-----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, ENwni3wWbVUc6WmBU5+pKIZWc1TGbs05K5jCt1pVPObHMdL/UViP1SwjXmMjKGms xfhfgKHSiRcp1EDnt6rCIA== 0000950144-01-004423.txt : 20010402 0000950144-01-004423.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950144-01-004423 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOTRAC CORP CENTRAL INDEX KEY: 0001051114 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 581592285 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-23741 FILM NUMBER: 1587650 BUSINESS ADDRESS: STREET 1: 6655 SUGARLOAF PARKWAY CITY: DULUTH STATE: GA ZIP: 30097 BUSINESS PHONE: 678-584-4000 MAIL ADDRESS: STREET 1: 1828 MECA WAY CITY: NORCROSS STATE: GA ZIP: 30093 10-K 1 g67982e10-k.txt INNOTRAC CORPORATION 1 DRAFT SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ---------- ---------- Commission File No. 000-23741 INNOTRAC CORPORATION (Exact name of Registrant as specified in its charter) GEORGIA 58-1592285 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) 6655 SUGARLOAF PARKWAY, DULUTH, GEORGIA 30097 --------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (678) 584-4000 Securities registered pursuant to Section 12(b) of the Act: None. Name of each exchange on which registered: The Nasdaq National Market. Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.10 Per Share. Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the voting stock held by nonaffiliates (which for purposes hereof are all holders other than executive officers and directors) of the Registrant as of March 20, 2001 was $32,398,431 based on the closing sale price of the Common Stock as reported by the Nasdaq National Market on such date. See Item 12. At March 20, 2001, there were 11,364,595 shares of Common Stock, par value $0.10 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 2000 Annual Report to Shareholders, filed as an exhibit hereto, are incorporated by reference into Part II of this Annual Report on Form 10-K for the year ended December 31, 2000 (the "Report"). Portions of the Registrant's definitive Proxy Statement for the 2001 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission (the "Commission" or the "SEC"), are incorporated by reference into Part III of this Report. 2 TABLE OF CONTENTS
PAGE ---- PART I....................................................................................................... 2 ITEM 1. BUSINESS................................................................................... 2 CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS....................................... 8 EXECUTIVE OFFICERS OF REGISTRANT........................................................... 13 ITEM 2. PROPERTIES................................................................................. 14 ITEM 3. LEGAL PROCEEDINGS.......................................................................... 14 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 15 PART II...................................................................................................... 16 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.................. 16 ITEM 6. SELECTED FINANCIAL DATA.................................................................... 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 16 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 17 PART III..................................................................................................... 18 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 18 ITEM 11. EXECUTIVE COMPENSATION..................................................................... 18 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............................. 18 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 18 PART IV...................................................................................................... 19 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................ 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES................................... S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............................................ S-2
3 PART I ITEM 1. BUSINESS Innotrac provides customized, technology-based marketing support, fulfillment, call center and total customer relationship management services to large corporations that outsource these functions. In order to perform marketing support, call center and fulfillment functions in-house, a company may be required to develop expensive, labor intensive infrastructures, which may divert its resources and management's focus from its principal business. By assuming responsibility for these tasks, we strive to improve the quality of the non-core operations of our clients and to reduce their overall operating costs. We enable our clients to manage their sales channels efficiently by utilizing our core competencies, which include: - Technology services: - electronic data interface, or EDI, integration - interactive voice response, or IVR - chat box capabilities - database management and data warehousing - integration into clients systems - full shopping cart, credit card processing - inventory and customer service integration - billing services - Fulfillment services: - sophisticated warehouse management technology - automated shipping solutions - real-time inventory tracking and order status - purchasing and inventory management - channel development - promotions and coupons - Customer support services: - inbound call center services - technical support and order status - returns and refunds processing - call centers integrated into fulfillment platform We receive most of our clients' orders either through electronic data interchange ("EDI") or the internet. On a same day basis, depending on product availability, the Company picks, packs and ships the item, tracks inventory levels through an automated, integrated perpetual inventory system, warehouses data and handles customer support and technical inquiries. Since 1994, we have had a high focus on the telecommunications industry because of its growth characteristics and increasing marketing needs. We provide marketing support services and fulfillment of telephones, Caller ID equipment, Digital Subscriber Line Modems ("DSL modems") and other telecommunications products to BellSouth, Pacific Bell, Southwestern Bell, 2 4 Ameritech and Qwest and their customers. Approximately 71% of our 2000 revenues came from sales to BellSouth Telecommunications, Inc., Pacific Bell and Southwestern Bell Telephone Co. and their customers, and an additional 9% was from sales to Qwest Communications Services, Inc., Bell Atlantic Corporation and Ameritech Services Inc. Pacific Bell, Southwestern Bell and Ameritech are all subsidiaries of SBC Communications, Inc. We believe that the flexibility of our services allows us to attract clients in many industries. We have provided literature and point-of-sale distribution for a number of years to companies in other industries, including Home Depot U.S.A., Inc., Siemens Energy and Automation Inc. and National Automotive Parts Association, or NAPA, amongst others, and we continue to aggressively pursue additional business in this area. The Company has converted its clients to a fee-for-service model. We no longer purchase and sell Caller ID equipped telephones, DSL modems and other telecommunications equipment from third party manufacturers for a majority of our clients. Instead, we warehouse products on a consignment basis and fulfill equipment on behalf of our customers for a fee. In certain cases, we purchase and own inventory, but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. Management believes that this new model will substantially reduce revenues as pass through cost of purchased equipment will no longer be included in revenues; however, since the Company will no longer have inventory risk or cost of equipment, gross margins, and more importantly, operating cash flows should improve. On May 17, 2000, the Company invested in a new venture, Return.com Online, Inc. ("Return.com") with its equity partner, Mail Boxes Etc. ("MBE"), to process product returns for online and catalog retailers. Return.com is the first full-service returns portal supported by the convenience of 3,400 physical locations. Customers returning merchandise purchased online, or by catalog or phone, can simply take the item to any participating MBE location in the U.S. for packaging and shipping. On December 28, 2000, Return.com was converted to a limited liability company. In March 2001, it was announced that United Parcel Services, Inc. ("UPS") had entered into a definitive agreement to purchase MBE. As a result of this agreement, MBE and Innotrac have begun discussions about the future of Return.com under joint ownership. While the outcome is not currently known, it is possible that Innotrac may obtain 100% ownership of Return.com in the future and that the relationship with MBE may be terminated. Management does not believe that this would have a material adverse effect on the Company's future results of operations. In December 2000, the Company, in an effort to expand its national presence and create a national footprint, acquired Universal Distribution Services, Inc. ("UDS"). UDS, located in Reno, Nevada, provides integrated order processing, order management, fulfillment and customer relationship management services. The acquisition was immediately accretive and added a 275,000 square foot facility and 190 people to Innotrac's team. Moreover, we acquired new clients that further diversified our client-base. UDS's customer base comprises traditional direct marketing companies as well as retailers including Thane International, Gateway Learning and Digital Convergence. We expect some of UDS's clients to expand their business with us during 2001 by taking advantage of our East Coast capabilities. We intend to continue our search for other selective acquisitions during the course of 2001 to complete our national model. We are committed to continued diversification of our client base. Our long-term goal is to have our business mix spread evenly across a higher number of clients in more diverse industries. We hired our first Vice President of Sales to facilitate this objective by creating a professional team focused on new, diversified client acquisition. We also formed strategic marketing alliances with Manhattan Associates, eDeltaCom and Commerce One to help produce leads for the team. 3 5 MARKETING SUPPORT SERVICES We design customized, technology-based marketing support solutions for our clients. We act as an extension of our clients in reaching their end user customers. Our full range of services are described below and can be offered to clients who sell products and services through various sales channels. TECHNOLOGY SERVICES Our integrated technology solutions help us provide marketing support services to our clients and create substantial barriers to entry for our competitors. We provide the following technology-based services: ELECTRONIC DATA INTERFACE INTEGRATION. We use EDI to link our systems to our clients' systems, which permits the automatic exchange of information. Our telecommunications clients generally transmit sales orders for telephones, Caller ID equipment, DSL Modems and other products to us via EDI. We can also provide sales, billing and individual customer order status updates to our clients through EDI links. The open architecture of our systems facilitates adapting our EDI capabilities to new clients and new marketing programs. We also develop methods to allow clients without EDI capabilities to transmit their order files to us through other methods. SYSTEMS INTEGRATION. With some clients, we develop proprietary software that provides direct integration between our system and theirs. This allows us to exchange data, update customer records, place orders for products and services and provide up-to-the-second inventory status. By developing an integrated system interface with our clients, our systems and our clients act as one and provide real-time, highly accurate data inquiries and updates. By developing proprietary software for integration, we are able to maintain longer, more consistent relationships with our largest clients. INTERACTIVE VOICE RESPONSE. In many cases, our call center services are offered through IVR systems. These menu driven systems allow customers to route their calls by selecting from several offerings. Our IVR systems include text to speech capabilities, which allow the IVR systems to "read" specific, real-time data from the client's databases and convert it into speech based on cues from a caller. These systems generally reduce personnel and physical plant expenses associated with a call center while expanding the operating capabilities of the center. Technical support is also integrated into our IVR systems so that an end user can obtain answers to technical questions from an automated system, rather than a call center representative, regarding the products they purchased. DATABASE MANAGEMENT. We manage client databases independently or in conjunction with other marketing support programs. Independent database management begins with the client providing the information to establish the database or our obtaining the data from a variety of sources. We then customize and manage this data to provide client reports. Many times we will develop a systems integration module that allows our system to fully integrate with our clients' systems enabling the sharing of database files. In addition, our integrated marketing support programs generate information about customers, demographics, recurring technical problems and other useful marketing data. We are then able to create customized databases that evolve with our ongoing marketing support and customer service programs. This data is a source of valuable information as we evaluate ongoing programs and plan and design future programs with our clients. FULFILLMENT SERVICES Providing effective turnkey fulfillment solutions for our clients' products and services is another of our core competencies and has been a key component in our revenue growth. Our capabilities in this area are described below: FULFILLMENT. We are committed to offering our clients' products and services to their customers on a timely and accurate basis. Our personnel pick, pack and ship product orders and requests for promotional, technical and educational literature, signage and point of sale materials for clients. We use 4 6 several custom-designed, semi-automated packaging and labeling lines to pack and ship products. By utilizing this technology, we are able to reduce labor costs and provide more timely shipments to our clients' customers. We streamline and customize the fulfillment procedures for each client based upon the product request and the tracking, reporting and inventory controls necessary to implement that client's marketing support program. We also offer comprehensive product return services whereby our personnel receive, log, test, repackage and dispose of products that are returned from end-users. PURCHASING MANAGEMENT. For selective clients, we place orders for products we fulfill with vendors chosen by those clients. Our purchasing management services include assisting a client in negotiating product pricing with the vendor, arranging returns and credits as well as forecasting product quantities required for normal business programs or promotions. INVENTORY MANAGEMENT. An integral part of our marketing support services is the on-line monitoring and control of a client's inventory. We provide automated inventory management to assure real-time stock counts of a client's products, literature, signage and other items. These inventory systems enable us to provide management information to maintain consistent and timely reorder levels and supply capabilities and also enable the client to quickly assess stock balances, pricing information, reorder levels and inventory values. We offer this information to the client on a real-time basis through our internet gateway or direct system integration. Inventory management data is also utilized in our reporting services. We utilize bar coding equipment in our inventory management systems which improves the efficiency of stock management and selection. PRODUCT CONSIGNMENT AND WAREHOUSING. For a majority of our clients, we no longer purchase and sell telephones, Caller ID equipment, DSL modems and other telecommunications equipment from third party manufacturers. Instead, we warehouse products on a consignment basis and fulfill equipment on behalf of our customers for a fee. In certain cases, we may purchase and own inventory, but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. END USER CUSTOMER SUPPORT SERVICES One of our core competencies is providing customer support services. We believe these services are critical to a comprehensive marketing solution. Our customer support services are described below: INBOUND CALL CENTER SERVICES AND TECHNICAL SUPPORT. Our call center representatives resolve questions regarding shipping, billing and technical support as well as a variety of other questions. From time to time they may sell equipment, telephone company services and extended warranties to customers who call us. Inquiries generally relate to a customer's purchase of a product or a customer's need for ongoing assistance. These end users dial a support number printed on the product or in the documentation accompanying the product. To handle the call properly, Innotrac's automated call distributor identifies each inbound call by the toll-free number dialed and immediately routes the call to the IVR system or an Innotrac representative. The IVR system attempts to resolve support issues by guiding the customer through a series of interactive questions. If IVR automatic resolution cannot solve the problem, the call is routed to one of our service representatives who is specially trained in the applicable client's business and products and answer using the client's name. Our call center representatives can enter customer information into our call-tracking system, listen to a question and quickly access a proprietary network database using a graphical interface to answer a customer's question. A senior representative is available to provide additional assistance for complex or unique customer questions. Customer requests are generally resolved with a single call, whether answered by a trained representative or our automated systems. As additional product information becomes available over the course of a marketing program, we promptly integrate this information into our database to ensure that IVR and representatives' answers are based upon the latest product information. 5 7 RETURNS AND REFUNDS PROCESSING. The representatives respond to customer calls about product returns and refunds and obtain information about customer service problems. They facilitate a customer's return of a product by providing a bar-coded label to the customer. When the returned item is processed and entered into our system, it automatically triggers a pre-set action for reshipment of a product or refund to the customer. TECHNOLOGY Our use of technology enables us to design and deliver services for each client's marketing support needs. Our information technology group, or IT Group, has developed our database marketing support and management systems, which utilize a UNIX-based open architecture comprised of multiple networked computers and anchored by two Hewlett-Packard HP9000 K460 multiprocessing systems. We also have multiple Sun Enterprise 6500 servers utilizing Veritas cluster server software which provides a high availability computing environment. Veritas Backup software, DLT tape libraries and Oracle Hot backup capabilities allow us to backup our production Oracle databases online without interruption to the business unit. Our burstable bandwidth allows us to increase data capacity in a matter of hours. Our EMC storage solutions provide rapid access to data and the ability to scale quickly depending on business demands. Network connectivity is achieved with high-end Cisco routers and local directors. The open architecture of our computer system permits us to seamlessly interact with many different types of client systems. Our IT Group uses this platform to design and implement application software for each client's program, allowing clients to review their programs' progress on-line to obtain real-time comprehensive trend analysis, inventory levels and order status and to instantly alter certain program parameters. As the needs of a client evolve, our IT Group works with our client services team to modify the program on an ongoing basis. Information can be exchanged via direct system integration, EDI, internet access and direct-dial applications. We believe that our technology platform provides us with the resources to continue to offer leading edge services to current and new clients and to integrate our systems with theirs. We believe that the integrity of client information is adequately protected by our data security system and our off-site disaster back-up facilities. Our Duluth and Pueblo call centers utilize sophisticated Rockwell Spectrum Automatic Call Distributor, or ACD, switches to handle call management functions. These ACD systems have the combined capacity to handle 2,400 call center representatives and are currently supporting over 470 representatives. Additionally, the ACD systems are integrated with software designed to enable management to automatically staff and supervise the call center based on call length and call volume data compiled by the ACD system. Our call center in Reno employs an InterTel switch with the capacity to handle 250 call center representatives and is currently supporting 120 representatives. PERSONNEL AND TRAINING Our success in recruiting, hiring and training large numbers of employees and obtaining large numbers of hourly employees during peak periods for fulfillment and call center operations is critical to our ability to provide high quality marketing support services. Call center representatives and fulfillment personnel receive feedback on their performance on a regular basis and, as appropriate, are recognized for superior performance or given additional training. To maintain good employee relations and to minimize employee turnover, we offer competitive pay, hire primarily full-time employees who are eligible to receive a full range of employee benefits and provide employees with clear, visible career paths. As of March 12, 2001, we had over 950 employees, of which approximately 99% were full-time and 1% were part-time. Management believes that the demographics surrounding our facilities and our reputation, stability, compensation and benefit plans should allow us to continue to attract and retain qualified employees. Currently, we are not a party to any collective bargaining agreements. None of our employees are unionized. Although we consider our relationship with our employees to be good, we have experienced occasional unionization initiatives, particularly among our call center personnel. 6 8 COMPETITION In tailoring services to client needs, we compete on the basis of quality, reliability of service, efficiency, technical superiority, speed, flexibility and price. We compete with many companies, some of which have greater resources than us, with respect to various portions of our business. Those companies include fulfillment businesses, call center operations and database management firms. We believe that our comprehensive and integrated services differentiate us from many of those competitors. We continuously explore new outsourcing service opportunities, typically in circumstances where clients are experiencing inefficiencies in non-core areas of their businesses and management believes we can develop a superior outsourced solution on a cost-effective basis. We primarily compete with the in-house operations of our current and potential clients and also compete with certain companies that provide similar services on an outsourced basis, many of whom have greater resources than Innotrac. GOVERNMENT REGULATION The Caller ID services offered by our telecommunications clients are subject to various federal and state regulations. The legality of Caller ID has been challenged in cases decided under the Electronic Communications Privacy Act, or the ECPA, and several state statutes. In March 1994, a Federal Communications Commission, or FCC, report preempted certain state regulation of interstate calling party number parameter, or CPN, based services, the technology underlying Caller ID. This report requires certain common carriers to transmit CPN and its associated privacy indicator (which allows telephone callers to block the display of their phone numbers on Caller ID display units) on an interstate call to connecting carriers without charge (the "Free Passage" rule). In connection with this report, the Department of Justice issued a memorandum which concluded that the installation or use of interstate Caller ID service is not prohibited by any federal wiretap statute and that, in general, the FCC has authority to preempt state laws that the FCC finds would hinder federal communications policy on Caller ID services. Court decisions since the FCC issued its March 1994 report have consistently held that Caller ID does not violate any state or federal wiretap statute. In May 1995, the FCC narrowed its March 1994 preemption of state public utilities blocking regulations by permitting subscribers to choose per-line blocking or per-call blocking on interstate calls, provided that all carriers were required to adopt a uniform method of overriding blocking on any particular call. At the same time, the FCC specifically preempted a California Public Utilities Commission, or CPUC, per-line blocking default policy, which required that all emergency service organizations and subscribers with nonpublished numbers, who failed to communicate their choice between per-call blocking and per-line blocking, be served with a per-line blocking. The FCC's revised rules and regulations also require carriers to explain to their subscribers that their telephone numbers may be transmitted to the called party and that there is a privacy mechanism (i.e., the "blocking" feature) available on interstate calls, and explain how the mechanism can be activated. The CPUC, seeking to protect the caller's privacy, has ruled that a carrier can offer Caller ID or transmit CPN to interconnecting carriers only upon CPUC approval of its customer notification and education plan. The CPUC has approved the education plan of Pacific Bell, whose Caller ID market includes California. The Telecommunications Act of 1996 introduced restrictions on telecommunications carriers' usage of customer proprietary network information, or CPNI. CPNI includes information that is personal to customers, including where, when and to whom a customer places a call, as well as the types of telecommunications services to which the customer subscribes and the extent these services are used. The FCC interprets the CPNI restrictions to permit telecommunications carriers, including BellSouth, Pacific Bell and Qwest, to use CPNI without customer approval to market services that are related to the customer's existing service relationship with his or her carrier. Before carriers may use CPNI to market services outside a customer's existing service relationships, the carrier must obtain express customer permission. Because we are dependent upon the efforts of our clients to promote and market their equipment and services, laws and regulations inhibiting those clients' ability to market these equipment and 7 9 services to their existing customers could have a material adverse effect on our business, results of operations and financial condition. Telephone sales practices are regulated at both the federal and state level. These regulations primarily relate to outbound teleservices, which we currently outsource to another company. Outbound teleservices are regulated by the rules of the FCC under the Federal Telephone Consumer Protection Act of 1991, the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and various state regulations regarding telephone solicitations. We believe that we are in compliance with these federal statutes and the FCC rules thereunder and the various state regulations and that we would operate in compliance with those rules and regulations if we were to engage in outbound teleservice operations in the future. We work closely with our clients, companies we outsource outbound teleservices to and their respective advisors to ensure that we and our client are in compliance with these regulations. We cannot predict whether the status of the regulation of Caller ID services or e-commerce will change and what effect, if any, this change would have on us or our industry. INTELLECTUAL PROPERTY We have used the service mark "Innotrac" since 1985 and have registered it and other marks used by us in our business through the US Patent and Trademark Office. The "innotrac.com" domain name has been a registered domain name since 1995. We also own several other internet domain names. Due to the possible use of identical or phonetically similar service marks by other companies in different businesses, there can be no assurance that our service marks will not be challenged by other users. Our operations frequently incorporate proprietary and confidential information. In accordance with industry practice, we rely upon a combination of contract provisions and trade secret laws to protect the proprietary technology we use and to deter misappropriation of our proprietary rights and trade secrets. CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements concern the Company's operations, performance and financial condition, including, in particular, the likelihood that Innotrac will succeed in developing and expanding its business, among other things. They are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties. Many of these uncertainties are beyond Innotrac's control. Consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those set forth below. WE RELY ON A SMALL NUMBER OF LARGE CLIENTS. IF WE LOSE ONE OR MORE OF OUR LARGEST CLIENTS, OR IF REVENUES FROM OUR LARGEST CLIENTS DECLINE, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Innotrac focuses on developing long-term relationships with large corporations. In recent years, this focus has been on telecommunications companies. A relatively small number of our clients account for a significant portion of our revenues. Our three largest clients, BellSouth, Pacific Bell and Southwestern Bell, accounted for an aggregate of approximately 95%, 90% and 71% of net revenues for 1998, 1999 and 2000. Pacific Bell, Southwestern Bell and Ameritech, which are all subsidiaries of SBC, accounted for an aggregate of 46% in 2000. If we lose one or more of our largest clients, or if revenues from our largest clients decline, then our business, results of operations and financial condition could be materially adversely affected. Internal issues at BellSouth did in fact slow Caller ID sales throughout 2000. Due to the recent resolution of those particular internal issues at BellSouth, we believe that sales of telecommunications products for BellSouth will significantly increase in the second half of 2001. 8 10 Additionally, if one of these large clients is lost, or revenues from our largest clients decline, we cannot assure you that we will be able to replace or supplement that client with others that generate comparable revenues or profits. Our fulfillment service for Pacific Bell and Southwestern Bell concluded in February 2001, but we were able to offset this with the pick-up of call center and data management services provided to them. OUR WRITTEN CONTRACTS GENERALLY DO NOT GUARANTEE SPECIFIC VOLUME LEVELS AND CAN USUALLY BE TERMINATED ON LITTLE NOTICE. Although we have written agreements with our telecommunications clients, those agreements are generally terminable for cause. In addition, some agreements provide for termination without cause on short notice. Our agreement with BellSouth, which does not expire until September 2003, may be terminated by BellSouth for any reason upon 120 days notice. Our agreement with SBC may be terminated for any reason upon 60 days notice prior to July 1, 2004 and upon 120 days notice thereafter. Most of our agreements do not assure specific volume or revenue levels. In addition, our contracts generally do not provide that we will be the client's exclusive service provider. IF THE MARKET FOR TELECOMMUNICATIONS PRODUCTS OR SERVICES CHANGES, OR THE NEW DSL PRODUCTS WE ARE DISTRIBUTING DO NOT ACHIEVE MARKET SUCCESS, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our success depends upon our ability to fulfill advanced telecommunications equipment. Currently, we rely heavily upon the fulfillment of Caller ID equipped telephones and DSL modems to the end user customers of our telecommunications clients for our revenues. We also depend upon these clients to promote Caller ID and DSL services. We cannot assure you that we will be able to continue to fulfill state-of-the-art telecommunications equipment. Our business, results of operations and financial condition could be materially adversely affected if: - the telecommunications products we fulfill and the related services offered by our clients do not gain or sustain marketplace acceptance, - our telecommunications clients fail to adequately promote these products and services or - our telecommunications clients lose market share. Some of the products we fulfill compete with each other. Our current telecommunications clients offer many of these technologies and services. Potential competing services and technologies include telephone company-related wireline technologies like traditional analog modems and integrated services digital network modems. We cannot assure you that we will be able to obtain, or retain, fulfillment service business from telecommunications companies with competing products and technologies. IF THE INTERNET FAILS TO CONTINUE TO GROW, SOME OF OUR CLIENTS MAY NOT SUCCEED AND OUR BUSINESS MAY BE HARMED. Commercial use of the internet is relatively new. Internet and e-commerce usage may be inhibited for a number of reasons, including: - increased government regulation, - insufficient availability, reliability or capacity of telecommunications services, - security and authentication concerns, - difficulty of access and - inconsistent service quality. We view e-commerce as another channel of distribution. Some of our clients are dependent on the success of the internet either because they use e-commerce as a channel for distribution or they distribute products that facilitate internet usage. Recently, we lost some business due to unsuccessful Internet Service Providers that utilized our service to distribute their DSL modems. If the internet develops as a commercial medium more slowly than we expect, it could adversely affect our business. If web usage grows more 9 11 slowly or declines for any reason, we may experience an increase in our accounts receivables and a decrease in revenues. IF WE ARE NOT ABLE TO CONTINUE OR MANAGE OUR GROWTH, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our operations have grown significantly in recent years. Our business, results of operations and financial condition could be materially adversely affected if we cannot effectively manage our growth. Our continued success depends upon our ability to: - initiate, develop and maintain existing and new client relationships, - respond to competitive developments, - continue to develop our sales infrastructure, - attract, train, motivate and retain management and other personnel and - maintain the high quality of our services. IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE ADVERSELY AFFECTED. We believe there has recently been a significant increase in businesses outsourcing services not directly related to their principal business activities. Our business, results of operations and financial condition could be materially adversely affected if the outsourcing trend declines or reverses, or if corporations bring previously outsourced functions back in-house. Particularly during general economic downturns, businesses may bring in-house previously outsourced functions in order to avoid or delay layoffs. IF WE ARE NOT ABLE TO RETAIN OR EMPLOY QUALIFIED EMPLOYEES, INCLUDING KEY EXECUTIVES, OUR EMPLOYMENT-RELATED COSTS MAY RISE AND OUR RESULTS OF OPERATIONS COULD SUFFER. WE MAY NOT BE ABLE TO RETAIN OR EMPLOY QUALIFIED MANAGERS. We depend in large part on the abilities and continuing efforts of our executive officers and senior management. Our business and prospects could be materially adversely affected if (1) current officers and managers do not continue in their key roles and we cannot attract and retain qualified replacements or (2) we cannot attract and retain additional qualified personnel to sustain growth. We have employment agreements with our key executive officers. We cannot assure you that we will be able to retain them. We only maintain key man life insurance on Scott D. Dorfman, in the amount of $3.5 million. In order to support growth, we must effectively recruit, develop and retain additional qualified management personnel. We cannot assure you that in the future we will be able to recruit and retain additional qualified managers. WE MAY NOT BE ABLE TO RETAIN OR EMPLOY OTHER QUALIFIED EMPLOYEES. Our success depends largely on our ability to recruit, hire, train and retain qualified employees. If we cannot do so, our business, results of operations or financial condition could be materially adversely affected. Our industry is very labor-intensive and has experienced high personnel turnover. If our employee turnover rate increases significantly, our recruiting and training costs could rise and our operating effectiveness and productivity could decline. New clients or new large-scale marketing support programs may require accelerated recruiting, hiring and training. We cannot assure you that we will be able to continue to hire, train and retain sufficient qualified personnel to adequately staff new marketing support programs. Some of our operations, particularly technical support and customer service, require specially trained personnel. In addition, the unemployment rate in the geographic area where our facilities are located is relatively low. Our need for specially trained personnel and low unemployment rates may make it more difficult and costly to hire and retain qualified personnel. 10 12 Currently, we are not a party to any collective bargaining agreements. None of our employees are unionized. Although we consider our relationship with our employees to be good, there have been occasional unionization initiatives at Innotrac, particularly among our call center personnel. If our employees were to join unions, we could incur increased wages, employee benefits and employment-related administrative costs. A significant portion of our operating expenses relates to labor costs. Therefore, an increase in wages or employee benefits could materially adversely affect our business, results of operations or financial condition. COMPETITION MAY HURT OUR BUSINESS. We operate in highly competitive markets and expect this environment to persist and intensify in the future. Because our marketing support services comprise marketing and product consultation, sales channel management, fulfillment and back-end support, including our call center operations, we have many competitors who offer one or more of these services. Our competitors include: - in-house marketing support operations of our current and potential clients, - other firms offering specific services, like fulfillment and call center operations and - large marketing support services firms. A number of our competitors have developed or may develop financial and other resources greater than ours. Additional competitors with greater name recognition and resources may enter our markets. Our existing or potential clients' in-house operations are also significant competitors. Our performance and growth could be negatively impacted if: - existing clients decide to provide, in-house, services they currently outsource, - potential clients retain or increase their in-house capabilities or - existing clients consolidate their outsourced services with other companies. In addition, competitive pressures from current or future competitors could result in significant price erosion, which could in turn materially adversely affect our business, financial condition and results of operations. For more information about our competition, see "Business--Competition" in this Item 1. IF WE ARE NOT ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY, OUR BUSINESS WILL BE MATERIALLY ADVERSELY AFFECTED. Our success depends significantly upon our ability to: - enhance existing services, - develop applications to focus on our clients' needs and - introduce new services and products to respond to technological developments. If we fail to maintain our technological capabilities or respond effectively to technological changes, our business, results of operations and financial condition could be materially adversely affected. We cannot assure you that we will select, invest in and develop new and enhanced technology on a timely basis in the future in order to meet our clients' needs and maintain competitiveness. We provide details about our technology in "Business--Technology" in this Item 1. OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY CAUSE SIGNIFICANT SWINGS IN THE MARKET PRICE FOR OUR COMMON STOCK. Our operating results may fluctuate in the future based on many factors. These factors include, among other things: - changes in the telecommunications industry, - changes in the marketing support services industry, 11 13 - changes in the timing and level of client-specific marketing programs, including the timing and nature of promotions, - increased competition and - changes in customer purchasing patterns for products we fulfill. Due to these and any unforeseen factors, it is possible that in some future quarter our operating results may be below the expectations of public market analysts and investors. If that variance occurs, our common stock price would likely decline materially. OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES OR INCREASE OUR COSTS. In connection with any outbound telemarketing services that we provide, we must comply with federal and state regulations. These include the Federal Communications Commission's rules under the Federal Telephone Consumer Protection Act of 1991 and the Federal Trade Commission's regulations under the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both of which govern telephone solicitation. If we conduct outbound telemarketing services, these rules and regulations would apply to that portion of our business. Furthermore, there may be additional federal and state legislation or changes in regulatory implementation. These changes could include interpretations under the Telecommunications Act of 1996 restricting the ability of telecommunications companies to use consumer proprietary network information, or CPNI. New legislation or regulatory implementation in the future may significantly increase compliance costs or limit our activities, our clients' activities or the activities of companies to which we outsource outbound telemarketing functions. Additionally, we could be responsible for failing to comply with regulations applicable to our clients or companies to which we outsource telemarketing. If unfavorable federal or state legislation or regulations affecting Caller ID service, internet service or other technology related to products we fulfill and provide customer support for are adopted, our business, financial condition and results of operations could be materially adversely affected. See "Business -- Government Regulation" in this Item 1 for further information about government regulation of our business. IF THE RETURN.COM BUSINESS MODEL IS UNSUCCESSFUL, SIGNIFICANT REVENUES ARE NOT GENERATED TO PRODUCE POSITIVE CASH FLOW OR MBE IS UNABLE TO CONTINUE AS AN INVESTMENT PARTNER, WE MAY NOT RECOVER OUR INVESTMENT IN RETURN.COM. As of December 31, 2000, we own 60% of Return.com, a start-up company formed for the purpose of handling product returns from catalogers and e-tailers. The Return.com business model is still not proven, the company has yet to generate any revenues and cash flow remains negative. Innotrac has invested $3.0 million in Return.com and has committed to an additional $3.0 million of funding. Additionally, it was announced in March 2001, that MBE is in the process of being acquired by UPS. There are no assurances that the Return.com business model will be successful or that Return.com will generate significant enough revenues to become cash flow positive. Further, with the announced acquisition of MBE by UPS, there are no assurances that UPS will support or allow MBE to continue its investment in Return.com. If one or a combination of the above events were to occur, Innotrac may not recover its investment in Return.com. IF WE ARE UNABLE TO INTEGRATE ACQUIRED BUSINESSES SUCCESSFULLY AND REALIZE ANTICIPATED ECONOMIC, OPERATIONAL AND OTHER BENEFITS IN A TIMELY MANNER, OUR PROFITABILITY MAY DECREASE. If we are unable to integrate acquired businesses successfully, we may incur substantial costs and delays in increasing our customer base. In addition, the failure to integrate acquisitions successfully may divert management's attention from Innotrac's existing business and may damage Innotrac's relationship with its key customers and suppliers. Integration of an acquired business may be more difficult when we acquire a business in a market in which we have little or no expertise, or with a corporate culture different from Innotrac's. 12 14 EXECUTIVE OFFICERS OF REGISTRANT The executive officers of Innotrac are as follows:
NAME AGE POSITION ---- --- -------- Scott D. Dorfman................ 43 Chairman of the Board, President and Chief Executive Officer David L. Ellin.................. 42 Senior Vice President and Chief Operating Officer Larry C. Hanger................. 46 Senior Vice President--Business Development David L. Gamsey ................ 43 Senior Vice President, Chief Financial Officer and Secretary William F. Hendrick, Jr......... 44 Vice President--Telecommunications Clifford A. Ruden............... 42 Vice President--Sales
Mr. Dorfman founded Innotrac and has served as Chairman of the Board, President and Chief Executive Officer since its inception in 1984. Prior to founding Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc., an equipment distributor. At Paymaster, Mr. Dorfman gained experience in distribution, tracking and inventory control by developing and managing Paymaster's mail order catalog. Mr. Ellin joined us in 1986 and has served as Senior Vice President and Chief Operating Officer since November 1997 and as a director since December 1997. He served as Vice President from 1988 to November 1997. From 1984 to 1986, Mr. Ellin was employed by the Atlanta branch of WHERE Magazine, where he managed the sales and production departments. From 1980 to 1984, Mr. Ellin was employed by Paymaster, where he was responsible for Paymaster's sales and collections. Mr. Hanger joined Innotrac in 1994 and has served as Vice President--Business Development since November 1997 and as a director since December 1997. He was promoted to Senior Vice President in April 1999. He served as Innotrac's 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 Telecommunications, Inc., a regional telecommunications company, 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. Gamsey joined Innotrac in May 2000 as Senior Vice President, Chief Financial Officer and Secretary. Prior to joining Innotrac, from September 1995 to May 2000, he served as Chief Financial Officer of AHL Services, Inc., a provider of contract staffing and outsourcing solutions. From 1988 to September 1995, Mr. Gamsey was a Managing Director of Investment Banking at the accounting firm Price Waterhouse LLP (now PricewaterhouseCoopers LLP). From 1987 to 1988, he served as Chief Financial Officer of Visiontech, Inc., a manufacturer of contact lenses, and from 1979 to 1987, he was a Senior Audit Manager for the accounting firm Arthur Andersen LLP. Mr. Gamsey is a certified public accountant. Mr. Hendrick joined Innotrac in April 1999 as Vice President-Telecommunications. Prior to joining Innotrac, from November 1997 to February 1999 he served as Vice President and General Manager for the former telecommunications division of InteliData Technologies Corp., which designed and distributed consumer telephone products. He also served as Vice President--Sales at InteliData and its predecessor from August 1995 to November 1997. He held the position of Senior Director--Product 13 15 Management with BellSouth from January 1993 to July 1995, and has also served as Director--Product Development for that company. Mr. Hendrick has 20 years experience in the telecommunications industry. Mr. Ruden joined Innotrac in December 2000 as Vice President--Sales. Prior to joining Innotrac, from February 1998 to December 2000 he held the positions of Client Management Officer and Vice President of Sales for ClientLogic Corporation, a provider of customer contact management, fulfillment and marketing services. Prior to his employment with ClientLogic, from December 1997 to February 1998 Mr. Ruden served as National Sales Manager at West Teleservices Corporation, a provider of inbound, outbound and interactive teleservices, and from September 1996 to December 1997 he was Major Account Manager at Neodata Services, a customer relationship services provider (now a division of EDS). Mr. Ruden was employed by FedEx Corporation, a global shipping company for 10 years, where he held Global and National Sales Executive positions. Mr. Ruden has 18 years of sales experience. ITEM 2. PROPERTIES Our headquarters and fulfillment facilities are located in 250,000 square feet of leased space in Duluth, Georgia. Our corporate offices occupy 50,000 square feet of this facility and the remaining 200,000 square feet is fulfillment space. This site also includes approximately 3.5 acres that will be available for Innotrac's expansion requirements, if required. The lease for our Duluth facility commenced in October 1998 and has a term of 10 years with two five year renewal options. The lease provides for an option to purchase the facility at the end of the first five years of the term or at the end of the first 10 years of the term. We have not yet determined whether to exercise this purchase option. We provide teleservices through our call center located in Duluth, Georgia. We renewed the lease for the center in May 1999 for a term of three years. The call center is currently configured with approximately 460 workstations of which approximately 100 are being used at present. It currently operates twenty-four hours a day, seven days a week. In June 1999, we entered into a lease for a new facility in Pueblo, Colorado with an initial term of five years with two five year renewal options. The facility provides approximately 87,000 square feet of floor space. Approximately 45,000 square feet is used as a second call center, as well as quality assurance, administrative, training and management space. This call center supports 390 workstations and utilizes 375 of the workstations at present. It currently operates from 6:00 a.m. to 9:00 p.m. Monday through Friday and from 6:00 a.m. to 6:00 p.m. on Saturday (Mountain Standard Time). The remaining 42,000 square feet is used for fulfillment. In October 1999, we entered into a lease for a facility in Duluth, Georgia with an initial term of five years with one three-year renewal option. The facility provides approximately 52,000 square feet of floor space for our literature fulfillment business. With the acquisition of UDS, located in Reno, Nevada, in December 2000, we operate a facility that consists of over 275,000 square feet and includes a call center that can support 240 workstations. UDS leases this facility through two lease agreements which were initiated in August 1999 and October 2000. These agreements have lease terms of 3 years and 7 years, respectively. Currently, the call center is configured with approximately 120 workstations. At this time, the call center operates twenty-four hours a day, seven days a week. The remainder of the facility is used for fulfillment. ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceeding. We are, from time to time, a party to litigation arising in the normal course of our business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operations. 14 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered by this Report. 15 17 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS The Company's Common Stock trades on the Nasdaq National Market under the symbol "INOC". The following table sets forth for the periods indicated the high and low sales prices of the Common Stock on the Nasdaq National Market.
