by like notice given in accordance with this Section 10.7. 10.8. TIME OF ESSENCE. Time is of the essence of this Agreement, the --------------- Other Agreements and the Security Documents. 10.9. ENTIRE AGREEMENT. This Agreement and the other Loan Documents, ---------------- together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. 10.10. GOVERNING LAW. This Agreement shall be governed by the laws of ------------- the State of Georgia (not including choice of law rules thereof). -20- IN WITNESS WHEREOF, this Agreement has been duly executed on the day and year specified at the beginning hereof. HOMETEL PROVIDERS PARTNERS, L.P. By:HomeTel Providers Inc., its general partner By: /s/ Scott Dorfman ------------------------------------------- Scott Dorfman, President [CORPORATE SEAL] ITC HOLDING COMPANY, INC. By: /s/ Doug Cox ------------------------------------------- Doug Cox, Chief Financial Officer [CORPORATE SEAL] -21- EXHIBIT A THIS NOTE HAS NOT BEEN REGISTERED PURSUANT TO THE SECURITIES ACT OF 1933, AS AMENDED (THE "FEDERAL ACT"), OR UNDER OR PURSUANT TO THE SECURITIES OR BLUE SKY LAWS (COLLECTIVELY, THE "STATE SECURITIES LAWS") OF ANY STATE. THIS NOTE HAS BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, OR SOLD, HYPOTHECATED, PLEDGED, TRANSFERRED OR ASSIGNED, NOR WILL BORROWER RECOGNIZE ANY ASSIGNEE OR TRANSFEREE AS HAVING AN INTEREST IN THIS NOTE IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THIS NOTE UNDER THE FEDERAL ACT AND/OR THE STATE SECURITIES LAWS OR AN OPINION OF LEGAL COUNSEL SATISFACTORY TO BORROWER THAT SUCH REGISTRATION IS NOT REQUIRED. TERM LOAN NOTE $3,500,000 April 11, 1994 Atlanta, Georgia FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to ITC HOLDING COMPANY, INC. ("Lender"), at Lender's office located at 910 First Avenue, West Point, Georgia 31833, or at such other place as the holder hereof may designate, the principal sum of THREE MILLION FIVE HUNDRED THOUSAND DOLLARS ($3,500,000) or so much thereof as may be outstanding from time to time, as well as all fees or expenses chargeable to Borrower under that certain Loan and Security Agreement, dated the date hereof, between Borrower and Lender (hereinafter, together with all supplements, riders, amendments, exhibits or schedules thereto, referred to as the "Loan Agreement"), said principal sum to be due and payable in a single installment due on the Maturity Date, together with interest on the unpaid amount hereof from the date each advance of the principal amount hereof is made until paid in full, said interest being due on each Interest Payment Date, and on the Maturity Date, and to be calculated at the rate (computed on the basis of a 360-day year and of the actual number of days elapsed) of: (i) for the period from the date hereof through and including the Adjustment Date, fourteen percent (14%) per annum, and (ii) from and after the Adjustment Date through and in including the Maturity Date, at an annual rate equal to the sum of (A) the Prime Rate as announced from time to time by the Reference Bank plus (B) eight percent (8%). All payments hereunder shall be made in lawful money of the United States. This Term Loan Note (the "Note") is the Term Loan Note referred to in, and is issued pursuant to, the Loan Agreement and is entitled to all of the -22- benefits and security of the Loan Agreement. All of the terms, covenants and conditions of the Loan Agreement and all other instruments evidencing or securing the indebtedness hereunder are hereby made a part of this Note and are deemed incorporated herein in full. All capitalized terms used herein, unless otherwise specifically defined in this Note, shall have the meanings ascribed to them in the Loan Agreement. This Note and all amounts due hereunder are expressly subject to the provisions of Section 3 of the Agreement and any subordination agreement, document or instrument which may evidence such subordination. If any Event of Default shall occur, then, at Lender's option, the outstanding principal balance of this Note shall bear interest from and after the occurrence of such Event of Default at a variable rate per annum equal to the Default Rate until either the Event of Default is cured with Lender's permission and to Lender's satisfaction or the principal balance of this Note is paid in full. In no contingency or event whatsoever, whether by reason of advancement of the proceeds hereof or otherwise, shall the amount paid or agreed to be paid to Lender for the use, forbearance or detention of money advanced hereunder exceed the highest lawful rate permissible under any law which a court of competent jurisdiction may deem applicable hereto. In the event that such a court determines that Lender has charged or received interest hereunder in excess of the highest applicable rate, such rate shall automatically be reduced to the maximum rate permitted by law and Lender shall promptly refund to Borrower any interest received by it in excess of the maximum lawful rate. It is the intent hereof that Borrower not pay or contract to pay, and that Lender not receive or contract to receive, directly or indirectly in any manner whatsoever, interest in excess of that which may be paid by Borrower under applicable law. If any Event of Default occurs or exists or the Loan Agreement is terminated, this Note may, at Lender's option, be declared by Lender to be immediately due and payable. In addition thereto, and not in substitution therefor, Lender shall be entitled to exercise any one or more of the other rights and remedies exercisable by lender under the Loan Agreement or any other agreement or instrument between Lender and Borrower, or provided by applicable law. No failure to exercise or delay in exercising said option or to pursue such other remedies shall constitute a waiver of such option or such other remedies or of the right to exercise any of the same in the event of any subsequent Event of Default. No single or partial exercise by Lender of any right hereunder, under any other Agreement or instrument or otherwise shall preclude any other or further exercise thereof or of any other rights. This paragraph is in addition to and in no way a limitation upon the nature of this Note or upon any other rights of Lender under this Note, the Loan Agreement, any other instrument between Lender and Borrower, or under applicable law. If this Note is collected by or through an attorney at law, then Borrower shall be obligated to pay, in addition the principal balance and accrued interest hereof, reasonable attorney's fees actually incurred and court costs. Time is of the essence of this Note. To the fullest extent permitted by applicable law, Borrower, for itself and its legal representatives, successors and assigns, expressly waives presentment, demand, protest, notice of dishonor, notice of non-payment, notice of maturity, notice of protest, presentment for the purpose of accelerating maturity, diligence in collection, and the benefit of any exemption or insolvency laws, and all defenses and pleas -23- on the grounds of any extension or extensions of the time of payments or the due dates of this Note, in whole or in part, before or after maturity, with or without notice. No renewal or extension of this Note, and no delay in enforcement of this Note or in exercising any right or power hereunder, shall affect the liability of Borrower. Wherever possible each provision of this Note shall be interpreted in such a manner as to be effective and valid under applicable law, but if any provision of this Note shall be prohibited or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity without invalidating the remainder of such provision or remaining provisions of this Note. No delay or failure on the part of Lender in the exercise of any right or remedy hereunder shall operate as a waiver thereof, nor as an acquiescence in any default, nor shall any single or partial exercise by Lender of any right or remedy preclude any other right or remedy. Lender, at its option, may enforce its rights against any collateral securing this Note without enforcing its rights against Borrower, any guarantor of the indebtedness evidenced hereby or any other property or indebtedness due or to become due to Borrower. Borrower agrees that, without releasing or impairing Borrower's liability hereunder, Lender may at any time release, surrender, substitute or exchange any collateral securing this Note and may at any time release any party primarily or secondarily liable for the indebtedness evidenced by this Note. This Note shall be governed by, and construed and enforced in accordance with, the laws of the State of Georgia, and is intended to take effect as an instrument under seal. IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed, sealed and delivered in Atlanta, Georgia, on the date first above written. HOMETEL PROVIDERS PARTNERS, L.P. By: HomeTel Providers Inc., its general partner By: /s/ Scott Dorfman ---------------------------------------------- Scott Dorfman, President [CORPORATE SEAL] [GUARANTEE OF SCOTT DORFMAN APPEARS ON FOLLOWING PAGE] -24- GUARANTEE FOR VALUE RECEIVED, Scott Dorfman ("Guarantor") hereby irrevocably and unconditionally guarantees to ITC HOLDING COMPANY, INC. ("Lender") the full and timely payment by HomeTel Providers Partners, L.P. ("Borrower") of all Obligations as defined in and under and pursuant to that certain Loan and Security Agreement, of even date herewith, between Lender and Borrower, and the Note upon which this Guarantee is endorsed, and any renewals, modifications, replacements or extensions of the Obligations. EXECUTED AND DELIVERED under seal this 11th day of April, 1994. /s/ Scott Dorfman (SEAL) -------------- Scott Dorfman -25- EXHIBIT B Form of Draw Notice [Date] VIA FACSIMILE - ------------- ITC Holding Company, Inc. 910 First Avenue P.O. Box 510 West Point, Georgia 31833 Attn: [ ] Re: Draw on Term Loan Credit Facility --------------------------------- Dear [ ]: Pursuant to Section 2.2 of that certain Loan and Security Agreement (the "Agreement") dated April [ ], 1994, between ITC Holding Company, Inc. and HomeTel Providers Partners, L.P. ("Borrower"), Borrower hereby advises you that it is making a draw on the term loan credit facility extended by you to Borrower under and pursuant to the Agreement in the amount of [INSERT AMOUNT]. Such amount should be wire transferred to the account of Borrower on or before [INSERT DATE THAT IS AT LEAST TWO BUSINESS DAYS AFTER TO DATE HEREOF], pursuant to the following instructions: [INSERT WIRE TRANSFER INSTRUCTIONS] In connection with the drawing hereunder, Borrower states as follows: (1) As of the date hereof, the total amount drawn by Borrower under the Agreement (and not giving effect to the drawing hereunder) is $[INSERT TOTAL DRAWINGS]; (2) As of the date hereof, the total amount available for drawing under the Agreement is $[INSERT AVAILABLE AMOUNT]; and -26- (3) Giving effect to the drawing hereunder, the remaining amount available to be drawn by Borrower is $[INSERT REMAINING AMOUNT TO BE DRAWN]. Borrower hereby represents and warrants to Lender as follows: (1) The representations and warranties set forth in Sections 5.2 and 6.1 of the Agreement are true and correct on and as of the date hereof; (2) As of the date hereof, Borrower is in compliance with all the terms and provisions set forth in the Agreement; (3) As of the date hereof, no Default or Event of Default under or pursuant to the Agreement or the other Loan Documents has occurred or is continuing; and (4) The conditions set forth in Sections 8.2(B) and 8.2(C) have been and continue to be satisfied as of the date hereof. HOMETEL PROVIDERS PARTNERS, L.P. By: HomeTel Providers Inc., its general partner By: /s/ Scott Dorfman ---------------------------------------------- Scott Dorfman, President [CORPORATE SEAL] -27- EXHIBIT C Principal