HIGH LOW -------- -------- 2000 First Quarter ................................. $ 13.500 $ 6.750 Second Quarter ................................ $ 8.250 $ 4.750 Third Quarter ................................. $ 6.750 $ 4.750 Fourth Quarter ................................ $ 5.750 $ 3.125 Fiscal Year Ended December 31, 2000 ........... $ 13.500 $ 3.125 1999 First Quarter ................................. $ 18.500 $ 10.000 Second Quarter ................................ $ 21.250 $ 14.125 Third Quarter ................................. $ 26.750 $ 15.250 Fourth Quarter ................................ $ 17.625 $ 10.625 Fiscal Year Ended December 31, 1999 ........... $ 26.750 $ 10.000
The approximate number of holders of record of Common Stock as of March 21, 2001 was 74. The approximate number of beneficial holders of our Common Stock as of that date was 3,000. The Company has never declared cash dividends on the Common Stock. The Company intends to retain its earnings to finance the expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon such factors as earnings, capital requirements, the Company's financial condition, restrictions in financing agreements and other factors deemed relevant by the Board of Directors. The payment of dividends by the Company is restricted by its revolving credit facility. ITEM 6. SELECTED FINANCIAL DATA The information contained under the heading "Selected Financial Data" in the Company's 2000 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's 2000 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained under the heading "Management's Discussion and Analysis of Financial Condition and Results of Operations--Quantitative and Qualitative Disclosures About Market Risk" in the Company's 2000 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. 16 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information contained under the headings "Report of Independent Public Accountants" and "Consolidated Financial Statements and Notes to the Consolidated Financial Statements" in the Company's 2000 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information contained under the heading "Election of Directors" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2001 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Company is included in Item 1 of this Report. ITEM 11. EXECUTIVE COMPENSATION The information contained under the heading "Executive Compensation" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2001 Annual Meeting of Shareholders, filed with the Commission, is hereby incorporated herein by reference. The information contained in the Proxy Statement under the headings "Compensation Committee Report on Executive Compensation" and "Stock Performance Graph" shall not be deemed incorporated herein by such reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information contained under the heading "Voting Securities and Principal Shareholders" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2001 Annual Meeting of Shareholders, filed with the Commission, is hereby incorporated herein by reference. For purposes of determining the aggregate market value of the Company's voting stock held by nonaffiliates, shares held by all current directors and executive officers of the Company have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be "affiliates" of the Company as defined by the Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information contained under the heading "Related Party Transactions" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2001 Annual Meeting of Shareholders, filed with the Commission, is hereby incorporated herein by reference. 18 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS 1. FINANCIAL STATEMENTS The following financial statements and notes thereto are incorporated herein by reference in Item 8 of this Report. Report of Independent Public Accountants Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Operations for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Partners', Members' and Shareholders' Equity for the years ended December 31, 2000, 1999, and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998 2. FINANCIAL STATEMENT SCHEDULES Report of Independent Public Accountants as to Schedules Schedule II - Valuation and Qualifying Accounts 3. EXHIBITS The following exhibits are required to be filed with this Report by Item 601 of Regulation S-K:
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - -------------- ----------------------- 3.1 Amended and Restated Articles of Incorporation of the Registrant, (incorporated by reference to Exhibit 3.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 3.2 Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1/A (Commission File No. 333-79929), filed with the Commission on July 22, 1999) 4.1 Form of Common Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 4.2(a) Rights Agreement between Company and Reliance Trust Company as Rights Agent, dated as of December 31, 1997 (incorporated by reference to Exhibit 4.2 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) (b)** First Amendment to the Rights Agreement dated as of November 30, 2000 between the Company, Reliance Trust Company and SunTrust Bank, dated as of November 30, 2000
19 21 10.1+(a) Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) (b) Amendment No. 1 to Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2(b) to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.2+ 2000 Stock Option and Incentive Award Plan and amendment thereto (incorporated by reference to Exhibit 4.3 and 4.4 to the Registrant's Form S-8 (Commission File No. 333-54970) filed with the Commission on February 5, 2001) 10.3 Purchase Agreement for Services between BellSouth Telecommunications, Inc. and the Registrant, effective November 1, 1998 (incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.4(a) Form of Indemnification Agreements entered into as of December 11, 1997, by and between the Registrant and each of Messrs. Scott D. Dorfman, David L. Ellin, Larry C. Hanger, Donald L. Colter, Jr., John H. Nichols III, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III and William H. Scott, III (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) (b) Form of Indemnification Agreements by and between the Registrant and each of Stephen J. Walden and Will Hendrick (incorporated by reference to Exhibit 10.5(b) to the Registrant's Form S-1 (Commission File No. 333-79929), filed with the Commission on June 3, 1999) 10.5 Lease, dated June 16, 1999, between Lockheed Martin Corporation and the Registrant (incorporated by reference to Exhibit 10.6 to the Registrant's Form S-1/A (Commission File No. 333-79929),filed with the Commission on June 28, 1999) 10.6 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) 10.7(a) Lease, dated December 8, 1997, by and between Weeks Development Partnership and the Registrant (incorporated by reference to Exhibit 10.8 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) (b) First Amendment to Lease Agreement dated May 1 1999, by and between Weeks Development Partnership and the Registrant (incorporated by reference to Exhibit 10.8(b) to the Registrant's Registration Statement on From S-1/A (Commission File No. 333-79929), filed with the Commission on June 28, 1999) 10.8** Sublease Agreement, dated May 26, 1999, by and between HSN Realty LLC and Universal Distribution Services, Inc.
20 22 10.9(a)** Master Lease Agreement and Addendums, dated March 20, 2000, by and between Computer Sales International, Inc. and the Registrant (b)** First Amendment to Master Lease Agreement dated June 8, 2000, by and between Computer Sales International, Inc. and the Registrant (c)** Second Amendment to Master Lease Agreement dated September 28, 2000, by and between Computer Sales International, Inc. and the Registrant 10.10+ Split Dollar Life Insurance Agreement, dated July 10, 1997, by and between the Registrant, Bruce V. Benator, as Trustee of The Scott David Dorfman Family Trust #2, and Scott David Dorfman (incorporated by reference to Exhibit 10.9 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.11+ Innotrac Corporation Deferred Compensation Plan, effective as of October 16, 1997 (incorporated by reference to Exhibit 10.10 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.12+ Grantor Trust Agreement dated October 16, 1997, by and between the Registrant and Wachovia Bank, N.A. (incorporated by reference to Exhibit 10.11 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1/A (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 10.13(a) Amended and Restated Loan and Security Agreement between the Registrant and SouthTrust Bank, N.A., dated January 25, 1999 (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 0-23741), filed with the Commission on March 26, 1999) (b) First Amendment to Amended and Restated Loan and Security Agreement by and between the Registrant and SouthTrust Bank, N.A., dated April 29, 1999 (incorporated by reference to Exhibit 10.14(b) to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929), filed with the Commission on June 3, 1999) (c) Letter Modification/Waiver to Amended and Restated Loan and Security Agreement, as amended, effective August 14, 2000 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the Commission on November 13, 2000) 10.14+** 2001 Senior Executive Incentive Compensation Plan 10.15(a) Contract by and between Market Reps, Inc. and the Registrant, dated June 26, 1998 (incorporated by reference to Exhibit 10.17(a) to the Registrant's Registration Statement on Form S-1/A (Commission File No. 333-79929), filed with the Commission on July 22, 1999) (b) Letter Amendment to Contract by and between Market Reps, Inc. and the Registrant, dated August 10, 1998 (incorporated by reference to Exhibit 10.17(b) to the Registrant's Registration Statement on Form S-1/A (Commission File No. 333-79929), filed with the Commission on July 22, 1999)
21 23 10.16* Master Agreement for Products and Services between the Company and SBC Operations, Inc. effective July 1, 1999 (incorporated by reference to Exhibit 10.18 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the Commission on September 30, 1999) 10.17 Shareholders Agreement dated May 16, 2000, by and among the Registrant, Return.com Online, Inc., and Mail Boxes Etc., USA, Inc. (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the Commission on August 14, 2000) 10.18(a) Amended and Restated Employment Agreement dated August 21, 2000, by and between David L. Gamsey and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10Q/A (Commission File No. 0-23741), filed with the Commission on August 21, 2000) (b)** Amendment to Amended and Restated Employment Agreement dated February 14, 2001, by and between David L. Gamsey and the Registrant 10.19 Employment Agreement dated August 31, 2000, by and between Scott D. Dorfman and the Registrant (Incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the Commission on November 13, 2000) 10.20 Employment Agreement dated August 30, 2000, by and between David L. Ellin and the Registrant (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the Commission on November 13, 2000) 10.21 Employment Agreement dated August 31, 2000, by and between Larry C. Hanger and the Registrant (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the Commission on November 13, 2000) 10.22** Operating Agreement dated December 28, 2000, by and among the Registrant, Return.com Online, LLC, and Mail Boxes Etc., USA, Inc. 13.1** Portions of the Registrant's Annual Report to Shareholders for 2000 incorporated into this Form 10-K 21.1** List of Subsidiaries 23.1** Consent of Arthur Andersen LLP 24.1** Power of Attorney (included on signature page) 99.1** Proxy Statement for the 2001 Annual Meeting of Shareholders
* Confidential treatment has been obtained for certain confidential portions of this exhibit pursuant to Rule 24b-2 under the Securities Exchange Act of 1934. In accordance with Rule 24b-2, these confidential portions have been omitted from this exhibit and filed separately with the Commission. ** Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit. 22 24 (B) REPORTS ON FORM 8-K No reports on Form 8-K were filed by the Registrant during the fourth quarter of the Registrant's 2000 fiscal year. 23 25 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of INNOTRAC CORPORATION AND SUBSIDIARY included in this Form 10-K and have issued our report thereon dated February 2, 2001. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ Arthur Andersen LLP ARTHUR ANDERSEN LLP Atlanta, Georgia February 2, 2001 S-1 26 INNOTRAC CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning Charged to Other End of Description of Period Expenses Accounts Deductions Period - ---------------------------------------- ---------- ---------- ---------- ---------- ---------- (in thousands) Provision for uncollectible accounts Year ended December 31, 2000 ......................... $ 1,177 $ 3,325 $ 1,254 $ (2,340) $ 3,416 1999 ......................... 4,935 5,552 -- (9,310) 1,177 1998 ......................... 5,707 18,558 -- (19,330) 4,935 Provisions for returns and allowances Year ended December 31, 2000 ......................... $ 297 $ 5,697 $ 12,428 $(17,697) $ 725 1999 ......................... 602 6,301 15,836 (22,442) 297 1998 ......................... -- 791 -- (189) 602 Provisions for restructuring charge Year ended December 31, 2000 ......................... $ -- $ 3,650 $ -- $ (1,787) $ 1,863 1999 ......................... -- -- -- -- -- 1998 ......................... -- -- -- -- --
S-2 27 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 30th day of March, 2001. INNOTRAC CORPORATION By: /s/ Scott D. Dorfman ----------------------------------------- Scott D. Dorfman Chairman of the Board, President and Chief Executive Officer EX-4.2.(B) 2 g67982ex4-2_b.txt FIRST AMENDMENT TO THE RIGHTS AGREEMENT 1 Exhibit 4.2(b) FIRST AMENDMENT TO RIGHTS AGREEMENT THIS FIRST AMENDMENT (the "FIRST AMENDMENT") to the RIGHTS AGREEMENT (the "AGREEMENT") dated as of December 31, 1997 between INNOTRAC CORPORATION, a Georgia corporation ("INNOTRAC") and RELIANCE TRUST COMPANY as Rights Agent ("RELIANCE") is made as of the 30th day of November, 2000 between Innotrac, Reliance and SUNTRUST BANK ("SUNTRUST"). WITNESSETH: WHEREAS, the parties desire and deem it to be in their mutual best interests to replace Reliance as Rights Agent under the Agreement with SunTrust; WHEREAS, the parties desire and deem it to be in their mutual best interests to amend the Agreement as set forth in this First Amendment; and WHEREAS, SunTrust currently serves as transfer agent for Innotrac; NOW, THEREFORE, for and in consideration of the premises and the mutual agreements contained herein, the parties hereto agree, represent and warrant as follows: SECTION 1. DEFINED TERMS. Capitalized terms used herein and not otherwise defined herein shall have the meanings ascribed to such terms in the Agreement. SECTION 2. APPOINTMENT OF SUNTRUST AS SUCCESSOR RIGHTS AGENT. (a) Effective upon execution of this First Amendment, Innotrac hereby appoints SunTrust to succeed Reliance as Rights Agent under the Agreement. Upon the effectiveness of the appointment, SunTrust shall be vested with the same powers, rights, duties and responsibilities as if it had been originally named as Rights Agent under the Agreement without further act or deed. (b) Reliance shall deliver and transfer to SunTrust any property held by Reliance under the Agreement, and execute and deliver any further assurance, conveyance, act or deed necessary for the purpose. SECTION 3. REPRESENTATIONS AND WARRANTIES OF SUNTRUST. SunTrust hereby represents and warrants that it is either (a) a corporation organized and doing business under the laws of the United States or of the State of Georgia (or any other state of the United States so long as such corporation is authorized to do business as a banking institution in the State of Georgia), in good standing, having a principal office in the State of Georgia, and authorized under such laws to exercise stock transfer or corporate trust powers and is subject to supervision or examination by federal or state authority or (b) an Affiliate of a corporation described in SECTION 3(A). SECTION 4. AMENDMENT OF SECTION 18(A) OF THE AGREEMENT. Effective immediately after the appointment of SunTrust as successor Rights Agent under the 2 Agreement, the second sentence of Section 18(a) of the Agreement is hereby deleted in its entirety and the following new second sentence of Section 18(a) is inserted in lieu thereof: "The Company also agrees to indemnify the Rights Agent for, and to hold it harmless against, any loss, liability, or expense, incurred without gross negligence, bad faith or willful misconduct on the part of the Rights Agent, for anything done or omitted by the Rights Agent in connection with the acceptance and administration of this Agreement or the exercise or performance of its duties hereunder, including the costs and expenses of defending against any claim of liability." SECTION 5. AMENDMENT OF SECTION 20(C) OF THE AGREEMENT. Effective immediately after the appointment of SunTrust as successor Rights Agent under the Agreement, Section 20(c) of the Agreement is hereby deleted in its entirety and the following new Section 20(c) is inserted in lieu thereof: "(c) The Rights Agent shall be liable hereunder only for its own gross negligence, bad faith or willful misconduct." SECTION 6. AMENDMENT OF SECTION 27 OF THE AGREEMENT. Effective immediately after the appointment of SunTrust as successor Rights Agent under the Agreement, the following sentence is hereby added to the end of Section 27 of the Agreement: "Notwithstanding anything contained in this Agreement to the contrary, no supplement or amendment shall be made which affects the duties, standard of care and indemnification of the Rights Agent without the express consent of the Rights Agent." SECTION 7. NOTICES TO SUNTRUST. Any notices to SunTrust as Rights Agent pursuant to Section 26 of the Agreement shall be made to the following address or such other address as SunTrust shall specify in writing to Innotrac: SunTrust Bank Stock Transfer Department Mail Code 258 Post Office Box 4625 Atlanta, Georgia 30302 Attention: Department Manager SECTION 8. WAIVER OF NOTICE UNDER SECTION 21. Reliance and SunTrust agree to waive any notice required under Section 21 of the Agreement with respect to the appointment of SunTrust as successor Rights Agent. SECTION 9. NO OTHER CHANGES. Except as set forth in this First Amendment, the other provisions of the Agreement shall remain in full force and effect in accordance 2 3 with their respective terms. Except as expressly set forth in this First Amendment, nothing contained herein shall constitute a waiver of any rights or claims of any party heretofore or hereafter arising under or related to the Agreement. IN WITNESS WHEREOF, the parties have executed this First Amendment as of the date first above written. INNOTRAC CORPORATION By:/s/David L. Gamsey ----------------------------------------- Name: David L. Gamsey Title: Senior Vice President, Chief Financial Officer and Secretary RELIANCE TRUST COMPANY By:/s/Jerry W. Dawson ----------------------------------------- Name: Jerry W. Dawson Title: Senior Vice President SUNTRUST BANK By:/s/Sandra Benefield ----------------------------------------- Name: Sandra Benefield Title: Assistant Vice President 3 EX-10.8 3 g67982ex10-8.txt SUBLEASE AGREEMENT, DATED MAY 26, 1999 1 EXHIBIT 10.8 SUBLEASE AGREEMENT 1. PARTIES. This Sublease, dated May 26, 1999, is made between HSN Realty LLC ("Sublessor") and UDS ("Sublessee"). 2. MASTER LEASE. Sublessor is the lessee under a written lease dated December 1, 1986, wherein G&M Properties, a Nevada Partnership ("Original Lessor"), Dermody Industrial Group, a Nevada General Partnership ("Lessor") leased to Sublessor a portion of the real property located in the City of Reno, County of Washoe, State of Nevada described as 4910 Longley Lane, which portion consists of a 223,200 square foot distribution warehouse/office facility. Said lease has been amended but, none of the amendments are relevant to this Sublease other than the change of Lessor referenced above. Accordingly Sublessee shall not be bound by such amendments. Said lease without amendments is herein collectively referred to as the "Master Lease" and is attached hereto as EXHIBIT A. 3. PREMISES. Sublessor hereby subleases to Sublessee on the terms and conditions set forth in this Sublease 223,200 square feet of warehouse/office space as set forth in EXHIBIT B attached hereto ("Premises"). 4. WARRANTY BY SUBLESSOR. Sublessor warrants and represents to Sublessee that the Master Lease has not been amended or modified except as expressly set forth herein, that Sublessor is not now, and as of the Commencement Date and during the Term hereof will not be, except as such default or breach shall have been directly caused by Sublessee's default or breach of the Sublease Agreement, be in default or breach of any of the provisions of the Master Lease, and that Sublessor has no knowledge of any claim or any facts that would form the basis of any claim by Lessor that Sublessor is in default or breach of any of the provisions of the Master Lease. 5. TERM. Following execution and delivery by the parties of this Sublease, the Term of this Sublease shall commence upon receipt of Lessor's consent to this Sublease ("Commencement Date") as required by the Master Lease. The obligation to pay rent shall not commence until August 1, 1999, and the Term of the Sublease shall end on September 30, 2002 ("Termination Date"), unless otherwise sooner terminated in accordance with the provisions 1 2 of this Sublease. Sublessee's right to occupy the Premises shall commence upon Lessor's execution and delivery of its consent to this Sublease. 6. RENT. Sublessee shall pay to Sublessor as minimum rent, without notice or demand, at 1 HSN Drive, St. Petersburg, FL 33729 or at such other place as Sublessor shall designate from time to time by written notice to Sublessee, the sum of Forty Eight Thousand Nine Hundred & No/100 Dollars ($48,900.00) per month, in advance on the first day of each month of the Term. Sublessee shall pay to Sublessor upon execution of this Sublease the sum of Forty Eight Thousand Nine Hundred & No/100 Dollars ($48,900.00) as rent for the month of August 1999. The total amount for taxes, insurance, and common area expenses presently being paid by Sublessor pursuant to the Master Lease are included in the amount of monthly rent set forth above, and except for any increases in the total amount of taxes, insurance, and common area expenses to be paid under the Master Lease assessed as of or after January 1, 2000, Sublessee shall have no obligation to pay any such amounts. If there is any increase in the total amount of taxes, insurance, and common area expenses assessed as of or after January 1, 2000, upon receipt of written notice thereof from Sublessor, with such supporting documentation therefor as Sublessee shall reasonably request, Sublessee shall pay the monthly amount of any such increase to Sublessor as additional rent. If Sublessee fails to pay to Sublessor any amount due hereunder within five (5) days after the due date, Sublessee shall pay Sublessor upon demand a late charge equal to five percent (5%) of the delinquent amount. The parties agree the foregoing late charge represents a reasonable estimate of the cost and expense Sublessor will incur in processing each delinquent payment. Additionally, if Sublessee fails to pay the Sublessor any amount when due hereunder, Sublessor shall be entitled to offset such amount against any amounts Sublessor may owe Sublessee under this or any other agreement. Rent for any partial month during the Term shall be prorated by multiplying the amount of the monthly rent times a fraction the numerator of which is the number of days in such month to be prorated and the denominator of which is the total number of days in said in month. 7. SECURITY DEPOSIT. Sublessee shall deposit with Sublessor upon execution of this Sublease the sum of Forty Eight Thousand Nine Hundred and No/100 Dollars ($48,900.00) as security for Sublessee's faithful performance of Sublessee's obligations hereunder ("Security Deposit"). If Sublessee fails to pay rent or other charges when due under this Sublease, or fails to perform any of its other obligations hereunder Sublessor may use or apply all or any portion of the Security Deposit for the payment of any rent or other amount then due hereunder and unpaid, or the payment of any other sum for which Sublessor may become obligated by reason of Sublessee's default or breach of this Sublease, or for any loss or damage sustained by Sublessor directly as a result of Sublessee's default or breach. If Sublessor so uses any portion of the Security Deposit, Sublessee shall, within ten (10) days after written demand by Sublessor, restore the Security Deposit to the full amount originally deposited, and 2 3 Sublessee's failure to do so shall constitute a default under this Sublease. Sublessor shall be required to keep the Security Deposit in trust separate from its general accounts, but shall not be required to keep such funds in an interest-bearing account for the benefit of Sublessee. In the event Sublessor assigns its interest in this Sublease, Sublessor shall deliver to its assignee so much of the Security Deposit as is then held by Sublessor. Within ten (10) days after the Term has expired, or Sublessee has vacated the Premises, or any final adjustment pursuant to Section 6 hereof has been made, whichever shall last occur, and provided Sublessee is not then in default of any of its obligations hereunder, the Security Deposit, or so much thereof as had not therefore been applied by Sublessor, shall be returned to Sublessee or to the last assignee, of any, of Sublessee's interest hereunder. 8. ADDITIONAL DEPOSIT. In addition to the security deposit set forth in Section 7 above, as additional security for Sublessee's faithful performance of Sublessee's obligations hereunder, Sublessee shall deposit with Sublessor the equivalent of Two Hundred Ninety-Three Thousand Four Hundred and No/100ths Dollars ($293,400.00)(the "Additional Security"). Ninety-Three Thousand Four Hundred and No/100 Dollars ($93,400.00) of the Additional Deposit shall be deposited with the Sublessor on August 1, 1999. Forty-Six Thousand Seven Hundred and No/100th Dollars ($46,700.00) in cash shall be deposited with Sublessor at the execution of this Sublease as part of the Additional Deposit, and Forty-Six Thousand Seven Hundred and No/100ths Dollars ($46,700.00) in cash shall be deposited with Sublessor on August 1, 1999, as part of the Additional Deposit. The balance of the Additional Deposit, at Sublessee's election, shall be made in cash or Tenant Improvements, or any combination thereof, on or before August 1, 2000. For purposes of this Section, Tenant Improvements shall include, but not be limited to, the following: the Repairs, as defined in Section 11; telephone systems, including wiring and installation costs, improvements of any nature to the office area portion of the Premises, including painting, carpeting, and all other improvements; fiber optic lines and computer cabling, including installation costs; warehouse racking; and all other tenant improvements of any nature or kind with a useful life of one (1) year or more. Sublessee shall provide Sublessor with invoices, receipts, and proof of payment for all Tenant Improvements by Sublessor as any part of the Additional Deposit. The foregoing notwithstanding, provided that there is then no uncured material default by Sublessee existing under the Sublease, the total cash portion of the Additional Deposit shall be reduced by one-third (1/3) on August 1 of each year commencing on August 1, 2000. 9. RIGHT TO CURE DEFAULTS, SUBLESSEE. If Sublessee fails to pay any sum of money to Sublessor, or fails to perform any other act on its part to be performed hereunder, the Sublessor may, but shall not be obligated to, after the passage of any applicable notice and cure periods, make such payment or perform such act. All such sums paid, and all reasonable costs and expenses of performing any such act, shall be deemed Additional Rent payable by Sublessee to Sublessor upon demand, together with 3 4 interest thereon at the rate of one and one-half percent (1-1/2%) per month from the date of the expenditure until repaid. 10. RIGHT TO CURE DEFAULTS, SUBLESSOR. If Sublessor fails to pay any sum of money to Lessor, or fails to perform any other act on its part to be performed under the Master Lease, the Sublessee may, but shall not be obligated to, after the passage of any applicable notice and cure periods, make such payment or perform such act. All such sums paid, and all reasonable costs and expenses of performing any such act, shall be payable by Sublessor to Sublessee upon demand, together with interest thereon at the rate of one and one-half percent (1-1/2%) per month from the date of the expenditure until repaid. 11. MAINTENANCE AND REPAIRS. Except for maintenance of the structural condition of the exterior walls, roof, and foundation of the Premises, which shall be at the sole obligation and expense of the Sublessor, Sublessee shall, at Sublessee's sole expense maintain all other parts of the premises in good, clean and secure condition and promptly make all necessary repairs and replacements, including but not limited to all windows, glass, doors, walls and wall finishes, floor covering, heating, ventilating and air conditioning systems, truck doors, dock bumpers, dock seals and levelers, electrical lighting systems, and fire sprinklers. Sublessee shall, at Sublessee's sole expense, also perform regular removal of trash and debris. Except for those items of maintenance and repair set forth on EXHIBIT C attached hereto (the "Repairs"), which shall have been made by Sublessor prior to August 1, 1999, Sublessor shall deliver premises to Sublessee in "as is" condition broom cleaned. Sublessee's obligations under this Paragraph 11 shall commence as of the Commencement Date of the Term. 12. PERSONAL PROPERTY OF SUBLESSOR. Sublessor, at or prior to the date of this Sublease Agreement shall provide Sublessee with a list of all personal property of Sublessor located in, on, or about the Premises (the "Personal Property"), and with respect to such Personal Property, shall: (a) provide Sublessee with a letter declaring that the Personal Property is intended to be included with the Premises and may be used by Sublessor during the Term of this Sublease; (b) provide Sublessee with a letter of abandonment regarding the Personal Property; or (c) remove at Sublessor's sole cost and expense all Personal Property not otherwise disposed of by Sublessor under (a) and (b) above. 13. UTILITIES. Sublessee shall be responsible for paying its own utilities, including gas, electric and water. 4 5 14. HAZARDOUS MATERIALS. Sublessee shall use no Hazardous Materials in, on, under or about the Premises or any part of the Master Premises, except for normal types and quantities of Hazardous Materials typically used in connection with use of real property for warehouse distribution purposes, which Sublessee may use, in compliance with all applicable laws and regulations, on the Premises. 15. USE OF PREMISES. The premises shall be used and occupied only for light assembly, warehousing, distribution, administration, and general office use, and for no other use or purpose. 16. ASSIGNMENT AND SUBLETTING. Sublessee shall not assign this Sublease or further sublet all or any part of the Premises without the prior written consent of Sublessor, which consent shall not be unreasonably withheld or delayed, and the consent of Lessor. 17. OTHER PROVISIONS OF SUBLEASE. All applicable terms and conditions of the Master Lease not inconsistent herewith are incorporated into and made a part of this Sublease as if Sublessor were the lessor thereunder, Sublessee the lessee thereunder. Sublessee assumes and agrees to perform the Lessee's obligations under the Master Lease during the Term to the extent that such obligations are applicable to the Premises, except that the obligation to pay rent to Lessor under the Master Lease shall be considered performed by Sublessee to the extent and in the amount rent is paid to Sublessor in accordance with Section 6 of this Sublease. Neither Sublessor nor Sublessee shall commit or suffer any act or omission that will violate any of the provisions of the Master Lease. Sublessor shall utilize its utmost best efforts and exercise due diligence to cause Lessor to perform its obligations under the Master Lease for the benefit of Sublessee. If the Master Lease terminates, this Sublease shall terminate and the parties shall be relieved of any further liability or obligation under this Sublease, provided however, that if the Master Lease terminates as a result of a default or breach by Sublessor or Sublessee under this Sublease and/or the Master Lease, then the defaulting party shall be liable to the nondefaulting party for the damage suffered as a result of such termination. Notwithstanding the foregoing, if the Master Lease gives Sublessor any right to terminate the Master Lease in the event of the partial or total damage, destruction, or condemnation of the Master Premises or the building or project of which the Master Premises are a part, the exercise of such right by Sublessor shall not constitute a default or breach hereunder. 5 6 18. ATTORNEYS' FEES. If Sublessor, Sublessee, or Broker shall commence an action against the other arising out of or in connection with this Sublease, the prevailing party shall be entitled to recover its costs of suit and reasonable attorney's fees. 19. AGENCY DISCLOSURE. Sublessor and Sublessee each warrant that they have dealt with no other real estate broker in connection with this transaction except: DICKSON REALTY, INC., and CUSHMAN & WAKEFIELD OF CALIFORNIA, INC., who represents the Sublessor and GRUBB & ELLIS/NEVADA COMMERCIAL GROUP, who represents the Sublessee. 20. NOTICES. All notices and demands, which may or are to be required or permitted to be given by either party hereunder shall be in writing. All notices and demands by the Sublessor to Sublessee shall be sent by United States Mail, postage prepaid, addressed to the Sublessee at the Premises, and to the address hereinbelow, or to such other place as Sublessee may from time to time designate in a notice to the Sublessor. All notices and demands by the Sublessee to Sublessor shall be sent by United States Mail, postage prepaid, addressed to the Sublessor at the address set forth herein, and to such other person or place as the Sublessor may from time to time designate in a notice to the Sublessee. To Sublessor: HSN Realty LLC Mike Hopkins 1 HSN Drive St. Petersburg, FL 33729 To Sublessee: UDS Patrick West 4910 Longley Lane Reno, NV 89511 21. CONSENT BY LESSOR. THIS SUBLEASE SHALL BE OF NO FORCE OR EFFECT UNLESS CONSENTED TO IN WRITING BY LESSOR WITHIN 15 DAYS AFTER EXECUTION HEREOF. IF LESSOR SHALL FAIL OR REFUSE TO CONSENT TO THIS SUBLEASE WITHIN THE FOREGOING TIME PERIOD, UPON THE LAPSE OF THE TIME PERIOD, SUBLESSOR SHALL IMMEDIATELY RETURN ALL FUNDS DELIVERED TO IT BY SUBLESSEE. 6 7 22. COMPLIANCE. The parties hereto agree to comply with all applicable federal, state and local laws, regulations, codes, ordinances and administrative orders having jurisdiction over the parties, property or the subject matter of this Agreement, including, but not limited to, the 1964 Civil Rights Act and all amendments thereto, the Foreign Investment In Real Property Tax Act, the Comprehensive Environmental Response Compensation and Liability Act, and the Americans With Disabilities Act. 23. ASSURANCES. Within five (5) days following receipt thereof, Sublessor shall provide Sublessee with copies of all notices or correspondence Sublessor receives from Lessor with respect to the Lease, and Sublessor, within five (5) days following a request therefore, shall provide Sublessee with such evidence of payment of the rent under the Lease as Sublessee may from time to time demand. The foregoing notwithstanding, any notice from the Lessor to pay rent or quit the Premises received by Sublessor shall be immediately sent to Sublessee by facsimile transmission at 775-332-5715, or such other number as Sublessee shall from time to time designate in a writing sent to Sublessor in accordance with Section 20 above. SUBLESSOR: SUBLESSEE: HSN REALITY LLC U D S By: /s/ Jed Blue By: /s/ Patrick West ---------------------------- ----------------------- Patrick West, President Title: President ------------------------ 7 EX-10.9.(A) 4 g67982ex10-9_a.txt MASTER LEASE AGREEMENT, DATED MARCH 20, 2000 1 EXHIBIT 10.9(a) CSI MASTER LEASE AGREEMENT NUMBER 172564 - -------------------------------------------------------------------------------- COMPUTER SALES INTERNATIONAL, INC. In California: CSI Leasing, Inc. 10845 Olive Boulevard In Florida: CSI Computer Sales, Inc. St. Louis, Missouri 63141 (341) 997-7010 - -------------------------------------------------------------------------------- MASTER LEASE AGREEMENT dated as of March 20, 2000 by and between COMPUTER SALES INTERNATIONAL, INC. (hereinafter called "Lessor") having its principal office and place of business at 10845 Olive Boulevard, St. Louis, Missouri 63141, and INNOTRAC CORPORATION - -------------------------------------------------------------------------------- (hereinafter called "Lessee") having its principal office and place of business at 6655 Sugarloaf Parkway - -------------------------------------------------------------------------------- Duluth, Georgia 30097 - -------------------------------------------------------------------------------- IN CONSIDERATION of the mutual agreements hereinafter set forth and the payment of rent as herein provided for, the parties hereto agree as follows: 1. LEASE AGREEMENT Lessor hereby leases to Lessee and Lessee hereby leases from Lessor all of the equipment and other tangible personal property described in each of the Equipment Schedules which are executed from time to time by Lessor and Lessee pursuant to this Master Lease. Each Equipment Schedule shall constitute a separate lease on the terms and conditions stated therein and, to the extent not inconsistent with the Equipment Schedule, on the terms and conditions stated in the Master Lease which shall be incorporated by reference in the Equipment Schedule. The term "Equipment" as used herein shall mean, with respect to any Equipment Schedule, the Equipment described therein. The term "Unit" as used herein shall mean an individual machine on an Equipment Schedule or an individual feature when such feature is leased separately from a machine. The term of this Master Lease shall begin on the date set forth above and shall continue in effect so long as any Equipment Schedule entered into pursuant to this Master Lease remains in effect. 2. TERM 2.1 COMMENCEMENT DATE: The commencement date ["Commencement Date"] for each Unit of Equipment will be the date on which such Unit is installed by the manufacturer or other installer, except that, in the event there is a delay in the installation of a Unit and such delay is attributable to Lessee, then the Commencement Date for such Unit shall be five [5] working days following the date upon which Lessee has been given notice that such Unit is available for installation. If requested by Lessor, Lessee will promptly execute and deliver to Lessor a certificate confirming the Commencement Date(s). 2.2 INITIAL TERM: The "Initial Term" of an Equipment Schedule shall mean the period beginning on the Commencement Date of the Unit having the latest Commencement Date of the Units on such Equipment Schedule if such Commencement Date is the first day of a month, and otherwise, the Initial Term shall begin on the first day of the month immediately following the month in which such latest Commencement Date falls. The Initial Term of an Equipment Schedule shall continue for the number of months specified therein and shall automatically be extended for successive four month periods thereafter at the same Monthly Rental unless and until terminated by either party giving the other party not less than 120 days prior written notice. Any termination (i) must relate to all of the Equipment described on the Equipment Schedule to which the notice applies, (ii) will be effective only on the last day of the Initial Term or on the last day of any successive four month period, (iii) will be effective only if Lessee returns all of the Equipment to Lessor in accordance with the terms of the Equipment Schedule by the day after the scheduled termination date, and (iv) may not be unilaterally revoked. 