Place of Business and All Other Addresses 1828 Meca Way Norcross, Georgia 30093 -28- EXHIBIT D [Date] ITC Holding Company, Inc. 910 First Avenue P.O. Box 510 West Point, Georgia 31833 Attn: Mr. Doug Cox, Chief Financial Officer RE: Loan and Security Agreement, dated April [ ], 1994, between ITC Holding Company, Inc. and HomeTel Providers Partners, L.P. -------------------------------------------------------------- Ladies and Gentlemen: We have acted as counsel to HomeTel Providers Partners, L.P., a Georgia limited partnership ("Borrower"), and Scott Dorfman, an individual resident of -------- the State of Georgia ("Guarantor"), in connection with the negotiation, --------- execution and delivery of that certain Loan and Security Agreement (the "Loan ---- Agreement"), dated April [ ], 1994, between Borrower and ITC Holding Company, - --------- Inc., a Georgia corporation ("Lender"), and that certain Term Loan Note (the ------ "Note"), dated April [ ], 1994, in the original aggregate principal amount of - ------ $3,500,000, executed and delivered by Borrower in favor of Lender. This opinion is furnished pursuant to Section 8.1(G) of the Loan Agreement. Terms used herein which are defined in the Loan Agreement have the respective meanings set forth or referred to in the Loan Agreement, unless otherwise defined herein. This opinion letter is limited by, and is in accordance with, the January 1, 1992 edition of the Interpretive Standards applicable to Legal Opinions to Third Parties in Corporate Transactions adopted by the Legal Opinion Committee of the Corporate and Banking Law Section of the State Bar of Georgia (the "Interpretive Standards"), which Interpretive Standards are incorporated in this opinion letter by this reference. In connection with our representation, we have examined fully executed counterparts (or copies as so executed) of the following documents (items (a) through (d) are hereinafter referred to collectively as the "Loan Documents" and all the items listed below are hereinafter referred to collectively as the "Transaction Documents"): -29- (a) The Loan Agreement; (b) The Note; (c) All Other Agreements described on Schedule I hereto; ---------- (d) Uniform Commercial Code ("UCC") financing statements naming --- Borrower as debtor and Lender as secured party (collectively, the "Financing Statements") to be filed in the filing offices -------------------- indicated on Schedule II attached hereto (collectively the "Filing ----------- ------ Offices"); ------- (e) Reports ("Search Reports") dated April [ ], 1994 delivered to us and prepared by EquiFax Business Information Services and Information America (each an independent contractor and is not affiliated or supervised by our firm) as to UCC-1 financing statements on file in respect of Borrower in the offices listed on Schedule II hereto, which Search Reports are attached hereto as ----------- Schedule III; and ------------ (f) The certificates, instruments, documents and agreements listed on Schedule IV (the documents listed on Schedule IV as Items 5 and 6 ----------- are collectively referred to as the "Material Contracts"). -------------------- In the capacity described above, we have also considered such matters of law and of fact, including the examination of originals or copies, certified or otherwise identified to our satisfaction, of the Certificate of Limited Partnership and Limited Partnership Agreement of Borrower, the Articles of Incorporation and Bylaws of the general partner of Borrower, written consents of the general partner of Borrower with respect to the transactions contemplated by the Loan Agreement, and written consents of the Board of Directors of the general partner of Borrower with respect to the transactions contemplated by the Loan Agreement, together with such other records and documents of Borrower, the general partner of Borrower, certificates of officers and representatives of Borrower and the general partner of Borrower, certificates of public officials and such other documents as we have deemed appropriate for the opinions herein set forth. With your permission, in rendering this opinion, we have assumed the following, in addition to the assumptions set forth in the Interpretive Standards, without any investigation or inquiry: (1) the due authorization, execution and delivery of all Loan Documents by all parties thereto (other than Borrower and Guarantor); (2) that the Loan Documents constitute the binding obligations of the parties thereto other than Borrower and Guarantor, and each such other party thereto has all requisite power and authority to perform its obligations thereunder; (3) that the only interest, fees and other charges contracted for or to be reserved, charged, taken or paid in connection with the transactions contemplated by the Transaction Documents are those set forth in the Loan -30- Documents and that all such interest, fees and charges will be reserved, charged, taken and applied by Lender solely as described therein, and that no interest shall be reserved, charged, taken or paid under the Loan Documents or the Transaction Documents on unpaid interest and that under no circumstances shall the rate of interest payable (including any fees, charges, premiums or similar amounts which may be characterized as interest) exceed 5.0% per month (whether due to prepayment, acceleration, or otherwise); (4) Borrower has, prior to or concurrently with the execution and delivery of the Loan Agreement, rights in, and the unrestricted right to convey the Collateral, including that portion of the Collateral which constitutes property of a type (i) in which a security interest may be granted and perfected under the provisions of Article 9 of the UCC and (ii) as to which the federal law of the United States has not preempted the UCC with respect to the validity, enforceability, perfection and priority of security interests therein (such portion of the Collateral, the "UCC Collateral"); ---------------- (5) The location of the principal place of business and chief executive office of the Borrower within the State of Georgia is and will remain entirely within the county specified on Schedule II; ----------- (6) Each of the Financing Statements gives a correct address of the secured party from which information concerning the security interest to be perfected thereby may be obtained. Based upon the foregoing, and subject to the other exceptions, assumptions and qualifications set forth or incorporated herein by reference, it is our opinion that: (a) Borrower is a limited partnership duly organized and validly existing under the laws of the State of Georgia. (b) Borrower has the partnership power and partnership authority to execute and deliver the Loan Agreement, the Note and each of the Material Contracts, to perform its obligations thereunder, to own and operate its assets and to conduct its business. (c) The general partner of Borrower is HomeTel Providers Inc., a Georgia corporation, holding of record and, to our knowledge, beneficially, a partnership interest representing 90% of the total partnership interests in Borrower. (d) Borrower has duly authorized the execution and delivery of the Loan Agreement, the Note, and each of the Material Contracts and performance by Borrower thereunder and has duly executed and delivered the Loan Agreement, the Note and the Material Contracts. (e) The Guarantee is enforceable against Scott Dorfman. (f) Each of the Loan Agreement, the Note and the Material Contracts is enforceable against Borrower. -31- (g) The execution and delivery by Borrower of the Loan Documents and the Material Contracts do not, and if Borrower were now to perform its obligations thereunder such performance would not, result in any: (I) violation of Borrower's Certificate of Limited Partnership or Limited Partnership Agreement; (II) violation of any existing federal or Georgia constitution, statute, regulation, rule, order or law to which Borrower or its properties are subject; (III) violation of any judicial or administrative decree, writ, judgment or order to which, to our knowledge, Borrower or its properties are subject; or (IV) to our knowledge, violation of any of the terms and conditions of the Material Contracts. (h) No consent, approval, authorization or other action by, or filing with, any governmental authority of the United States or the State of Georgia is required for Borrower's execution and delivery of the Loan Agreement and the Note or its performance thereunder. (i) (I) The Loan Agreement is effective to create a security interest in the UCC Collateral; (II) The Financing Statements are in appropriate form for filing in the State of Georgia and no taxes or fees, other than normal filing fees, are required to be paid in connection with such filing, and the filing of the Financing Statements in the Filing Offices will be effective to perfect the security interest created by the Loan Agreement in that portion of the UCC Collateral in which a security interest may be perfected by the filing of a UCC financing statement in the State of Georgia (the "Security Interest"); and ----------------- (III) Assuming that the Financing Statements are filed in the Filing Offices, the Security Interest will have the priority accorded to a UCC security interest perfected by the filing of a UCC financing statement in the State of Georgia. Our opinions and confirmations set forth above are subject to the following exceptions and qualifications: A. The opinions set forth herein are limited to the laws of the State of Georgia and applicable federal laws, other than for the rules and regulations of the Federal Communications Commission. B. Except as expressly stated in Paragraph (j) above, we express no opinion herein with respect to the perfection or priority of any security interests, security titles or other liens created or granted under any of the -32- Loan Documents or with respect to any person's title to any collateral covered thereby. C. In rendering our opinions herein regarding the enforceability of the Loan Documents, we have assumed that, to the extent that applicable law would require the rights and remedies set forth therein to be exercised in good faith or in a reasonable or commercially reasonable manner as a condition to the enforceability thereof, and to the extent that any such condition cannot be waived, such legal requirements will be observed and satisfied. D. Notwithstanding anything herein to the contrary, we express no opinion in this letter regarding: (i) the effect on the enforceability of any Loan Document of any applicable laws which limit or prohibit the exercise of self- help or other non-judicial remedies (such as any right, without judicial process, to enter upon, to take possession of, to collect, retain, use and enjoy rents, issues and profits from property, or to manage property); (ii) the enforceability of any provisions in any of the Loan Documents which purport to permit any sale or other disposition of collateral other than in compliance with applicable law; (iii) the enforceability of any provisions in any of the Loan Documents which purport to permit any secured party to collect a deficiency except upon compliance with applicable law; (iv) the enforceability of any provisions in any of the Loan Documents which purport to entitle any party, as a matter of right and without court approval after any required showings and hearings, to the appointment of a receiver or the issuance of a writ of possession; (v) the enforceability of any provisions in any of the Loan Documents which purport to provide for payment of interest on unpaid interest in violation of Official Code of Georgia Annotated ("O.C.G.A.") (S) 7-4-17; (vi) ---------------------------------- -------- the enforceability of any provisions in any of the Loan Documents which, due to prepayment, acceleration