3. MONTHLY RENTAL Lessee shall pay to Lessor the monthly rental ["Monthly Rental"] for each Unit as set forth in the relevant Equipment Schedule. The Monthly Rental shall be payable at the above mailing address of Lessor or at such other place as Lessor may from time to time designate in a written notice to Lessee. The Monthly Rental for each Unit shall commence on the Commencement Date of such Unit and shall be due and payable in advance and without demand on the first day of each month thereafter during the term of this Lease. If the Commencement Date for a Unit is a day other than the first day of a month. Daily Rental shall be payable ["Daily Rental" shall equal one-thirtieth of the Monthly Rental for such Unit] for each day from, and including, the Commencement Date to, but not including, the first day of the Initial Term, and such total Daily Rental amount shall be due and payable on the first day of the Initial Term. 4. WARRANTIES 4.1 AFFIRMATIVE WARRANTIES: Lessor represents and warrants that: [a] The Equipment shall be eligible for the manufacturer's standard prime shift maintenance contract on installation, provided that, prior to installation of the Equipment, Lessee makes a written request directly to the manufacturer for such a maintenance contract. [b] During the term of this Master Lease, if no Event of Default has occurred. Lessee's quiet enjoyment and peaceable possession of the Equipment shall not be interrupted by Lessor or anyone claiming solely through or under Lessor. 4.2 DISCLAIMER OF WARRANTIES: THE AFFIRMATIVE WARRANTIES SET FORTH ABOVE ARE IN LIEU OF ALL OTHER WARRANTIES OF LESSOR. LESSOR MAKES NO OTHER WARRANTIES, EXPRESS OR IMPLIED, AS TO ANY MATTER WHATSOEVER, INCLUDING, WITHOUT LIMITATION, THE DESIGN OR Page No. 1 of 6 INNOTRAC CORPORATION Master Lease No. 172564 March 20, 2000 2 CONDITION OF THE EQUIPMENT, ITS MERCHANTABILITY, FITNESS, CAPACITY OR SUITABILITY FOR ANY PARTICULAR PURPOSE. THE QUALITY OF THE MATERIAL OR WORKMANSHIP OF THE EQUIPMENT, OR CONFORMITY OF THE EQUIPMENT TO THE PROVISIONS AND SPECIFICATIONS OF ANY PURCHASE ORDER OR ORDERS RELATING THERETO. Without limiting the generality of the foregoing, Lessor shall not be liable to Lessee for any liability, claim, loss, damage or expense of any kind or nature [including strict liability in tort] caused directly or indirectly by the Equipment, any inadequacy thereof for any purpose, any deficiency or defect therein, whether known or unknown to Lessor. In any event, Lessor shall not be liable to Lessee for any loss of business or any other incidental or consequential loss or damage resulting from any cause whatsoever. 4.3 ASSIGNMENT OF WARRANTIES: Lessor hereby assigns to Lessee any and all manufacturer's warranties, if assignable, and any other such rights that are assignable as Lessor may have against the manufacturer of the Equipment provided, however, that Lessee's sole remedy for the breach of any such warranty or right shall be against the manufacturer and not Lessor. 4.4 SELECTION: Lessee acknowledges, represents and warrants that it has made the selection of the Equipment based on its own judgement and expressly disclaims any reliance upon statement made by the Lessor. The Equipment is being leased for commercial or business purposes only, and will not be used for consumer, personal, home, or family purposes. 5. NET LEASE Each Equipment Schedule constitutes a net lease. Lessee shall be solely responsible for all costs and expenses of every nature arising out of the possession, use, and operation of the Equipment. Lessee's obligation to pay the Monthly Rental and all other sums due hereunder shall be absolute and unconditional and shall not be subject to any setoff, abatement, counterclaim, recoupment, defense, cancellation, repudiation, rejection of Equipment, revocation of acceptance of Equipment or any other right that Lessee may have against Lessor. Except as expressly provided for herein, neither this Master Lease, nor any Equipment Schedule, shall terminate nor shall the obligations of Lessee be affected by reason of any defect in, damage to, or any loss or destruction of the Equipment or any Unit from any cause whatsoever, or the interference with the use thereof by any private person, corporation, or governmental authority or as a result of any war, riot, insurrection or Act of God. It is the express intention of Lessor and Lessee that all Monthly Rental payable by Lessee under each Equipment Schedule shall be, and continue to be, payable in all events throughout the term thereof. 6. TAXES 6.1 PAYMENT OF TAXES: Lessee covenants and agrees to pay to the appropriate taxing authority, and discharge before the same become delinquent, all taxes, fees, or other charges of any natures whatsoever, without pro-ration, together with any related interest or penalties ["impositions"] now or hereafter imposed, assessed or payable during the term of the relevant Equipment Schedule including any extension thereof (or an imposition relating to a record date or status date that fell within the term of the relevant Equipment Schedule including any extension thereof or is otherwise associated with Lessee's leasing, possession or use of the Equipment) against Lessor, Lessee or the Equipment by any federal, state, county or local government or taxing authority upon or with respect to [i] the Equipment or any Unit, [ii] upon the leasing, ordering, purchase, sale, ownership, use, operation, return or other disposition thereof, [iii] the Monthly Rental or any other sums due hereunder with respect to any Equipment Schedule, or [iv] the leasing of the Equipment [excepting only federal, state and local taxes measured by the net income of Lessor or any franchise tax upon Lessor measured by Lessor's capital, capital stock or net worth]. Because the payment due date or reimbursement date for an Imposition may occur after the expiration or termination of the term of the relevant Equipment Schedule, it is understood and agreed that Lessee's liability for such Imposition shall survive the expiration or termination of the term of the relevant Equipment Schedule. 6.2 BILLING: Lessee shall, to the extent permitted by law, cause all Impositions to be billed to Lessee. Lessee shall, at its expense, timely file all forms and returns and timely do all things required to be done in connection with the levy, assessment and payment of any Impositions, and Lessor hereby appoints Lessee as Lessor's attorney-in-fact where necessary for such purposes. Lessee shall submit written evidence to Lessor of the payment of all Impositions required to be paid by Lessee hereunder promptly after such payment. Notwithstanding the foregoing, Lessor, in its sole discretion, may pay any Imposition itself or file any forms or returns with respect thereto. If Lessor pays any Imposition, Lessee shall, when billed, reimburse Lessor for such payment. 6.3 CONTEST: Lessee may contact any Imposition by appropriate legal proceedings provided the nonpayment of such Imposition thereof, or such proceedings, will not, in the opinion of counsel for Lessor, adversely affect the title, property interest or rights of Lessor in the Equipment and provided further that, if requested by Lessor, Lessee has given to Lessor security, sufficient in form and amount, in Lessor's reasonable judgment, to fully satisfy the amount of the contested Imposition. 7. DELIVERY AND RETURN Lessor shall arrange for delivery, and Lessee shall pay, when billed, all delivery expenses [including, without limitation, transportation costs and the cost of in-transit insurance] associated with the delivery of each Unit from its previous location to the location specified in the relevant Equipment Schedule. Lessee shall inspect each Unit upon delivery, identify any observable damage prior to accepting delivery, and note any such damage on the bill of lading. Costs of repair which are not recoverable from the carrier because of Lessee's failure to properly inspect for observable damage shall be borne and promptly paid by Lessee. Lessee shall provide a suitable place for installation of the Equipment with all appropriate facilities as specified by the manufacturer. Lessor shall arrange and Lessee shall pay for the installation of each Unit [if Lessee wishes to have the Equipment installed by an installer other than the manufacturer or some other party approved in writing by Lessor, then Lessee shall accept the Equipment "as is" and Lessor's warranty set forth in Paragraph 4.1 (a) shall not apply]. Upon the termination of Lessee's right to possession of any Unit [by expiration of the term of the relevant Equipment Schedule or otherwise], Lessee shall, in accordance with Lessor's instructions and at Lessee's expense {including without limitation transportation costs and costs of in-transit insurance] return the Unit to such location within the Continental United States as shall be designated by Lessor. Lessee shall reimburse Lessor for all expenses paid by Lessor associated with return of the Unit when billed. Lessee shall return each Unit in the same operating order, repair, condition and appearance as when received, excepting only normal wear and tear, and with all engineering changes prescribed by the manufacturer prior to the termination of Lessee's right of possession incorporated in the Unit. Lessee, at its expense, shall make any repairs necessary in order to certify the Equipment as eligible for the manufacturer's prime shift maintenance contract upon its return and shall have the Unit certified as eligible for the same. At the time the Equipment is returned, Lessee shall provide a letter from the manufacturer certifying such maintenance eligibility 8. CARE OF EQUIPMENT 8.1 USE AND MAINTENANCE: Lessee shall, at its expense, maintain the Equipment in good operating order, repair, and condition. Lessee shall not use the Equipment for any purpose other than that for which it was designed. Prior to the delivery date and before any action is taken to install the Equipment, Lessee shall make a written request to the manufacturer for continued coverage of the Equipment under one of the manufacturer's standard maintenance agreements, and shall, at its expense, enter into and maintain in force Page No. 2 of 6 INNOTRAC CORPORATION Master Lease No. 172564 March 20, 2000 3 such maintenance agreement for each Unit and provide Lessor with a copy of such agreement. IF LESSEE FAILS TO MAKE THE PROPER WRITTEN REQUEST TO THE MANUFACTURER FOR COVERAGE UNDER ONE OF THE MANUFACTURER'S STANDARD MAINTENANCE AGREEMENTS, THEN LESSEE SHALL ACCEPT THE EQUIPMENT "AS IS" AND LESSOR'S WARRANTY SET FORTH IN PARAGRAPH 4.1(A) SHALL NOT APPLY. In no event, however, shall Lessee be required to enter into such a contract for any Unit so long as that Unit is under a manufacturer's warranty which provides substantially similar coverage. 8.2 ALTERNATION AND ATTACHMENTS: With the prior written consent of the Lessor, Lessee may, at its expense, make alterations or add attachments to the Equipment which are removable and which do not interfere with the normal and satisfactory operation or maintenance of the Equipment or Lessee's ability to obtain the maintenance contract required in Section 8.1 above. Upon the termination of Lessee's right to possession of any Unit, any alterations or attachments to such Unit shall become the property of Lessor unless removed at Lessee's expense prior to such termination. Lessor shall have the right, following termination of Lessee's right to possession of any Unit, to remove any attachment or alternations made by Lessee to such Unit and dispose of the same without any liability therefor to Lessee and Lessee shall pay the costs of such removal when billed. 8.3 INSPECTION: Lessee shall make the Equipment available to Lessor. Secured Party [hereinafter defined] and Assignee [hereinafter defined] or the designees of any of them during normal working hours for inspection or for any other reasonable purpose. 9.2 LOSS OR DAMAGE AGE 9.1 RISK OR LOSS: Lessee shall be responsible for and hereby assumes the entire risk of the Equipment being lost, damaged, destroyed, stolen, or otherwise rendered unfit or unavailable for use from the date of delivery to Lessee to the date of return to Lessor. 9.2 OCCURRENCE OF LOSS: If any Unit is lost, damaged, destroyed, stolen, or otherwise rendered unfit for use, Lessee shall give to Lessor immediate notice thereof, and this Master Lease and the applicable Equipment Schedule shall continue in force and effect without any abatement in the Monthly Rental. Lessee shall determine within fifteen (15) days after the date of the occurrence of damage whether such Unit can be repaired. In the event Lessee determines that such Unit can be repaired, Lessee, at its expense, shall cause such Unit to be promptly repaired. If a Unit is lost, destroyed or stolen or if Lessee determines that a damaged Unit cannot be repaired, Lessee shall, at Lessor's direction, within thirty [30] days of such event either replace the Unit with an identical Unit, the title to which shall thereupon vest in Lessor and which thereafter shall be considered the Unit subject to the Equipment Schedule with no abatement in the Monthly Rental or, in Lessor's sole discretion, pay to Lessor an amount equal to the Stipulated Loss Value of the Unit determined as of the date of payment in accordance with the Stipulated Loss Value Schedule attached to the applicable Equipment Schedule together with all unpaid Monthly Rental which is due and payable through the date of payment. Upon such payment, Lessee's obligation to pay further Monthly Rental for such Unit shall cease. 10. INSURANCE 10.1 PROPERTY INSURANCE: Throughout the term of each Equipment Schedule, Lessee shall, at its expense, maintain in full force and effect "all risk" extended coverage, fire and casualty insurance for the Equipment. Such insurance shall provide for coverage in an amount equal to the greater of the Stipulated Loss Value or the replacement cost of the Equipment at the time of loss. Lessor shall be named as the Loss Payee on such policy. In addition, the policy shall, by means of a standard mortgage clause, named the Secured Party and Assignee as additional insureds and loss payees as their interest shall appear. Such policy shall provide that it may not be canceled or materially altered unless thirty [30] days prior written notice is given to all parties named therein. Upon Lessor's written request, Lessee shall provide Lessor with a Certificate of Insurance evidencing such insurance coverage. If, within two weeks after Lessee's receipt of such request, Lessee has not provided Lessor with a satisfactory Certificate, then Lessor may, at Lessor's option, obtain such insurance until Lessee provides the Certificate, and Lessee shall reimburse Lessor for the cost of such insurance when billed. 10.2 LIABILITY INSURANCE: During the term of this Master Lease, Lessee, at its expense, shall maintain reasonable, commercial general liability and property damage insurance with respect to the use, possession and operation of the Equipment in an amount not less than one million dollars for each occurrence. 11. INDEMNIFICATION Lessee shall and does hereby indemnify and hold Lessor, any Assignee, and any Secured Party, harmless from and against any and all claims, costs, reasonable attorney's fees, expenses, damages, and liabilities [including those resulting from the application of strict liability doctrines or statutes] arising out of Lessee's selection, possession, leasing, operation, control, use, maintenance, delivery, or return of the Equipment Notwithstanding the foregoing. Lessee shall not be required to indemnify a party for any claim resulting from acts of that party which constitute willful misconduct or gross negligence. 12. ASSIGNMENT, SUBLEASE OR RELATION BY LESSEE UPON AT LEAST THIRTY [30] DAYS PRIOR WRITTEN NOTICE TO LESSOR, LESSEE MAY ASSIGN OR SUBLEASE A UNIT TO ANY PARTY, OR RELOCATE A UNIT TO ANY LOCATION, WITHIN ANY STATE OF THE CONTINENTAL UNITED STATES, PROVIDED THAT LESSOR, ASSIGNEE AND SECURED PARTY, IN SUCH PARTIES' SOLE DISCRETION, SHALL HAVE APPROVED SUCH ASSIGNEE, SUBLESSEE, OR LOCATION, AND PROVIDED FURTHER THAT [I] ALL COSTS OF ANY NATURE WHATSOEVER [INCLUDING ANY ADDITIONAL IMPOSITIONS AND ANY ADDITIONAL EXPENSES ASSOCIATED WITH FILING NEW PRECAUTIONARY UNIFORM COMMERCIAL CODE FINANCING STATEMENTS] RESULTING FROM ANY RELOCATION, ASSIGNMENT OR SUBLEASE SHALL BE BORNE BY LESSEE; [II] ANY ASSIGNMENT OR SUBLEASE SHALL BE MADE EXPRESSLY SUBJECT AND SUBORDINATE TO THE TERMS OF THIS LEASE; AND [III] LESSEE SHALL ASSIGN ITS RIGHTS UNDER SUCH ASSIGNMENT OR SUBLEASE TO LESSOR, ASSIGNEE, OR SECURED PARTY AS ADDITIONAL COLLATERAL AND SECURITY FOR LESSEE'S OBLIGATIONS HEREUNDER. In the event of a relocation, assignment, or sublessee, Lessee and its assignee or its sublessee shall cooperate with Lessor in taking all reasonable measures to protect the title of Lessor or Assignee and the interest of any Secured Party to and in the Equipment. No relocation, assignment, or sublease shall relieve Lessee of its primary obligations under the relevant Equipment Schedule and this Master Lease. 13. ASSIGNMENT BY LESSOR Lessor shall have the right to assign as security its interest or grant a security interest in any or all of the Equipment Schedules which may from time to time be executed and the Units described in any such Equipment Schedules to a security assignee ["Secured Party"]. Lessor shall also have the right to sell or otherwise dispose of any or all of the Units described in any Equipment Schedule, subject to the prior right of Lessee in such Units, and to assign its interest as Lessor under such Equipment Schedule, to any assignee ["Assignee"]. Any such assignment shall not in any way release Computer Sales International, Inc. from liability for performance of the Lessor's obligations hereunder. Lessee acknowledges that any assignment by Lessor will not materially change Lessee's duties or obligations under the Equipment Schedule nor materially increase the burden or risk imposed on Lessee. Lessee hereby consents to and shall acknowledge such assignment or assignments as shall be designated by written notice to Lessee by Lessor. Lessee further covenants and agrees that: [a] Any such Secured Party or Assignee shall have and be entitled to exercise any and all discretions, rights and powers of Lessor under the Equipment Schedule in which it has an interest, provided that a Secured Party or Assignee shall not be obligated to perform any of the obligations of Lessor other than Lessor's obligations under Paragraph 4.1[b]. Page No. 3 of 6 INNOTRAC CORPORATION Master Lease No. 172564 March 20, 2000 4 (b) Lessee shall pay directly to the Secured Party or Assignee all Monthly Rental and all other sums due upon receipt of notice of any assignment and of instructions to do so; and (c) After an assignment to a Secured Party or Assignee, Lessee's obligations hereunder including its obligation to pay the Monthly Rental and any and all other amounts payable under the Equipment Schedule by Lessee shall be absolute and unconditional and shall not be subject to any abatement, reduction, recoupment, defense, setoff, or counterclaim available to Lessee against Lessor for any reason whatsoever. (d) Only one executed counterpart of any Equipment Schedule shall be marked "Original"; any other executed counterparts shall be marked "Non-original" or "Copy". No security interest in any Equipment Schedule may be created through the transfer and possession of any counterpart other than the "Original", nor shall any sale, assignment or transfer of any interest in an Equipment possession of any counterpart other than the "Original", nor shall any sale, assignment or transfer of any interest in an Equipment Schedule be effective or be binding upon Lessee through the transfer and possession of any counterpart other than the "Original". 14. EVENTS OF DEFAULT The occurrence of any one or more of the following events ("Events of Default") shall constitute a default under the relevant Equipment Schedule: (a) Lessee fails to pay the Monthly Rental, or any other amount due hereunder, on or before the date the same is due and such failure continues for a period of ten (10) days after receipt of written notice thereof from Lessor; (b) any financial statements or information or any other representation or warranty given to Lessor proves to have been materially false or misleading as of the date it was given by or on behalf of Lessee; (c) Lessee fails to observe or perform any other term, condition, obligation, agreement or covenant set forth herein, and such failure continues for a period of ten (10) days after receipt of written notice thereof from Lessor; (d) Lessee assigns or attempts to assign this Master Lease or any Equipment Schedule, or removes, transfers, encumbers, sublets or parts with possession of any Unit, attempts to do any of the foregoing, or suffers or permits any of the foregoing to occur except as expressly permitted herein; (e) Lessee ceases doing business as a going concern, or it or its shareholders take any action looking to its dissolution or liquidation; (f) the entry of an order for relief under the United States federal bankruptcy laws or the entry of any other decree or order by a court having jurisdiction in the premises adjudging the Lessee a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjustment or composition of or in respect of the Lessee under the United Stated federal bankruptcy laws or any other applicable federal or state law, or appointing a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Lessee or of any substantial part of its property, or the ordering, the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; (g) the commencement by the Lessee of a voluntary case under the United States federal bankruptcy laws, or the institution by the Lessee of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization, an arrangement with creditors or an order for relief under the United States federal bankruptcy laws or any other applicable federal or state law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, custodian, sequestrator (or other similar official) of the Lessee or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts as they become due, or, to the knowledge of the Lessor, the taking of corporate action by the Lessee in furtherance of any such action. 15. REMEDIES 15.1 EXPRESS REMEDIES: If an Event of Default occurs, Lessor may, at its option, do any or all of the following: (a) proceed by appropriate court action or actions either at law or in equity to enforce performance by Lessee of the relevant Equipment Schedule, and the covenants and terms of this Master Lease to the extent it pertains to such Equipment Schedule, and to recover from Lessee any and all damages or expenses, including reasonable attorneys' fees, which Lessor shall have sustained or incurred by reason of the Event of Default or on account of Lessor's enforcement of its remedies hereunder, or (b) by notice to Lessee, declare immediately due and payable all monies to be paid by Lessee during the Initial Term (or any extended term then in effect) of the Equipment Schedule, as liquidated damages, and not as a penalty, and Lessor shall have the right, to the extent permitted by law, to (i) recover all monies so declared due and payable, discounted to the date of payment at the rate of 4% per annum, or one-half of the then-prevailing prime interest rate charged by principal New York banks, whichever is less, as liquidated damages, and not as a penalty; (ii) recover all other amounts which are due or which become due under the Equipment Schedule; (iii) terminate Lessee's right to possession (but not Lessee's obligations under this Lease) and to retake immediate possession of the Equipment without any process of law and for such purpose Lessor may enter upon premises where the Equipment may be located and may remove the same therefrom without notice, and without being liable to Lessee therefor, except that Lessor shall be liable for damages resulting from the negligence of Lessor, Lessor's assignee or their respective agents and representatives in any such entry or repossession; (iv) recover all expenses, including reasonable attorneys' fees, which Lessor shall have incurred or may incur by reason of the Event of Default or on account of Lessor's enforcement of its remedies hereunder; and (v) pursue any other remedy permitted by law or equity. The possibility of a re-lease or resale under Paragraph 15.2 shall not excuse prompt payment in full by Lessee under this Paragraph 15.1. 15.2 RE-LEASE OR RESALE: Lessor shall make a reasonable, good faith effort to retake possession of the Equipment and, if Lessor succeeds in retaking possession of any Unit, Lessor shall sell or lease each Unit with the privilege of becoming the purchaser thereof, at public or private sale, for cash or on credit. Lessee's share of the proceeds of any such sale or lease ("Lessee's Share") shall be the lesser of (x), the amount by which the Re-Lease Proceeds or the Resale Proceeds of such Unit exceed the Remarketing Costs of such Unit, and (y), the amount payable by Lessee to Lessor pursuant to Paragraph 15.1 (b)(i) above with respect to such Unit. Lessor shall credit Lessee's Share against all amounts owed by Lessee to Lessor under Paragraph 15.1 or otherwise and the remainder of Lessee's share, if any, shall be paid to Lessee. EXCEPT AS SET FORTH IN THIS PARAGRAPH, LESSEE HEREBY WAIVES ANY RIGHTS NOW OR HEREAFTER CONFERRED BY STATUTE OR OTHERWISE WHICH MAY REQUIRE LESSOR TO MITIGATE ITS DAMAGES OR MODIFY OR LIMIT ANY OF LESSOR'S RIGHTS OR REMEDIES STATED HEREIN. In applying this provision, the following definitions shall apply: (a) The "Re-Lease Proceeds" of a Unit shall mean the present value (discounted to the date of payment using the interest rate at which Lessor has non-recourse financing or a non-recourse financing commitment with respect to the re-lease) of the monthly rental payments for the Unit under a re-lease to a third party, taking into account only those monthly rental payments under the re-lease which are payable on or before the last day of the Initial Term or the last day of any extended term then in effect with respect to the Unit under the Equipment Schedule. If the re-lease is not financeable, the Re-Lease Proceeds shall be the monthly rental payments for such period as received. (b) The term "Resale Proceeds" of a Unit shall mean the amount by which the proceeds of any sale of the Unit exceed the Lessor's estimate of the fair market value of the Unit at the end of the Initial Term or at the end of any extended term then in effect with respect to the Unit under this Master Lease. (c) The term "Remarketing Costs" of a Unit shall mean all expenses incurred directly or indirectly by Lessor in re-leasing or PAGE NO. 4 of 6 INNOTRAC CORPORATION MASTER LEASE NO. 172564 MARCH 20, 2000 5 selling the Unit and in obtaining a financing commitment in the case of a re-lease of a Unit, including without limitation, reasonable fees and commissions (including a reasonable fee to Lessor) incurred in locating a buyer, a subsequent lessee or a financing commitment, attorneys' fees, the cost of recovering the Unit from the Lessee and transportation, installation, refurbishing, reconditioning and storage charges. 15.3 NO WAIVER: The waiver by Lessor of any breach of any obligation of Lessee shall not be deemed a waiver of a breach of any other obligation or of any subsequent breach of the same or any other obligation. The subsequent acceptance of rental payments hereunder by lessor shall not be deemed a waiver of any prior existing breach by Lessee regardless of lessor's knowledge of such prior existing breach at the time of acceptance of such rental payments. 15.4 CUMULATION: To the extent permitted by law, the above remedies shall be deemed cumulative and may be exercised successively or concurrently. 16. PERFORMANCE AND EXECUTION Lessee represents and warrants to Lessor (i) that the execution and performance of this Master Lease and each Equipment Schedule have been duly authorized by Lessee and that upon execution by Lessee and Lessor this Master Lease and each Equipment Schedule will constitute a valid obligation binding upon, and enforceable against, Lessee in accordance with the terms of the Master Lease and each Equipment Schedule; (ii) that neither the execution of this Master Lease or any Equipment Schedule nor the due performance thereof by Lessee will result in any breach of, or constitute any default under or violation of, Lessee's certificate or articles of incorporation, Lessee's by-laws or any agreement to which Lessee is a party or by which any interest of Lessee may be affected; (iii) that Lessee is in good standing in its state of incorporation and in the states where any Unit is to be located; (iv) the persons executing this Master Lease and each Equipment Schedule on behalf of Lessee have been duly authorized to do so; and (v) that any and all financial statements and other information with respect to Lessee heretofore furnished by Lessee to Lessor in connection with negotiations concerning one or more Equipment Schedules were, when furnished, and remain at the time of execution of any Equipment Schedule, true and without any misleading omissions, excepting any changes which have been disclosed in a written notice to Lessor. 17. ADDITIONAL DOCUMENTATION Lessee shall promptly deliver to Lessor the documentation listed below which may from time to time be requested by Lessor. If such a request is made prior to the delivery of any Unit, receipt of such documentation shall be a condition precedent to Lessor's obligation to deliver such Unit: (a) financial information including, without limitation, a copy of Lessee's balance sheet and income statement for Lessee's three prior fiscal years, certified by independent certified public accountants and such other current financial information representing the financial condition and operations of Lessee as Lessor may from time to time reasonably request; (b) a certificate of the resolutions of the Board of Directors of Lessee duly authorizing or ratifying this Master Lease or any Equipment Schedule executed hereunder; (c) a certificate of incumbency setting forth names and signatures of those persons authorized to execute this Master Lease or any Equipment Schedule on behalf of Lessee; (d) landlord's and/or mortgagee's waiver, in form and substance satisfactory to any Assignee or Secured Party, from any landlord or mortgage of any premises upon which the Unit is located; (e) an opinion of counsel for Lessee as to the matters set forth in Paragraph 16 (i through iv) above, and as to such other matters as Lessor may reasonably request; and (f) such document confirming the execution of the Lease necessary or desirable to effect an assignment, to perfect an interest of Lessor, a Secured Party or Assignee, or for such other purpose relating to the Master Lease and/or any Equipment Schedule or to an assignment as Lessor may reasonably request. Lessee hereby appoints Lessor as Lessee's agent to prepare, execute and file in Lessee's name precautionary Uniform Commercial Code financing statements in connection with each Equipment Schedule showing the interest of Lessor, and any Assignee or Secured Party in the Equipment as appropriate. 18. GENERAL 18.1 TITLE: This Master Lease is intended to be a true lease and not a lease intended as security or lease in the nature of a security interest. Lessee shall, at its expense, protect and defend Lessor's title to the Equipment and the interest of any Assignee or Secured Party against all persons claiming against or through Lessee. Lessee shall keep and maintain the Equipment and this Master Lease free and clear of all liens and encumbrances (other than those placed on the same by Lessor and the liens for current taxes not yet payable). 18.2 FIXTURES: Lessee will not affix any Unit of the Equipment to any real property if, as a result thereof, the Unit will become a fixture under applicable law. 18.3 ENTIRE AGREEMENT: This Agreement (together with all schedules and attachments hereto) constitutes the entire agreement between Lessor and Lessee, and no provision hereof may be amended or modified except in writing signed by Lessor and Lessee. NO PROVISION OF THIS AGREEMENT MAY BE WAIVED EXCEPT IN WRITING SIGNED BY THE PARTY FROM WHOM SUCH WAIVER IS SOUGHT, AND ANY SUCH WAIVER SHALL BE EFFECTIVE ONLY IN THE SPECIFIC INSTANCE AND FOR THE SPECIFIC PURPOSE GIVEN. LESSEE'S INITIALS: /s/ -------- 18.4 NOTICES: All notices hereunder shall be in writing and shall be delivered in person or sent by registered or certified mail, to the address of the party contained herein, and shall be deemed received three (3) days after deposit in the United States mail with postage prepaid. Either party may change its address for notice purposes by notifying the other party in the manner aforesaid of such change. Lessee shall also send copies of all notices sent to Lessor, to Secured Party, or Assignee (if any). 18.5 SEVERABILITY: Any provision hereof prohibited by, or unlawful or unenforceable under, any applicable law of any jurisdiction shall be ineffective as to such jurisdiction without invalidating the remaining provisions of this Agreement provided, however, that where the provisions of any such applicable law may be waived, they are hereby waived by Lessee and Lessor to the full extent permitted by law. 18.6 GOVERNING LAW: THIS MASTER LEASE AND ALL EQUIPMENT SCHEDULES AND ANY OTHER INSTRUMENT EXECUTED IN CONNECTION HEREWITH SHALL BE GOVERNED BY, AND CONSTRUED AND INTERPRETED UNDER THE LAWS OF THE STATE OF MISSOURI, WITHOUT GIVING EFFECT TO PRINCIPLES OF CONFLICTS OR CHOICE OF LAW. NO RIGHTS OR REMEDIES REFERRED TO IN ARTICLE 2A OF THE UNIFORM COMMERCIAL CODE WILL BE CONFERRED ON LESSEE UNLESS EXPRESSLY GRANTED IN THIS MASTER LEASE OR AN EQUIPMENT SCHEDULE. This Master Lease and Equipment Schedules are subject to acceptance by Lessor at its home office. 18.7 PERFORMANCE OF LESSEE'S OBLIGATIONS: If Lessee shall fail to make any payment or perform any act required by this Master Lease or any Equipment Schedule, Lessor may at Lessee's expense, but shall not be obligated to, make such payment or perform such act without notice to or demand upon Lessee and without waiving or releasing any obligation or default. Lessee shall, when billed, reimburse Lessor for any expense incurred hereunder by Lessor in performing Lessee's obligations. LESSEE MAY NOT ASSIGN ITS PAGE NO. 5 OF 6 INNOTRAC CORPORATION MASTER LEASE NO. 172564 MARCH 20, 2000 6 RIGHTS OR OBLIGATIONS, EXCEPT AS SPECIFICALLY PROVIDED IN PARAGRAPH 12 OF THIS MASTER LEASE. 18.8 SURVIVAL. All representations, warranties, indemnities, and covenants contained in this Master Lease and in any Equipment Schedule, which by their nature would continue beyond the termination, cancellation or expiration of the Lease, including, by way of illustration only and not limitation, those in Paragraphs 6, 10, 11 and 18, shall continue in full force and effect and shall survive notwithstanding the full payment of all amounts due hereunder or the termination of Lessee's right to possession of any Unit. 18.9 HEADINGS: Headings and captions are for convenience of reference only and shall not be construed as part of the Lease. 18.10. OVERDUE PAYMENTS: Any Monthly Rental due Lessor under this Master Lease, if not paid by the fifth day of the month in which payment became due, shall accrue interest until paid at a rate equal to one and one-half percent per month, or the maximum rate permissible by law, whichever is lower. Any other amounts payable to Lessor by Lessee under this Master Lease are due and payable within [15] days after the billing date, and, if not paid on or before such due date, shall accrue interest from the due date until paid at a rate equal to one and one-half percent per month, or the maximum rate permitted by law, whichever is lower. Any judgment entered on any amounts owed under this Master Lease or an Equipment Schedule shall accrue interest until paid at a rate equal to one and one-half percent per month, or the maximum rate permissible by law, whichever is lower. 18.11 CONSENT OR APPROVAL. With respect to any provision herein which calls for the consent or approval of a party, such consent or approval shall not be unreasonably withheld. 18.12. SUBSTITUTION OF EQUIPMENT. If, at any time during the term of an Equipment Schedule, Lessor's right to lease the Equipment expires, Lessor shall promptly provide identical substitute Equipment, and all expenses of such substitution, including deinstallation, installation and transportation expenses, shall be borne by Lessor. 18.13 DELIVERY FOR EXAMINATION: Submission of the form of this Master Lease for examination shall not bind Lessor in any manner, and no obligations shall arise until this instrument is signed by both Lessor and Lessee. 18.14 TERMS IN EQUIPMENT SCHEDULES: If the provisions of any Equipment Schedule are inconsistent with the provisions of this Master Lease, then the provisions of such Equipment Schedule shall control. PAGE NO. 6 OF 6 INNOTRAC CORPORATION MASTER LEASE NO. 172564 MARCH 20, 2000 7 ADDENDUM ONE TO MASTER LEASE AGREEMENT NO. 172564 This Addendum One to Master Lease Agreement No. 172564 (the "Lease") is dated as of March 20, 2000, and is entered into by and between COMPUTER SALES INTERNATIONAL, INC. ("Lessor") and INNOTRAC CORPORATION ("Lessee"). Notwithstanding anything to the contrary contained in the Lease between the parties hereto, dated on even date herewith, and in consideration of the mutual promises, covenants, and conditions contained in the Lease and contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. CONTROLLING TERMS: This Addendum One shall become a part of the Lease and shall be read together with the Lease as one single document. To the extent that there shall be any conflict as between the terms and provisions contained in the Lease and those contained herein, the terms and provisions set forth herein shall control. 2. SECTION 2.2 INITIAL TERM: In line 6, delete "120" and insert "60." 3. SECTION 17 ADDITIONAL DOCUMENTATION: Insert the following at the end of subsection [a]: "As long as Lessee is a publicly owned corporation, the financial information provided will be that which is publicly available." Delete subsections [b], [d] and [e] in their entirety. 4. SECTION 18.10 OVERDUE PAYMENTS: In line 1, delete "fifth" and insert "tenth". In line 4, delete "fifteen [15]" and insert "thirty [30]." In lines 2, 5 and 6 (continuing to line 7), delete "and one-half." IN WITNESS WHEREOF, the parties hereto have executed this Addendum One to Master Lease No. 172564, as of the date set forth below. 8 EXHIBIT 10.9(a) ADDENDUM ONE TO EQUIPMENT SCHEDULE NO. ONE MASTER LEASE AGREEMENT NO. 172564 This Addendum One to "Equipment Schedule One, Master Lease Agreement No. 172564" (the "Lease"), is dated as of March 20, 2000, and is entered into, by and between COMPUTER SALES INTERNATIONAL, INC. ("Lessor") and INNOTRAC CORPORATION ("Lessee"). Notwithstanding anything to the contrary contained in the Lease between the parties hereto, dated on even date herewith and with respect to certain computer equipment (the "Equipment"), and in consideration of the mutual promises, covenants, and conditions in the Lease and contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. CONTROLLING TERMS: This Addendum One shall become a part of the Lease and shall be read together with the Lease as one single document. To the extent that there shall be any conflicts as between the terms and provisions contained in the Lease and those contained herein, the terms and provisions set forth herein shall control. 2. LESSOR'S PURCHASE OF EQUIPMENT: a) Lessor will purchase the Equipment directly from the vendor(s) designated by Lessee. b) The Total Cost of the Lease (hardware, software license fees and other costs) is not to exceed $1,353,807.00. If Lessee wants this Lease to cover costs greater than $1,353,807.00, Lessor, in its sole discretion, may pay the additional costs. c) Lessor is not liable for any failure or delay in delivery caused by the manufacturer, vendor or any other party or condition not within Lessor's control. *3. QUANTITIES; MONTHLY RENTAL: a) This Equipment Schedule covers all machines of the type(s) listed that are installed at Lessee's facilities between March 1, 2000 and April 30, 2000, inclusive. At this time, Lessee is unable to specify exactly how many Units will be installed; therefore, the "quantity" column has been left blank. As Lessee determines the quantities of Equipment it requires, Lessee shall have the applicable vendor send to Lessor invoices which will reference this Lease and which will specify machine type(s), quantities, equipment location(s), sales price, series number(s) and installation date(s) of the Units ordered by Lessee. Upon receipt of each properly prepared invoice, Lessor shall remit the sales price to the vendor. b) Monthly Rental per Unit will equal the "Monthly Lease Rate Factor" for that Unit, which is specified in the Equipment Schedule or on Exhibit "A", multiplied by the Unit's cost. On May 1, 2000, or as soon thereafter as is reasonably practicable, Lessee shall execute a Certificate of Acceptance for all installed Equipment, which Certificate verifies the actual quantities of machines; and the Monthly Rental per Unit and the total Monthly Rental for the Equipment Schedule, both of which will be expressed as dollar amounts. 9 4. INITIAL TERM. The thirty-six (36) month Initial Term shall start on May 1, 2000, and expire on April 30, 2003. Lessee shall pay to Lessor Daily Rental as set forth in Section 3 of the Master Lease, for each Unit of Equipment for each day from, and including, its installation date through, but not including, May 1, 2000. Daily Rental shall be due in a lump sum on May 1, 2000. 5. STIPULATED LOSS VALUE: Because the actual quantities of Equipment are unknown at this time, specific dollar amounts cannot be listed on the Stipulated Loss Value Schedule. Instead, "Manufacturer list price" has been specified so that, at the time of a loss, the Stipulated Loss Value shall be equal to the present manufacturer list price for the Unit times the applicable percentage. The parties agree, however, that on May 1, 2000, or as soon thereafter as reasonably practicable, a new Stipulated Loss Value Schedule specifying a dollar amount Base Value shall be executed. 6. SOFTWARE LICENSE FEES AND OTHER COSTS: In consideration of Lessee's entering into this Lease, Lessor shall pay on Lessee's behalf various operating and/or application software license fees so that Lessee may use such software packages in connection with the Equipment. Lessor may also pay other costs related to the Equipment, on Lessee's behalf. Lessee shall reimburse Lessor for such costs by (i) paying a daily charge equal to one-thirtieth of the Soft Cost Factor set forth below times the cost of the software license fee or other cost for each day from and including the date Lessor pays such fees or costs through, but not including May 1, 2000, such total daily charges to be paid in a lump sum on May 1, 2000, and (ii) making a monthly payment to Lessor equal to the Soft Cost Factor times the cost of the applicable software license fees or other costs. The resulting monthly payment amount will then be assigned on a pro-rata basis (pro-rated by Unit cost) to Units of Equipment and will be treated as additional rental for the lease of the Equipment. The total amount of software license fees and other costs will not exceed $340,883.00, without Lessor's prior written consent. The Soft Cost Factor for the first $200,000.00 of soft costs will be .02838, and the Soft Cost Factor for all soft costs in excess of $200,000.00 will be .031563. 7. INTEREST RATE CONTINGENCY: the Lease Rate and Soft Cost Factors (the "Rate Factors") specified in this Lease are based upon the yield to maturity of U.S. Treasury notes maturing in May 2003 (the "Treasury Yield"); the Treasury Yield is currently 6.5%. Lessor intends to obtain a fixed-rate, non-recourse loan, using only the Equipment and the Lease as collateral (the "Loan"). If, at the time the Loan is closed, the then current Treasury Yield exceeds 6.5%, then the Rate Factors shall be increased by .0001 for each 25 basis points by which the then current Treasury Yield exceeds the current Treasury Yield of 6.5%. The Rate Factors will be increased only until the then current Treasury Yield exceeds the current Treasury Yield by 300 basis points. Any increases in the Treasury Yield in excess of 300 basis points will have no further effect on the Rate Factors. Increases of the Treasury Yield by increments of less than 25 basis points will have no effect on the Rate Factors. 8. PURCHASE OPTION: Provided Lessee is not then in default under the Lease, Lessee may, on the last day of the Initial Term, upon no less than sixty (60) days prior written notice to Lessor, purchase the Equipment at its then current fair market value. In the event that Lessee and Lessor cannot agree on fair market value, then fair market value shall equal the average of three appraisals obtained from three members of the Information Technology Resellers Association, the first member to be chosen by Lessor, the second member to be chosen by Lessee, and the third member to be chosen by the first two members. If Lessee fails to exercise this option, then the provisions of section 2.2 of the Master Lease control. 10 IN WITNESS WHEREOF, the parties hereto have executed this Addendum One to Equipment Schedule No. One, Master Lease No. 172564, as of the date set forth below. By: /s/ E. William Gillula By: /s/ Ron Patrick ------------------------------- ------------------------------- Title: Chief Operating Officer & Title: Director of Accounting CFO ----------------------------- ----------------------------- Date: March 24, 2000 Date: March 11, 2000 ----------------------------- ----------------------------- MFM/ATL EX-10.9.(B) 5 g67982ex10-9_b.txt FIRST AMENDMENT TO MASTER LEASE AGREEMENT 1 EXHIBIT 10.9(b) FIRST AMENDMENT TO EQUIPMENT SCHEDULE ONE TO MASTER LEASE NO. 172564 This First Amendment to Equipment Schedule No. One to Master Lease No. 172564, is dated June 8, 2000, and is between COMPUTER SALES INTERNATIONAL, INC. ("Lessor") and INNOTRAC CORPORATION ("Lessee"). The parties previously entered into Equipment Schedule No. One, Master Lease No. 172564 (the "Lease") for the lease of certain units of computer equipment ("Equipment"). Lessee wants to extend the installation date of the Equipment on the Lease. In consideration of the foregoing and the promises and covenants contained in this First Amendment, the parties agree to amend the Lease on the terms and conditions set forth below: 1. The Anticipated Installation Date is extended through June. All references in the Lease to "April 30, 2000," "May 1, 2000," and "April 30, 2003" are changed to "June 30, 2000," "July 1, 2000" and "June 30, 2003," respectively. 2. All other terms and conditions of the Lease remain unchanged and in full force and effect. The parties have executed this First Amendment to Equipment Schedule No. One, Master Lease No. 172564, as of the date set forth below. By: /s/ E. William Gillula By: /s/ Ron Patrick ------------------------------ ----------------------------- Title: Chief Operating Officer & Title: Senior Director of CFO Accounting & Finance ------------------------------ ----------------------------- Date: July 11, 2000 Date: June 16, 2000 ------------------------------ ----------------------------- EX-10.9.(C) 6 g67982ex10-9_c.txt SECOND AMENDMENT TO MASTER LEASE AGREEMENT 1 10.9(c) SECOND AMENDMENT TO EQUIPMENT SCHEDULE ONE TO MASTER LEASE NO. 172564 This Second Amendment to Equipment Schedule No. One to Master Lease No. 172564, is dated September 28, 2000, and is between COMPUTER SALES INTERNATIONAL, INC. ("Lessor") and INNOTRAC CORPORATION ("Lessee"). The parties previously entered into Equipment Schedule No. One, Master Lease No. 172564 (the "Lease") for the lease of certain units of computer equipment ("Equipment"). Lessee wants to add a certain soft cost to the Lease, and change the start date of the Lease. In consideration of the foregoing and the promises and covenants contained in this Second Amendment, the parties agree to amend the Lease on the terms and conditions set forth below: 1. In consideration of Lessee's entering into this Amendment, Lessor agrees to pay to Lessee a sum not to exceed $23,000.00 in reimbursement for various professional services in connection with the Equipment. 2. The first day of the Initial Term is changed to October 1, 2000. All references in the Lease to "July 1, 2000" and "June 30, 2003," are changed to "October 1, 200," and "September 30, 2003," respectively. 3. All other terms and conditions of the Lease remain unchanged in full force and effect. The parties have executed this Second Amendment to Equipment Schedule No. One, Master Lease No. 172564, as of the date set forth below. EX-10.14 7 g67982ex10-14.txt 2001 SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN 1 EXHIBIT 10.14 INNOTRAC CORPORATION SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN 2001 PLAN RULES FOR EXECUTIVES These 2001 Plan Rules (the "Plan Rules") were adopted pursuant to the Innotrac Corporation Senior Executive Incentive Compensation Plan (the "Plan") by action of the Committee (as defined in the Plan) of Innotrac Corporation (the "Company") administering the Plan on February 14, 2001, and ratified by the Board of Directors of the Company on the same date. The Committee has determined that compliance with the performance-based exception under Code Section 162(m) is not necessary for 2001. Capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Plan. Unless and until new Plan Rules are adopted by the Committee, these Plan Rules shall be deemed the Plan Rules for subsequent Plan Years. 1. Eligibility. These Plan Rules apply only to the following individuals eligible to participate in the Plan for 2001 (or, as applicable, a subsequent Plan Year): Scott D. Dorfman David L. Ellin David L. Gamsey Larry C. Hanger William F. Hendrick Once designated as a Participant, the Committee can remove an employee as a Participant with or without cause at any time and the Participant shall not be entitled to any Award under the Plan for the year in which he or she is removed regardless of when during such year he or she is removed. 2. Definitions. For purposes of the Plan and these Plan Rules: (a) "Earnings Per Share" or "EPS" shall mean the earnings per share of the Company (on a consolidated basis) for fiscal 2001, without inclusion of any earnings or losses attributable to Return.com Online, LLC. (b) "Revenue" shall mean the gross revenues of the Company for fiscal 2001, excluding any revenues attributable to Return.com Online, LLC. 3. Calculation and Limitation of Awards Each Participant is hereby awarded an Incentive Award under which he will be eligible to receive 100% of the Target Award (which, as defined in the Plan, shall be a percentage of Base Annual Salary) indicated on the chart below if the performance criteria described below are met. 2
TARGET AWARD PARTICIPANT (% OF BASE ANNUAL SALARY) ----------- ------------------------- Scott D. Dorfman 100% David Ellin 60% David L. Gamsey 50% Larry C. Hanger 60% William F. Hendrick 50%
Performance Criteria. A Participant's Award will be computed using three factors: (1) Revenues, (2) Earnings Per Share, and (3) the Participant's achievement of individual goals and objectives as determined by the Committee. (1) 25% of the Participant's Target Award shall be based on the Revenues achieved by the Company. If the Company attains Revenues of $108 million (as budgeted), the Participant shall be entitled to 25% of the Participant's Target Award. For each one percent (1%) that Revenues fall below $108 million (rounded to the closest whole percentage), the amount payable under this portion of Participant's Award shall decrease by three percent (3%), provided that a threshold level of $72.0 million of Revenues must be attained for any amount to be payable under this portion of the Award. For each one percent (1%) that Revenues exceed $108 million (rounded to the closest whole percentage), the amount payable under this portion of the Award shall increase by three percent (3%) up to a maximum of 133% paid for Revenues of $119.9 million. (2) 50% of the Participant's Target Award shall be based upon the Earnings Per Share achieved by the Company. If the Company attains EPS of $.41 (as budgeted), the Participant shall be entitled to 50% of the Participant's Target Award. For each one percent (1%) that EPS fall below $.41 (rounded to the closest whole percentage), the amount payable under this portion of Participant's Award shall decrease by three percent (3%), provided that a threshold level of EPS of $.27 must be attained for any amount to be payable under this portion of the Award. For each one percent (1%) that EPS exceed $.41 (rounded to the closest whole percentage), the amount payable under this portion of the Award shall increase by three percent (3%) up to a maximum of 133% paid for EPS equal to at least $.46. (3) 25% of the Participant's Target Award shall be based upon the Participant's achievement of individual goals and objectives as determined by the Committee. Examples Participant A has a Base Annual Salary of $200,000. Participant A's Target Award is 50% The Company's Revenues for 2001 were $112 million The Company had EPS equal to $.39 The Participant met his individual goals and objectives. The Participant's Award for 2001 equals $95,500, calculated as follows: Target Award = $100,000 (50% x 200,000) 2 3 Revenues Portion: 25% of $100,000 = $25,000 Target. Revenues of $112 million = 3.7% above budget (rounded to 4%), so award = 112%. $25,000 x 112% = $28,000. EPS Portion: 50% of $100,000 = $50,000 Target. EPS of $.39 = 95.1% of target (5% below target), so award = 85% of target. $50,000 x 85% = $42,500. Individual Performance Portion: 25% of $100,000 = $25,000 Target. Met individual goals, so entitled to $25,000. All Awards are subject to further adjustment as provided in the Plan. The Committee may, in its discretion, decrease the amount of a Participant's Award for a year based upon such factors as it may determine, including the failure of the Company or an affiliate to meet certain performance goals or of a Participant to meet his personal performance goals. No Participant's Award shall be increased as a result of any other Participant's Award being decreased. Notwithstanding the above, the maximum Award that may be earned by any Participant for the Plan Year shall not exceed $2.0 million. 4. Payment of Awards As soon as administratively practical and generally within 60 days after the end of the fiscal year, the Committee will determine the amount of the Award for each Participant, calculated in accordance with Section 2 above. In determining Earnings Per Share, generally accepted accounting principles shall be applied on a basis consistent with prior periods, and such determination shall be based on the calculations made by the Company's Chief Financial Officer; provided, however, that the Committee may adjust the Company's financial results as provided in Section 6(a) of the Plan. Payment of the Awards shall be made in cash within 60 days after the close of the Company's fiscal year or as soon as practical thereafter. 3 EX-10.18.(B) 8 g67982ex10-18_b.txt AMENDMENT TO AMENDED EMPLOYMENT AGREEMENT 1 EXHIBIT 10.18(b) AMENDMENT TO AMENDED AND RESTATED EMPLOYMENT AGREEMENT THIS AMENDMENT is made as of the 14th day of February, 2001, by and between David L. Gamsey ("Employee") and INNOTRAC CORPORATION, a Georgia corporation ("Employer"): WITNESSETH: WHEREAS, the Employee and the Employer entered into an Amended and Restated Employment Agreement ("Agreement"), dated August 21, 2000, relating to Employee's employment with the Employer; and WHEREAS, in accordance with Section 6.5 of the Agreement, the parties desire to amend the Agreement; NOW, THEREFORE, for and in consideration of the mutual agreements in the Agreement and in this Amendment, and other good and valuable consideration, the parties agree as follows: 1. Section 3.1(b) of the Agreement is hereby amended by deleting the first sentence of the present section following the heading, "Bonus.", in its entirety and substituting the following in lieu thereof: "Employee will be entitled to participate in the Innotrac Corporation Executive Incentive Compensation Plan with a target annual bonus ("Bonus") of no less than 50% of Salary." 2. Except as hereby modified, the Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the Employer, by and through its duly authorized officers, and the Employee have executed this Amendment as of the date first written above. EMPLOYEE: /s/ David L. Gamsey EMPLOYER: INNOTRAC CORPORATION By: /s/ Scott D. Dorfman Chairman, President, and Chief Executive Officer EX-10.22 9 g67982ex10-22.txt OPERATING AGREEMENT, DATED DECEMBER 28, 2000 1 EXHIBIT 10.22 RETURN.COM ONLINE, LLC OPERATING AGREEMENT DATED AS OF DECEMBER 28, 2000 2 TABLE OF CONTENTS
Page ---- ARTICLE I GENERAL............................................................................................... 2 1.1 Formation; Members................................................................ 2 1.2 Name.............................................................................. 2 1.3 Management........................................................................ 2 1.4 Purposes of the Company........................................................... 2 1.5 Offices........................................................................... 2 1.6 Term.............................................................................. 2 ARTICLE II AUTHORIZED SHARES, SHARE CERTIFICATES; STATUS OF HOLDERS............................................. 2 2.1 Shares............................................................................ 2 2.2 Share Certificates; Legend........................................................ 3 2.3 Share Register; Registration of Transfer.......................................... 4 2.4 Record Date....................................................................... 4 2.5 Status of Shares Purchased by Company............................................. 4 2.6 Company Option Plan............................................................... 4 ARTICLE III CAPITAL CONTRIBUTIONS AND LOANS..................................................................... 4 3.1 Initial Capital Contributions; Issuance of Shares................................. 4 3.2 Intentionally Left Blank.......................................................... 5 3.3 Obligation to Make Capital Contributions.......................................... 5 3.4 No Interest on Contributions...................................................... 5 3.5 Loans to or by Members............................................................ 5 ARTICLE IV DISTRIBUTIONS........................................................................................ 6 4.1 Distributions of Available Cash................................................... 6 4.2 No Other Distributions............................................................ 6 4.3 Distributions upon Dissolution.................................................... 6 4.4 Withholding from Distributions.................................................... 6 ARTICLE V MANAGERS.............................................................................................. 6 5.1 Number, Tenure, and Qualifications................................................ 6 5.2 Manner of Action; Quorum.......................................................... 7 5.3 Meetings.......................................................................... 7 5.4 Action in Lieu of Meeting......................................................... 8 5.5 Powers of Managers................................................................ 8 5.6 Limitations on Authority of Managers and Officers................................. 8 5.7 Compensation of Managers; Expenses................................................ 10
i 3 ARTICLE VI OFFICERS............................................................................................. 10 6.1 Number........................................................................... 10 6.2 Compensation..................................................................... 10 6.3 Term of Office................................................................... 10 6.4 Removal.......................................................................... 10 6.5 Vacancies........................................................................ 10 6.6 Powers........................................................................... 11 ARTICLE VII POWERS, RIGHTS, AND LIABILITIES OF MEMBERS AND HOLDERS............................................. 12 7.1 Management....................................................................... 12 7.2 No Withdrawals................................................................... 12 7.3 Failure to Deliver Shares to the Company......................................... 12 ARTICLE VIII MEETINGS OF MEMBERS; VOTING....................................................................... 13 8.1 Annual Meeting................................................................... 13 8.2 Special Meetings................................................................. 13 8.3 Place of Meetings................................................................ 13 8.4 Notice of Meetings............................................................... 13 8.5 Meeting of All Members........................................................... 13 8.6 Quorum........................................................................... 13 8.7 Manner of Acting................................................................. 14 8.8 Proxies.......................................................................... 14 8.9 Action by Members without a Meeting.............................................. 14 8.10 Waiver of Notice................................................................. 14 8.11 Meeting by Telephone; Action by Consent.......................................... 14 ARTICLE IX TRANSFER AND ASSIGNMENT OF SHARES................................................................... 15 9.1 General Prohibition.............................................................. 15 9.2 Permitted Transfers.............................................................. 15 9.3 Right of First Refusal........................................................... 15 9.4 Right of Co-Sale................................................................. 19 9.5 Admission As A Member............................................................ 19 9.6 Non-Member Transferee............................................................ 20 9.7 Unauthorized Transfer............................................................ 20 9.8 Binding on Transferees........................................................... 20 9.9 Agreement of the Company......................................................... 21 ARTICLE X ACCOUNTING, BOOKS AND RECORDS........................................................................ 21 10.1 Accounting Methods; Fiscal Year................................................. 21 10.2 Books and Records............................................................... 21 10.3 Financial Reports and Tax Returns............................................... 21 10.4 General Information............................................................. 21 10.5 Tax Matters Partner............................................................. 22 10.6 Adjustment of Tax Basis......................................................... 22
ii 4 ARTICLE XI CAPITAL ACCOUNT MAINTENANCE......................................................................... 22 11.1 Maintenance of Capital Accounts................................................. 22 11.2 Allocation of Profits and Losses................................................ 22 11.3 Substitute Allocations.......................................................... 22 11.4 Tax Items; Contributed and Revalued Property.................................... 23 ARTICLE XII DISSOCIATION OF MEMBERS............................................................................ 23 12.1 Effect of Dissociation.......................................................... 23 12.2 Dissociation.................................................................... 24 ARTICLE XIII DISSOLUTION OF COMPANY............................................................................ 24 13.1 Events of Dissolution........................................................... 24 13.2 No Action for Dissolution....................................................... 24 ARTICLE XIV LIQUIDATION OF COMPANY............................................................................. 24 14.1 Liquidation..................................................................... 24 14.2 No Further Claim................................................................ 25 ARTICLE XV DEFINITIONS......................................................................................... 25 15.1 Definitions In General.......................................................... 25 15.2 Certain Definitions............................................................. 25 ARTICLE XVI MISCELLANEOUS...................................................................................... 31 16.1 Applicable Law.................................................................. 31 16.2 Dispute Resolution.............................................................. 31 16.3 Notices......................................................................... 31 16.4 Entire Agreement................................................................ 32 16.5 No Partnership.................................................................. 32 16.6 Creditors Not Benefited......................................................... 32 16.7 Severability.................................................................... 32 16.8 Successors...................................................................... 33 16.9 Counterparts.................................................................... 33 16.10 Section Headings................................................................ 33 16.11 Time............................................................................ 33 16.12 Usage........................................................................... 33 16.13 Consent......................................................................... 33 16.14 Waiver.......................................................................... 33 16.15 Specific Performance............................................................ 33
iii 5 Exhibit A Capital Contributions; Shares Issued Exhibit B Form of Share Certificate Exhibit C Elected Corporate Officers
iv 6 RETURN.COM ONLINE, LLC OPERATING AGREEMENT THIS OPERATING AGREEMENT (this "AGREEMENT") is made and entered into as of the 28th day of December, 2000 by and among those persons identified on EXHIBIT A who execute and deliver this Agreement together with any Person who shall hereafter be admitted as a Member pursuant to SECTION 9.5. WITNESSETH: WHEREAS, Innotrac previously formed RETURN.COM ONLINE, INC., a Georgia corporation (the "CORPORATION") for the purpose of engaging in the business of handling product returns for e-commerce companies, retailers and catalog houses (the "COMPANY'S BUSINESS", ARTICLE XV sets forth the definitions of certain capitalized terms used in this Agreement and not defined elsewhere in this Agreement); and WHEREAS, MBE and Innotrac formed a strategic relationship with respect to the ownership, operation and management of the Corporation; and WHEREAS, as part of such strategic relationship, MBE acquired issued and outstanding capital stock of the Corporation and warrants to purchase such capital stock; and WHEREAS, in connection with forming the Corporation, MBE and Innotrac entered into a Shareholders Agreement dated as of May 16, 2000; and WHEREAS, the Corporation elected pursuant to ss. 14-11-212 of the Georgia Limited Liability Company Act O.C.G.A. ss. 14-11-100, et seq. (the "ACT") to become a limited liability company (the "CONVERSION"); and WHEREAS, the parties hereto desire to agree to the operation of the company described herein (the "COMPANY") pursuant to ss. 14-11-100, et seq. of the Act; and WHEREAS, it is the intent of the parties that this Agreement reflect substantially all of the substantive terms and conditions contained in the aforesaid Shareholders Agreement. NOW, THEREFORE, for and in consideration of the foregoing premises, the mutual covenants and agreements contained in this Agreement, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto do hereby covenant and agree as follows: 7 ARTICLE I GENERAL 1.1 FORMATION; MEMBERS. The Members acknowledge that the Company was formed as a Georgia limited liability company on the date of this Agreement pursuant to the Conversion and by the filing of the articles of organization (the "ARTICLES") pursuant to the Act. Those persons identified on EXHIBIT A on whose behalf this Agreement is executed, together with all Persons who are hereafter admitted as a Member pursuant to SECTION 9.5, shall constitute the members of the Company pursuant to the Act (collectively, "MEMBERS"). 1.2 NAME. The name of the Company is RETURN.COM ONLINE, LLC, and the business of the Company shall be conducted under the Company name unless the Managers change the Company's name or implement a different trade name for the business of the Company. 1.3 MANAGEMENT. The full and entire management of the business and affairs of the Company is vested in a group of individuals determined from time to time as provided in ARTICLE V (the "MANAGERS"), except as such authority may be delegated, by this Agreement or by action of the Managers, to the officers described in ARTICLE VI. All of the powers that the Company may exercise or perform may be performed by the Managers, except as such powers may be delegated to an officer described in ARTICLE VI. Except for situations in which the approval of the Members is expressly required by this Agreement or by nonwaivable provisions of applicable law, the Managers (or, by delegation, the officers of the Company) shall have full and complete authority, power, and discretion to manage and control the business, affairs, and properties of the Company, to make all decisions regarding those matters, and to perform any and all other acts or activities customary or incident to the management of the Company's business. 1.4 PURPOSES OF THE COMPANY. The purposes of the Company are to engage in any activity lawfully conducted by a limited liability company pursuant to the Act. 1.5 OFFICES. The initial principal office of the Company is located at 6655 Sugarloaf Parkway, Duluth, Georgia 30097. The Company's initial registered office in the State of Georgia is located at 1100 Peachtree Street, Suite 2800, Atlanta, Georgia 30309 and the Company's initial registered agent at such address is Jan M. Davidson. The Managers may designate a different principal office, registered office, or registered agent for the Company. The Company may have additional offices at such other places as the Managers shall deem advisable. 1.6 TERM. The Company commenced on the date of the filing of the Articles and shall continue until dissolved as hereinafter provided. ARTICLE II AUTHORIZED SHARES, SHARE CERTIFICATES; STATUS OF HOLDERS 2.1 SHARES. (a) All interests in the Company, including a Member's distributive share of the capital, profits, and losses of the Company and the right to receive distributions of property of the Company, shall be as set forth in this Agreement. All such 2 8 interests shall, for certain purposes as indicated in this Agreement, be represented by units (each such unit being referred to herein as a "SHARE" and collectively as the "SHARES"). The Company may issue a maximum number of ONE HUNDRED TWENTY MILLION (120,000,000) Shares; provided, however, that Members holding seventy-five percent (75%) of the Shares held by Members may at any time increase the maximum number of Shares that may be issued by the Company. (b) Each outstanding share of common stock in the Corporation shall be converted, pursuant to the Conversion, into one Share of the Company, and each outstanding option for or security convertible into common stock of the Corporation shall be converted into the right to receive the same number of Shares of the Company. 2.2 SHARE CERTIFICATES; LEGEND. (a) The Company shall evidence all interests in the Company by numbered Share certificates in the form of EXHIBIT B to this Agreement or such other form as the Managers shall approve, signed by the President, and attested by the Secretary, of the Company. (b) Each certificate representing any Shares now or hereinafter issued to or acquired by any Member or any transferee, successor or assign of any Member, shall bear the following or comparable legends, appropriately completed as to date, together with any other legends required under applicable law (and the Members agree to the restrictions referred to therein): "THE INTERESTS (THE "SHARES") IN RETURN.COM ONLINE, LLC (THE "COMPANY") HAVE NOT BEEN REGISTERED UNDER THE GEORGIA SECURITIES ACT OF 1973, AS AMENDED (THE "GEORGIA ACT"), IN RELIANCE UPON THE EXEMPTION PROVIDED BY O.C.G.A. ss. 10-5-9(13), UNDER ANY OTHER STATE SECURITIES LAWS (THE "STATE LAWS"), OR UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "FEDERAL ACT"). THE SHARES HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE OFFERED FOR SALE, PLEDGED, HYPOTHECATED, SOLD OR TRANSFERRED, NOR WILL ANY ASSIGNEE OR TRANSFEREE OF ANY SHARES BE RECOGNIZED BY THE COMPANY AS HAVING ANY INTEREST IN THE COMPANY, IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT WITH RESPECT TO THE SHARES UNDER THE FEDERAL ACT, THE GEORGIA ACT, AND ANY APPLICABLE STATE LAWS OR AN OPINION OF COUNSEL, WHICH OPINION AND COUNSEL SHALL BE SATISFACTORY TO THE COMPANY, THAT NO SUCH REGISTRATION IS REQUIRED. THE TRANSFER OF SHARES IS SUBJECT TO CERTAIN RESTRICTIONS SET FORTH IN THAT CERTAIN RETURN.COM ONLINE, LLC OPERATING AGREEMENT DATED DECEMBER 28, 2000, A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE COMPANY. ANY PURPORTED TRANSFER OF SHARES 3 9 NOT EXPRESSLY PERMITTED BY THE OPERATING AGREEMENT WILL NOT BE RECOGNIZED BY THE COMPANY, NOR WILL ANY ASSIGNEE OR TRANSFEREE OF ALL OR ANY SHARES BE RECOGNIZED AS HAVING ANY INTEREST IN THE COMPANY." 2.3 SHARE REGISTER; REGISTRATION OF TRANSFER. (a) The Company shall keep at its principal office a register for the registration of, and registration of transfers of Shares. The name and address of each holder of one or more Shares, each transfer thereof, and the name and address of each transferee of one or more Shares shall be registered in such register. Prior to due presentment for registration of transfer, the Person in whose name any Share shall be registered (each a "HOLDER") shall be deemed and treated as the owner and holder thereof for all purposes hereof, and the Company shall not be affected by any notice or knowledge to the contrary. (b) Subject to the limitations on the transfer of Shares set forth in ARTICLE 2.4, the Company shall reflect transfers of Shares on the Share register of the Company by the transferring Member in person or by power of attorney, upon surrender of the old certificate evidencing the Shares to be transferred, duly assigned to the transferee, and only upon compliance with the provisions of this Operating Agreement. 2.4 RECORD DATE. For the purpose of determining Members entitled to notice of or to vote at any meeting of Members or any adjournment thereof, or Holders entitled to receive payment of any distribution, or in order to make a determination of Members or Holders for any other purpose, the date set by the Managers or the date on which notice of the meeting is mailed or the date on which the resolution declaring such distribution is adopted, as the case may be, shall be the record date for such determination of Members or Holders. When a determination of Members entitled to vote at any meeting of Members has been made as provided in this SECTION 2.5, such determination shall apply to any adjournment of such meeting. 2.5 STATUS OF SHARES PURCHASED BY COMPANY. Shares acquired by the Company pursuant hereto shall not be outstanding and shall become authorized and unissued Shares. 2.6 COMPANY OPTION PLAN. The Company shall reserve 6,666,667 Shares for issuance to employees and consultants of the Company holding options (the "OPTIONS") in connection with the Company's 2000 Share Option Plan. The Options shall be governed by the terms of such Plan (and any individual award agreement), and upon the exercise of an Option, the employee shall become a Holder, but shall not be admitted as a Member unless and until the employee complies with the provisions of SECTION 9.5(A) and SECTION 9.5(B). ARTICLE III CAPITAL CONTRIBUTIONS AND LOANS 3.1 INITIAL CAPITAL CONTRIBUTIONS; ISSUANCE OF SHARES. The Members acknowledge that as a result of the Conversion, the parties are deemed to have made a capital contribution equal to their proportionate share of the assets of the Corporation immediately prior to the Conversion. As a result, Innotrac's deemed capital contribution as a result of the 4 10 Conversion is equal to $6,736,000 and MBE's deemed capital contribution as a result of the Conversion is equal to $1,122,666.50. In addition, contemporaneously with the execution of this Agreement, MBE is making a capital contribution of $3,368,000, pursuant to an exercise of a Corporation warrant granted on May 16, 2000 to MBE for an aggregate of 10,000,000 shares of common stock of the Corporation (which shares of Common Stock are converted one-for-one into Shares pursuant to this Agreement) (the "WARRANT"). The exercise price per share under the Warrant is hereby amended to become $0.3368. In consideration of the issuance of the shares underlying the Warrant, MBE has issued to the Company that certain Promissory Note dated the date of this Agreement in the principal amount of $3,368,000 (the "NOTE"), secured, pursuant to the Pledge Agreement of the same date, by the 10,000,000 Shares issued under the Warrant. The Company has issued the Shares to each of Innotrac and MBE as set forth on Exhibit A in consideration for such Capital Contributions. Innotrac agrees to contribute an additional $3,000,000 to the Company when a majority of the Board of Directors deems it necessary and appropriate. 3.2 INTENTIONALLY LEFT BLANK.3.3 OBLIGATION TO MAKE CAPITAL CONTRIBUTIONS. No Member shall have any obligation to make any contributions to the capital of the Company, purchase additional Shares or otherwise invest any funds in the Company. From time to time the Initial Members may make contributions to the capital of the Company in addition to those provided for above if and to the extent they so desire, and if the Managers determine that such additional capital contributions are necessary or appropriate in connection with the conduct of the Company's Business (including without limitation, expansion or diversification). In such event, the Initial Members shall have the opportunity (but not the obligation) to participate in such additional capital contributions on a pro rata basis in accordance with the number of Shares held of record by the Initial Members. 3.4 NO INTEREST ON CONTRIBUTIONS. No Member shall have any right or entitlement to receive interest on any Capital Contribution. 3.5 LOANS TO OR BY MEMBERS. Subject to the other terms of this Agreement: (a) In the event that the Managers determine that the Company requires funds in excess of amounts available on hand and amounts expected to be received from operations, the Company may borrow such funds from any Person, including one or more of the Members, as the Managers shall determine in their sole discretion; provided, however, that if the Managers borrow such funds from one or more of the Members, all Members shall have the opportunity (but not the obligation) to participate in such loans on a pro rata basis according to the number of Shares held of record by the Members. (b) In connection with the management and operation of the Company for the purposes authorized hereunder, the Company shall borrow money from any Member. Any such loan shall bear interest at a commercially reasonable rate. The Company shall pay all principal and interest of the loan payable pursuant to the terms thereof before making any distribution to the Members under the provisions of this Agreement. If any funds are available for payment of amounts due pursuant to loans from Members, but such funds are not adequate to pay all such amounts due in full, payment shall be made pro rata according to the respective amounts due (including both principal and interest) on all Member loans. Except as otherwise provided in this 5 11 Agreement, any Member who lends money to the Company hereunder shall be deemed a general creditor of the Company and not a Member for the purpose of paying principal and interest of any such loan. (c) The Company shall not make loans or advances to Members or Managers except upon commercially reasonable terms and approved by the Managers. ARTICLE IV DISTRIBUTIONS 4.1 DISTRIBUTIONS OF AVAILABLE CASH. At such time as shall be determined by the Managers in their sole and absolute discretion, the Company shall distribute any Available Cash to the Holders in proportion to their respective Percentage Interests. 4.2 NO OTHER DISTRIBUTIONS. Prior to the dissolution of the Company, the Company shall not distribute property other than Available Cash to any Holders unless such distribution is approved by all Members. 4.3 DISTRIBUTIONS UPON DISSOLUTION. Upon the dissolution of the Company, the Company shall distribute its assets, including the proceeds from the liquidation of its assets pursuant to SECTION 14.1, after payment or provision for amounts described in SECTION 14.1(I) and SECTION 14.1(II), to the Holders in proportion to their respective Percentage Interests. 