or otherwise, would cause the rate of interest payable under any of the Loan Documents to exceed five percent (5.0%) per month in violation of O.C.G.A. (S) 7-4-18; and (vii) the enforceability of any provisions in any of the Credit Documents which purport to provide that any party shall be deemed to have been given or to have received any notice which such party did not actually receive. E. The opinions expressed in Paragraph (j) above are subject to the following additional exceptions and qualifications: (i) The effect of bankruptcy, insolvency, reorganization, moratorium, or other similar laws affecting the rights of creditors, including the U.S. Bankruptcy Code in its entirety and State laws regarding fraudulent transfers, obligations and conveyances or regarding receiverships; (ii) In the case of proceeds, as such term is defined in the UCC, continuation of the perfection of the Security Interest therein is limited to the degree set forth in O.C.G.A. (S) 11-9-306; (iii) Continuation statements relating to each Financing Statement must be filed within six (6) months prior to the expiration of five (5) years from the date of filing thereof or from the effectiveness of the last continuation; and -33- (iv) Additional filings may be necessary with respect to the UCC Collateral if Borrower changes its name, identity or corporate structure or the jurisdiction in which the UCC Collateral is located or in the event Borrower changes the location of its principal place of business or chief executive office. This opinion has been delivered solely for the benefit of the addressees pursuant to the Loan Agreement and may not be relied upon by any other person or entity for any other purpose without the express written permission of the undersigned. Very truly yours, KILPATRICK & CODY By:/s/ David A. Stockton, a Partner -------------------------------- David A. Stockton, a Partner -34- SCHEDULE I OTHER CREDIT DOCUMENTS REVIEWED ------------------------------- 1. Term Loan Note, dated April [ ], 1994, executed and delivered by Borrower in favor of Lender; 2. Guarantee, dated April [ ], 1994, endorsed on the Term Loan Note, and executed and delivered by Guarantor in favor of Borrower; 3. Draw Notice, dated April [ ], 1994, executed by Borrower and delivered to Lender; and 4. Bailee Letter, dated April [ ], 1994, acknowledged by Innotrac Corporation, and related UCC-1 Financing Statement -35- SCHEDULE II FILING OFFICES -------------- Office of the Clerk of the Superior Court of Gwinnett County, Georgia. -36- SCHEDULE III UCC SEARCH REPORTS ------------------ -37- SCHEDULE IV OTHER DOCUMENTS REVIEWED ------------------------ 1. Certificate of Limited Partnership for Borrower issued on April [ ], 1994 by the Office of the Secretary of State of Georgia; 2. Limited Partnership Agreement, dated April [ ], 1994, between HomeTel Providers Inc. ("General Partner") and Lender, as Limited Partner; ----------------- 3. Articles of Incorporation and By-laws of General Partner; 4. Certificate of Secretary of General Partner, dated as of April [ ], 1994; 5. Assignment and Management Agreement, dated April [ ], 1994, between Borrower and HomeTel Systems, Inc.; and 6. Services Agreement, dated April [ ], 1994, between Borrower and Innotrac Corporation. -38- EX-10.7 10 LEASE AGREEMENT EXHIBIT 10.7 COVER PAGE The capitalized terms of this Lease shall have the meanings ascribed to them below, and each reference to such term in the Lease shall incorporate such meaning therein as if fully set forth therein. LANDLORD: WEEKS REALTY, L.P., a Georgia limited partnership, with its principal office located at 4497 Park Drive, Norcross, Georgia 30093 TENANT: INNOTRAC CORPORATION, a corporation duly organized and existing under the laws of the State of Georgia. LEASED PREMISES: (a) Address: 2505 Meadowbrook Parkway (b) Rentable Area: 53,481 square feet (c) Project: Meadowbrook TERM: Three (3) years COMMENCEMENT DATE: May 1, 1996 TERMINATION DATE: April 30, 1999 BASE RENT (PER YEAR) $267,405.00 i INNOTRAC CORPORATION LEASE AGREEMENT TABLE OF CONTENTS SECTION PAGE - ------- ---- 1. LEASED PREMISES............................... 1 2. TERM.......................................... 1 3. RENTAL........................................ 1 4. DELAY IN DELIVERY............................. 2 5. USE OF LEASED PREMISES........................ 3 6. UTILITIES..................................... 4 7. ACCEPTANCE OF PREMISES........................ 4 8. ALTERATION, MECHANICS' LIENS.................. 4 9. QUIET CONDUCT/QUIET ENJOYMENT................. 5 10. FIRE INSURANCE, HAZARDS....................... 5 11. INSURANCE..................................... 5 12. INDEMNIFICATION BY TENANT..................... 6 13. WAIVER OF CLAIMS.............................. 7 14. REPAIRS....................................... 7 15. SIGNS, LANDSCAPING............................ 8 16. ENTRY BY LANDLORD............................. 8 17. TAXES......................................... 8 18. ABANDONMENT................................... 9 19. DESTRUCTION................................... 10 20. ASSIGNMENT AND SUBLETTING..................... 10 ii 21. INSOLVENCY OF TENANT.......................... 11 22. BREACH BY TENANTS............................. 12 23. ATTORNEY'S FEES/COLLECTION CHARGES............ 12 24. CONDEMNATION.................................. 13 25. NOTICES....................................... 13 26. WAIVER........................................ 14 27. EFFECT OF HOLDING OVER........................ 14 28. SUBORDINATION................................. 14 29. ESTOPPEL CERTIFICATE.......................... 15 30. PARKING....................................... 15 31. MORTGAGE PROTECTION........................... 15 32. PROTECTIVE COVENANTS.......................... 15 33. GOVERNMENT REGULATIONS 34. RELOCATION.................................... 16 35. BROKERAGE COMMISSIONS......................... 16 36. MISCELLANEOUS PROVISIONS...................... 16 EXHIBITS: EXHIBIT "A": Site Plan EXHIBIT "B" Floor Plan of the Leased Premises EXHIBIT "B-1": Parking EXHIBIT "C": Tenant's Acceptance of Premises EXHIBIT "D": Subordination, Non-disturbance and Attornment Agreement EXHIBIT"D": Special Stipulations iii STATE OF GEORGIA GWINNETT COUNTY This Lease Agreement is made this __ day of April, 1996, by and between WEEKS REALTY, L.P., a Georgia limited partnership, hereinafter referred to as "Landlord", and INNOTRAC CORPORATION, hereinafter referred to as "Tenant". LEASED PREMISES 1.01 Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the property hereinafter referred to as the LEASED PREMISES, described as approximately 53,481 rentable square feet of office/warehouse at 2505 Meadowbrook Parkway, Duluth, Georgia, Gwinnett County, as shown on the plan attached hereto as Exhibit "A" and by reference incorporated herein. The building in which the Leased Premises are located is herein referred to as the "Building"; and the real property on which the building is situated is herein referred to as the "Land". TERM 2.01 TO HAVE AND TO HOLD said Leased Premises for a term of three (3) years, commencing on May 1, 1996, and continuing until midnight on April 30, 1999. RENTAL 3.01 As rental for the Leased Premises, Tenant agrees to pay to Landlord, without offset or abatement, the sum of Two Hundred Sixty Seven Thousand Four Hundred Five and 00/100 Dollars ($267,405.00) per year, payable in monthly installments each in the amount of Twenty Two Thousand Two Hundred Eighty Three and 75/100 Dollars ($22,283.75) on or before the first day of each calendar month beginning on May 1, 1996 and thereafter for the remainder of the term, together with any other additional rental as hereinafter set forth. Tenant shall pay interest at a rate of ten percent (10%) per annum on all rental payments not received by Landlord within ten (10) days of the due date thereof. If the Lease shall commence on any date other than the first day of a calendar month, or end on any date, other than the last day of a calendar month, rent for such month shall be prorated. Tenant has deposited with Landlord, upon delivery of this Lease Agreement, an amount equal to Twenty Two Thousand Two Hundred Eighty Three and 75/100 ($22,23.750) Dollars to be applied as first month's rental. 3.02 The rental provided in paragraph 3.01 "Rental" above, includes an allowance in the amount of Seventy Thousand Five Hundred and 00/100 Dollars ($70,500.00) (the "Allowance") towards the cost of tenant improvements to the Leased Premises on the basis set forth in the plans and specifications attached, or to be attached, hereto in Exhibit "B". The Allowance shall be used for alterations, improvements, fixtures and equipment which become part of or are attached or affixed to the Leased Premises, including walls, wall coverings and floor coverings, but excluding trade fixtures, furniture or furnishings or other personal property. In the event the cost of tenant improvements exceeds the Allowance, the excess shall be paid by Tenant to Landlord within thirty (30) days upon Tenant's receipt of Landlord's invoice. 3.03 In addition to the base rental, Tenant agrees to pay Landlord as additional rental the amounts described in subparagraph (a) below. Each year during the term hereof, Landlord shall give Tenant written notice of its estimate of the amount of common area utility charges (collectively "Charges") for the Lease Premises for the calendar year. Tenant shall, thereafter, during that calendar year, pay to Landlord one-twelfth (1/12) of the amount set forth in said statement at such time as its monthly installments of base rental hereunder are due and payable. At such time as Landlord is able to determine the actual Charges for such calendar year, Landlord shall deliver to Tenant a statement thereof and in the event the estimated Charges differ from the actual Charges, any adjustment necessary shall be made to additional rental payments next coming due under this paragraph. (a) In the event any utilities furnished to the Building or the Leased Premises are not separately metered, Tenant shall pay to Landlord, as additional rental, the gas, water, electricity, fuel, light and heat, garbage collection services and for all other sanitary services rendered to the Leased Premises used by Tenant. Tenant's amount shall be determined on the basis of the size of the Leased Premises, unless Landlord determines that Tenant's use of the Leased Premises justifies a disproportionate allocation of utility costs to Tenant. (b) Landlord agrees to maintain those areas around the Building and in the Project, including parking areas, planted areas, signs and landscaped areas which are from time to time designated by Landlord. Tenant agrees to pay to Landlord as additional rental the amount of $805.00 per month for the first year of the lease term for common area charges and expenses for the Building and the Land ("CAM Charges") which shall increase at a rate of six percent (6%) each year during the term of the lease. The term "grounds maintenance" shall include, without limitation, all landscaping, planting, lawn and grounds care, irrigation costs, all repairs and maintenance to the grounds, signs and other common areas around the Building and in the Project and to all sidewalks, driveways, loading areas and parking areas. CAM Charges shall not include items of a capital nature. 3.04 Tenant agrees to pay as additional rent to Landlord, upon demand, any utility surcharges, or any other costs levied, assessed or imposed by, or at the discretion of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any Federal, State, Municipal or local governmental authorities in connection with the use or occupancy of the Leased Premises. DELAY IN DELIVERY OF POSSESSION 4.01 If Landlord, for any reason whatsoever, cannot deliver possession of the Leased Premises to Tenant at the commencement of the term of this Lease, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any loss or damage resulting therefrom, but in that event there shall be a proportionate reduction of rent covering the period between the commencement of the term and the time when Landlord can deliver possession. If delay is -2- longer than three (3) months, Landlord will provide Tenant such space (not exceeding in area the Leased Premises) as Landlord may have available, until the Leased Premises can be completed, at no charge to Tenant. The term of this Lease shall be extended by such delay. USE OF LEASED PREMISES 5.01 The Leased Premises may be used and occupied only for general manufacturing and assembly, testing, warehousing and distribution, showroom and offices and for no other purpose or purposes, without Landlord's prior written consent. Tenant shall promptly comply at its sole expense with all laws, ordinances, orders, and regulations affecting the Leased Premises and their cleanliness, safety, occupation and use. Tenant shall not do or permit anything to be done in or about the Leased Premises that will in any way increase the fire insurance upon the building. Tenant will not perform any act or carry on any practices that may injure the building or be a nuisance or menace to tenants of adjoining premises. Tenant shall not cause, maintain or permit any outside storage on or about the Leased Premises, including pallets or other refuse. The rear loading areas of the Tenant's unit must be clean and unobstructed. On or before the Commencement Date, Tenant shall take possession of, and, thereafter, continuously occupy the Leased Premises during the term of this Lease, and operate between the normal business operations of Tenant. 5.02 Tenant shall, at Tenant's sole cost and expense, comply fully with all environmental laws and regulations, and all other legal requirements, applicable to Tenant's operations at, on or within, or to Tenant's use and occupancy of, the Leased Premises. Tenant shall not (either with or without negligence) cause or permit the escape, disposal or released of any biologically or chemically active or other hazardous substances, or materials. Tenant shall not allow the storage or use of such substances or materials in any manner not sanctioned by law or by the highest standards prevailing in the industry for the storage and use of such substances or materials, nor allow to be brought into the Project any such materials or substances except to use in the ordinary course of Tenant's business, and then only after written notice is given to Landlord of the identity of such substances or materials. Without limitation, hazardous substances and materials shall include those described in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended, 42 U.S.C. Section 9601 et seq., the Resource Conservation and Recovery Act, as amended, 42 U.S.C. Section 6901 et seq., any applicable state or local laws and the regulations adopted under these acts. If any lender or governmental agency shall ever require testing to ascertain whether or not there has been any release or hazardous materials, then the reasonable costs thereof shall be reimbursed by Tenant to Landlord upon demand as additional charges if such requirement applies to the Leased Premises. In addition, Tenant shall execute affidavits, representations and the like from time to time at Landlord's request concerning Tenant's best knowledge and belief regarding the presence of hazardous materials on the Leased Premises. In all events, Tenant shall indemnify Landlord in the manner elsewhere provided in this lease from any release of hazardous materials on the Leased Premises occurring while Tenant is in possession, or elsewhere if caused by Tenant or persons acting under Tenant. The within covenants shall survive the expiration or earlier termination of the lease term. -3- UTILITIES 6.01 Landlord shall not be liable in the event of any interruption in the supply of any utilities. Tenant agrees that it will not install any equipment which will exceed or overload the capacity of any utility facilities and that if any equipment installed by Tenant shall require additional utility facilities, the same shall be installed by Tenant at Tenant's expense in accordance with plans and specifications approved in writing by Landlord. Tenant shall be solely responsible for and shall pay all charges for use or consumption of sanitary sewer, water, gas, electricity and any other utility services. In the event Landlord determines that it is advisable to separately meter any utility services provided to the Leased Premises, Landlord shall have the right to install a sub-meter and bill Tenant for the actual cost thereof, which shall be paid to Landlord within fifteen (15) days following billing. ACCEPTANCE OF PREMISES 7.01 By entry hereunder, Tenant acknowledges that it has examined the Leased Premises and accepts the same as being in the condition called for by this Lease, and as suited for the uses intended by Tenant. Upon delivery of possession of the Leased Premises to Tenant, Tenant agrees to execute and deliver to Landlord a Tenant's Acceptance of Premises, in the form attached hereto as Exhibit "C". ALTERATION, MECHANICS' LIENS' 8.01 Alterations may not be made to the Leased Premises without prior written consent of Landlord, and any alterations of the Leased Premises excepting movable furniture and trade fixtures shall at Landlord's option become part of the realty and belong to the Landlord. 8.02 Should Tenant desire to alter the Leased Premises and Landlord gives written consent to such alterations, at Landlord's option, Tenant shall contract with a contractor approved by Landlord for the construction of such alterations. 8.03 Notwithstanding anything in paragraph 8.02 above, Tenant may, upon written consent of Landlord, install trade fixtures, machinery or other trade equipment in conformance with all applicable laws, statutes, ordinances, rules, regulations, and the same may be removed upon the termination of this Lease provided Tenant shall not be in default under any of the terms and conditions of this Lease, and the Leased Premises are not damaged by such removal. Tenant shall return the Leased Premises on the termination of this Lease in the same condition as when rented to Tenant, reasonable wear and tear only excepted. Tenant shall keep the Leased Premises, the building and property in which the Leased Premises are situated free from any liens arising out of any work performed for, materials furnished to, or obligations incurred by Tenant. All such work provided for above, shall be done at such times and in such manner as Landlord may from time to time designate. Tenant shall give Landlord written notice five (5) days prior to employing any laborer or contractor to perform work resulting in an alteration of the Leased Premises so that Landlord may post a notice of non-responsibility. -4- QUIET CONDUCT/QUIET ENJOYMENT 9.01 Tenant shall not commit, or suffer any waste upon the Leased Premises, or any nuisance, or other act or thing which may disturb the quiet enjoyment of any other tenant in the Building or any building in the project in which the Leased Premises are located. 9.02 So long as Tenant is not in default in the payment of rent, or other charges or in the performance of any of the other terms, covenants, or conditions of the Lease, Tenant shall not be disturbed by Landlord or anyone claiming by, through or under Landlord in Tenant's possession, enjoyment, use and occupancy of the Leased Premises during the original or any renewal term of the Lease or any extension or modification thereof. FIRE INSURANCE, HAZARDS 10.1 No use shall be made or permitted to be made of the Leased Premises, nor acts done which might increase the existing rate of insurance upon the building or cause the cancellation of any insurance policy covering the building, or any part thereof, nor shall Tenant sell, or permit to be kept, used or sold, in or about the Leased Premises, any article which may be prohibited by the Standard form of fire insurance policies. Tenant shall, at its sole cost and expense, comply with any and all requirements pertaining to the Leased premises, of any insurance organization or company, necessary for the maintenance of reasonable fire and public liability insurance, covering the Leased Premises, building and appurtenances. INSURANCE 11.01 (a) Tenant, at its own expense, shall provide and keep in force with companies acceptable to Landlord public liability insurance for the benefit of Landlord and Tenant jointly against liability for bodily injury and property damage in the amount of not less than Three Million Dollars ($3,000,000.00) in respect to injuries to or death of more than one person in any one occurrence, in the amount of not less than One Million Dollars ($1,000,000.00) in respect to injuries to or death of any one person, and in the amount of not less than Fifty Thousand Dollars ($50,000.00) per occurrence in respect to damage to property, such limits to be for any greater amounts as may be reasonably indicated by circumstances from time to time existing. Tenant shall furnish Landlord with a certificate of such policy (which certificate shall contain the insurer's waiver of subrogation rights exercisable against the Landlord) within thirty (30) days of the commencement date of this Lease and whenever required shall satisfy Landlord that such policy is in full force and effect. Such policy shall name Landlord as an additional insured and shall be primarily and non-contributing with any insurance carried by Landlord. The policy shall contain a contractual liability endorsement. The policy shall further provide that it shall not be canceled or altered without twenty (20) days prior written notice to Landlord. (b) Tenant shall maintain in full force and effect on all of its inventory, fixtures and equipment in the Leased Premises a policy or policies of fire and extended coverage insurance with standard coverage endorsement to the extent of at least eighty percent (80%) of their insurable value. During the term of this Lease the proceeds from any such policy or policies of -5- insurance shall be used for the repair or replacement of the fixtures, and Landlord will sign all documents necessary or proper in connection with the settlement of any claim or loss by Tenant. Landlord will not carry insurance on Tenant's possessions. Tenant shall furnish Landlord with a certificate of such policy within thirty (30) days of the commencement of this Lease, and whenever required, shall satisfy Landlord that such policy is in full force and effect. (c) Landlord shall obtain and keep in force at Tenant's sole cost and expense during the term of this Lease a policy or policies of insurance covering loss or damage to the Leased Premises, in the amount of the full replacement value thereof, as the same may exist from time to time, but in no event less than the total amount of promissory notes secured by liens on the Leased Premises against all perils included within the classification of fire, extended coverage, vandalism, malicious mischief, special extended perils (all risk) and sprinkler leakage. Said insurance shall provide for payment of loss thereunder to Landlord or to the holders of mortgages or deeds of trust on the Leased Premises. The insuring party shall in addition, obtain and keep in force during the term of this Lease a policy of rental income insurance covering a period of one (1) year, which insurance shall also cover all real estate taxes and insurance costs for said period. If such insurance coverage has a deductible clause, Tenant shall be liable for the deductible amount. Upon demand by Landlord, Tenant shall promptly pay the cost of such insurance coverage as additional rent. (d) If the Leased Premises are part of