4.4 WITHHOLDING FROM DISTRIBUTIONS. The Company may withhold from distributions or with respect to allocations and pay over to any federal, state, or local government any amount required to be withheld pursuant to the Code or any provision of any other federal, state, or local law and may allocate any such amounts among the Holders in any manner that is in accordance with applicable law. All amounts withheld pursuant to the Code or any provision of any state or local tax law with respect to any payment, distribution or allocation to the Company or to the Holders shall be treated as amounts distributed to the Holders pursuant to this ARTICLE IV for all purposes of the Agreement. ARTICLE V MANAGERS 5.1 NUMBER, TENURE, AND QUALIFICATIONS. (a) The business affairs of the Company shall be managed and conducted by its Managers subject to the provisions of this Agreement. (b) The Company shall initially have five (5) Managers. Each of Innotrac and MBE shall have the right to designate and have elected two Managers, and to remove the Managers designated by it at any time, with or without cause, but only for so long as such Member is the registered owner of at least 25% of the Shares; provided, however, that MBE shall have such right through June 30, 2001, despite it being at any such time through such date the registered owner of less than 25% of the Shares. For so long as each of Innotrac and MBE is the registered owner of at least 10% of the Shares, the fifth member of the Managers, who may be an employee of the Company, (the "OUTSIDE MANAGER") will be designated, and may be removed at any time, with or without cause, by mutual agreement of Innotrac and MBE. On and after 6 12 January 1, 2001, if Innotrac or MBE is the registered owner of 10% or more of the Shares but less than 25% of the Shares, such Member shall have the right to designate and have elected only one member of the Managers, and to remove the Manager designated by it at any time, with or without cause. Promptly after July 1, 2001, if MBE is not the record owner of 25% or more of the Shares, MBE will determine which of the two Managers nominated by it will be removed from the Managers, and will cause that person to resign or be removed from the Board. If Innotrac or MBE is the registered owner of less than 10% of the Shares, such Member will not have the right to designate or have elected any members of the Managers under this Agreement; provided, however, if MBE is the registered owner of 5% of the Shares and MBE's exclusivity obligations are in effect under SECTION 15 of that certain Services and Marketing Agreement between MBE and the Company dated July 7, 2000, MBE shall have the right to designate and elect one Manager and jointly designate with Innotrac the Outside Manager, until MBE owns less than 5% of the Shares or such exclusivity obligations terminate. If any member of the Managers designated by Innotrac or MBE resigns, is removed, dies or is unable or unwilling to serve as a Manager of the Company, then the Member who designated such member shall have the sole right to appoint a successor Manager, provided that the Member who designated the member still has the right to appoint such Manager under this SECTION 5.1. If the Outside Manager resigns, is removed, dies or is unable or unwilling to serve as a Manager of the Company, then Innotrac and MBE shall appoint a successor Manager by mutual agreement, provided that each of Innotrac and MBE is the registered owner of at least 10% of the Shares. Each Member agrees to vote its Shares or to take any other action reasonably necessary or convenient to give effect to the provisions of this SECTION 5.1. (c) Subject to SECTION 5.6 of this Agreement, the Members may change by resolution the number of the Managers. (d) Managers may, but need not be, residents of the State of Georgia and/or Members of the Company. 5.2 MANNER OF ACTION; QUORUM. The Managers may not take any action permitted to be taken by the Managers unless the Managers act at any regular or special meeting held in accordance with SECTION 5.3 or by unanimous written consent in accordance with SECTION 5.4. A majority of the Managers shall constitute a quorum for the transaction of business at any meeting. All resolutions adopted and all business transacted by the Managers shall require the affirmative vote of a majority of the Managers present at the meeting. 5.3 MEETINGS. (a) The Managers shall meet annually, without notice, following the annual meeting of the Members. The Managers may set any number of regular meetings by resolution. No notice need be given for any annual or regular meeting of the Managers. (b) The Chairman or any two Managers may call at any time a special meeting of the Managers, on five days' written notice to each Manager, which notice shall specify the time and place of the meeting. Managers may waive notice of any such meeting by an instrument in writing executed before or after the meeting. 7 13 (c) Managers may attend and participate in meetings either in person or by means of conference telephones or similar communications equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by means of such communication equipment shall constitute presence in person at any meeting. Attendance in person at such meeting shall constitute a waiver of notice thereof. 5.4 ACTION IN LIEU OF MEETING. Any action to be taken at a meeting of the Managers, or any action that may be taken at a meeting of the Managers, may be taken without a meeting if all of the Managers sign a consent in writing, setting forth the action so taken, and if the Managers have complied with any further requirements of law pertaining to such consents. 5.5 POWERS OF MANAGERS. With respect to the Company's assets, affairs and operations, the Managers shall have rights, powers, and authority to carry out all actions on behalf of the Company, except as such rights, powers, and authority may be delegated, by this Agreement or by action of the Managers, to the officers of the Company pursuant to ARTICLE VI and subject to any approval of the Members required by SECTION 5.6, SECTION 5.7, or the Act. Without limiting the generality of the foregoing, the Managers shall have the authority to elect officers of the Company, who may but need not be Members, and to delegate executive responsibility among the officers in a manner consistent with this Agreement. Unless authorized by the Managers or this Agreement, no Manager, attorney in fact, employee, or other agent of the Company, and no Member, acting in its capacity as a Member, shall have any power or authority to act on behalf of or bind the Company in any manner. 5.6 LIMITATIONS ON AUTHORITY OF MANAGERS AND OFFICERS. (a) Notwithstanding anything to the contrary set forth in this Agreement, without the consent of Members holding at least 75% of the Shares, neither the Managers nor any officer or other agent of the Company shall have any authority to: (i) Make any material change in the Company's Business, including the commencement of any business venture by the Company that is not substantially similar to the Company's Business immediately prior to the proposed commencement of the business venture; (ii) Enter into any transaction or series of transactions within a fiscal year with any of the Members or any of their respective Affiliates with consideration between such Member or Affiliate and the Company in excess of $60,000, other than the transactions contemplated in the Services Agreements; (iii) Liquidate, dissolve or wind up the affairs, or adopt any plan for the liquidation, dissolution or winding up of the affairs, of the Company; (iv) Commence any voluntary proceeding for bankruptcy under the United States Bankruptcy Code; (v) Pay make any distribution to any Member, or repurchase or redeem the Shares of any Member (except in accordance with the right of first refusal provisions set forth in SECTION 9.3); 8 14 (vi) Acquire any equity interest in any Person, lend any money to any Person or otherwise make an investment in any Person; (vii) Acquire all or substantially all of the assets of any Person; (viii) Merge or consolidate the Company with any Person, enter into a recapitalization, or adopt any plan of share exchange involving the Company pursuant to the Act or any similar laws of any other jurisdiction; (ix) Alter or amend the Operating Agreement; (x) Sell all or substantially all of the assets of the Company; (xi) Issue options to purchase Shares of the Company to a Member, any of its Affiliates or the employees of a Member or any of such Member's Affiliates; provided that amendments or new agreements to reflect the conversion of the prior grants of Corporation options to acquire 4,400,000 shares of the Corporation's Common Stock to Company Shares issued to Innotrac and MBE and its Affiliates or its employees promptly shall not require approval under this Section; (xii) Increase or decrease the number of Managers; (xiii) Issue Shares or instruments convertible into Shares to any Person in amounts equal to or greater than 5% of the then outstanding Shares; (xiv) Incur debt in excess of 25% of the capital contributed to the Company; or (xv) Amend the Services Agreements in any material respect. (b) Prior to June 30, 2001, the parties agree that if any action set forth in SECTION 5.6(A) will be considered by the Members, the party requesting that the action be considered will provide 30 days' written notice to the other party. (c) Each Member agrees to vote all Shares owned or controlled by it, execute and deliver such documents, take such further actions, and otherwise use its best efforts to cause the Managers to vote in such a manner as may be necessary or desirable to carry out the purposes and intent of this Section. (d) Notwithstanding anything to the contrary set forth in this Agreement, without the written consent or ratification of the specific act by Members holding a majority of the Shares held by Members, neither the Managers nor any officer or other agent of the Company shall have any authority to authorize Shares above the number of Shares authorized in this Agreement or issue Shares to the extent that such issuance would cause the number of outstanding Shares to exceed the number of Shares then authorized. (e) As soon as practicable after the date hereof, the Company shall prepare, or cause to be prepared, with input and assistance from the Members, an annual budget for the Company's first fiscal year, which shall be approved by a majority of the Managers. With 9 15 respect to each following fiscal year, the Company shall prepare, or cause to be prepared, with input and assistance from the Members, a proposed annual budget for such fiscal year, and shall present such proposed annual budget to the Managers for approval. Any proposed annual budget approved by a majority of the Managers shall constitute the annual budget for the fiscal year to which such annual budget relates. If the Managers fail to approve all or any part of the proposed annual budget for any fiscal year, the annual budget in effect for the prior fiscal year shall remain in effect until the approves a new annual budget with respect to a fiscal year. Each annual budget shall include the costs and expenses anticipated to be incurred by the Members for or on behalf of the Company during such fiscal year, including costs and expenses to be incurred by the Company under the Services and Marketing Agreement by and between the Company and MBE dated July 7, 2000 and the Services Agreement by and between the Company and Innotrac, dated July 7, 2000, (collectively, the "SERVICES AGREEMENTS"). 5.7 COMPENSATION OF MANAGERS; EXPENSES. The Managers shall not receive any fees or salaries or other compensation for their service as a Manager other than the Outside Manager (but only if the Outside Manager is not also an employee of the Company), but shall be reimbursed for reasonable expenses of travel and lodging associated with meetings of the Managers, including committee meetings. ARTICLE VI OFFICERS 6.1 NUMBER. The officers of the Company shall be chosen by the Managers. The Managers may choose a chairman of the board, chief executive officer, president, one or more vice-presidents, a secretary, assistant secretaries and assistant treasurers. The Managers 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 Managers. 6.2 COMPENSATION. The salaries of all officers and agents of the Company shall be fixed by the Managers or a committee or officer appointed by the Managers. 6.3 TERM OF OFFICE. Unless otherwise provided by resolution of the Managers, the principal officers shall be chosen annually by the Managers at the first meeting of the Managers following the annual meeting of Managers of the Company, 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. 6.4 REMOVAL. Any officer may be removed from office at any time, with or without cause, by the Managers whenever in its judgment the best interest of the Company will be served thereby, or if appointed at the authorization of the Managers, by a senior officer at any time, with or without cause, whenever in the officer's judgment the best interest of the Company will be served thereby. 6.5 VACANCIES. Any vacancy in an office resulting from any cause may be filled by the Managers. 10 16 6.6 POWERS. Except as hereinafter provided, the officers of the Company 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 Managers. (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 Managers. The chairman of the board shall perform other duties and have other authority as may from time to time be delegated by the Managers. (b) Chief Executive Officer. The chief executive officer shall be charged with the general and active management of the Company, shall see that all orders and resolutions of the Managers are carried into effect, shall have the authority to select and appoint employees and agents of the Company, 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 Company. The chief executive officer shall perform any other duties and have any other authority as may be delegated from time to time by the Managers, and shall be subject to the limitations fixed from time to time by the Managers. (c) President. If there shall be no separate chief executive officer of the Company, then the president shall be the chief executive officer of the Company, with the duties and authority provided in SECTION 6.6(B). The president shall otherwise be the chief operating officer of the Company and shall, consistent with the authority otherwise conferred upon the chief executive officer in SECTION 6.6(B), have responsibility for the conduct and general supervision of the business operations of the Company, including without limitation responsibility for the direction, supervision, and coordination of the activities of all operating subsidiaries and other business units of the Company. The president shall perform such other duties and have such other authority as may from time to time be delegated by the Managers. 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 this Agreement or otherwise. If the Company has more than one vice president, the one designated by the Managers 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 Managers, the chief executive officer, or the president. (e) Secretary. The secretary shall attend all meetings of the Managers and record all the proceedings of the meetings of the Company and of the Managers 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 Managers and special meetings of the Managers, and shall perform such other duties as may be prescribed by the Managers or president, under whose supervision he shall be. He shall have custody of the corporate seal of the Company 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 11 17 signature of such assistant secretary. The Managers may give general authority to any other officer to affix the seal of the Company 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 Managers (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 Managers may from time to time prescribe. (g) Treasurer. The treasurer shall have the custody of the Company funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Company and shall deposit all moneys and other valuable effects in the name and to the credit of the Company in such depositories as may be designated by the Managers. He shall disburse the funds of the Company as may be ordered by the Managers, taking proper vouchers for such disbursements, and shall render to the president and the Managers, at its regular meetings, or when the Managers so requires, an account of all his transactions as treasurer and of the financial condition of the Company. If required by the Managers, he shall give the Company a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Managers for the faithful performance of the duties of his office and for the restoration to the Company, 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 Company. ARTICLE VII POWERS, RIGHTS, AND LIABILITIES OF MEMBERS AND HOLDERS 7.1 MANAGEMENT. Except as expressly set forth in this Agreement, no Holder shall take part in, or interfere in any manner with, the conduct or control of the Company's Business and no Holder shall have any right or authority to act or sign for, or to obligate the Company, but a Member shall have all other rights of a "member" required pursuant to the Act. 7.2 NO WITHDRAWALS. No Holder shall at any time be entitled to withdraw any capital of the Company, whether resulting from a Capital Contribution or otherwise, except to the extent that such Holder may be entitled to a distribution pursuant to the provisions of ARTICLE IV. The Holders shall have no right to demand and receive any property other than cash in respect of or in connection with any return of their Capital Contributions, and prior to the dissolution of the Company pursuant to ARTICLE XIII, they shall have no rights to receive distributions, except out of Available Cash pursuant to SECTION 4.1. 7.3 FAILURE TO DELIVER SHARES TO THE COMPANY. If a Holder (the "OBLIGATED HOLDER") becomes obligated to sell any Shares to the Company or to the Members other than the Obligated Holder (the "NON-OBLIGATED MEMBERS") under this Agreement and fails to deliver such Shares in accordance with the terms of this Agreement, the Company or such Non-Obligated Members may, in addition to all other remedies, tender to the Obligated Holder the 12 18 purchase price for such Shares as shall be specified in this Agreement, and, in the case of Shares to be sold to the Company pursuant to this Agreement, cancel such Shares on its books and records whereupon all of the Obligated Holder's right, title, and interest in and to such Shares shall terminate, and in the case of Shares to be sold to a Non-Obligated Member under this Agreement, issue certificates representing such Shares to the Non-Obligated Member and register the Non-Obligated Member on its Company's books and records as the record owner of the Shares, whereupon all of the Obligated Holder's right, title, and interest in and to such Shares shall terminate. ARTICLE VIII MEETINGS OF MEMBERS; VOTING 8.1 ANNUAL MEETING. The Members shall hold a meeting annually. The Members shall hold the annual meeting at such time and place and on such date as the Managers shall determine from time to time and as shall be specified in the notice of the meeting. Failure to hold the annual meeting of Members as provided above shall not invalidate any actions taken by the Company after the failure to hold the annual meeting as provided above. 8.2 SPECIAL MEETINGS. The Chairman or President may call special meetings of Members, for any purpose or purposes, unless otherwise prescribed by statute. The President shall call a special meeting of the Members upon the written request of a Member or Members holding at least twenty-five percent (25%) of the then outstanding Shares held by Members. The Members shall hold any special meetings at such time and place and on such date specified in the notice of the meeting. 8.3 PLACE OF MEETINGS. The Members may hold annual meetings or special meetings of Members within or outside the United States. 8.4 NOTICE OF MEETINGS. The Company shall give written notice of annual or special meetings of Members stating the place, day, and hour of the meeting not less than ten (10) nor more than sixty (60) days before the date of the meeting, either personally or by mail, by or at the direction of the Managers or Person calling or requiring the call of the meeting, to each Member entitled to vote at such meeting. Notice of a meeting may be waived by an instrument in writing executed before or after the meeting. The waiver need not specify the purpose of the meeting or the business transacted. Attendance at such meeting in person or by proxy shall constitute a waiver of notice thereof. Notice of any special meeting of Members shall state the purpose or purposes for which the meeting is called. 8.5 MEETING OF ALL MEMBERS. If all of the Members shall meet at any time and place, either within or outside of the State of Georgia, and consent to the holding of a meeting at such time and place, such meeting shall be valid without call or notice, and at such meeting any lawful action may be taken. 8.6 QUORUM. At all meetings of Members, a majority of the outstanding Shares held by Members represented at the meeting, in person or by proxy, shall constitute a quorum for the transaction of business. In the absence of a quorum at any such meeting, a majority of the Shares so represented may adjourn the meeting from time to time for a period not 13 19 to exceed sixty (60) days without further notice. If at the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each Member of record entitled to vote at the meeting. At such adjourned meeting at which a quorum is present or represented, any business may be transacted that might have been transacted at the meeting as originally noticed. The Members present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal during such meeting of that number of Shares whose absence would cause less than a quorum to be present. 8.7 MANNER OF ACTING. If a quorum is present, the affirmative vote of Members holding a majority of the Shares represented at the meeting, in person or by proxy and entitled to vote, shall be the act of the Members, unless the vote of a greater or lesser proportion or number shall be otherwise required by the Act, by the Articles, or by this Agreement. Unless otherwise expressly provided in this Agreement or required under applicable law, Members who have an interest (economic or otherwise) in the outcome of any particular matter upon which the Members vote or consent may vote or consent upon any such matter and their vote or consent, as the case may be, shall be counted in the determination of whether the requisite matter was approved by the Members. If at any time the Company has no Shares issued and outstanding, the Members shall act by the affirmative vote of a majority of all Members. 8.8 PROXIES. At all meetings of Members, a Member may attend and vote in person or by proxy executed in writing by the Member or by a duly authorized attorney-in-fact. Such proxy shall be filed with the Secretary of the Company before or at the time of the meeting. No proxy shall be valid after eleven (11) months from the date of its execution, unless otherwise provided in the proxy. 8.9 ACTION BY MEMBERS WITHOUT A MEETING. Action required or permitted to be taken at a meeting of Members may be taken without a meeting if the action is evidenced by one or more written consents describing the action taken, signed by all of the Members, and delivered to the Managers of the Company for inclusion in the minutes or for filing with the Company records, with a copy of such consent transmitted to all Members within ten (10) days after such action becomes effective. Action taken under this SECTION 8.9 shall be effective when the Members required to approve such action have signed the consent, unless the consent specifies a different effective date. The record date for determining Members entitled to take action without a meeting shall be the date the first Member signs a written consent or as otherwise agreed to by the Managers or Members. 8.10 WAIVER OF NOTICE. When any notice is required to be given to any Member, a waiver thereof in writing signed by the person entitled to such notice, whether before, at, or after the time stated therein, shall be equivalent to the giving of such notice. 8.11 MEETING BY TELEPHONE; ACTION BY CONSENT. Members may also meet by conference telephone call if all Members can hear one another on such call and the requisite notice is given or waived. 14 20 ARTICLE IX TRANSFER AND ASSIGNMENT OF SHARES 9.1 GENERAL PROHIBITION. Except as expressly provided in this Agreement, no Member may Transfer any of its Shares, or any interest therein, or allow the same to be subject, directly or indirectly, to Transfer by operation of law or agreement, or pledge, mortgage, hypothecate, assign or transfer as security any of its Shares, without the prior written consent of the Initial Members (and, to the extent that one of the Initial Members is seeking to Transfer any Shares, the consent of the remaining Initial Member will be required in accordance with this ARTICLE IX) (which consent will be conditioned upon the transferee, pledgee or other secured party agreeing in writing to be bound by the terms and conditions of this Agreement), except as expressly permitted by this Agreement. Notwithstanding anything in this Agreement to the contrary, without the prior written consent of the other Members, no Member may transfer or sell Shares owned by it until May 17, 2001, except pursuant to SECTION 9.2 of this Agreement. Any purported Transfer, pledge, mortgage or hypothecation in any other manner shall be void, and shall not be recognized or given effect by the Company. The parties acknowledge that the Shares owned by MBE will be pledged to Chase Manhattan as Administrative Agent pursuant to that certain Credit Agreement dated June 10, 1998, as amended (including the Guarantee and Collateral Agreement made by U.S. Office Products Company and certain of is subsidiaries in favor of Chase Manhattan Bank as Administrative Agent dated as of June 10, 1998 and the other agreements and instruments executed in connection therewith, the "CREDIT AGREEMENT") and agree that the terms of this Agreement shall apply to the shares pledged thereunder. MBE represents and warrants to the Company and Innotrac that no consents are required to be obtained pursuant to the Credit Agreement for the execution, delivery and performance of this Agreement and the Services Agreements, and that this Agreement and the Services Agreements will not violate the Credit Agreement or constitute a breach thereunder. 9.2 PERMITTED TRANSFERS. Notwithstanding SECTION 9.1 above, a Member may transfer any or all of its Shares to any direct or indirect wholly-owned subsidiary or subsidiaries of such Member or to any Person acquiring all or substantially all of the assets of such Member or to any Person into which such Member has merged from and after the date of this Agreement. Each such transferee shall first agree in writing to be bound by the terms and conditions of this Agreement as if it were an original party hereto. SECTION 9.3 of this Agreement does not apply to the transfer by a Member pursuant to the first sentence of this SECTION 9.2. 9.3 RIGHT OF FIRST REFUSAL. All of the Shares, without limitation, shall be subject to the following provisions: (a) A Member may Transfer any or all of its Shares, without the consent required above, if the Member (the "SELLING MEMBER") first obtains a bona fide written offer (the "OUTSIDE OFFER") from a non-Affiliated third party (the "THIRD PARTY") to purchase such Shares (the "OFFERED SHARES") and, before accepting the Outside Offer, such Member offers, in succession, to sell the Offered Shares to the Company and the other Members (as a group) upon the terms, including price, contained in the Outside Offer. The Selling Member's successive offers to the Company and the other Members shall be in writing and shall be accompanied by a copy of the Outside Offer and the full name and address of the Third Party. 15 21 (b) The Company shall have the right to purchase all (but not less than all) of the Offered Shares upon the terms, including price, contained in the Outside Offer. Within ten (10) days after the Company receives the Selling Member's offer, the Secretary of the Company shall call a special meeting of the Managers in accordance with this Agreement for the purpose of deciding whether the Company will accept the Selling Member's offer to sell the Offered Shares to the Company. In lieu of such special meeting, the Secretary may provide the notices required by law and in order for the Managers of the Company to sign a written consent evidencing their decision with respect to the offer. None of the Managers designated by the Selling Member under SECTION 5.1 shall have a vote on the question of whether the Company shall accept such offer; provided, however, that such Managers shall sign any written consent of the Managers for the purpose of authorizing and implementing the decision of the other Manager(s) on behalf of the Company concerning the offer. In addition, the Company's purchase of the Offered Shares is subject to SECTION 5.6 of this Agreement, to the extent applicable. The Company shall have thirty (30) days from receipt of the offer from the Selling Member within which to accept the offer by delivering a written acceptance notice to the Selling Member. Failure by the Company to accept the Selling Member's offer within said 30-day period shall be deemed a rejection of such offer by the Company. (c) If the Company rejects or is deemed to have rejected the Selling Member's offer to sell the Offered Shares to the Company, then the Selling Member shall offer to sell the Offered Shares to the other Members upon the terms, including price, contained in the Outside Offer. The other Members shall have the right to purchase all (but not less than all) of the Offered Shares upon the terms, including price, stated in the Outside Offer, and each in an amount proportionate to its own respective holdings of the Shares held by the other Members (unless: (x) otherwise agreed among them, or (y) one or more of them decline the Selling Member's offer, in which event, the remaining other Members shall be entitled to purchase the excess Offered Shares in amounts proportionate to their own respective holdings of the Shares held by the remaining other Members or as otherwise agreed among them). The other Members shall have thirty (30) days from receipt of the offer from the Selling Member in which to accept the Selling Member's offer by delivering a written notice to that effect to the Selling Member. Failure by the other Members to accept the Selling Member's offer to sell all of the Offered Shares within such 30-day period shall be deemed a rejection of the offer by the other Members. (d) If the Company and the other Members reject or are deemed to have rejected the Selling Member's offer to sell the Offered Shares to the Company and the other Members, the Selling Member shall have the right to sell all (but not less than all) of the Offered Shares to the Third Party at the price and on the terms and conditions stated in the Outside Offer, provided that, before any such transfer may be consummated: (i) the Third Party shall furnish the Company with an opinion of counsel reasonably satisfactory to the Company and in form and substance reasonably satisfactory to the Company that the sale and transfer of such Shares does not violate the provisions of any applicable securities laws, (ii) the Selling Member shall cause the Third Party to acknowledge and agree in writing to be bound by the terms, conditions and restrictions of this Agreement, and (iii) the Selling Member shall comply with the provisions of SECTION 9.4 relating to co-sale rights. (e) If the consideration proposed to be paid to the Selling Member as described in the Outside Offer includes non-cash consideration, the Outside Offer shall state the 16 22 fair market value thereof. The Company and the other Members collectively, or any of them, may by written notice to the Selling Member challenge such valuation. In the case of such a challenge, the value of non-cash consideration shall be determined by averaging the values set by the Outside Offer and by the Company if the Company but none of the other Members challenges such valuation, or, if any other Member challenges such valuation then, regardless of whether the Company makes a challenge, by such other Member and not by the Company, provided that the difference between the two values is within ten percent (10%) of the higher of such values. If such difference is not equal to or less than such 10% amount, then the Selling Member and the other party submitting valuations as provided above shall agree upon one appraiser, who shall determine the fair market value of the non-cash consideration for these purposes. In the event that such parties are unable to agree upon such an appraiser, the parties agree that the American Arbitration Association (the "AAA") shall be employed to choose an appraiser, and such person shall determine the fair market value of the non-cash consideration for these purposes. If the appraisal process is utilized, the party whose valuation of the shares less closely approximates the value selected pursuant to the above-described appraisal process, measured by dollar amounts and not by percentages, shall pay all costs of the appraisal process. In the event the right of first refusal is exercised following such appraisal, the exercising party shall pay cash to the Selling Member in lieu of said non-cash consideration equal to the fair market value as so determined. (f) If the Offered Shares have not been Transferred to the Third Party in accordance with the terms and conditions of the Outside Offer within one hundred twenty (120) days after the other Members reject or are deemed to have rejected the Selling Member's offer pursuant to SECTION 9.3(C), then the restrictions provided in this SECTION 9.3 shall again become effective with respect to such Shares, and, except as provided in SECTION 9.2, no Transfer of such Shares may be made thereafter without the prior written consent of the other Members or without again offering such Shares to the Company and the other Members in accordance with the provisions of this SECTION 9.3. (g) The closing of any purchase and sale with respect to any Offered Shares above shall be held at the principal offices of the Company on the thirtieth (30th) day after the acceptance of the Selling Member's offers with respect to the Offered Shares, provided that if such thirtieth (30th) day is not a Business Day, the closing shall be held on the next ensuing Business Day. At the closing, the Selling Member shall, and shall cause any custodian or trustee holding Shares for or on behalf of such Selling Member to, deliver to the Company or purchasing Member(s), as applicable, certificates representing the Offered Shares to be sold to each such party pursuant to this SECTION 9.3, duly endorsed for transfer and free and clear of all claims, liens, encumbrances, security interests, and restrictions (except for any restrictions created by this Agreement) and with full warranties of title, and the Company or such purchasing Member(s), as the case may be, shall pay to the Selling Member the aggregate purchase price therefor in cash by wire transfer or other delivery of immediately available funds. The Company or any purchasing Member shall be entitled to set-off against any purchase price otherwise payable under this Agreement to any Selling Member the amount of any obligations owed by such Selling Member to the Company or such purchasing Member, as the case may be, on the closing date. If an obligation is owed by the Selling Member to the Company and the Offered Shares are purchased by any of the other Members, the Company shall be entitled to effect the 17 23 set-off, and the applicable purchasing Member(s) shall pay the Company (and reduce the purchase price paid to the Selling Member by) the amount so set-off. (h) If the holder ("PLEDGEE") of a security interest in any Shares pledged or otherwise used as collateral in a lending transaction that is permitted by the parties upon mutual consent (including the Shares of MBE pledged pursuant to the Credit Agreement) forecloses on the Shares subject to the pledge, the Pledgee shall provide the Company and the Members with notice of its foreclosure. Within thirty (30) days of the date of foreclosure, the Pledgee shall in the Pledgee's discretion, either (A) offer all of the foreclosed pledged Shares first to the Company and then to the Members (other than the Pledgor) at Fair Value (as defined below) or (B) if the Pledgee has a bona fide written offer for the foreclosed pledged Shares, offer all of the foreclosed pledged Shares first to the Company and then to the Members (other than the Pledgor) pursuant to the procedures of SECTIONS 9.3(A)-(G) above. If the Pledgee fails to make the required offer within the 30-day period, it shall be deemed to have made an offer pursuant to clause (A) of the preceding sentence. The term "FAIR VALUE" shall mean the cash price per Share that a willing buyer (under no compulsion to buy) would pay, and that a willing seller (under no compulsion to sell) would accept, as of the date of the proposed sale by the Pledgee, taking into account all of the assets and liabilities of the Company as of such date as determined in accordance with generally accepted accounting principles consistently applied and the value of the Company as a going concern. An offer at Fair Value shall be governed by SECTIONS 9.3(B) and (C) above, with the Fair Value and number of the foreclosed pledged Shares being deemed for the purposes of this subsection as the Outside Offer and the Offered Shares, respectively, and the Pledgee being deemed for the purposes of this subsection as the Selling Member. For the purposes of this subsection, in an offer for Fair Value, there shall be no other conditions associated with the Outside Offer and the Offered Shares, other than the Fair Value and the number of foreclosed pledged Shares. If the Company and/or the Members fail to purchase all (but not less than all) of the foreclosed pledged Shares, the Pledgee may sell such Shares to an outside party only pursuant to the procedure set forth in SECTION 9.3(A), (B) AND (c). If the Pledgee offers Shares for Fair Value and if the Company notifies the Pledgee in writing within ten (10) days of receipt of a Fair Value offer that, in its good faith judgment it disagrees with the Fair Value, the Fair Value shall be set by appraisal in accordance with the following procedure: (i) Within 30 days after the Fair Value set forth in the Pledgee's offer notice is rejected by the Company and the Members, the Pledgee, on the one hand, and the Company, on the other hand, shall each designate a Qualified Appraiser (as herein defined) to act as its appraiser for the purpose of establishing the Fair Value. A "QUALIFIED APPRAISER" shall mean any Person actively engaged in providing valuations of the Company's business that has not previously been in the employ of the Company or any Member or the Pledgee, or any Affiliate of any Member or the Pledgee. (ii) The two (2) Qualified Appraisers so named shall certify to the Company and the Pledgee within 30 days thereafter the Fair Value of the Shares, as hereinabove defined. Any valuation not timely certified shall be disregarded. If such appraisers fail to agree on the Fair Value of the Shares, they shall then designate a third appraiser (who shall be a Qualified Appraiser) who shall promptly certify to the Company and the Pledgee its appraisal of the Fair Value of the Shares, which appraisal shall be conclusive. If the first two appraisers fail to designate a third appraiser, then the Company or the 18 24 Pledgee may request any judge in a court of competent jurisdiction in Georgia to designate said third appraiser (who shall be a Qualified Appraiser), and the designation of said judge shall be conclusive. (iii) Subject to reasonable restrictions imposed by the Company in order to protect the Company's business, the appraisers shall have access to all books and records of the Company and shall have the right to examine all of the Company's accounts, securities, assets and equipment. (iv) If either the Company or the Pledgee fails to designate an appraiser within the required time, then the valuation of the appraiser designated by the other party shall be conclusive of the Fair Value of the Shares. Each party shall bear the expense of the appraiser named by such party. The expense of the third appraiser shall be borne equally by the Company and the Pledgee. 9.4 RIGHT OF CO-SALE. (a) If the other Members reject or are deemed to have rejected the Selling Member's offer to sell the Offered Shares to the other Members under SECTION 9.3(C), the Selling Member shall send a written notice (the "CO-SALE NOTICE") to the other Members as to their rights under this SECTION 9.5(A) within ten (10) days after the other Members reject or are deemed to have rejected the Selling Member's offer to sell the Offered Shares to the other Members. Within twenty (20) days after the date of receipt of the Co-Sale Notice, each of the other Members shall notify the Selling Member in writing if such other Member elects to participate in the proposed Transfer of Offered Shares (the other Members electing to participate being referred to as the "PARTICIPATING MEMBERS"). Each of the Participating Members shall then have the right to Transfer to the Third Party, at the same price and on the same terms as the Selling Member, a number of Shares equal to the number of Offered Shares multiplied by a fraction, the numerator of which is the number of Shares held by the Participating Member, and the denominator is the aggregate number of Shares held by the Selling Member and all of the Participating Members. (b) The Participating Members shall enter into an agreement with the Third Party on terms and conditions identical, to the extent practical, to the agreement entered into by the Selling Member containing representations and warranties and other terms and conditions agreed to by the Selling Member. 