a larger building, or if the Leased Premises are part of a group of buildings owned by Landlord, which are adjacent to the Leased Premises, then Tenant shall pay for any increase in the property insurance of such other building or buildings if said increase is caused by Tenant's acts, omissions, use or occupancy of the Leased Premises. (e) All policies of insurance shall provide that the insurers waive any right of subrogation against Landlord or Tenant. INDEMNIFICATION BY TENANT 12.01 Tenant shall indemnify and hold harmless Landlord against and from any and all claims arising from Tenant's use of the Leased Premises (other than those arising solely from negligence of Landlord or its agents or employees), or the conduct of its business or from any activity, work, or thing done, permitted or suffered by the Tenant in or about the Leased Premises, and shall further indemnify and hold harmless Landlord against and from any and all claims arising from any breach or default in the performance of any obligation on Tenant's part to be performed under the terms of this Lease, or arising from any act, neglect, fault or omission of the Tenant, or of its agents or employees, and from and against all costs, attorney's fees, expenses and liabilities incurred in or about such claim or any action or proceeding brought relative thereto and in case any action or proceeding be brought against Landlord by reason of any such claim, Tenant upon notice from Landlord shall defend the same at Tenant's expense by counsel, chosen by Tenant and who is reasonably acceptable to Landlord. Tenant, as a material part of the consideration to Landlord, hereby assumes all risk of damage to property or injury to persons in or about the Leased premises from any cause whatsoever except that which is caused by the failure of Landlord to observe any of the terms and conditions of this Lease where such -6- failure has persisted for an unreasonable period of time after written notice of such failure, and Tenant hereby waives all claims in respect thereof against Landlord. 12.02 Landlord shall indemnify and hold harmless Tenant against and from any and all claims for bodily injury, death or property damage, to the extent caused solely by Landlord's negligence or misconduct, or arising from the conduct of its business or from any activity, work, or thing done by the Landlord within the Building or on the Land. 12.03 The obligations of Landlord and Tenant under this paragraph arising by reason of any occurrence taking place during the term of this Lease shall survive the termination or expiration of this Lease. WAIVER OF CLAIMS 13.01 Tenant, as a material part of the consideration to be rendered to Landlord, hereby waives all claims against Landlord for damages to goods, wares and merchandise in, upon or about the Leased Premises and for injury to Tenant, its agents, employees, invitees, or third person in or about the Leased Premises from any cause arising at any time. REPAIRS 14.01 Tenant shall, at its sole cost, keep and maintain the Leased Premises and appurtenances and every part thereof (excepting exterior walls and roofs which Landlord agrees to repair) including by way of illustration and not by way of limitation all windows, and skylights, doors, any store front and the interior of the Leased Premises, including all pluming, heating, air conditioning, sewer, electrical systems and all fixtures and all other similar equipment serving the Leased Premises in good and sanitary order, condition, and repair. Tenant shall be responsible for all pest control within the Leased Premises; including, but not limited to the eradication of any ants or terminates should infestation be observed during the term of the Lease. To the best of Landlord's knowledge, the Leased Premises is free of any insects or rodents. Tenant shall, at its sole cost, keep and maintain all utilities, fixtures and mechanical equipment used by Tenant in good order, condition and repair. All windows shall be washed and cleaned as often as necessary to keep them clean and fee from smudges and stains. In the event Tenant fails to maintain the Leased Premises as required herein or fails to commence repairs (requested by Landlord in writing) within thirty (30) days after such request, or fails diligently to proceed thereafter to complete such repairs, Landlord shall have the right in order to preserve the Leased Premises or portion thereof, and/or the appearance thereof, to make such repairs or have a contractor make such repairs and charge Tenant for the cost thereof as additional rent, together with interest at the rate of twelve percent (12%) per annum from the date of making such payments. Landlord agrees to inspect the mechanical equipment in the Leased Premises to insure it is in good working order at lease commencement. 14.02 Landlord agrees to keep in good repair the roof, foundations, and exterior walls of the Leased Premises except repairs rendered necessary by the negligence of Tenant, its agents, employees or invitees. Landlord gives to Tenant exclusive control of Leased Premises and shall -7- be under no obligations to inspect said Leased Premises. Tenant shall promptly report in writing to Landlord any defective condition known to it which Landlord is required to repair, and Landlord shall move with reasonable diligence to repair such item. Failure to report such obvious, known defects shall make Tenant responsible to Landlord for any liability incurred by Landlord by reason of such defects. 14.03 Tenant shall obtain upon occupancy and keep current during the lease term a service maintenance contract on the heating, ventilation and air conditioning (HVAC) equipment serving the Leased Premises. The contract shall be between Tenant and a dealer-authorized company acceptable to Landlord, and shall at a minimum provide for an equipment check and tune-up service each spring and fall, and filter and lubrication service every three months. A copy of said contract shall be provided to Landlord, as well as any modification, extension, renewal or replacement thereof. SIGNS, LANDSCAPING 15.01 Landlord shall have the right to control landscaping and Tenant shall make no alterations or additions to the landscaping. Landlord shall have the right to approve the placing of signs and the size and quality of the same. Tenant shall place no exterior signs on the Leased Premises without the prior written consent of Landlord. Any signs not in conformity with the Lease may be immediately removed by Landlord. Landlord shall provide, at its cost and expense, building standard signage. ENTRY BY LANDLORD 16.01 Upon reasonable notice, Tenant shall permit Landlord and Landlord's agents to enter the Leased Premises at all reasonable times for the purpose of inspecting the same or for the purpose of maintaining the building, or for the purpose of making repairs, alterations, or additions to any portion of the building, including the erection and maintenance of such scaffolding, canopies, fences and props as may be required, or for the purpose of posting notices of non-responsibility for alterations, additions, or repairs, or for the purpose of showing the Leased Premises to prospective tenants, or placing upon the building any usual or ordinary "for sale" signs, without any rebate of rent and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Leased Premises thereby occasioned; and shall permit Landlord at any time within six (6) months prior to the expiration of this Lease, to place upon the Leased Premises any usual or ordinary "to let" or "to lease" signs. For each of the aforesaid purposes, Landlord shall at all times have and retain a key with which to unlock all of the exterior doors about the Leased Premises. TAXES 17.01 (a) Tenant shall, as additional rent, pay and discharge, on or before the last day on which the same may be paid without penalty, "all taxes", (as hereinafter defined) which shall or may during the term be levied, assessed or imposed on or become a lien upon or grow due or payable out of or for or by reason of the Leased Premises or any part thereof, only if -8- caused by Tenant or the Landlord's interest in the real property described on Exhibit "A" hereto. For the purposes hereof "taxes" means all taxes at any time imposed by the United States of America or by any state, city, county or other political or taxing subdivision thereof upon or against this Lease, the Leased Premises, the use or occupancy thereof, the buildings, improvements or personalty thereon, and all assessments imposed subsequent to the execution and delivery of this lease by both Landlord and Tenant (including assessments for benefits from public works or improvements, whether commenced or completed prior to the commencement of the term hereof and whether or not to be completed within said term), levies, license fees, permit fees, water rents and charges, sewer rents, excises, franchises, imposts, interest, costs, penalties and charges, general and special, ordinary and extraordinary, of whatever name, nature and kind, and whether or not within the contemplation of the parties hereto, which are now or may hereafter be levied, assessed, charged or imposed upon or against this Lease, the Leased Premises, the use or occupancy thereof, or the building, improvements or personal property thereon or which are or may become a lien on any thereof. Notwithstanding anything hereinabove to the contrary, "taxes" shall not include any penalties or interest imposed or incurred because of Landlord's dilatory payment, unless the delay in payment is due to Tenant's breach of its obligations under this Section 17. (b) All assessments imposed upon the Leased Premises during the final year of the term of this Lease for public improvements which shall benefit the Leased Premises after the expiration of this Lease shall be equitably pro rated, so that only the portion of such assessments properly allocable to the term of this Lease shall be included in determining Tenant's share of "taxes" in accordance with Section 16.01(a) above. 17.02 Tenant shall pay as additional rent the amount of all taxes, other than income taxes, upon or measured by the rent payable hereunder, whether as a sales tax, transaction privilege tax, excise tax, or otherwise, which additional rent shall be due and payable at the same time as each installment of basic rent. 17.03 Joint Assessment. If the Leased Premises are not separately assessed, Tenant's liability shall be an equitable proportion of the real property taxes for all of the land and improvements included with the tax parcel assessed, such proportion to be determined by Landlord from the respective valuations assigned in the assessor's work sheets or such other information as may be reasonably available. Landlord's reasonable determination thereof, in good faith, shall be conclusive. 17.04 Personal Property Taxes. Tenant shall pay prior to delinquency all taxes assessed against and levied upon trade fixtures, furnishings, equipment and all other personal property of Tenant contained in the Leased Premises or elsewhere. ABANDONMENT 18.01 Tenant shall not vacate nor abandon the Leased Premises at any time during the term of this Lease, unless agreed to in writing by both Landlord and Tenant; and if Tenant shall abandon, vacate or surrender the Leased Premises, or be dispossessed by process of law, or -9- otherwise, any personal property belonging to Tenant and left on the Leased Premises shall, at the option of the Landlord, be deemed abandoned and be and become the property of Landlord. DESTRUCTION 19.01 If the Leased Premises or any portion thereof are destroyed by storm, fire, lightning, earthquake or other casualty, Tenant shall immediately notify Landlord. In the event the Leased Premises cannot, in Landlord's judgment, be restored within one hundred twenty (120) days of the date of such damage or destruction, this Lease shall terminate as of the date of such destruction, and all rent and other sums payable by Tenant hereunder shall be accounted for as between Landlord and Tenant as of that date. Landlord shall notify Tenant within thirty (30) days of the date of the damage or destruction whether the Leased Premises can be restored within one hundred twenty (120) days. If this Lease is not terminated as provided in this paragraph, Landlord shall, to the extent insurance proceeds payable on account of such damage or destruction are available to Landlord (with the excess proceeds belonging to Landlord), within a reasonable time, repair, restore, rebuild, reconstruct or replace the damaged or destroyed portion of the Leased Premises to a condition substantially similar to the condition which existed prior to the damage or destruction. Provided, however, Landlord shall only be required to repair, restore, rebuild, reconstruct and replace the Landlord's Work shown on Exhibit "B", and Tenant shall, at its sole cost and expense, upon completion of the Landlord's Work, repair, restore, rebuild, reconstruct and replace, as required, any and all improvements installed in the Leased Premises by Tenant and all trade fixtures, personal property, inventory, signs and other contents in the Leased Premises, and all other repairs not specifically required of Landlord hereunder, in a manner and to at least the condition existing prior to the damage. Tenant's obligation to pay Base Rent shall abate until Landlord has repaired, restored, rebuilt, reconstructed or replaced the Leased Premises, as required herein, in proportion to the part of the Leased Premises which are unusable by Tenant. If the damage or destruction is due to the act, neglect, fault or omission of Tenant, there shall be no rent abatement except to the extent of rent loss insurance. In the event of any dispute between Landlord and Tenant relative to the provisions of this paragraph, they may each select an arbitrator, the two arbitrators so selected shall select a third arbitrator and the three arbitrators so selected shall hear and determine the controversy and their decision thereon shall be final and binding on both Landlord and Tenant who shall bear the cost of such arbitration equally between them. Landlord shall not be required to repair any property installed in the Leased Premises by Tenant. Tenant waives any right under applicable laws inconsistent with the terms of this paragraph and in the event of a destruction agrees to accept any offer by Landlord to provide Tenant with comparable space within the project in which the Leased Premises are located on the same terms as this Lease. Notwithstanding the provisions of this paragraph, if any such damage or destruction occurs within the final two (2) years of the term hereof, then Landlord, in its sole discretion, may, without regard to the aforesaid 120 day period, terminate this Lease by written notice to Tenant. ASSIGNMENT AND SUBLETTING 20.01 Landlord shall have the right to transfer and assign, in whole or in part its rights and obligations in the building and property that are the subject of this Lease. Tenant shall not -10- assign this Lease or sublet all or any part of the Leased Premises without the prior written consent of the Landlord. In the event of any assignment or subletting, Tenant shall nevertheless at all times, remain fully responsible and liable for the payment of the rent and for compliance with all of its other obligations under the terms, provisions and covenants of this Lease. If all or any part of the Leased Premises are then assigned or sublet, Landlord, in addition to any other remedies provided by this Lease or provided by law, may at its option, collect directly from the assignee or subtenant all rents becoming due to Tenant by reason of the assignment or sublease, and Landlord shall have a security interest in all properties on the Leased Premises to secure payment of such sums. Any collection directly by Landlord from the assignee or subtenant shall not be construed to constitute a novation or a release of Tenant from the further performance of its obligations under this Lease. In the event that Tenant sublets the Leased Premises or any part thereof, or assigns this Lease and at any time receives rent and/or other consideration which exceeds that which Tenant would at that time be obligated to pay to Landlord, Tenant shall pay to Landlord 50% of the gross excess in such rent as such rent is received by Tenant and 50% of any other consideration received by Tenant from such subtenant in connection with such sublease or, in the case of any assignment of this Lease by Tenant, Landlord shall receive 50% of any consideration paid to Tenant by such assignee in connection with such assignment. In addition, should Landlord agree to an assignment or sublease agreement, Tenant will pay to Landlord on demand the sum of $500.00 to partially reimburse Landlord for its costs, including reasonable attorneys' fees, incurred in connection with processing such assignment or subletting request. INSOLVENCY OF TENANT 21.01 Either (a) the appointment of a trustee to take possession of all or substantially all of the assets of Tenant, or (b) a general assignment by Tenant for the benefit of creditors, or (c) any action taken or suffered by Tenant under any insolvency or bankruptcy act shall, if any such appointments, assignments or action continues for a period of thirty (30) days, constitute a breach of this Lease by Tenant, and Landlord may at its election without notice, terminate this Lease and in that event be entitled to immediate possession of the Leased Premises and damages as provided below. -11- BREACH BY TENANTS 22.01 In the event of a default, Landlord in addition to any and all other rights or remedies that it may have hereunder, at law or in equity shall have the right to either terminate this Lease or from time to time, without terminating this Lease relet the Leased Premises or any part thereof for the account and in the name of Tenant or otherwise, for any such term or terms and conditions as Landlord in its sole discretion may deem advisable with the right to make reasonable alterations and repairs to the Leased Premises. Tenant shall pay to Landlord, as soon as ascertained, the costs and expenses incurred by Landlord in such reletting or in making such reasonable alterations and repairs. Should such rentals received from time to time from such reletting during any month be less than that agreed to be paid during that month by Tenant hereunder, the Tenant shall pay such deficiency to Landlord. Such deficiency shall be calculated and paid monthly. 22.02 No such reletting of the Leased Premises by Landlord shall be construed as an election on its part to terminate this Lease unless a notice of such intention be given to Tenant or unless the termination thereof be decreed by a court of competent jurisdiction. Notwithstanding any such reletting without termination, Landlord may immediately or at any time thereafter terminate this Lease, and this Lease shall be deemed to have been terminated upon receipt by Tenant of notice of such termination; upon such termination Landlord shall recover from Tenant all damages that Landlord may suffer by reason of such termination including, without limitation, all arrearages in rentals, costs, charges, additional rentals, and reimbursements, the cost (including court costs and attorneys' fees actually incurred) of recovering possession of the Leased Premises, the actual or estimated (as reasonably estimated by Landlord) cost of any alteration of or repair to the Leased Premises which is necessary or proper to prepare the same for reletting and, in addition thereto, Landlord shall have and recover from Tenant the difference between the present value (discounted at a rate per annum equal to the discount rate of the Federal Reserve Bank of Atlanta at the time the Event of Default occurs) of the rental to be paid by Tenant for the remainder of the lease term, and the present value (discounted at the same rate) of the rental for the Leased Premises for the remainder of the lease term, taking into account the cost, time and other factors necessary to relet the Leased Premises; provided, however, that such payment shall not constitute a penalty or forfeiture, but shall constitute full liquidated damages due to Landlord as a result of Tenant's default. Landlord and Tenant acknowledge that Landlord's actual damages in the event of a default by Tenant under this Lease will be difficult to ascertain, and that the liquidated damages provided above represent the parties' best estimate of such damages. The parties expressly acknowledge that the foregoing liquidated damages are intended not as a penalty, but as full liquidated damages, as permitted by Section 13-6-7 of the Official Code of Ga. Annotated. ATTORNEY'S FEES/COLLECTION CHARGES' 23.01 If Landlord and Tenant litigate any provision of this Lease or the subject matter of this Lease, the unsuccessful litigant will pay to the successful litigant all costs and expenses, including reasonable attorneys' fees and court costs, incurred by the successful litigant at trial and on any appeal. If, without fault, either Landlord or Tenant is made a party to any litigation -12- instituted by or against the other, the other will indemnify the faultless one against all loss, liability, and expense, including reasonable attorneys' fees and court costs, incurred by it in connection with such litigation. CONDEMNATION 24.01 If, at any time during the term of this Lease, title to the entire Leased Premises should become vested in a public or quasi-public authority by virtue of the exercise of expropriation, appropriation, condemnation or other power in the nature of eminent domain, or by voluntary transfer from the owner of the Leased Premises under threat of such a taking then this Lease shall terminate as of the time of such vesting of title, after which neither party shall be further obligated to the other except for occurrence antedating such taking. The same results shall follow if less than the entire Leased Premises be thus taken, or transferred in lieu of such a taking, but to such extent that it would be legally and commercially impossible for Tenant to occupy the portion of the Leased Premises remaining, and impossible for Tenant to reasonably conduct his trade or business therein. 24.02 Should there be such a partial taking or transfer in lieu thereof, but not to such an extent as to make such continued occupancy and operation by Tenant an impossibility, then this Lease shall continue on all of its same terms and conditions subject only to an equitable reduction in rent proportionate to such taking. 