9.5 ADMISSION AS A MEMBER. Any Person who is not otherwise a Member but who acquires Shares in a transfer permitted under SECTION 9.1, SECTION 9.2, SECTION 9.3 or any other provision of this Agreement, or otherwise acquires Shares in any manner (a "Non-Member Transferee") shall not, except upon compliance with the following requirements, become a Member: (a) The Non-Member Transferee shall have executed a written agreement, in form and substance reasonably satisfactory to the Managers, to assume all of the duties and obligations of the transferor Member under this Agreement and to be bound by and subject to all of the terms and conditions of this Agreement; 19 25 (b) The transferor Member and the Non-Member Transferee shall have executed a written agreement, in form and substance reasonably satisfactory to the Members, to indemnify and hold the Company, the Managers, the officers, and the Members harmless from and against all liabilities, losses, costs, and expenses arising out of the transfer, including, without limitation, any liability arising by reason of the violation of any securities laws of the United States, any State of the United States, or any foreign country; (c) The Non-Member Transferee shall have paid the reasonable expenses incurred by the Company and the other Members in connection with the transfer of the Shares and admission of the Non-Member Transferee to the Company; and (d) Members (other than the transferor Member) holding at least a majority of the Shares held by Members (other than the transferor Member) shall consent to the admission of the Non-Member Transferee as a Member, which consent may be withheld for any reason or no reason. 9.6 NON-MEMBER TRANSFEREE. Upon a transfer of Shares permitted by this Agreement and until compliance with SECTION 9.5, (a) the transferor shall cease to be a Member for all purposes of this Agreement if the transfer is of all Shares of the transferor, and (b) until such time as the transferee becomes a Member pursuant to SECTION 9.5, the transferee shall be a Non-Member Transferee and shall have the rights of a Holder with respect to the transferred Shares, but the Non-Member Transferee shall not have any other rights of a Member pursuant to this Agreement or otherwise, including, without limitation, any rights to vote on any matter submitted to the Members for a vote. 9.7 UNAUTHORIZED TRANSFER. (a) Any purported transfer of Shares not expressly permitted by this ARTICLE IX or any other provision of this Agreement shall be null and void and of no effect whatsoever, provided that, (i) if a court of competent jurisdiction issues a final judgment requiring the Company to recognize such transfer, or (ii) if the Company in its sole discretion elects to recognize such transfer, the transferee shall have only the rights of a Non-Member Transferee, as set forth in SECTION 9.6 above. (b) In the event of a transfer or purported transfer not permitted by this ARTICLE IX or any other provision of this Agreement, the transferor (or purported transferor) and the transferee (or purported transferee) shall indemnify and hold harmless the Company and the other Members from all cost, liability, and damage that any of the Company or such Members may incur, including, without limitation, any incremental tax liability, or any professional fees and costs, as a result of such transfer or purported transfer and efforts to enforce this Agreement and this indemnity. 9.8 BINDING ON TRANSFEREES. (a) Anything herein to the contrary notwithstanding, no Transfer (by operation of law or otherwise) of any of the Shares or any right to obtain Shares shall have any force, validity or effect, or vest in the transferee any rights with respect thereto, unless and until (i) the restrictions regarding such transaction contained in this Agreement shall have been complied with and (ii) such transferee shall have agreed in writing to be bound by the provisions of this Agreement with the same force and effect as if such transferee 20 26 had initially been a party to this Agreement, and such transferee shall thereafter be deemed to be a Member for purposes of this Agreement. (b) Except as otherwise expressly provided herein, the provisions of this Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns, including, without limitation, all subsequent holders of any Shares. 9.9 AGREEMENT OF THE COMPANY. The Company agrees for itself and for its successors and assigns: (a) to be bound by this Agreement; (b) not to transfer, issue or reissue any of the Shares in violation of this Agreement or without requiring proof of compliance with this Agreement and, if such transferee or recipient is not already a party hereto, requiring the transferee or recipient of such Shares to agree in writing to become a party to and be bound by this Agreement as a "Member;" and (c) to place the appropriate legend set forth in SECTION 2.2 on all certificates for Shares issued by the Company during the term of this Agreement. ARTICLE X ACCOUNTING, BOOKS AND RECORDS 10.1 ACCOUNTING METHODS; FISCAL YEAR. The Managers shall determine whether the accounting for the Company shall be on a cash or accrual basis, and they may make any changes of accounting method that they shall deem advisable at any time and from time to time. The Company's Fiscal Year shall be the calendar year, unless the Managers determine that another Fiscal Year is appropriate or unless another Fiscal Year is required by the Code. 10.2 BOOKS AND RECORDS. The Company shall keep or cause to be kept, at Company expense, full, complete, and accurate books of account and other records showing the assets, liabilities, costs, expenditures, and receipts of the Company, the Capital Contributions of the Members, Profits, Losses, items of income, gain, loss, and deduction, Available Cash, the respective Capital Accounts of the Holders, and such other matters as the Managers shall deem appropriate. Such books of account shall be the property of the Company, shall be kept in accordance with sound accounting principles and procedures consistently applied, and shall be open to the reasonable inspection and examination of the Members or their duly authorized representatives. The books of account shall be maintained at the principal office of the Company. 10.3 FINANCIAL REPORTS AND TAX RETURNS. As soon as practicable after the end of each Fiscal Year, the Company shall cause to be prepared a full, detailed, and complete set of financial statements of the Company for such Fiscal Year, prepared in accordance with sound accounting principles consistently applied, as determined by the Managers. The Company shall also cause the preparation of the Company's income tax returns. The Company shall deliver copies of such financial statements, Schedule K-1 of Form 1065 (or a comparable schedule), and tax returns to the Members as soon as practicable after they are completed after the end of each Fiscal Year. 10.4 GENERAL INFORMATION. The Managers shall keep all of the Members informed generally of the Company's transactions and shall furnish to the Members, from time 21 27 to time as the Managers shall deem advisable, information regarding the activities and company's business. 10.5 TAX MATTERS PARTNER. Innotrac is hereby designated as the "tax matters partner," pursuant to Code section 6231 and the Regulations thereunder. The tax matters partner shall represent the Company in all federal income tax matters, and the Company shall hire such attorneys, accountants, and other professionals at Company expense as the tax matters partner deems necessary to defend the positions taken by the Company for federal income tax purposes. 10.6 ADJUSTMENT OF TAX BASIS. In the event of a transfer of Shares in accordance with the terms of this Agreement, upon the request of any Member, the Company shall elect, pursuant to Code section 754 (the "SECTION 754 ELECTION"), to adjust the basis of the Company property if (a) the effect of such adjustment is to increase the adjusted basis of Company property, and (b) the requesting Member or the Member's transferee agrees to bear any additional expense attributable to accounting and recordkeeping required as a result of the Company's Section 754 Election. The Company may, but is not required to, make a Section 754 Election in any circumstance not described in the preceding sentence. ARTICLE XI CAPITAL ACCOUNT MAINTENANCE 11.1 MAINTENANCE OF CAPITAL ACCOUNTS. The Company shall maintain a Capital Account for each Holder as part of its books and records. 11.2 ALLOCATION OF PROFITS AND LOSSES. After giving effect to the special allocations in SECTION 11.3, the Company shall allocate Profits or Losses for each Accounting Period to the Holders in proportion to their respective Percentage Interests. 11.3 SUBSTITUTE ALLOCATIONS. (a) The Members acknowledge that the Company intends to determine and allocate each Holder's distributive share of income, gain, loss, deduction, or credit (or item thereof) consistently with the provisions of Code section 704(b). If for any reason the Managers deem it necessary in order to comply with Code, the Managers may, and they hereby are authorized and directed to, allocate income, gain, loss, deduction, or credit (or items thereof) arising in any year differently than as provided for in this ARTICLE XI if, and to the extent, that allocating income, gain, loss, deduction, or credit (or item thereof) pursuant to SECTION 11.2 would cause the determinations and allocations of each Holder's distributive share of income, gain, loss, deduction, or credit (or item thereof) (i) not to be permitted by the Code and Regulations promulgated thereunder or (ii) be inconsistent with a Holder's interest in the Company taking into consideration all facts and circumstances. (b) The Holders' acknowledge that a requirement of the Regulations pursuant to Code section 704(b) is that liquidating distributions be made in accordance with the positive balances of the Holders' respective Capital Accounts. If, upon the dissolution of the Company, the Holders' Capital Account balances are not in the same proportion as the amount of distributions to which they are entitled pursuant to SECTION 4.3, the Company shall make Substitute Allocations in such manner so that the positive balances of the Holders' Capital Accounts are equal, as closely as possible, to the amount of distributions the Holders' are entitled 22 28 to receive pursuant to SECTION 4.3 if the Company sold its assets for the Gross Asset Value of the assets and applied the proceeds of such sale pursuant to this Agreement. (c) Substitute Allocations shall be deemed to be a complete substitute for any allocation otherwise provided for in this Agreement, and no further amendment of this Agreement or approval by any Holder is required to effectuate such allocation. In making Substitute Allocations, the Managers are authorized and directed to act in reliance upon advice of counsel to the Company or the Company's regular certified public accountants that, in their opinions after examining the relevant provisions of the Code and any current or future proposed or final Treasury Regulations thereunder, the Substitute Allocations are necessary in order to ensure that, in either the then-current Accounting Period or in any preceding Accounting Period, each Holder's distributive share of income, gain, loss, deduction, or credit (or items thereof) are determined and allocated in accordance with the Code and the Holder's interests in the Company. Substitute Allocations made by the Managers in reliance upon the advice of counsel and accountants as described above is deemed to be made in the best interests of the Company and all of the Holders consistent with the duties of the Managers hereunder, and any such Substitute Allocations shall not give rise to any claim or cause of action by any Holder against the Company or any Manager. 11.4 TAX ITEMS; CONTRIBUTED AND REVALUED PROPERTY. (a) Except as provided in SECTION 11.40, any allocation to a Holder of a portion of the Profits, Losses, or items of income, gain, loss, or deduction for a Accounting Period is deemed to be an allocation to that Holder of the same proportionate part of each item of income, gain, loss, deduction, or credit that is earned, realized, or available by or to the Company for federal income tax purposes. (b) For federal income tax purposes, any income, gain, loss, or deduction with respect to property contributed by a Holder to the Company that has a fair market value different from its adjusted basis for federal income tax purposes is allocated among the Holders in accordance with Code section 704(c) and the Regulations section 1.704-3, using any method prescribed in Regulations section 1.704-3 determined by the Managers. With respect to any Company asset that is revalued pursuant to the terms of this Agreement, subsequent allocations of income, gain, loss, and deduction with respect to the asset shall take into account any variation between the adjusted basis of such asset for federal income tax purposes and its fair market value at the time of revaluation in the same manner as under Code section 704(c) and Regulations section 1.704-3, using any method prescribed therein as determined by the Managers. ARTICLE XII DISSOCIATION OF MEMBERS 12.1 EFFECT OF DISSOCIATION. The Company shall not dissolve as a result of the Dissociation of any Member. The Dissociated Member or the successor-in-interest of the Dissociated Member, as the case might be, shall be treated as a Non-Member Transferee of the Shares of the dissociated Member and shall have only those rights set forth in SECTION 9.6; provided, however, that such dissociated Member shall not again become and no such successor-in-interest shall become a Member without first complying with the provisions of SECTION 9.5. 23 29 12.2 DISSOCIATION. For purposes of this Agreement, the occurrence to any Member of an event described in section 14-11-601(a) of the Act shall cause the Member to be "DISSOCIATED" and shall constitute the "DISSOCIATION" of the Member. ARTICLE XIII DISSOLUTION OF COMPANY 13.1 EVENTS OF DISSOLUTION. The Company shall dissolve upon the happening of any of the following events: (a) the dissolution or liquidation of the Company, or the voluntary filing of a petition in bankruptcy by the Company, or the liability of the Company to pay its debts as they become due; (b) the election to dissolve or liquidate the Company by Members holding all of the Shares; (c) a determination by Managers to participate in a Qualified Public Offering; (d) at such time as all of the Shares are held by the same person. 13.2 NO ACTION FOR DISSOLUTION. The Members acknowledge that the Company will suffer irreparable damage (on account of a premature liquidation of the Company's assets, loss of goodwill and reputation, and other factors) if any Member seeks to dissolve, terminate, or liquidate the Company, by litigation or otherwise. The Members further acknowledge that the parties have drawn this Agreement carefully to provide fair treatment of all parties and equitable payments in liquidation of the Interests of all Members, and that the Members entered into this Agreement with the intention that the Company continue until dissolved and liquidated in accordance with the terms of this Agreement. Accordingly, each Member hereby waives and renounces any right to dissolve, terminate, partition, or liquidate the Company, to obtain the appointment of a receiver or trustee to liquidate the Company, or to obtain partition of Company assets, except as specifically set forth in this Agreement. ARTICLE XIV LIQUIDATION OF COMPANY 14.1 LIQUIDATION. (a) Upon the dissolution of the Company, the Company immediately shall commence to wind-up its affairs. A reasonable period of time shall be allowed for the orderly termination of the Company's business, the discharge of its liabilities, and the distribution or liquidation of its remaining assets so as to enable the Company to minimize the normal losses attendant to the liquidation process. A full accounting of the assets and liabilities of the Company shall be taken and a written statement thereof shall be furnished to each Member within a reasonable period after dissolution. The Managers shall conduct the liquidation of the Company, including, without limitation, the preparation of the accounting and statement, provided that the Managers, by mutual agreement, may agree to select a liquidating trustee to conduct the liquidation of the Company. 24 30 (b) In the event of a dissolution on account of a sale or other disposition of all or substantially all of the Company's assets other than cash, and payment of a portion of the proceeds from the sale or disposition is deferred through the Company receiving a purchase money note or otherwise, the Company shall not be finally liquidated until the deferred portion of the purchase price shall be collected in full (or deemed worthless by the Company), and the Company shall not be required to distribute the indebtedness representing the deferred portion of the purchase price to the Members. In the event that following a sale of all or substantially all of the Company's assets, the Company reacquires title to all or a portion of the assets, by foreclosure, sale under power of sale, deed in lieu thereof, or otherwise, the Company shall be reformed and reinstated on the terms contained in this Agreement, notwithstanding the prior dissolution under ARTICLE IV. (c) The Company shall apply its property and assets and the proceeds from the liquidation thereof in the following order of priority: (i) Payment of the debts and liabilities of the Company incurred in accordance with the terms of this Agreement, including, without limitation, any debts to any Member, and payment of the expenses of liquidation; (ii) Establishment of reserves as the Managers may deem reasonably necessary for any contingent or unforeseen liabilities or obligations of the Company or any obligation or liability not then due and payable; provided, any unspent balance of the reserves shall be distributed in the manner hereinafter provided when deemed reasonably prudent by the Members or liquidating trustee; and (iii) Distribution to the Holders pursuant to SECTION 4.3. 14.2 NO FURTHER CLAIM. Except as expressly provided in this Agreement, each Holder shall look solely to the assets of the Company for the return of any investment of such Holder in the Company (including Capital Contributions and loans from a Holder to the Company), and no Holder, Manager, or officer shall have any liability or obligation to the Company or to any other Holder to repay any unreturned Capital Contributions or loans made by any Holder to the Company. ARTICLE XV DEFINITIONS 15.1 DEFINITIONS IN GENERAL. This ARTICLE XV sets forth the definitions of certain terms used in this Agreement. Terms defined elsewhere in this Agreement shall have for all purposes of this Agreement the meanings set forth elsewhere in this Agreement. 15.2 CERTAIN DEFINITIONS. For purposes of this Agreement, the following terms shall have the meanings set forth in this SECTION 15.2: (a) "ACCOUNTING PERIOD" shall mean any period (i) beginning with the later of (A) the date of this Agreement or (B) the close of an Accounting Period and (ii) ending with the earlier of (A) the close of a Fiscal Year of the Company, (B) a variation of the Holders' interests 25 31 in the Company, or (C) any other period for which the Managers determine that a closing of the books of the Company is appropriate. (b) "ACT" shall have the meaning set forth in the recitals of this Agreement. (c) "ADDITIONAL CAPITAL CONTRIBUTION" shall have the meaning set forth in SECTION 3.3. (d) "AFFILIATE" of any Person means any other Person directly or indirectly controlling, controlled by or under direct or indirect common control with the former Person, where "control" means the power to direct cause the direction of the management and policies of another Person, whether through the ownership of voting securities, by contract or otherwise. (e) "AGREEMENT" shall have the meaning set forth in the preamble to this Agreement. (f) "APPLICABLE FEDERAL RATE" shall have the meaning set forth in Section 1274(d) of the Code. (g) "ARBITRATION TRIBUNAL" shall have the meaning set forth in SECTION 16.2. (h) "ARTICLES" shall have the meaning set forth in SECTION 1.1. (i) "AVAILABLE CASH" shall mean cash and cash equivalents in excess of an amount that the Managers determine to be a reasonable reserve for (i) working capital needs, or (ii) the payment of other costs and expenses incident to the purposes of the Company that are anticipated to be incurred, or to become due and payable, or both, in the future and for which cash sufficient to pay the costs and expenses at the time they become due and payable may not be generated by the Company. (j) "BUSINESS DAY" means any day other than Saturday, a Sunday or any day on which national banks in the State of Georgia are required or permitted to be closed. (k) "CAPITAL ACCOUNT" shall mean, with respect to any Member, the account maintained by the Company for the Member in accordance with the following provisions: (i) The Company shall credit to each Member's Capital Account (A) the amount of cash and the Gross Asset Value of property other than cash contributed by the Member to the Company as a Capital Contribution, (B) the Member's distributive share of Profits and any items in the nature of income or gain that the Company specially allocates pursuant to ARTICLE XI, and (C) the amount of any Company liabilities that the Member assumes or that any Company property distributed to the Member secures. (ii) The Company shall debit to each Member's Capital Account (A) the amount of cash and the Gross Asset Value of property other than cash distributed by the Company to the Member pursuant to ARTICLE IV or SECTION 0, (B) the Member's distributive share of Losses and any items in the nature of expenses or losses that the Company specially allocates pursuant to ARTICLE XI, and (C) the amount of the Member's 26 32 liabilities that the Company assumes or that any property contributed by the Member to the Company secure. (iii) In the event that a Member transfers all or a portion of an Interest in accordance with the terms of this Agreement, the transferee shall succeed to the Capital Account of the transferor to the extent that the Capital Account relates to the transferred Interest. (iv) In determining the amount of any liability for purposes of computing a Member's Capital Account, the Company shall take into account Code section 752(c) and any other applicable provisions of the Code and Regulations. The Company intends that the foregoing provisions and the other provisions of this Agreement relating to the maintenance of Capital Accounts comply with Regulations section 1.704-1(b), and the Company shall interpret and apply such provisions in a manner consistent with such Regulations. (l) "CODE" shall mean the Internal Revenue Code of 1986, as amended. (m) "COMPANY" shall have the meaning set forth in set forth in the preamble to this Agreement. (n) "CONVERSION" shall have the meaning set forth in the recitals to this Agreement. (o) "COMPANY'S BUSINESS" shall have the meaning set forth in SECTION 1.4. (p) "CREDIT AGREEMENT" shall have the meaning set forth in SECTION 9.1. (q) "DEPRECIATION" shall mean for each Accounting Period or other period, an amount equal to the depreciation, amortization or other cost recovery deduction allowable for federal income tax purposes with respect to an asset for the Accounting Period; provided, however, that if the Gross Asset Value of an asset differs from that asset's adjusted basis for federal income tax purposes at the beginning of a Accounting Period, Depreciation shall be an amount that bears the same ratio to the beginning Gross Asset Value of such asset as the federal income tax depreciation, amortization or other cost recovery deduction for such Accounting Period bears to the beginning adjusted tax basis of such Accounting Period; provided further, however, that if the federal income tax depreciation, amortization or other cost recovery deduction for such period is zero, the Company shall determine Depreciation with reference to such beginning Gross Asset Value using a reasonable method selected by the Company. (r) "DISSOCIATED" or "DISSOCIATION" shall have the meaning set forth in SECTION 12.2. (s) "FAIR VALUE" shall have the meaning set forth in SECTION 9.3(H). (t) "FISCAL YEAR" shall mean the period determined pursuant to SECTION 10.1. 27 33 (u) "GROSS ASSET VALUE" with respect to any Company asset shall mean the value placed on the asset in connection with the maintenance of Capital Accounts and shall be that asset's adjusted basis for federal income tax purposes except as follows: (i) The initial Gross Asset Value of assets contributed to the capital of the Company by a Member shall be the gross fair market value of the contributed assets on the date of contribution. (ii) The Company shall increase or decrease the Gross Asset Value of Company assets to reflect any adjustments to the adjusted basis of the assets pursuant to Code section 734(b) or 743(b), but only to the extent that Company must take the adjustments into account in determining Capital Accounts pursuant to Regulations section 1.704-1(b)(2)(iv)(m); provided, however, that the Company shall not adjust the Gross Asset Values of Company assets pursuant to this paragraph to the extent that the Company determines that an adjustment pursuant to paragraph (iii) below is appropriate in connection with a transaction that would otherwise result in an adjustment pursuant to this paragraph; (iii) The Company may adjust the Gross Asset Value of all Company assets to equal their respective gross fair market values upon the occurrence of any of the following events: (A) the acquisition of additional Shares by any new or existing Holder in exchange for more than a de minimis capital contribution; (B) the distribution by the Company to a Holder of more than a de minimis amount of Company assets as consideration for all or a portion of a Holder's Shares; and, (C) the liquidation of the Company within the meaning of Regulations section 1.704-1(b)(2)(ii)(g); (iv) The Gross Asset Value of any Company asset shall be adjusted by any Depreciation taken into account with respect to such Company asset for purposes of computing Profits and Losses; and (v) The Gross Asset Value of any Company asset distributed to any Member shall be adjusted to the gross fair market value of the asset on the date of distribution. For purposes of this definition, the Company shall determine the fair market value of Company assets by the agreement of the Managers or by any method consented to by the Managers. (v) "HOLDER" shall have the meaning set forth in SECTION 2.3. (w) "INITIAL MEMBERS" shall mean Innotrac and MBE to the extent that either such Person is a Member, and any Person to whom the Shares of Innotrac or MBE are transferred and who becomes a Member pursuant to SECTION 9.5, and reference to an "Initial Member" shall mean any one of such Persons. (x) "INNOTRAC" shall mean Innotrac Corporation. (y) "MANAGERS" shall have the meaning set forth in SECTION 1.3. 28 34 (z) "MBE" shall mean Mail Boxes Etc. USA, Inc. (aa) "MEMBERS" shall have the meaning set forth in SECTION 1.1. (bb) "NON-MEMBER TRANSFEREE" shall have the meaning set forth in SECTION 9.6. (cc) "NON-OBLIGATED MEMBER" shall have the meaning set forth in SECTION 7.3. (dd) "OBLIGATED HOLDER" shall have the meaning set forth in SECTION 7.3. (ee) "OBLIGATED MEMBER" shall have the meaning set forth in SECTION 7.3. (ff) "OPTIONS" shall have the meaning set forth in SECTION 2.6. (gg) "OUTSIDE MANAGER" shall have the meaning set forth in SECTION 5.1. (hh) "OFFERED SHARES" shall have the meaning set forth in SECTION 9.3. (ii) "OUTSIDE OFFER" shall have the meaning set forth in SECTION 9.3. (jj) "PERCENTAGE INTEREST" shall mean with respect to any Holder the number of Shares held by such Person divided by the total number of Shares issued and outstanding. (kk) "PERSON" shall mean an individual, partnership, joint venture, association, corporation, trust, unincorporated organization, limited liability company and a government or any department or agency thereof or any other legal entity. (ll) "PLEDGEE" shall have the meaning set forth in SECTION 9.3. (mm) "PROFITS" or "LOSSES" shall mean the Company's taxable income or loss determined in accordance with Code section 703(a) for each of its Accounting Periods, with the following adjustments: (i) The Company shall (A) add to its taxable income or loss any of its income that is exempt from federal income tax and not otherwise taken into account in computing Profits or Losses, and (B) subtract from its taxable income or loss any expenditures under Code section 705(a)(2)(B) (or treated as such an expenditure pursuant to Regulations section 1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in determining Profits or Losses. (ii) In the event that the Company adjusts the Gross Asset Value of any Company asset pursuant to paragraph (ii), (iii) or (iv) of the definition of Gross Asset Value, the Company shall take into account the amount of such adjustment as gain or loss from the disposition of such asset for purposes of computing Profits or Losses. 29 35 (iii) The Company shall compute gain or loss resulting from any disposition of any Company asset with respect to which the Company recognizes gain or loss for federal income tax purposes by reference to the Gross Asset Value of the Company asset disposed of, notwithstanding that the adjusted tax basis of such Company asset differs from its Gross Asset Value. (iv) In lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, the Company shall take into account Depreciation for such Accounting Period. (v) For purposes of computing Profits or Losses, to the extent that, as a result of a distribution to a Member other than in liquidation of the Member's Interest, Regulations section 1.704-1(b)(2)(iv)(m)(4) requires an adjustment to the adjusted tax basis of any Company asset pursuant Code section 734(b) or Code section 743(b) to be taken into account in determining a Member's Capital Account, the Company shall treat the amount of the adjustment as an item of gain (to the extent the adjustment increases the tax basis of the asset) or loss (to the extent the adjustment decreases the tax basis of the asset) from the disposition of the asset. (vi) Notwithstanding any other provision of this definition, in computing Profits or Losses, the Company shall not take into account any items of income, gain, expense or loss that it specially allocates pursuant to SECTION 11.3. The Company shall use rules analogous to those set forth in this definition to determine the amount items of income, gain, deduction or loss available for special allocation pursuant to SECTION 11.3. (nn) "QUALIFIED APPRAISER" shall have the meaning set forth in SECTION 9.3. (oo) "QUALIFIED PUBLIC OFFERING" means an underwritten public offering on a firm commitment basis pursuant to an effective registration statement filed under the Securities Act of 1933, as amended, covering the offer and sale of Shares in which the aggregate net cash proceeds of the offering to the Company and any selling Members in the offering equal or exceed $25,000,000. (pp) "REGULATIONS" shall mean Treasury Regulations promulgated under the Code, as such Regulations may be amended from time to time (including corresponding provisions of succeeding Regulations). (qq) "SECTION 754 ELECTION" shall have the meaning set forth in SECTION 10.6. (rr) "SELLING MEMBER" shall have the meaning set forth in SECTION 2.1. (ss) "SERVICES AGREEMENTS" shall have the meaning set forth in SECTION 5.6. (tt) "SHARES" shall have the meaning set forth in SECTION 2.1. (uu) "SUBSTITUTE ALLOCATION" shall mean any allocation made pursuant to SECTION 11.3. 30 36 (vv) "THIRD PARTY" shall have the meaning set forth in SECTION 9.3. (ww) "TRANSFER" means to sell assign, transfer or otherwise dispose of any of the Shares. (xx) "WARRANT" shall have the meaning set forth in SECTION 3.1. ARTICLE XVI MISCELLANEOUS 16.1 APPLICABLE LAW. This Agreement shall be governed by, construed under, and enforced and interpreted in accordance with, the laws of the State of Georgia, without giving effect to its rules governing choice of law. 16.2 DISPUTE RESOLUTION. The parties endeavor to settle amicably by mutual discussions any disputes, differences, or claims whatsoever related to this Agreement. Failing such amicable settlement, any controversy, claim, or dispute arising under or relating to this Agreement, including the existence, validity, interpretation, performance, termination or breach thereof, shall finally be settled by arbitration in accordance with the Arbitration Rules of the AAA. Unless otherwise agreed by the parties in writing, any arbitration proceeding shall take place in metropolitan Atlanta, Georgia. Notwithstanding any provision of this Agreement relating to which state laws govern this Agreement, all issues relating to arbitrability or the enforcement of the agreement to arbitrate contained herein shall be governed by the Federal Arbitration Act and the federal common law of arbitration. There will be three (3) arbitrators (the "ARBITRATION TRIBUNAL"), the first of which will be appointed by the claimant in its notice of arbitration, the second of which will be appointed by the respondent within thirty (30) days of the appointment of the first arbitrator and the third of which will be jointly appointed by the party-appointed arbitrators within thirty (30) days thereafter. The Arbitration Tribunal will not have the authority to award punitive damages to either party. Each party shall bear its own expenses, but the parties will share equally the expenses of the Arbitration Tribunal and the AAA. Judgment upon an arbitration award may be entered in any court having competent jurisdiction and shall be final, binding and non-appealable. 16.3 NOTICES. All notices and other communications required or permitted to be given or made hereunder shall be in writing and delivered personally or sent by pre-paid, first class certified or registered mail, return receipt requested, or by facsimile transmission, to the intended recipient thereof at its address or facsimile number set forth below: To the Company: Return.com Online, LLC 6655 Sugarloaf Parkway Duluth, Georgia 30097 Attn: Scott D. Dorfman Facsimile: (678) 475-5840 31 37 To Innotrac: Innotrac Corporation 6655 Sugarloaf Parkway Duluth, Georgia 30097 Attn: Scott D. Dorfman Facsimile: (678) 475-5840 To MBE: Mail Boxes Etc. USA, Inc. 6060 Cornerstone Court, West San Diego, California 92121-3795 Attn: Thomas K. Herskowitz Facsimile: (858) 625-3196 Any such notice or communication shall be deemed to have been duly given immediately (if given or made in person or by facsimile confirmed by mailing a copy thereof to the recipient in accordance with this SECTION 16.3 on the date of such facsimile), or three days after mailing (if given or made by mail), and in proving same it shall be sufficient to show that the envelope containing the same was delivered to the delivery or postal service and duly addressed, or that receipt of a facsimile was confirmed by the recipient as provided above. Any party may change the address or facsimile number to which notices or other communications to such party shall be delivered, mailed or transmitted by giving notice thereof to the other parties hereto in the manner provided herein. 16.4 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties and supersedes any prior understanding or agreement between them respecting the subject matter of this Agreement. There are no representations, arrangements, understandings or agreements, oral or written, between the parties hereto relating to the subject matter of this Agreement, except those fully expressed in this Agreement. 16.5 NO PARTNERSHIP. The Members intend that the Company be taxable as a partnership for federal and state income tax purposes. Certain of the definitions contained in this Agreement are a derivative of or refer to applicable partnership provisions of the Code and Regulations. In no event shall any such definition or any reference to any such provision give rise to an inference that the Company is not a limited liability company pursuant to the Act. 16.6 CREDITORS NOT BENEFITED. Nothing contained in this Agreement shall be intended or shall be deemed to benefit any creditor of the Company or of any Holder, and no creditor of the Company shall be entitled to require the Company or the Holders to solicit or accept any Capital Contribution for the Company or to enforce any right that the Company or any Holder may have against any Holder under this Agreement or otherwise. 16.7 SEVERABILITY. If any provision of this Agreement is held illegal or unenforceable, the Members hereby covenant and agree that such provision shall be absolutely and completely severable from all other provisions of this Agreement and such other provisions shall constitute the agreement of the Members with respect to the subject matter of this Agreement. 32 38 16.8 SUCCESSORS. Subject to the provisions of this Agreement imposing limitations and conditions upon the transfer, sale or other disposition of the Shares in the Company, all the provisions of this Agreement shall inure to the benefit of and be binding upon the heirs, successors, legal representatives and assigns of the parties hereto. 16.9 COUNTERPARTS. This Agreement may be executed in counterparts, each of which shall for all purposes be deemed an original, and all of such counterparts shall together constitute one and the same agreement. 16.10 SECTION HEADINGS. Section and other headings contained in this Agreement are for reference purposes only and are in no way intended to define, interpret, describe or limit the scope, extent or intent of this Agreement or any provision of this Agreement. 16.11 TIME. Time is of the essence of this Agreement. 16.12 USAGE. All pronouns used in this Agreement shall include the neuter, masculine, and feminine genders, and all words imparting the singular number hereunder shall include the plural number, and vice versa, as the context requires. 16.13 CONSENT. Any approval or consent required to be given under this Agreement may be evidenced by one or more written consents, unless otherwise required by law or this Agreement. 16.14 WAIVER. No failure on the part of any party hereto to exercise, and no delay in exercising, any right, power, or remedy 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 express waiver or assent by any party hereto to any breach of or default in any term or condition of this Agreement shall constitute a waiver of or an assent to any succeeding breach of or default in the same or any other term or condition hereof. 16.15 SPECIFIC PERFORMANCE. Each of the parties acknowledges and agrees that a breach or threatened breach of any of the terms of this Agreement would result in material and irreparable damage to the other parties and that it would be impossible to measure in monetary terms the damages that would accrue upon a breach hereof. Therefore, the parties acknowledge and agree that any non-breaching party shall be entitled to injunctive relief by a court of appropriate jurisdiction in the event of a breach or threatened breach of any of the terms contained in this Agreement, and each party hereby waives the claim or defense that any other party hereto has an adequate remedy at law. [Remainder of page intentionally left blank. Signature page follows.] 33 39 IN WITNESS WHEREOF, the undersigned have executed, sealed, and delivered this Agreement as of the date first set forth above. MEMBERS: (CORPORATE SEAL) RETURN.COM ONLINE, LLC Attest: /s/ David L. Gamsey By: /s/ Scott Dorfman ------------------------------ Name: SCOTT DORFMAN Its: Chairman Return.com Online, LLC 6655 Sugarloaf Parkway Duluth, Georgia 30097 Facsimile: (678) 475-5840 INNOTRAC CORPORATION (CORPORATE SEAL) Attest: /s/ David L. Gamsey By: /s/ Scott Dorfman ------------------------------ Name: SCOTT DORFMAN Its: CEO/President Innotrac Corporation 6655 Sugarloaf Parkway Duluth, Georgia 30097 Facsimile: (678) 475-5840 MAIL BOXES ETC., USA, INC. (CORPORATE SEAL) Attest: /s/ Bruce Rosenberg By: /s/ Thomas K. Herskowitz ------------------------------ Name: THOMAS K. HERSKOWITZ Its: CFO/CRO Mail Boxes Etc. USA, Inc. 6060 Cornerstone Court, West San Diego, California 92121-3795 Facsimile: (858) 625-3196 34 40 EXHIBIT A CAPITAL CONTRIBUTIONS; SHARES ISSUED
MEMBER OR NON-MEMBER TRANSFEREE CAPITAL CONTRIBUTION SHARES ISSUED - ------------------------------- -------------------- ------------- INNOTRAC $6,740,000.00 20,000,000 MBE $4,490,666.50 13,333,333(1)
- --------------- (1) Includes 10,000,000 shares issued contemporaneously with the execution of this Operating Agreement. See Section 3.1. 41 EXHIBIT C COMPANY OFFICERS Scott D. Dorfman Chairman Lee Waters President Joel Holtzman Senior Vice President, Business Development Connie Siewert Vice President, Marketing Christopher Shaw Vice President, Information Technology David Gamsey Chief Financial Officer, Secretary, and Treasurer Gerda Dale Assistant Secretary EX-13.1 10 g67982ex13-1.txt PORTIONS OF REGISTRANT'S ANNUAL REPORT 1 EXHIBIT 13.1 SELECTED FINANCIAL DATA The following table sets forth selected financial data for the Company. The selected historical statements of operations data for each of the years ended December 31, 2000, 1999, 1998, 1997 and 1996 and the selected historical balance sheet data for the periods then ended have been derived from the Consolidated Financial Statements that have been audited by Arthur Andersen LLP, independent public accountants.
RESULTS FOR YEAR ENDED DECEMBER 31: 2000 1999 1998 1997 1996 - --------------------------------------------------------------------------------------------------- (IN 000'S, EXCEPT PER SHARE AMOUNTS) Revenues, net ...................... $ 174,085 $ 227,011 $ 139,673 $ 87,978 $ 71,297 Cost of revenues ................... 129,626 169,602 90,195 57,551 52,514 Special charges .................... 16,462 -- -- -- -- --------- --------- --------- --------- --------- Gross profit ....................... 27,997 57,409 49,478 30,427 18,783 --------- --------- --------- --------- --------- OPERATING EXPENSES: Selling, general and administrative 41,665 36,341 31,332 19,296 10,391 Special charges .................... 17,801 -- -- -- -- Depreciation and amortization ...... 4,168 3,414 3,843 4,342 3,434 --------- --------- --------- --------- --------- TOTAL OPERATING EXPENSES ........... 63,634 39,755 35,175 23,638 13,825 --------- --------- --------- --------- --------- Operating (loss) income ............ (35,637) 17,654 14,303 6,789 4,958 --------- --------- --------- --------- --------- Interest expense, net .............. 80 1,370 956 1,788 1,457 Other expenses ..................... 141 60 35 118 94 --------- --------- --------- --------- --------- TOTAL OTHER EXPENSE ................ 221 1,430 991 1,906 1,551 --------- --------- --------- --------- --------- (Loss) income before income taxes and minority interest .............. (35,858) 16,224 13,312 4,883 3,407 Income tax benefit (provision) ..... 14,084 (6,389) (3,743) 77 (212) --------- --------- --------- --------- --------- Net (loss) income before minority interest ........................... (21,774) 9,835 9,569 4,960 3,195 Minority interest, net of income tax (199) -- -- -- -- --------- --------- --------- --------- --------- NET (LOSS) INCOME ................. $ (21,575) $ 9,835 $ 9,569 $ 4,960 $ 3,195 ========= ========= ========= ========= ========= Pro forma net (loss) income ........ $ (21,575) $ 9,835 $ 8,186 $ 3,003 $ 2,095 ========= ========= ========= ========= ========= Pro forma net (loss) income per share-basic ........................ $ (1.92) $ 0.99 $ 1.01 $ 0.46 $ 0.32 Pro forma net (loss) income per share-diluted ...................... $ (1.92) $ 0.98 $ 1.00 $ 0.46 $ 0.32 YEAR-END FINANCIAL POSITION: Current assets ..................... $ 76,150 $ 94,810 $ 66,416 $ 24,330 $ 37,845 Current liabilities ................ 34,175 24,930 39,563 22,809 38,887 Property and equipment, net ........ 13,717 8,922 7,463 7,609 10,939 Total assets ....................... 97,145 104,218 73,992 32,497 49,037 Long-term obligations .............. 166 75 135 3,944 4,779 Total liabilities .................. 34,341 25,005 39,698 26,753 43,666 Shareholders' equity ............... 58,635 79,213 34,294 4,827 4,540 COMMON STOCK INFORMATION: Average number of common shares outstanding ........................ 11,212 9,911 8,096 6,500 6,500 Common stock price per share: High .......................... 13 1/2 26 3/4 24 3/8 N/A N/A Low ........................... 3 1/8 10 5 3/4 N/A N/A Year-end ...................... 3 1/2 13 3/4 18 1/8 N/A N/A Book value per common share ........ $ 5.23 $ 7.99 $ 4.24 $ 0.74 $ 0.70 OTHER DATA: Capital expenditures ............... $ 13,644 $ 5,328 $ 5,739 $ 6,937 $ 7,972
1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion may contain certain forward-looking statements that are subject to conditions that are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, the reliance on a small number of major clients; risks associated with the terms of our contracts; reliance on the telecommunications industry; the impact of the trend toward outsourcing; risks associated with changing technology; risks associated with competition; risks associated with fluctuations in operating and quarterly results; compliance with government regulation; risks associated with the start-up subsidiary, Return.com, LLC and other factors discussed in more detail under "Business" on Form 10-K. OVERVIEW Innotrac, founded in 1984 and headquartered in Atlanta, Georgia, provides customized, technology-based marketing support, order fulfillment, call center and total customer relationship management services to large corporations that outsource these functions. The Company offers inventory management, inbound call center, pick/pack/ship services, order tracking, transaction processing and returns of telecommunications products, including Digital Subscriber Line Modems ("DSL Modems"), to BellSouth, Pacific Bell, Southwestern Bell, Ameritech Services, Inc., and Qwest and their customers. The Company also provides these services for a significant number of non-telecommunications related companies such as Home Depot, Coca-Cola, NAPA and Siemens. Historically, over ninety percent of the Company's volume has been generated from its telecommunications clients. During 2000, the Company substantially completed its migration towards a fee-for-service business model which eliminates inventory ownership risk and also elected to discontinue its front-end web site development, maintenance and hosting services to its e-commerce clients. As a result of these significant changes in the Company's business, a special, pre-tax charge of $34.3 million was recognized during the year of which $33.3 million was non-cash related. This special charge includes charges for impairment of certain assets, other exit costs related to the e-commerce business and inventory, accounts receivable, software and other items related to the Company's shift to a fee-for-service model. With the Company's conversion of its clients to a fee-for-service model, the Company no longer purchases and sells Caller ID equipped phones, DSL modems and other telecommunications equipment from third party manufacturers for a majority of its clients. Instead, the Company warehouses products on a consignment basis and fulfills equipment on behalf of its customers for a fee. In certain cases, the Company purchases and owns inventory, but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. Management believes that this new model will substantially reduce revenues as pass through cost of purchased equipment will no longer be included in revenues; however, since the Company will no longer have inventory risk or cost of equipment, gross margins, and more importantly, operating cash flows should improve. On May 17, 2000, the Company invested in a new venture, Return.com Online, Inc. ("Return.com") with its equity partner, Mail Boxes Etc. ("MBE"), to process product returns for online and catalog retailers. Return.com is the first full-service returns portal supported by the convenience of 3,400 physical locations. Customers returning merchandise purchased online, or by catalog or phone, can simply take the item to any participating MBE location in the U.S. for packaging and shipping. During 2000, Innotrac invested $3.0 million in this subsidiary and has committed to fund an additional $3.0 million when needed. Approximately $1.0 million of this commitment was funded in the first quarter of 2001. During 2000, MBE invested $1.0 million in this venture and on December 29, 2000, MBE entered into a note agreement to fund an additional $3.4 million into Return.com resulting in a total 2 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS investment of $4.4 million. On December 28, 2000, Return.com was converted to a limited liability company. As of December 31, 2000, Innotrac owned 60% of this subsidiary with the remaining 40% owned by MBE. As a result of this ownership structure, the Company consolidated the results of operations and financial position of Return.com in the consolidated financial statements. The Company expects Return.com to continue to generate significant operating losses in 2001. In March 2001, it was announced that United Parcel Services, Inc. ("UPS") had entered into a definitive agreement to purchase MBE. As a result of this agreement, MBE and Innotrac have begun discussions about the future of Return.com under joint ownership. While the outcome is not currently known, it is possible that Innotrac may obtain 100% ownership of Return.com in the future and that the relationship with MBE may be terminated. Management does not believe that this would have a material adverse effect on the Company's future results of operations. On December 8, 2000, the Company acquired Universal Distribution Services ("UDS"), located in Reno, Nevada, for approximately $4.3 million in total consideration. UDS is a leading provider of integrated order processing, order management, fulfillment, and customer relationship management services. UDS's customer base includes traditional direct marketing companies as well as retailers including Thane International, Gateway Learning and Digital Convergence. 3 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS The following table sets forth summary operating data, expressed as a percentage of revenues, for the years ended December 31, 2000, 1999 and 1998. 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 consolidated financial statements and notes thereto.
Year Ended December 31, ---------------------------------- 2000 1999 1998 ----- ----- ----- REVENUES, NET 100.0% 100.0% 100.0% COST OF REVENUES 74.5 74.7 64.6 SPECIAL CHARGES 9.5 -- -- ----- ----- ----- GROSS PROFIT 16.0 25.3 35.4 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23.9 16.0 22.4 SPECIAL CHARGES 10.2 -- -- DEPRECIATION AND AMORTIZATION 2.4 1.5 2.8 ----- ----- ----- OPERATING (LOSS) INCOME (20.5) 7.8 10.2 OTHER EXPENSE 0.1 0.6 0.7 ----- ----- ----- (LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (20.6)% 7.2% 9.5%
SPECIAL CHARGES Special charges are infrequent transactions that may affect comparability between years. The special charges of $34.3 million for the year ended December 31, 2000 include the following: $24.4 million for inventory, accounts receivable, and other items primarily related to the Company's shift to a fee-for-service business model; $6.2 million for the impairment of long-lived assets primarily due to the abandonment of specified software development projects; and $3.7 million in costs to exit the e-commerce business related to web development, maintenance and hosting services. The Company has approximately $6.9 million in accruals related to the special charges at December 31, 2000, which include $5.1 million for the Company's shift to a fee-for-service business model and $1.8 million for e-commerce exit costs. Cash payments for the year totaled approximately $1.0 million. The Company expects that substantially all of the remaining accruals will be utilized during the year ending December 31, 2001. YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999 REVENUES. Net revenues decreased 23.3% to $174.1 million for the year ended December 31, 2000 from $227.0 million for the year ended December 31,1999. The decrease in revenue is consistent with the Company's switch to a fee-for-service model and the decline in sales of Caller ID equipment, offset by an increase in DSL modems fulfilled. Under the fee-for-service model, revenues are recorded net of equipment costs sold or fulfilled. COST OF REVENUES. Cost of revenues decreased 23.6% to $129.6 million for the year ended December 31, 2000 compared to $169.6 million for the year ended December 31, 1999. Cost of revenues decreased primarily due to the decrease in equipment units sold, as opposed to fulfilled, by the Company due to the shift to fee-for-service and the decline in Caller ID equipment volume. 4 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SPECIAL CHARGES. The Company recorded a special charge of $16.5 million associated with its exit from inventory ownership. GROSS PROFIT. For the year ended December 31, 2000, the Company's gross margin decreased 51.2% to $28.0 million compared to $57.4 million for the year ended December 31, 1999. The decrease in gross margin was due primarily to special charges of $16.5 million as discussed above. Exclusive of the special charges, gross margins for the year ended December 31, 2000 remained consistent at approximately 25% as compared to 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. S,G&A expenses for the year ended December 31, 2000 increased 14.7% to $41.7 million or 23.9% of revenues compared to $36.3 million or 16.0% of revenues for the year ended December 31, 1999. This increase is primarily due to two factors: cost incurred during the year associated with the Company's subsidiary, Return.com, which was founded in February 2000 and a significant investment, beyond normal levels, being expended on information technology during 2000. Management expects such expenditures to return to normal levels in 2001 due to a reduction in headcount and expenditures with the Company's discontinuation of its front-end web site development, maintenance and hosting services. SPECIAL CHARGES. The Company recorded special charges of $17.8 million for impaired assets, accounts receivable and other write-offs during the year ended December 31, 2000. These special charges, as previously discussed, were primarily related to the Company's shift to a fee-for-service business model, its exit from the e-commerce business and the abandonment of specified software development projects. INCOME TAXES. The Company's effective tax rate for the years ended December 31, 2000 and 1999 was 39.3% and 39.4%, respectively. YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998 REVENUES. Net revenues increased 62.5% to $227.0 million for the year ended December 31, 1999 from $139.7 million for the year ended December 31,1998. The increase in revenue was due primarily to increased sales of Caller ID equipment in 1999. There was also an increase in promotional sales programs by certain clients during 1999. The increase in unit volume was partially offset by a decrease in its average per unit price. COST OF REVENUES. Cost of revenues increased 88.0% to $169.6 million for the year ended December 31, 1999 compared to $90.2 million for the year ended December 31, 1998. Cost of revenues increased primarily due to an increase in cost of equipment associated with the increase in units sold by the Company and the impact of the new call center in Pueblo, Colorado that became operational during the third quarter of 1999. GROSS PROFIT. Gross profit for the year ended December 31, 1999 increased 16.0% to $57.4 million or 25.3% of revenues as compared to $49.5 million or 35.4% of revenues for the year ended December 31, 1998. The increase in gross profit was due primarily to the increase in revenue. Gross margins declined for several reasons. First, for strategic reasons, in the first quarter of 1999 the Company conducted a promotional program that resulted in $11.0 million in revenues and $11.0 million in cost of sales. The Company chose to conduct the program in order to strengthen its relationship with the client. In addition, gross margins were impacted by the increased percentage of business derived from certain clients where the Company did not assume the bad debt risk associated with the sale as it had done in the past. This decline is offset by lower bad debt expense, which is included in selling, general and administrative expenses. Also, during the third quarter of 1999, the Company opened a new call center in Pueblo, Colorado. The impact of the new call center was an increase in revenues and cost of revenues of $1.0 million. The $1.0 million in cost of revenues included start up costs of the new facility. 5 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. S,G&A expenses for the year ended December 31, 1999 were $36.3 million or 16.0% of revenues compared to $31.3 million or 22.4% of revenues for the year ended December 31, 1998. The Company's bad debt expense was $3.3 million, or 1.5% of net revenues for the year ended December 31, 1999 as compared to $8.2 million, or 5.9% of net revenues for the year ended December 31, 1998. The decrease in bad debt expense as a percentage of revenue is due primarily to the increased percentage of business derived from clients who pay the Company directly for telecommunications equipment sold to end-users. The increase in other S,G&A expenses is due to increased sales and marketing efforts and increased costs to support the Company's growth. INCOME TAXES. The Company's effective tax rates for the years ended December 31, 1999 and 1998 were 39.4% and 28.1%, respectively. The effective tax rates are lower than statutory rates for the year ended December 31, 1998 due to the amount of income attributable to the pass-through entities involved in the combination of Innotrac at the same time as consummation of our initial public offering in May 1998. LIQUIDITY AND CAPITAL RESOURCES The Company funds its operations and capital expenditures primarily through cash flow from operating activities and borrowings under a credit facility with a bank and, from time to time, equity offerings. The Company had cash and cash equivalents of approximately $18.3 million at December 31, 2000, including $3.0 million that is committed to the startup and development of Return.com. The Company maintains a $40.0 million revolving line of credit with a bank, maturing in June 2002. Borrowings under the line of credit bear interest at the Company's option at the bank's prime rate, as adjusted from time to time, or LIBOR plus up to 225 basis points. At December 31, 2000, the interest rate on the line of credit was 9.50%. At December 31, 2000, there was no outstanding balance under the line of credit. During the year ended December 31, 2000, the Company generated $39.0 million in cash flow from operating activities compared to the use of $23.4 million in cash flow from operating activities during 1999. The generation of cash flow from operating activities during 2000 as compared to the use of cash flow from operating activities in 1999 was due primarily to the decrease in inventory levels attributable to the Company's migration towards a fee-for-service business model, decrease in accounts receivable and the timing of various payables. Net cash used in investing activities was $15.3 million in 2000 as compared to $5.3 million for the year ended December 31, 1999. This increase was primarily due to an increase in capital expenditures to $13.6 million in 2000 from $5.3 million in 1999. The Company made purchases of new technology for e-commerce applications and internal systems development in 2000. During the year ended December 31, 2000, the net cash used in financing activities was $6.2 million compared to $26.2 million provided by financing activities in 1999. This use of cash during 2000 was primarily due to repayments of borrowings under the Company's line of credit. In 1999, the Company received $34.9 million in net proceeds from its equity offering. The Company estimates that its cash and financing needs in 2001 will be met by cash flows from operating activities and its line of credit facility. The Company may need to raise additional funds in order to take advantage of unanticipated opportunities, such as acquisitions of complementary businesses. 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. 6 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Management believes the exposure to markets risks is immaterial. Innotrac holds no market risk sensitive instruments for trading purposes. At present, the Company does not employ any derivative financial instruments, other financial instruments or derivative commodity instruments to hedge any market risks and its does not currently plan to employ them in the future. To the extent that the Company has borrowings outstanding under its credit facility, the Company will have market risk relating to the amount of borrowings due to variable interest rates under the credit facility. The Company's exposure is immaterial due to the short-term nature of these borrowings. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative`s fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138 (" SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities", an amendment of SFAS No. 133. SFAS 138 addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS 133 and amends the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. SFAS 133/138 is effective for fiscal years beginning after June 15, 2000. In management's opinion, the impact of adopting SFAS 133/138 will not have a material impact upon the Company's results of operations or financial position. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue Recognition" ("SAB No.101"), which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provides guidance for disclosure related to revenue recognition policies. An amendment in June 2000 delayed the effective date until the fourth quarter of 2000. Management believes that the Company's revenue recognition practices are in conformity with the guidelines prescribed in SAB No. 101. 7 8 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Innotrac Corporation: We have audited the accompanying consolidated balance sheets of INNOTRAC CORPORATION (a Georgia corporation) AND SUBSIDIARY as of December 31, 2000 and 1999 and the related consolidated statements of operations, partners', members' and shareholders' equity and cash flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innotrac Corporation and its subsidiary as of December 31, 2000 and 1999 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting standards generally accepted in the United States. ARTHUR ANDERSEN LLP Atlanta, Georgia February 2, 2001 8 9 INNOTRAC CORPORATION CONSOLIDATED BALANCE SHEETS (IN 000'S)
DECEMBER 31, ASSETS 2000 1999 ------ ---------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 18,334 $ 894 Accounts receivable, net (Note 3) 31,217 52,431 Inventories, net 15,056 39,503 Deferred income taxes (Note 7) 3,984 583 Prepaid expenses and other (Note 4) 7,559 1,399 ---------- ----------- TOTAL CURRENT ASSETS 76,150 94,810 ---------- ----------- PROPERTY AND EQUIPMENT: Rental equipment 3,464 4,986 Computer, machinery and equipment 16,362 8,711 Furniture, fixtures and leasehold improvements 3,695 2,830 ---------- ----------- 23,521 16,527 Less accumulated depreciation and amortization (9,804) (7,605) ---------- ----------- 13,717 8,922 ---------- ----------- Goodwill, net (Notes 2 and 9) 3,466 0 Deferred income taxes (Notes 7) 2,579 353 Other assets, net (Notes 2 and 9) 1,233 133 ---------- ----------- TOTAL ASSETS $ 97,145 $ 104,218 ========== ===========
DECEMBER 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999 ------------------------------------ ---------- ----------- CURRENT LIABILITIES: Accounts payable $ 22,104 $ 10,530 Accrued expenses and other 12,071 7,384 Current portion of long-term debt (Note 5) 0 8 Line of credit (Note 5) 0 7,008 ---------- ----------- TOTAL CURRENT LIABILITIES 34,175 24,930 ---------- ----------- TOTAL NONCURRENT LIABILITIES (NOTES 5 AND 6) 166 75 COMMITMENTS AND CONTINGENCIES (NOTE 6) MINORITY INTEREST IN SUBSIDIARY 4,169 0 SHAREHOLDERS' EQUITY (NOTE 10): Common stock 1,136 1,121 Additional paid-in capital 60,889 59,701 Retained earnings (3,184) 18,391 Less: Treasury stock (206) 0 ---------- ----------- TOTAL SHAREHOLDERS' EQUITY 58,635 79,213 ---------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 97,145 $ 104,218 ========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. 9 10 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN 000'S, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Revenues, net $ 174,085 $ 227,011 $ 139,673 Cost of revenues 129,626 169,602 90,195 Special charges (Note 14) 16,462 0 0 ----------- ----------- ----------- Gross profit 27,997 57,409 49,478 ----------- ----------- ----------- OPERATING EXPENSES: Selling, general and administrative expenses 41,665 36,341 31,332 Special charges (Note 14) 17,801 0 0 Depreciation and amortization 4,168 3,414 3,843 ----------- ----------- ----------- Total operating expenses 63,634 39,755 35,175 ----------- ----------- ----------- Operating (loss) income (35,637) 17,654 14,303 ----------- ----------- ----------- OTHER EXPENSE: Interest expense, net (Note 5) 80 1,370 956 Other 141 60 35 ----------- ----------- ----------- Total other expense 221 1,430 991 ----------- ----------- ----------- (Loss) income before income taxes and minority interest (35,858) 16,224 13,312 Income tax benefit (provision) 14,084 (6,389) (3,743) ----------- ----------- ----------- Net (loss) income before minority interest (21,774) 9,835 9,569 Minority interest, net of income taxes (199) 0 0 ----------- ----------- ----------- NET (LOSS) INCOME $ (21,575) $ 9,835 $ 9,569 =========== =========== =========== UNAUDITED PRO FORMA DATA: Pro forma net (loss) income (Note 2) $ (21,575) $ 9,835 $ 8,186 =========== =========== =========== Pro forma net (loss) income per share-basic $ (1.92) $ 0.99 $ 1.01 =========== =========== =========== Pro forma net (loss) income per share-diluted $ (1.92) $ 0.98 $ 1.00 =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. 10 11 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY (IN 000'S)
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED TREASURY CAPITAL CAPITAL STOCK CAPITAL EARNINGS STOCK TOTAL ------- -------- ------ -------- -------- ------- -------- BALANCE, DECEMBER 31, 1997 $ 1,759 $(490) $ 5 $ 14 $ 3,539 $ 0 $ 4,827 Distributions to partners, members and shareholders (4,836) (209) 0 0 (4,747) 0 (9,792) Merger of companies (461) 288 645 (1,667) 1,195 0 0 Record deferred taxes associated with merger 0 0 0 0 3,016 0 3,016 Proceeds from sale of common stock, net 0 0 250 26,491 0 0 26,741 Net income 3,538 411 0 0 5,620 0 9,569 Accreted dividends on redeemable capital stock 0 0 0 0 (67) 0 (67) ------- ----- ------ -------- -------- ----- -------- BALANCE, DECEMBER 31, 1998 $ 0 $ 0 $ 900 $ 24,838 $ 8,556 $ 0 $ 34,294 Proceeds from sale of common stock, net 0 0 220 34,694 0 0 34,914 Proceeds from exercise of stockholder's options and 0 0 1 169 0 0 170 grants Net income 0 0 0 0 9,835 0 9,835 ------- ----- ------ -------- -------- ----- -------- BALANCE, DECEMBER 31, 1999 $ 0 $ 0 $1,121 $ 59,701 $ 18,391 $ 0 $ 79,213 Issuance of common stock 0 0 15 1,238 0 0 1,253 Purchase of treasury stock 0 0 0 0 0 (206) (206) Restricted stock grant, net 0 0 0 (50) 0 0 (50) Net loss 0 0 0 0 (21,575) 0 (21,575) ------- ----- ------ -------- -------- ----- -------- BALANCE, DECEMBER 31, 2000 $ 0 $ 0 $1,136 $ 60,889 $ (3,184) $(206) $ 58,635 ======= ===== ====== ======== ======== ===== ========
The accompanying notes are an integral part of these consolidated statements. 11 12 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000'S)
YEAR ENDED DECEMBER 31, -------------------------------------- 2000 1999 1998 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $ (21,575) $ 9,835 $ 9,569 Adjustments to reconcile net (loss) income to net cash provided by used in) operating activities: Depreciation and amortization 4,168 3,414 3,843 Loss on disposal of fixed assets 6,430 502 2,158 Deferred income taxes (5,627) 1,824 602 Minority interest in subsidiary (199) 0 0 Amortization of deferred compensation 38 0 0 Changes in working capital, net of effect of business acquired: Decrease (increase) in accounts receivable 21,908 (8,077) (24,273) Decrease (increase) in inventories 24,447 (25,122) (11,445) (Increase) in prepaid expenses and other assets (2,554) (30) (734) Increase in accounts payable 9,390 1,143 4,621 Increase (decrease) in accrued expenses and other 2,538 (6,867) 6,571 --------- --------- --------- Net cash provided by (used in) operating activities 38,964 (23,378) (9,088) --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (13,644) (5,328) (5,739) Acquisition of business, net of cash acquired (1,678) 0 0 --------- --------- --------- Net cash used in investing activities (15,322) (5,328) (5,739) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings under line of credit (7,008) (8,728) 7,191 Borrowing (repayment) of long-term debt 12 (65) (1,067) Repayment of subordinated debt 0 0 (3,500) Proceeds from equity offerings, net 0 34,914 26,741 Proceeds from stock options exercised 0 170 0 Redemption of redeemable capital stock 0 0 (984) Distributions to partners, members and shareholders 0 (70) (10,729) Proceeds from minority interest in subsidiary 1,000 0 0 Purchase of treasury stock shares (206) 0 0 --------- --------- --------- Net cash (used in) provided by financing activities (6,202) 26,221 17,652 --------- --------- --------- Net increase (decrease) in cash and cash equivalents 17,440 (2,485) 2,825 Cash and cash equivalents, beginning of period 894 3,379 554 --------- --------- --------- Cash and cash equivalents, end of period $ 18,334 $ 894 $ 3,379 ========= ========= ========= Supplemental cash flow disclosures: Cash paid for interest $ 429 $ 1,386 $ 1,006 ========= ========= ========= Cash paid for income taxes, net of refunds received $ (5,907) $ 7,364 $ 1,493 ========= ========= ========= Non-cash transactions: Accreted dividends on redeemable capital stock $ 0 $ 0 $ 67 ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. 12 13 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Innotrac Corporation ("Innotrac" or the "Company") provides customized, technology-based marketing support, order fulfillment, call center and total customer relationship management services. The Company offers inventory management, inbound call center, pick/pack/ship services, order tracking, transaction processing and returns, primarily of telecommunication equipment. Prior to May 6, 1998, Innotrac operated as eight separate affiliates: Innotrac, IELC, Inc., RenTel #1, Inc. ("RenTel"), SellTel #1, Inc. ("SellTel"), HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. ("Providers L.P.") (collectively referred to herein as the "Companies"). The Companies were all owned 100% by one shareholder or his immediate family except for RenTel, SellTel, and Providers L.P. which each had a 10% minority interest owned by one party. The minority interests of RenTel and SellTel were owned by a related party of the shareholder. On May 6, 1998, Innotrac consolidated these eight entities (the "Consolidation"), effective simultaneously with, and as a condition to, the Company's initial public offering (the "Offering") of 2.5 million shares, at an initial public offering price of $12.00 per share (see Note 10). On May 17, 2000, the Company invested in a new venture, Return.com Online, Inc. ("Return.com") with its equity partner, Mail Boxes Etc. ("MBE"), to process product returns for online and catalog retailers. Return.com is the first full-service returns portal supported by the convenience of 3,400 physical locations. Customers returning merchandise purchased online, or by catalog or phone, can simply take the item to any participating MBE location in the U.S. for packaging and shipping. On December 28, 2000, Return.com was converted from a C-corporation to a limited liability company. On December 8, 2000, the Company acquired Universal Distribution Services ("UDS"), located in Reno, Nevada, for approximately $4.3 million in total consideration. UDS is a leading provider of integrated order processing, order management, fulfillment, and customer relationship management services. UDS's customer base includes traditional direct marketing companies as well as retailers including Thane International, Gateway Learning and Digital Convergence. 2. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION Prior to the Consolidation, the accompanying financial statements were combined to include the accounts of the Companies and were prepared on the accrual basis of accounting. Significant intercompany accounts and transactions have been eliminated in the combination. Combined financial statements were presented since the Companies have similar ownership and interrelated activities. The financial information included herein may not necessarily reflect the financial position, results of operations, or cash flows of the Companies in the future or what the financial position, results of operations, or cash flows of the Companies would have been if they were combined as a separate, stand-alone company during the periods presented. Subsequent to the Consolidation, the accompanying financial statements include the consolidated accounts of Innotrac. Significant intercompany accounts and transactions have been eliminated in the consolidation. Certain prior year amounts have been reclassified to conform with the current financial statement presentation. 13 14 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCOUNTING ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CONCENTRATION OF REVENUES Revenues earned under the Company's contracts with its telecommunication clients to provide fulfillment of telecommunications equipment, including DSL modems, accounted for approximately 92%, 93% and 97% of total revenues for the years ended December 31, 2000, 1999 and 1998, respectively. The following table sets forth the percentage of total net revenues derived from services provided to each of the largest clients for the years ended December 31, 2000, 1999 and 1998. Except for the major clients noted in the following table, no single customer provided more than 10% of consolidated revenues during these years. Pacific Bell and Southwestern Bell are subsidiaries of SBC Communications, Inc.