24.03 In the event of any such taking or transfer, whether of the entire Leased Premises, or a portion thereof, it is expressly agreed and understood that all sums awarded, allowed or received in connection therewith shall belong to Landlord, and any rights otherwise vested in Tenant are hereby assigned to Landlord, and Tenant shall have no interest in or claim to any such sums or any portion thereof, whether the same be for the taking of the property or for damages, or otherwise. Nothing herein shall be construed, however, to preclude Tenant from prosecuting any claim directly against the condemning authority for loss of business, moving expenses, damage to, and cost of, trade fixtures, furniture and other personal property belonging to Tenant and Landlord will have no interest in or claim to any such sums or any portion thereof; provided, however, that Tenant shall make no claim which shall diminish or adversely affect any award claimed or received by Landlord. NOTICES 25.02 All notices, statements, demands, requests, consents, approvals, authorization, offers, agreements, appointment, or designations under this Lease by either party to the other shall be in writing and shall be sufficiently given and served upon the other party, (i) by depositing same in the United States mail, addressed to the party to be notified, postage prepaid and registered or certified with return receipt requested; (ii) by recognized overnight, third party prepaid courier service (such as Federal Express), requiring signed receipt; (iii) by delivering the same in person to such party; or (iv) by prepaid telegram, telecopy or telex with delivery of an original copy of any such notice delivered pursuant to (ii) or (iii) above to be received no later than the next business day. Notice personally delivered or sent by courier service, telegram, -13- telecopy or telex shall be effective upon receipt. Any notice mailed in the foregoing manner shall be effective three (3) business days after its deposit in the United States mail. Either party may change its address for notices by giving notice to the other as provided above. For purposes of notice, the addresses of the parties shall be as follows: (a) To Tenant at 1828 Meca Way, Norcross, Georgia 30093 (b) To Landlord, addressed to Landlord at 4497 Part Drive, Norcross, Georgia 30093, with a copy to such other place as Landlord may from time to time designate by notice to Tenant. WAIVER 26.01 The waiver by Landlord of any breach of any term, covenant, or condition herein contained shall not be deemed to be a waiver of such term, covenant, or condition or any subsequent breach of the same or any other term, covenant, or condition herein contained. The subsequent acceptance of rent hereunder by Landlord shall not be deemed to be a waiver of any preceding breach by Tenant of any term, covenant, or condition of this Lease, other than the failure of Tenant to pay the particular rental so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent. EFFECT OF HOLDING OVER 27.01 If Tenant should remain in possession of the Leased Premises after the expiration of the lease term and without executing a new lease, then such holding over shall be construed as a tenancy from month to month, subject to all the conditions, provisions, and obligations of this Lease insofar as the same are applicable to a month to month tenancy, except that the rent payable pursuant to subparagraph 3.01 hereof shall be 125% of the rent payable pursuant to subparagraph 3.01. SUBORDINATION 28:01 This lease, at Landlord's option, shall be subordinate to any ground lease, first priority mortgage, first priority deed of trust, or first priority security deed now or hereafter placed upon the real property of which the Leased Premises are a part and to any and all advances made on the security thereof and to all renewals, modifications, consolidations, replacements and extensions thereof. 28.02 Tenant agrees to execute any documents required to effectuate such subordination or to make this Lease prior to the lien of any such ground lease, mortgage, deed of trust, or security deed, as the case may be, including specifically a subordination, non-disturbance and attornment agreement in the form hereto attached as Exhibit "D", and failing to do so within ten (10) business days after written demand, does hereby make, constitute and irrevocably appoint Landlord as Tenant's attorney in fact and in Tenant's name, place and stead, to do so. If requested to do so, Tenant agrees to attorn to any person or other entity that acquires title to the -14- real property encompassing the Leased Premises, whether through judicial foreclosure, sale under power, or otherwise, and to any assignee of such person or other entity. ESTOPPEL CERTIFICATE 29.01 Upon ten (10) business days notice from Landlord to Tenant, Tenant shall deliver a certificate dated as of the first day of the calendar month in which such notice is received, executed by an appropriate officer, partner or individual, in the form as Landlord may require and stating but not limited to the following: (i) the commencement date of this Lease; (ii) the space occupied by Tenant hereunder; (iii) the expiration date hereof; (iv) a description of any renewal or expansion options; (v) the amount of rental currently and actually paid by Tenant under this Lease; (vi) the nature of any default or claimed default hereunder by Tenant and (vii) that Tenant is not in default hereunder nor has any event occurred which with the passage of time or the giving of notice would become a default by Tenant hereunder. PARKING 30.01 Tenant agrees to park all Tenant's trucks in the parking spaces designated on the attached Exhibit B-1. "Parking" as used herein means the use by Tenant's employees, its visitors, invitees, and customers for the parking of motor vehicles for such periods of time as are reasonably necessary in connection with use of and/or visits to the Leased Premises. No vehicle may be repaired of serviced in the parking area and any vehicle deemed abandoned by Landlord will be towed from the project and all costs therein shall be borne by the Tenant. No areas outside of the Leased Premises shall be used by Tenant for storage without Landlord's prior written permission. There shall be no parking permitted on any of the streets or roadways located in Meadowbrook. MORTGAGEE PROTECTION 31.01 In the event of any default on the part of Landlord, Tenant will give notice by registered or certified mail to any beneficiary of a deed or trust or holder of a security deed or mortgage covering the Leased Premises whose address shall have been furnished it, and shall offer such beneficiary or holder a reasonable opportunity to cure the default, including time to obtain possession of the Leased Premises by power of sale or a judicial foreclosure, if such should prove necessary to effect a cure. PROTECTIVE COVENANTS 32.01 This lease is subject to the Protective Covenants of Meadowbrook, and to such rules and regulations as may hereafter be adopted and promulgated. In addition, Tenant shall comply with all covenants, restrictions and other matters of record in the deed records of the county in which the Leased Premises are located which affect or encumber the Leased Premises, the Building or the Land. -15- RELOCATION 33.01 Intentionally Deleted BROKERAGE COMMISSIONS 34.01 Tenant's Agent and Landlord's Agent (collectively, "Agent") shall each be entitled to receive a commission in the amounts, and upon the terms and conditions, contained in a commission agreement between Landlord and such parties. 34.02 Tenant warrants and represents to Landlord that, other than Agent, no other party is entitled as a result of the actions of Tenant, to a commission or other fee resulting from the execution of this Lease; and in the event Tenant extends or renews this Lease, or expands the Leased Premises, and Tenant's Agent is entitled to a commission under the above-referenced commission agreement, Tenant shall pay all commissions and fees payable to any party (other than Tenant's Agent) engaged by Tenant to represent Tenant in connection therewith. Landlord warrants and represents to Tenant that, except as set forth above, no other party is entitled, as a result of the actions of Landlord, to a commission or other fee resulting from the execution of this Lease. Landlord and Tenant agree to indemnify and hold each other harmless from any loss, cost, damage or expense (including reasonable attorneys' fees) incurred by the nonindemnifying party as a result of the untruth or incorrectness of the foregoing warranty and representation, or failure to comply with the provisions of this subparagraph. 34.03 Tenant's Agent is representing Tenant in connection with this Lease, and is not representing Landlord. Landlord's Agent, or employees of Landlord or its affiliates, are representing Landlord and are not representing Tenant. 34.04 The parties acknowledge that certain officers, directors, shareholders, or partners of Landlord or its general partner(s), are licensed real estate brokers and/or salesmen under the laws of the State of Georgia. Tenant consents to such parties acting in such dual capacities. MISCELLANEOUS PROVISIONS A. Whenever the singular number is used in this Lease and when required by the context, the same shall include the plural, and the masculine gender shall include the feminine and neuter genders, and the word "person" shall include corporation, firm or association. If there be more than one tenant, the obligations imposed upon Tenant under this Lease shall be joint and several. B. The headings or titles to paragraphs of this Lease are for convenience only and shall have no effect upon the construction or interpretation of any part of this Lease. C. This instrument contains all of the agreements and conditions made between the parties to this Lease and may not be modified orally or in any other manner than by agreement in writing signed by all parties to this Lease. -16- D. Where the consent of a party is required, such consent will not be unreasonably withheld. E. This Lease shall crate the relationship of Landlord and Tenant between Landlord and Tenant; no estate shall pass out of Landlord; Tenant has only a usufruct, not subject to levy and/or sale and not assignable by Tenant except as provided in paragraph 20.01 hereof. F. Except as otherwise expressly stated, each payment required to be made by Tenant shall be in addition to and not in substitution for other payments to be made by Tenant. G. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. H. No payment by Tenant or receipt by Landlord of a lesser amount than any installment or payment of rent due shall be deemed to be other than on account of the amount due, and no endorsement or statement on any check or payment of rent shall be deemed an accord and satisfaction. Landlord may accept such check or payment without prejudice to Landlord's right to recover the balance of such installment or payment of rent, or pursue any other remedies available to Landlord. I. Subject to paragraph 20, the terms and provisions of this Lease shall be binding upon and inure to the benefit of the heirs, executors, administrators, successors, and assigns of Landlord and Tenant. In the event of any conveyance by Landlord of its interest in and to the Leased Premises, the Building or the Land, all obligations under this Lease of the conveying party shall cease and Tenant shall thereafter look solely to the party to whom the Leased Premises were conveyed for performance of all of Landlord's duties and obligations under this Lease. J. Tenant acknowledges and agrees that Landlord shall not provide guards or other security protection for the Leased Premises and that any and all security protection shall be the sole responsibility of Tenant. K. This Lease shall be governed by Georgia law. L. Time is of the essence of each term and provision of this Lease. M. Tenant shall not record this Lease or a memorandum thereof without the written consent of Landlord. Upon the request of Landlord, Tenant shall join in the execution of a memorandum or so-called "short form" of this Lease for the purpose of recordation. Said memorandum or short form of this Lease shall describe the parties, the Leased Premises and the lease term, and shall incorporate this Lease by reference. -17- N. Landlord's liability for performance of its obligations under the terms of this Lease shall be limited to its interest in the Leased Premises. (SIGNATURES CONTAINED ON FOLLOWING PAGE) -18- IN WITNESS WHEREOF, the parties hereto who are individuals have set their hands and seals, and the parties who are corporations have caused this instrument to be duly executed by its proper officers and its corporate seal to be affixed, as of the day and year first above written. Signed, sealed and delivered LANDLORD: as to Landlord, in the presence of: WEEKS REALTY, L.P., a Georgia limited partnership /s/ By: Weeks Corporation, - ----------------------------- a Georgia corporation, its sole general partners /s/ By: /s/ A.R. Weeks, Jr. - ----------------------------- --------------------- Notary Public Name: A.R. Weeks, Jr. Its: Chairman/CEO (Corporate Seal) Signed, sealed and delivered TENANT: as to Landlord, in the presence of: INNOTRAC CORPORATION Nyra P. Williams By: /s/ David Ellin - ----------------------------- --------------------- Name: David Ellin ------------------- Its: Vice President -------------------- /s/ Nyra P. Williams - ----------------------------- Notary Public ATTEST: By: -------------------------------- Name: ------------------------------ Its: ------------------------------- (Corporate Seal) -19- EXHIBIT "C" ACCEPTANCE OF PREMISES Lessee: Innotrac Corporation --------------------------------------------------- Lessor: Weeks Realty, L.P. --------------------------------------------------- Date Lease Signed: April 1, 1996 --------------------------------------------------- Term of Lease: 3 (Three) Years --------------------------------------------------- Address of Leased Premises: Suite ________ containing approximately 53,481 2505 Meadowbrook Parkway square feet, located at Duluth, Georgia Duluth, Georgia --------------------------------------------------- Commencement Date May 1, 1996 --------------------------------------------------- Expiration Date: April 30, 1999 --------------------------------------------------- The above described premises are accepted by Lessee as suitable for the purpose for which they were let. The above described lease term commences and expires on the dates set forth above. Lessee acknowledges that it has been received from Lessor ____________ number of keys to the leased premises. It is understood that there is a punch list which will be completed after move-in and will be an exhibit to the Tenant Estoppel. LESSEE Innotrac Corporation - ------------------------------- (Type Name of Lessee) WITNESS By: /s/ T. Hawkins /s/ Nyra O. Williams --------------------------- ------------------------------ (Signature) (Signature) -20- Terri Hawkins, Office Manager Innotrac Corporation - ------------------------------- ------------------------------ (Type Name and Title) (Company) -21- EXHIBIT "D" SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT ------------------------------------------------------- THIS AGREEMENT, made as of the __ day of _________, 1995, between _________________ with offices at ____________________("Tenant") and _______________________________ (herein, together with its successors, transferees and assigns, the "Mortgagee"); W I T N E S S E T H: WHEREAS, Mortgagee is about to or has theretofore granted to ________________, a Georgia limited partnership (the "owner") a first mortgage loan, which loan is secured by a security deed (herein "Mortgage") dated as of ______, 199_ and duly recorded on ______, 199_ in the land records of Gwinnett County, Georgia; and WHEREAS, the Mortgage is to be a first and prior lien upon the Owner's fee estate in the real property described in Exhibit "A" annexed hereto ("Mortgaged Premises"); and WHEREAS, Tenant is occupying a portion of the Mortgaged Premises under a lease dated as of _____________, 199___ in which Owner is Landlord (the "Lease") covering that portion of the Mortgaged Premises therein more particularly described (the "Leased Premises"); and WHEREAS, Tenant desires to be assured of its continued and undisturbed occupancy of the Leased Premises should the Mortgage be foreclosed or the Mortgaged Premises sold pursuant to any power of sale contained therein and Mortgagee is agreeable thereto. NOW, THEREFORE, in consideration of the mutual covenants contained in this Agreement and in further consideration of the sum of ONE DOLLAR ($1.00) each to the other in hand paid, the receipt whereof is hereby acknowledged, Tenant and Mortgagee mutually covenant and agree as follows: FIRST: The Lease and all of Tenant's rights, interest and estate therein and thereunder are hereby made subject and subordinate to the lien of the Mortgage and to any extensions, renewals, replacements, modifications, additions or consolidations thereof and to all rights, title and interest of Mortgagee and its successors and assigns therein and thereunder. SECOND: In the event, however, proceedings shall ever be instituted by Mortgagee to foreclose or liquidate the Mortgage, the Tenant's possession of its leased portion of the Mortgaged Premises shall not be disturbed by the foreclosure proceedings and the Mortgaged Premises shall be sold at any foreclosure sale subject to Tenant's possession on condition that: (a) there shall be, at the time of commencement of foreclosure proceedings, as well as all subsequent times, no default by Tenant in the due and timely observance and performance of any covenant and agreement in the Lease to be observed and performed by Tenant; and (b) the Tenant shall not have entered into any agreement modifying any term, condition or agreement of the Mortgagee-approved Lease without the prior written consent of Mortgagee. THIRD: Tenant shall attorn to Mortgagee while Mortgagee is in possession of the Mortgaged Premises, or to a Receiver appointed in any action or proceeding to foreclose the Mortgage. In the event of the completion of foreclosure proceedings and sale of the Mortgaged Premises or in the event the Mortgagee should otherwise acquire possession of the Mortgaged Premises, the Tenant will promptly upon demand attorn to the purchaser at the foreclosure sale or to the Mortgagee, as the case may be, and will recognize such purchaser or the Mortgagee as the Tenant's landlord. The Tenant agrees to execute and deliver, at any time and from time to time, upon the request of the Mortgagee or the purchaser at the foreclosure sale, as the case may be, any instrument which may be necessary or appropriate to such successor landlord to evidence such attornment. The Tenant shall, upon demand of the Mortgagee or any Receiver or purchaser at the foreclosure sale, pay to the Mortgagee or to such Receiver or purchaser, as the case may be, all rental monies then due or as they thereafter become due. FOURTH: Upon the attornment provided for in preceding Paragraph THIRD the Tenant's occupancy shall thereafter be in full force and effect as under a direct Lease between Mortgagee, the Receiver or the purchaser at the foreclosure sale, as the case may be, and Tenant. It is specifically understood and agreed that Mortgagee or any such Receiver or purchaser shall not be: (a) liable for any act, omission, negligence or default of any prior landlord, or (b) subject to any offsets, claims or defenses which Tenant might have against any prior landlord; or (c) bound by any rent or additional rent which Tenant might have paid for more than one month in advance to any prior landlord; or (d) bound by any amendment or modification of the Lease made without the prior written consent of the Mortgagee. FIFTH: On and after the date Tenant in good standing attorns to Mortgagee or any Receiver or subsequent owner in pursuance of its agreement herein set forth, Mortgagee, the Receiver or such subsequent owner will undertake and perform all subsequent obligations of the Landlord as set forth in the Lease for the benefit of and undisturbed occupancy of Tenant under the Lease. SIXTH: Tenant agrees it will not amend, modify nor abridge the Lease in any way, nor cancel or surrender the same without prior written approval of the Mortgagee other than by reason of a continued uncured material default of the landlord under the Lease, nor will the Lease ever merge into the fee in the event that Mortgagee acquires fee title to the Mortgage Premises. SEVENTH: Any notices or other communication to be given hereunder by either party shall be in writing and shall be deemed to have been sufficiently given or served for all purposes if sent by registered or certified mail with return receipt requested to the other party hereto at its address above stated or such other address of which written notification has been timely given to the other party. -2- EIGHTH: Mortgagee has and shall have the continuing right to execute and record in the Land Records of Gwinnett County, Georgia at any time, in its unilateral discretion, a Declaration of Subordination for the purpose of thereby subordinating its rights, title and interest in and under the Mortgage to the rights, title and interest of Tenant under the Lease. Such Declaration of Subordination shall, at Mortgagee's election, operate, function and be in full force and effect for whatever period of time Mortgagee declares therein that it shall be in force not exceeding the term of the Lease and any extensions thereof and the said Declaration may be voided unilaterally by Mortgagee when it so elects. NINTH: Tenant waives any and all rights it may have to execute and record after the date hereof any document purporting to again or further subordinate its right, title or interest under the Lease to the lien of either the Mortgage or any other mortgage or deed of trust or any ground lease or any agreement modifying or amending the Mortgage except with the written consent of Mortgagee. TENTH: This Agreement cannot be changed orally but only in writing signed by both parties hereto. ELEVENTH: This Agreement may be recorded by either party at its own expense in the Land Records of Gwinnett County, Georgia whenever, in its sole discretion, either party elects so to do. TWELFTH: All of the terms, covenants and conditions hereof shall run with the Mortgaged Premises and shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed, acknowledged and delivered the day and year first above written. SIGNED, SEALED AND DELIVERED TENANT: in the presence of: - ----------------------------- BY: ------------------------------ - ----------------------------- MORTGAGEE: - ----------------------------- BY: ------------------------------ - ----------------------------- The undersigned Owner of the leased and mortgaged premises hereby consents to the foregoing Agreement and agrees to be bound by and subject to the terms thereof. -3- EXHIBIT "E" SPECIAL STIPULATIONS OPTION TO RENEW: (a) Provided Tenant is not then in default beyond any applicable notice and cure period provided for herein, Tenant shall have the option to renew this Lease for one (1) two (2) year term. Such option may be exercised by written notice to Landlord of its intention to renew at least six (6) months prior to the expiration of the initial term of this Lease. The renewal term shall be on the same terms and conditions as contained herein for the initial term of this Lease, except as expressly provided herein to the contrary with respect to Base Rent and except for such as are, by their terms, inapplicable to a renewal term. It is expressly understood that Tenant shall have no option to extend the term of this Lease if at the time of such attempted exercise of the option this Lease is not then in full force and effect and if Tenant is then in default of any terms and conditions of this Lease beyond any applicable notice and cure period provided for herein. The Base Rental for the renewal term shall be $5.50 per square foot per annum, payable in monthly installments on or before the first day of each calendar month in the renewal term. EX-23.2 11 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 December 16, 1997 EX-27 12 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 nine-months ended September 30, 1997. 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 $425,624 0 27,268,847 5,596,008 5,308,965 28,008,624 13,220,002 4,971,353 36,387,484 26,415,305 0 894,402 0 18,960 4,902,262 4,921,222 67,313,499 67,313,499 0 51,799,309 9,525,751 14,226,571 1,422,302 4,567,852 75,300 4,492,552 0 0 0 4,492,552 0 0
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