Year Ended December 31, ----------------------------- 2000 1999 1998 ---- ---- ---- BELL SOUTH 28% 39% 59% PACIFIC BELL 27 31 25 SOUTHWESTERN BELL 16 20 11
14 15 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CASH AND CASH EQUIVALENTS The Company considers 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, including DSL modems, are stated at the lower of cost or market, with cost determined by the first-in, first-out method. Substantially all inventory is for the account of one client who has completely indemnified the Company from all risk associated with such inventory. 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 years Computers and software 3-5 years Machinery and 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. Maintenance and repairs are expensed as incurred. During the third quarter of 1999, the Company opened a call center in Pueblo, Colorado. As part of the establishment of the facility in Pueblo, the Company received various tax incentives from the city of Pueblo. These tax incentives have been recorded as a reduction in the basis of property and equipment. Rental equipment is written off at its net book value when it is no longer generating revenues or is not returned by the customer. Equipment rental losses were approximately $103,000, $502,000 and $2,158,000 for the years ended December 31, 2000, 1999 and 1998, respectively, and are included in "Depreciation and Amortization" in the accompanying Consolidated Statements of Operations. LONG-LIVED ASSETS Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of," ("SFAS 121") requires that long-lived assets, including certain identifiable intangibles, and goodwill related to those assets, be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. Management has reviewed the Company's long-lived assets and has determined that there are no long-lived assets requiring impairment loss recognition, other than those included in the Company's special charges recorded in the fourth quarter of 2000 (see Note 14). 15 16 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GOODWILL AND OTHER ACQUIRED INTANGIBLES Goodwill represents the cost of an acquired enterprise in excess of the fair market value of the net tangible and identifiable intangible assets acquired. Goodwill and other acquired intangibles are being amortized over 5-20 years on a straight-line basis , which represents management's estimation of the related benefit to be derived from the acquired business. During the year ended December 31, 2000, amortization expense totaled approximately $31,000 (see Note 9). STOCK-BASED COMPENSATION PLANS The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted the disclosure option of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires that companies which do not choose to account for stock-based compensation as prescribed by this statement, shall disclose the pro forma effects on earnings and earnings per share as if SFAS 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS 123 (see Note 12). INCOME TAXES Innotrac, as a C corporation, utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Prior to the Consolidation, the shareholders of certain affiliated companies had elected to have the Companies treated as S corporations. The Internal Revenue Code of 1986, as amended (the "Code") and certain applicable state statutes provide that the income and expenses of an S corporation are not taxable separately to the corporation but rather accrue directly to the shareholders. In addition, other entities were limited liability companies which are not subject to federal and state income taxes. Accordingly, no provisions for federal and certain state income taxes related to these entities have been made in the accompanying consolidated financial statements. Prior to the Consolidation, it was the policy of management to pay and accrue distributions primarily for income taxes that were required to be paid by the shareholders, members and partners due to the flow through of income of these entities. During the year ended December 31, 1998, distributions of approximately $2.3 million, were recorded. Additionally, in conjunction with the Consolidation (see Note 1) in May 1998, the Company distributed $7.5 million of the undistributed earnings of approximately $9.0 million to the owners of certain pass-through entities. MINORITY INTERESTS The minority interest represents the investment in Return.com Online, LLC ("Return.com"), a subsidiary of the Company, held by Mail Boxes Etc ("MBE") including their proportionate share of losses. Prior to December 29, 2000 when MBE increased its ownership to 40%, this amount was 14%. In March 2001, United Parcel Services, Inc. ("UPS") announced a definitive agreement to purchase MBE. As a result of this agreement, MBE and Innotrac have begun discussions about the future of Return.com under joint ownership. While the outcome is not currently known, it is possible that the Company may obtain 100% ownership of Return.com in the future and that the relationship with MBE may be terminated. Management does not believe that this would have a material adverse effect on the Company's future results of operations. 16 17 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EARNINGS PER SHARE Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. In the computation of diluted earnings per share, the weighted average number of common shares outstanding is adjusted for the effect of all potential common stock equivalent shares. PRO FORMA NET INCOME AND NET INCOME PER SHARE In conjunction with the Consolidation, HomeTel Providers, Inc., Providers, L.P., RenTel #1, RenTel #2, and SellTel #2 lost their non C-corporation status as of May 6, 1998 due to the Company's initial public offering. Accordingly, the pro forma income taxes for the year ended December 31, 1998 reflect income taxes at statutory rates applied to pro forma earnings. In addition, the pro forma earnings per share reflect the Consolidation as if it had occurred at January 1, 1998 (see Note 8). REVENUE RECOGNITION Revenues are recognized on the accrual basis as services are provided to customers or as units are shipped. Revenues are reduced for freight and an estimate of product returns and allowances. In 2000, revenues have also been recorded net of the cost of the equipment for all fee-for-service clients. FAIR VALUE OF FINANCIAL INSTRUMENTS The carrying value of the Company's financial instruments approximates fair value. RECENT ACCOUNTING PRONOUNCEMENTS In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities". The statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. SFAS 133 requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. In June 2000, the FASB issued Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting for Certain Derivative Instruments and Certain Hedging Activities", an amendment of SFAS No. 133. SFAS 138 addresses a limited number of issues causing implementation difficulties for numerous entities that apply SFAS No. 133 and amends the accounting and reporting standards of SFAS 133 for certain derivative instruments and certain hedging activities. SFAS 133/138 is effective for fiscal years beginning after June 15, 2000. In management's opinion, the impact of adopting SFAS 133 and 138 will not have a material impact upon the Company's results of operations or financial position. In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue Recognition" ("SAB No. 101"), which provided guidance on the recognition, presentation, and disclosure of revenue in financial statements filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to recognize revenue and provided guidance for disclosure related to revenue recognition policies. An amendment in June 2000 delayed the effective date until the fourth quarter of 2000. Management believes that the Company's revenue recognition practices are in conformity with the guidelines prescribed in SAB No. 101. 17 18 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ACCOUNTS RECEIVABLE Accounts receivable were composed of the following at December 31, 2000 and 1999 (in 000's):
2000 1999 ---------- ---------- Billed receivables $ 31,933 $ 32,778 Unbilled receivables 2,700 20,831 ---------- ---------- 34,633 53,609 Less: Allowance for doubtful accounts (3,416) (1,178) ---------- ---------- $ 31,217 $ 52,431 ========== ==========
4. NOTE RECEIVABLE MBE issued a $3.4 million, 6.15% note receivable to the Company for MBE's additional investment in Return.com on December 29, 2000. The note receivable matures on October 1, 2001 and is included in "Prepaid expenses and other" in the Company's Consolidated Balance Sheets. 5. FINANCING OBLIGATIONS Financing obligations as of December 31, 2000 and 1999 consisted of the following (in 000's):
2000 1999 -------- -------- Borrowings under revolving credit agreement (up to $40,000,000); the revolving advances cannot exceed an amount equal to the sum of 80% of the eligible accounts receivable plus 70% of the eligible installment receivables; interest payable monthly at rates equal to the prime rate (9.5% and 8.5% at December 31, 2000 and 1999, respectively), or at the Company's option, LIBOR plus up to 225 basis points, expires on June 1, 2002, secured by all the assets of the Company $ 0 $ 7,008 Other 0 10 -------- -------- 0 7,018 Current portion 0 7,016 -------- -------- $ 0 $ 2 ======== ========
The balance of the line of credit was paid during the third quarter of 2000 with a weighted average interest rate of 7.49% through this period. The weighted average interest rate on the revolving line of credit agreement was 6.26% for the year ended December 31, 1999. The Company incurred interest expense related to its line of credit of $0.5 million, $1.3 million and $1.0 million for the years ended December 31, 2000, 1999 and 1998, respectively. The revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. The Company was in compliance with all covenants as of December 31, 2000. 18 19 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. 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. Aggregate future minimum lease payments under noncancellable operating leases with original periods in excess of one year as of December 31, 2000 are as follows (in 000's): 2001.................................................................................. $ 3,874 2002.................................................................................. 3,620 2003.................................................................................. 3,435 2004.................................................................................. 2,947 2005.................................................................................. 2,078 Thereafter............................................................................ 4,795 -------- Total minimum lease payments.......................................................... $ 20,749 ========
Rent expense under all operating leases totaled approximately $3.1 million, $2.0 million and $1.2 million during the years ended December 31, 2000, 1999 and 1998, respectively. LEGAL PROCEEDINGS The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. There are no material pending legal proceedings to which the Company is a party. 7. INCOME TAXES Details of the income tax benefit (provision) for the years ended December 31, 2000, 1999 and 1998 are as follows (in 000's):
2000 1999 1998 --------- --------- --------- Current $ 8,457 $ (4,565) $ (3,141) Deferred 5,627 (1,824) (602) --------- --------- --------- $ 14,084 $ (6,389) $ (3,743) ========= ========= =========
19 20 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Deferred income taxes reflect the net effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Companies' deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows (in 000's):
2000 1999 ---------- ----------- Current deferred tax assets: Allowance for doubtful accounts 1,351 466 Reserve for returns and equipment losses 1,512 117 Other reserves 1,121 0 ---------- ----------- 3,984 583 ---------- ----------- Noncurrent deferred tax assets (liabilities): Net operating loss carryforwards $ 3,428 $ 0 Depreciation (810) 324 Other (39) 29 ---------- ----------- 2,579 353 ---------- ----------- Net deferred tax asset $ 6,563 $ 936 ========== ===========
Management believes that sufficient income will be earned in the future to realize the net deferred tax assets. At December 31, 2000, the Company had net operating loss ("NOL") carryforwards of approximately $8.7 million for income tax purposes, which primarily begin to expire beginning in 2020. Section 382 of the Internal Revenue Code limits the utilization of net operating loss carryforwards when there are changes in ownership greater than 50%, as defined. If such a change occurs, the timing of the Company's utilization of its NOL carryforwards could be impacted. Innotrac converted from the cash basis to the accrual basis for income tax purposes effective August 1995, with the accumulated difference added back to taxable income over a four-year period. Effective with the Consolidation in 1998, the Company converted all of its entities that were non-C-corporations for income tax reporting purposes to C-corporation status and recorded a one-time benefit of approximately $3.0 million related to certain temporary differences at these entities. A reconciliation of the income tax (benefit) provision computed at statutory rates to the income tax (benefit) provision for the years ended December 31, 2000, 1999 and 1998 is as follows:
2000 1999 1998 ------ ------ ------ Federal statutory rate (35.0)% 35.0% 35.0% Increase (decrease) in taxes resulting from: State income taxes, net of federal benefit (4.0) 4.0 6.0 Income taxable directly to shareholders, partners and members (see Note 2) 0.0 0.0 (13.3) Other (0.3) 0.4 0.5 ------ ------ ------ (39.3)% 39.4% 28.2% ====== ====== ======
20 21 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 8. EARNINGS PER SHARE The following table shows the amounts used in computing earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards No. 128 and the effects on income and the weighted average number of shares of potential diluted common stock. Options outstanding to purchase shares of the Company's common stock were not included in the computation of diluted EPS for the year ended December 31, 2000 because their effect would be anti-dilutive if exercised. Shares used to compute diluted earnings per share are as follows (in 000's):
2000 1999 1998 ------- ------- ------ Diluted earnings per share: Weighted average shares outstanding 11,212 9,911 8,096 Employee and director stock options -- 122 59 ------- ------- ------ Weighted average shares assuming dilution 11,212 10,033 8,155 ======= ======= ======
9. ACQUISITION On December 8, 2000, the Company acquired Universal Distribution Services, Inc. ("UDS") for approximately $4.3 million in total consideration, including $1.3 million in shares of common stock. The purchase agreement contains certain earn-out provisions, which, if achieved, will be recorded as additional purchase price consideration when earned. The transaction was accounted for under the purchase method of accounting and, accordingly, the operating results of UDS have been included since the date of acquisition in the Company's consolidated results of operations. The following table summarizes the assets purchased and liabilities assumed as well as the preliminary allocation of the purchase price to various intangibles and goodwill (in 000's): Purchase price $ 4,272 Current assets 2,402 Current liabilities (4,291) Property 1,686 Other (17) Customer base 1,010 Goodwill 3,482
This allocation represents management's best estimate of the values acquired. This allocation is subject to change up to one year from the date of acquisition, but management does not currently anticipate any material changes. 21 22 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 10. SHAREHOLDERS' EQUITY Innotrac has authorized 50,000,000 shares of Common Stock, $0.10 par value, and 10,000,000 shares of Preferred Stock, $0.10 par value. On December 12, 1997, Innotrac effected a 70.58823-for-1 stock split resulting in 1,080,000 shares outstanding. Additionally, in exchange for their previous ownership interests, 5,420,000 shares of $0.10 par value common stock were issued to the remaining entity owners pari-passu based on their relative value to the consolidated group except for the minority stockholder of one of the affiliated entities, whose ownership interest was repurchased as scheduled in the fourth quarter of 1998. After the Consolidation, there were an aggregate of 6,500,000 shares outstanding. As discussed in Note 1, on May 6, 1998 the Company completed an initial public offering of 2.5 million shares at a price of $12.00 per share for net proceeds of approximately $26,741,000. On July 30,1999, the Company completed a secondary public offering of 2.2 million shares at a price of $17.00 per share for net proceeds of approximately $34,914,000. In June 2000, the Company's Board of Directors authorized the repurchase, at the direction of senior management, of up to $5.0 million of the Company's common stock. As of December 31, 2000, the Company had repurchased 45,000 shares at a total cost of $206,000. The repurchased shares are recorded at cost as treasury stock and result in a reduction of shareholder's equity. At December 31, 2000 and 1999, there were 11,364,595 and 11,215,000 shares of common stock outstanding, respectively. 11. 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 six months of service and are 18 years of age or older. Participants may elect to defer up to 15% of compensation up to a maximum amount determined annually pursuant to IRS regulations. Innotrac has elected to provide matching employer contributions equal to 15% of contributions for less than five years of service, 25% of contributions for five to nine years of service, and 35% of contributions for over nine years of service. Total matching contributions made to the plan and charged to expense by Innotrac for the years ended December 31, 2000, 1999 and 1998 were not material. 12. STOCK BASED COMPENSATION The Company has adopted two stock option plans: the 1997 and 2000 Stock Option and Incentive Award Plans ("The Plans"). The Plans provide key employees, officers, directors, contractors and consultants an opportunity to own shares of common stock of the Company and to provide incentives for such persons to promote the financial success of the Company. Awards under The Plans may be structured in a variety of ways, including as "incentive stock options" as defined in Section 422 of the Internal Revenue Code, as amended, non-qualified stock options, restricted stock awards, and stock appreciation rights ("SARs"). Incentive stock options may be granted only to full-time employees (including officers) of the Company and its subsidiaries. Non-qualified options, restricted stock awards, SARs, and other permitted forms of awards may be granted to any person employed by or performing services for the Company, including directors, contractors and consultants. The 1997 Stock Option Plan and 2000 Stock Option Plan provides for the issuance of options to purchase up to an aggregate of 800,000 shares and 1,300,000 shares of common stock, respectively. The Company also has an amendment to the 2000 Plan for the issuance of options to purchase up to an additional 1,500,000 shares of common stock pending approval at the 2001 Shareholder's Meeting. 22 23 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 Plans. A summary of the options outstanding and exercisable by price range as of December 31, 2000 is as follows:
Options Outstanding Options Exercisable ------------------------------------ ----------------------------------- Weighted Average Weighted Range of As of Remaining Weighted Average As of Average Exercise Prices December 31, 2000 Contractual Life Exercise Price December 31, 2000 Exercise Price - --------------- ----------------- ---------------- ---------------- ----------------- -------------- $ 1.77 - $ 3.54 535,000 10.0 $ 3.13 -- $ -- $ 3.54 - $ 5.31 380,000 9.4 4.86 -- -- $ 5.31 - $ 7.07 160,000 9.4 6.07 -- -- $ 7.07 - $ 8.84 310,000 9.2 7.13 -- -- $ 8.84 - $10.61 239,175 6.9 9.10 193,131 9.10 $10.61 - $12.38 30,000 7.3 12.00 30,000 12.00 $12.38 - $14.15 99,500 8.7 13.07 12,499 14.13 $15.92 - $17.68 40,500 8.2 16.63 9,999 17.69 --------- ------ ------- ------- ------- 1,794,175 9.1 $ 6.19 245,629 $ 10.05 ========= ====== ======= ======= =======
A summary of the status of the Company's two stock option plans as of December 31, 2000, 1999 and 1998 is as follows (shares in thousands):
Shares Weighted Average Price ------ ---------------------- Outstanding at December 31, 1997 343 $ 9.10 Granted 40 12.00 Forfeited (20) 9.10 ----- -------- Outstanding at December 31, 1998 363 9.42 Granted 209 14.35 Exercised (13) 11.33 Forfeited (31) 14.11 ----- -------- Outstanding at December 31, 1999 528 10.98 Granted 1,725 5.01 Forfeited (459) 7.14 ----- -------- Outstanding at December 31, 2000 1,794 $ 6.19 ===== ======== Options exercisable at December 31, 2000 246 $ 10.05 ===== ========
23 24 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company accounts for The Plans under APB No. 25, under which no compensation cost has been recognized. Had compensation cost for stock options been determined under SFAS No. 123, the Company's net (loss) income and net (loss) income per share would have been the following pro forma amounts (in 000's, except per share data):
YEAR ENDED DECEMBER 31, -------------------------------------------------- 2000 1999 1998 ----------- ----------- ----------- Net (loss) income Pro forma $ (21,575) $ 9,835 $ 8,186 Pro forma adjusted for the impact of SFAS No. 123 $ (22,347) $ 9,048 $ 7,402 Diluted net (loss) income per share Pro forma $ (1.92) $ 0.98 $ 1.00 Pro forma adjusted for the impact of SFAS No. 123 $ (1.99) $ 0.90 $ 0.91
The Company has computed for pro forma disclosure purposes the value of all options granted using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions:
2000 1999 1998 -------- --------- --------- Risk-free interest rate 5.44% 6.34% 5.17% Expected dividend yield 0% 0% 0% Expected lives 2.7 Years 2.7 Years 2.7 Years Expected volatility 90.4% 80.5% 86.0%
24 25 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In 000's, except per share data) First Second Third Fourth --------- --------- -------- --------- 2000 Quarters: Revenues, net $ 47,850 $ 50,352 $ 50,284 $ 25,599 Operating (loss) income (1,614) (15,337) 283 (18,969) Net (loss) income (1,124) (9,206) 319 (11,564) Net (loss) income per share-basic (0.10) (0.82) 0.03 (1.03) Net (loss) income per share-diluted $ (0.10) $ (0.82) $ 0.03 $ (1.03) 1999 Quarters: Revenues, net $ 67,320 $ 57,496 $ 51,661 $ 50,534 Operating income 5,784 5,869 4,075 1,926 Net income 3,286 3,266 2,303 980 Net income per share-basic 0.37 0.36 0.22 0.09 Net income per share-diluted $ 0.36 $ 0.36 $ 0.22 $ 0.09 1998 Quarters: Revenues, net $ 22,565 $ 36,346 $ 35,233 $ 45,529 Operating income 2,587 4,494 3,669 3,553 Net income 1,393 2,596 2,169 2,028 Net income per share-basic 0.21 0.33 0.24 0.23 Net income per share-diluted $ 0.21 $ 0.33 $ 0.24 $ 0.22
14. SPECIAL CHARGES During 2000, the Company substantially completed its migration towards a fee-for-service business model, which eliminates inventory ownership risk and also elected to discontinue its front-end web site development, maintenance and hosting services to its e-commerce clients. As a result of these significant changes in the Company's business, a special pre-tax charge of $34.3 million was recognized. The special charges of $34.3 million for the year ended December 31, 2000 includes the following: $24.4 million for inventory, accounts receivable and other items primarily related to the Company's shift to a fee-for-service business model; $6.2 million for the impairment of long-lived assets primarily due to the abandonment of specified software development projects; and $3.7 million in costs to exit the e-commerce business related to web development, maintenance and hosting services. The Company has approximately $6.9 million in accruals related to the special charges at December 31, 2000, which include $5.1 million for the Company's shift to a fee-for-service business model and $1.8 million for e-commerce exit costs. Cash payments for the year totaled approximately $1.0 million. The Company expects that substantially all of the remaining accruals will be utilized during the year ended December 31, 2001. 25 26 INNOTRAC CORPORATION SHAREHOLDER INFORMATION CORPORATE HEADQUARTERS Innotrac Corporation 6655 Sugarloaf Parkway Georgia 30097 678-584-4000 www.innotrac.com TRANSFER AGENT SunTrust Bank P.O. Box 4625 Atlanta, Georgia, 30302 ANNUAL MEETING Wednesday, May 21, 2001 9 a.m. Eastern Daylight Time Gwinnett Civic and Cultural Center 6400 Sugarloaf Parkway Duluth, Georgia 30097 INDEPENDENT PUBLIC ACCOUNTANTS Arthur Andersen LLP Atlanta, Georgia FORM 10-K/INVESTOR CONTACT A copy of the Innotrac Annual Report on Form 10-K for 2000 filed with the Securities and Exchange Commission is available from the Company at no charge. These requests and other investor contacts should be directed to the Chief Financial Officer at the Company's corporate office. COMMON STOCK Innotrac's common stock trades on The Nasdaq Stock Market under the symbol INOC. As of March 20, 2001, the Company had approximately 3,074 shareholders based on the number of holders of record and an estimate of the number of individual participants represented by securities position listings. The following table sets forth the reported high and low sales prices for Innotrac's common stock as reported by Nasdaq:
2000 HIGH LOW ---- ----- ----- First Quarter 13 1/2 6 3/4 Second Quarter 8 1/4 4 3/4 Third Quarter 6 3/4 4 3/4 Fourth Quarter 5 3/4 3 1/8
1999 HIGH LOW ---- ------ ------ First Quarter 18 1/2 10 Second Quarter 20 1/4 14 1/8 Third Quarter 26 3/4 15 1/4 Fourth Quarter 17 5/8 10 5/8
The Company has never paid a dividend on its common stock. The Company presently intends to retain its earnings to support the growth of its business and does not expect to pay any dividends in the foreseeable future. 26 27 INNOTRAC CORPORATION DIRECTORS AND OFFICERS BOARD OF DIRECTORS Scott D. Dorfman(1)(3) Chairman, President and Chief Executive Officer David L. Ellin(1) Senior Vice President and Chief Operating Officer Larry C. Hanger Senior Vice President - Business Development Bruce V. Benator(1)(2) Managing Partner William, Benator and Libby, LLP Certified Public Accountants Martin J. Blank(2)(3) Chairman and Chief Operating Officer Automobile Protection Corporation (a subsidiary of the Ford Motor Company) markets extended vehicle service contracts and warranty programs William H. Scott, III(2)(3) President and Chief Operating Officer ITC Holding Company, Inc. a telecommunications company OFFICERS Scott D. Dorfman Chairman, President and Chief Executive Officer David L. Ellin Senior Vice President and Chief Operating Officer David L. Gamsey Senior Vice President, Chief Financial Officer, and Secretary Larry C. Hanger Senior Vice President - Business Development William F. Hendrick, Jr. Vice President - Telecommunications Clifford A. Ruden Vice President - Sales (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee 27 EX-21.1 11 g67982ex21-1.txt LIST OF SUBSIDIARIES 1 EXHIBIT 21.1 LIST OF SUBSIDIARIES - Return.com Online, LLC EX-23.1 12 g67982ex23-1.txt CONSENT OF ARTHUR ANDERSEN, LLP. 1 EXHIBIT 23.1 CONSENT OF ARTHUR ANDERSEN LLP As independent public accountants, we hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-66045 and 333-54970) of Innotrac Corporation of our reports, dated February 2, 2001, included in the December 31, 2000 Annual Report on Form 10-K of Innotrac Corporation. /s/ ARTHUR ANDERSEN LLP Atlanta, Georgia March 28, 2001 EX-24.1 13 g67982ex24-1.txt POWER OF ATTORNEY 1 EXHIBIT 24.1 POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Scott D. Dorfman and David L. Gamsey and either of them, as attorneys-in-fact, with power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 30th day of March, 2001.
Signature Title - --------- ----- /s/ Scott D. Dorfman Chairman of the Board, President and Chief Executive - ------------------------------------------------- Officer (principal executive officer) Scott D. Dorfman /s/ David L. Gamsey Senior Vice President, Chief Financial Officer and - ------------------------------------------------- Secretary (principal financial and accounting David L. Gamsey officer) /s/ David L. Ellin Senior Vice President, Chief Operating Officer and - ------------------------------------------------- Director David L. Ellin /s/ Larry C. Hanger Senior Vice President--Business Development and - ------------------------------------------------- Director Larry C. Hanger /s/ Bruce V. Benator Director - ------------------------------------------------- Bruce V. Benator /s/ Martin J. Blank Director - ------------------------------------------------- Martin J. Blank /s/ William H. Scott, III Director - ------------------------------------------------- William H. Scott, III
EX-99.1 14 g67982ex99-1.txt PROXY STATEMENT FOR 2001 ANNUAL MEETING 1 EXHIBIT 99.1 (INNOTRAC LOGO) DRAFT April 20, 2001 To Our Shareholders: On behalf of the Board of Directors and management of Innotrac Corporation, I cordially invite you to the Annual Meeting of Shareholders to be held on May 21, 2001, at 9:00 AM, Eastern Daylight Time, at the Gwinnett Civic and Cultural Center located at 6400 Sugarloaf Parkway in Duluth, Georgia. At the Annual Meeting, shareholders will be asked to: - Consider and vote upon the reelection of two current Innotrac directors; and - Approve an amendment to Innotrac's 2000 Stock Option and Incentive Award Plan (the "Stock Incentive Plan") to increase the number of shares of Common Stock reserved for issuance under the Plan from 1,300,000 to 2,800,000. Information about the nominees for directors, the Stock Incentive Plan, and certain other matters is contained in the accompanying Proxy Statement. A copy of Innotrac's 2000 Annual Report to Shareholders, which contains financial statements and other important information about Innotrac's business, is also enclosed. It is important that your shares of stock be represented at the meeting, regardless of the number of shares you hold. We encourage you to specify your voting preferences by marking and dating the enclosed proxy card. However, if you wish to vote for re-electing the nominees for director specified herein and approving the amendment to the Stock Incentive Plan, all you need to do is sign and date the proxy card. Please complete and return the proxy card in the enclosed envelope, whether or not you plan to attend the meeting. If you do attend and wish to vote in person, you may revoke your proxy at that time. I hope you are able to attend, and look forward to seeing you. Sincerely, SCOTT D. DORFMAN Chairman of the Board, President and Chief Executive Officer 2 INNOTRAC CORPORATION 6655 SUGARLOAF PARKWAY DULUTH, GEORGIA 30097 ----------------------- NOTICE OF ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 21, 2001 DRAFT ----------------------- To the Shareholders of Innotrac Corporation: Notice is hereby given that the Annual Meeting of Shareholders of Innotrac Corporation will be held at 9:00 AM, Eastern Daylight Time, on Monday, May 21, 2001, at the Gwinnett Civic and Cultural Center, 6400 Sugarloaf Parkway, Duluth, Georgia 30097, for the following purposes: 1. To elect two directors whose terms, if re-elected, will expire in 2004; 2. To approve an amendment to Innotrac's 2000 Stock Option and Incentive Award Plan to increase the number of shares of Common Stock reserved for issuance under the Plan from 1,300,000 to 2,800,000; and 3. To consider such other matters as may properly come before the meeting and any adjournment or postponement thereof. Only shareholders of record on April 16, 2001, are entitled to notice of and to vote at the Annual Meeting and any adjournment or postponement thereof. A Proxy Statement and a Proxy Card solicited by the Board of Directors are enclosed herewith. Please sign, date and return the Proxy Card promptly in the enclosed business reply envelope. If you attend the meeting you may, if you wish, withdraw your Proxy and vote in person. BY ORDER OF THE BOARD OF DIRECTORS, DAVID L. GAMSEY APRIL 20, 2001 Secretary WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, WE URGE YOU TO FILL IN, DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED BUSINESS REPLY ENVELOPE. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE, AND IF YOU ARE PRESENT AT THE ANNUAL MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY AT THAT TIME AND EXERCISE THE RIGHT TO VOTE YOUR SHARES PERSONALLY. 3 INNOTRAC CORPORATION PROXY STATEMENT CONTENTS Introduction................................................................................ 1 Quorum and Voting Requirements.............................................................. 2 Voting Securities and Principal Shareholders................................................ 2 Items for Vote: Item No. 1: Election of Directors.................................................. 3 Item No. 2: Approval of Amendment to 2000 Stock Incentive Plan..................... 6 Executive Compensation...................................................................... 10 Related Party Transactions.................................................................. 14 Report of the Compensation Committee on Executive Compensation.............................. 14 Stock Performance Graph..................................................................... 17 Independent Public Accountants.............................................................. 18 Report of the Audit Committee............................................................... 18 Shareholders' Proposals for 2002 Annual Meeting............................................. 19 Other Matters............................................................................... 19 Appendix A: Audit Committee Charter......................................................... A-1
4 (INNOTRAC LOGO) PROXY STATEMENT DATED APRIL 20, 2001 FOR THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD MAY 21, 2001 INTRODUCTION This Proxy Statement is furnished to shareholders in connection with the solicitation of proxies by the Board of Directors of Innotrac Corporation ("Innotrac" or the "Company") for use at Innotrac's 2001 Annual Meeting of Shareholders (the "Annual Meeting") to be held on Monday, May 21, 2001, including any postponement, adjournment or adjournments thereof, for the purposes set forth in the accompanying Notice of Annual Meeting. Management intends to mail this Proxy Statement and the accompanying form of proxy to shareholders on or about April 20, 2001. Only shareholders of record at the close of business on April 16, 2001 (the "Record Date"), are entitled to notice of and to vote in person or by proxy at the Annual Meeting. As of the Record Date, there were 11,364,595 shares of common stock, $.10 par value per share (the "Common Stock"), of Innotrac outstanding and entitled to vote at the Annual Meeting. Proxies in the accompanying form, duly executed and returned to the management of Innotrac, and not revoked, will be voted at the Annual Meeting. Any proxy given pursuant to this solicitation may be revoked by the shareholder at any time prior to the voting of the proxy by delivery of a subsequently dated proxy, by written notification to the Secretary of Innotrac or by personally withdrawing the proxy at the Annual Meeting and voting in person. Proxies that are executed, but that do not contain any specific instructions, will be voted for the election of all the nominees for director specified herein and for approval of the amendment to Innotrac's 2000 Stock Option and Incentive Award Plan to increase the number of shares of Common Stock reserved for issuance under the Plan from 1,300,000 to 2,800,000. The persons appointed as proxies will vote in their discretion on any other matter that may properly come before the Annual Meeting or any postponement, adjournment or adjournments thereof, including any vote to postpone or adjourn the Annual Meeting. A copy of Innotrac's Annual Report to Shareholders is being furnished herewith to each shareholder of record as of the close of business on the Record Date. Copies of Innotrac's Annual Report on Form 10-K for the year ended December 31, 2000 will be provided free of charge upon written request to: INNOTRAC CORPORATION 6655 SUGARLOAF PARKWAY DULUTH, GEORGIA 30097 ATTN.: INVESTOR RELATIONS MANAGER If the person requesting the Annual Report on Form 10-K for the year ended December 31, 2000 was not a shareholder of record on the Record Date, the request must include a representation that the person was a beneficial owner of Common Stock on that date. Copies of any exhibits to Innotrac's Annual Report on Form 10-K for the year ended December 31, 2000 will also be furnished on request and upon payment of Innotrac's expenses in furnishing the exhibits. 1 5 QUORUM AND VOTING REQUIREMENTS The holders of a majority of the shares entitled to vote on the Record Date, represented in person or by proxy, shall constitute a quorum for the purpose of transacting business at the Annual Meeting. Each outstanding share shall be entitled to one vote on each matter submitted to a vote at the Annual Meeting. The required vote for each item of business at the Annual Meeting is as follows: - For Item 1 on the Proxy Card, the election of directors, those nominees receiving the greatest number of votes at the Annual Meeting, assuming a quorum is present, shall be deemed elected, even though such nominees may not receive a majority of the votes cast. - For Item 2 on the Proxy Card, the approval of the amendment to the Stock Incentive Plan, the vote of a majority of the shares voted on the matter, assuming a quorum is present, shall be the act of the shareholders on that matter. - For any other business at the Annual Meeting, the vote of a majority of the shares voted on the matter, assuming a quorum is present, shall be the act of the shareholders on that matter, unless the vote of a greater number is required by law. In counting the votes cast, only those cast "for" and "against" a matter are included, although you cannot vote "against" a nominee for director. An abstention and a "broker non-vote" are counted only for purposes of determining the presence of a quorum at the Annual Meeting. "Broker non-votes" are votes that brokers holding shares of record for their customers (i.e., in "street name") are not permitted to cast under applicable regulations because the brokers have not received clear voting instructions from their customers. VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS The following table sets forth the information concerning the beneficial ownership of the Common Stock, which is Innotrac's only class of voting stock, at March 19, 2001, by: - each person known to Innotrac to beneficially own more than 5% of the Common Stock; - each director (including nominees for reelection), the Chief Executive Officer and the four other most highly compensated executive officers; and - all of Innotrac's directors and executive officers as a group. To Innotrac's knowledge, except under applicable community property laws or as otherwise indicated, the persons named in the table have sole voting and sole investment control with regard to all shares beneficially owned.
NUMBER OF SHARES PERCENTAGE BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED - ---------------- --------------------- ------------------ Scott D. Dorfman............................................... 5,567,047(2) 49.0% Dimensional Fund Advisors Inc.................................. 772,400(3) 6.8 David L. Ellin................................................. 220,530(4) 1.9 Larry C. Hanger................................................ 24,021(5) * David L. Gamsey................................................ 5,250 * William F. Hendrick, Jr........................................ 17,529(6) * Bruce V. Benator................................................. 31,000(7) * Martin J. Blank................................................ 37,000(8) * William H. Scott, III.......................................... 226,333(8)(9) 2.0 All directors and executive officers as a group (9 persons).... 6,128,908 53.0%
- --------------- * Denotes less than 1% 2 6 (1) Beneficial ownership is determined under the rules of the Securities and Exchange Commission. These rules deem common stock subject to options currently exercisable, or exercisable within 60 days, to be outstanding for purposes of computing the percentage ownership of the person holding the options or of a group of which the person is a member, but they do not deem such stock to be outstanding for purposes of computing the percentage ownership of any other person or group. As of March 19, 2001, there were 11,364,595 shares of Common Stock outstanding. (2) Includes an aggregate of 243,618 shares owned by: (i) Mr. Dorfman's wife individually and as custodian for the benefit of their three oldest children; (ii) Mr. Dorfman's brother as trustee for the benefit of Mr. Dorfman's three oldest children; (iii) shares held by Mr. Dorfman's two oldest children directly; (iv) shares held by Mr. Dorfman as custodian for his three youngest children; and (v) a foundation for which Mr. Dorfman and his wife serve as trustees. Mr. Dorfman's address is 6655 Sugarloaf Parkway, Duluth, Georgia 30097. (3) According to a Schedule 13G filed February 2, 2001, Dimensional Fund Advisors Inc. ("Dimensional") is a registered investment advisor that furnishes investment advice to four registered investment companies and serves as investment manager to certain other commingled group trusts and separate accounts. In its role as investment advisor or manager, Dimensional possesses voting and/or investment power with respect to the shares of Innotrac's Common Stock owned by the investment companies, trusts and separate accounts. Dimensional disclaims beneficial ownership over the shares of Innotrac's Common Stock owned by the investment companies, trusts and separate accounts. The address of Dimensional is 1299 Ocean Avenue, 11th Floor, Santa Monica, California 90401. (4) Includes 133,000 shares subject to presently exercisable stock options. (5) Includes 20,500 shares subject to presently exercisable stock options. (6) Includes 12,499 shares subject to presently exercisable stock options. (7) Includes 30,000 shares subject to presently exercisable stock options and options vesting in the next 60 days. (8) Includes 15,000 shares subject to presently exercisable stock options and options vesting in the next 60 days. (9) Includes 208,333 shares owned of record by ITC Service Company, with respect to which Mr. Scott is an officer and director. Mr. Scott disclaims beneficial ownership of these shares. SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16(a) of the Securities Exchange Act of 1934 requires Innotrac's directors and executive officers, and persons who own more than 10% of Innotrac's Common Stock, to file with the Securities and Exchange Commission certain reports of beneficial ownership of the Common Stock. Based solely on copies of such reports furnished to Innotrac and written representations that no other reports were required, Innotrac believes that all applicable Section 16(a) reports were filed by its directors, officers and 10% shareholders during the fiscal year ended December 31, 2000 with the following exceptions: Messrs. Ellin and Hendrick inadvertently failed to file Form 4s reporting their acquisitions of 5,030 shares each, and Mr. Hanger inadvertently failed to file a Form 4 reporting his acquisition of 3,521 shares. These acquisitions were subsequently reported on Form 5s. In addition, one of our new executive officers filed a Form 3 and Form 5 late. ELECTION OF DIRECTORS (ITEM NUMBER 1 ON THE PROXY CARD) The Bylaws of Innotrac provide that the Board of Directors shall consist of not less than five nor more than eleven directors, with the exact number being set from time to time by the Board or the shareholders. The Board presently consists of six directors, three of whom are independent directors. The Board is divided into three classes of directors serving staggered three-year terms. Two directors are to be elected at the meeting for a three-year term expiring in 2004. The Board has nominated Scott D. Dorfman and David L. Ellin for those positions. Both nominees have indicated that they will serve if elected, but if the situation should arise that either nominee is no longer able or willing to serve, the proxy may be voted for the election of such other person as may be designated by the Board of Directors. 3 7 The following information as of March 19, 2001 has been furnished by the nominees for director and the continuing directors. Except as otherwise indicated, the nominees and the continuing directors have been or were engaged in their present or last principal employment, in the same or a similar position, for more than five years.
Name (Age) Information About the Nominees and the Continuing Directors Nominees for Director at the Meeting and Whose Terms Will Expire in 2004 if Elected SCOTT D. DORFMAN (43) Mr. Dorfman founded Innotrac and has served as Chairman of the Board, President and Chief Executive Officer since its inception in 1984. Prior to founding Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc., an equipment distributor. At Paymaster, Mr. Dorfman gained experience in distribution, tracking and inventory control by developing and managing Paymaster's mail order catalog. DAVID L. ELLIN (42) Mr. Ellin joined Innotrac in 1986 and has served as Senior Vice President and Chief Operating Officer since November 1997 and as a director since December 11997. From 1984 to Vice President from 1988 to November 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. Directors Whose Terms Expire in 2002 LARRY C. HANGER (46) Mr. Hanger joined Innotrac in 1994, and has served as Vice President-Business Development since November 1997 and as a director since December 1997. He was promoted to Senior Vice President in April 1999. He served as Innotrac's Department Manager of Business Development from 1994 to November 1997, and was responsible for the management of the telecommunication equipment marketing and service business. From 1979 to 1994, Mr. Hanger served as Project Manager--Third Party Marketing at BellSouth Corporation, where he managed the marketing program for BellSouth's network services and was involved in implementing the billing options program for BellSouth with Innotrac. BRUCE V. BENATOR (43) Mr. Benator is the Managing Partner of Williams Benator and Libby, LLP, certified public accountants, and has been a director since 1997. He has been affiliated with the firm since 1984 and is the firm's Director of Accounting and Auditing Services. From 1979 to 1984, Mr. Benator was employed by Ernst & Young, LLP. Directors Whose Terms Expire in 2003 MARTIN J. BLANK (54) Mr. Blank has been a director of Innotrac since 1997 and is a co-founder of Automobile Protection Corporation, or APCO, a subsidiary of the Ford Motor Company 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.
4 8 WILLIAM H. SCOTT, III (53) Mr. Scott has been a director of Innotrac since 1997 and has served as President and Chief Operating Officer of ITC Holding Company, Inc., the parent company of ITC Service Company, since 1991. He has been a director of Headhunter.Net, Inc., a job information and recruiting internet site, since October 1997 and has served as Chairman of the Board of that company since July 1998. He has also been a director of ITC Holding Company, Inc. since 1989, and served as its Executive Vice President from 1989 to 1991. Mr. Scott is a director of Powertel, Inc., a wireless telecommunications services company operating in the southeastern United States; KNOLOGY Holdings, Inc., a broadband telecommunications services company currently operating in Alabama, Florida, Georgia and South Carolina; and ITC DeltaCom, Inc., a full service telecommunications provider to business customers in the southeastern United States.
MEETINGS AND COMMITTEES OF THE BOARD The Board of Directors meets on a regular basis to supervise, review, and direct Innotrac's business and affairs. During the 2000 fiscal year, the Board held five meetings. The Board of Directors has established an Executive Committee, an Audit Committee, a Compensation Committee and an Executive Compensation Subcommittee to which it has assigned certain responsibilities in connection with the governance and management of its affairs. Innotrac has no standing nominating committee or other committee performing similar functions. Each of the directors attended 75% of the Board meetings and meetings of committees on which he served during the 2000 fiscal year. Audit Committee. The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its financial and other oversight responsibilities. The Audit Committee's duties, responsibilities and activities include reviewing Innotrac's financial statements, reports and other financial information, overseeing the annual audit and the independent auditors and reviewing the integrity of Innotrac's financial reporting process and the quality and appropriateness of its accounting principles. Messrs. Benator, Blank and Scott comprise the members of the Audit Committee. The Audit Committee held three meetings during fiscal 2000. The Board has adopted a written Audit Committee Charter, which is attached to this Proxy Statement as Appendix A. The members of the Audit Committee are all independent as defined in the listing standards of the Nasdaq Stock Market. Compensation Committee and Executive Compensation Subcommittee. The Compensation Committee is responsible for the review and approval of compensation of employees above a certain salary level, the review of management recommendations relating to incentive compensation plans, the administration of Innotrac's Stock Incentive and Senior Executive Compensation Plans, the review of compensation of directors and consultation with management and the Board on senior executive continuity matters. Messrs. Dorfman, Blank and Scott comprise the members of the Compensation Committee. The Compensation Committee held no meetings during fiscal 2000. The Executive Compensation Subcommittee, comprised of Messrs. Blank and Scott, was constituted to (1) achieve certain securities law advantages with respect to stock-based compensation to Innotrac's officers and directors and (2) maintain the tax deductibility of certain annual compensation in excess of $1 million to Innotrac's Chief Executive Officer and four other most highly compensated officers. Executive Committee. The Executive Committee, pursuant to authority delegated by the Board, from time to time considers certain matters in lieu of convening a meeting of the full Board, subject to any restrictions in applicable law related to the delegation of certain powers to a committee of the Board. Messrs. Dorfman, Ellin and Benator comprise the members of the Executive Committee. The Executive Committee held no meetings during fiscal 2000. 5 9 DIRECTORS' COMPENSATION We pay our outside directors an annual fee of $10,000, and additional fees of $250 and $100, respectively, for each Board meeting and committee meeting attended. We also reimburse all directors for their travel and other expenses incurred in connection with attending Board or committee meetings. We have traditionally granted options annually to each of our outside directors on or about the dates we hold our annual meetings of shareholders. The exercise price is the closing price of our Common Stock reported on the Nasdaq National Market on the date of grant. On May 15, 2000, we granted options for 20,000 shares to each of Messrs. Benator, Blank and Scott. These options are exercisable at $5.875 per share. One half of such shares vest on the second anniversary of the date of grant, a quarter on the third anniversary and the remaining quarter on the fourth anniversary. APPROVAL OF AMENDMENT TO 2000 STOCK INCENTIVE PLAN (ITEM NUMBER 2 ON THE PROXY CARD) PURPOSE OF THE AMENDMENT TO THE 2000 STOCK INCENTIVE PLAN The Board of Directors adopted the Innotrac Corporation 2000 Stock Option and Incentive Award Plan (the "Stock Incentive Plan") on March 28, 2000. The Stock Incentive Plan was subsequently approved by Innotrac's shareholders at the 2000 Annual Meeting of Shareholders on May 17, 2000. On December 20, 2000, the Board of Directors voted to amend the Stock Incentive Plan, subject to shareholder approval, to increase the number of the shares of Common Stock reserved for issuance under the Stock Incentive Plan from 1,300,000 to 2,800,000. The initial number of shares reserved for issuance has been depleted by incentive awards. As of March 19, 2001, options for 1,797,325 shares of Common Stock and a restricted stock award for 50,000 shares of Common Stock were outstanding under the Stock Incentive Plan and Innotrac's former 1997 stock option plan. The Board of Directors is proposing that Innotrac's shareholders approve the amendment to the Stock Incentive Plan for a number of reasons, including compliance with Section 162(m) of the Internal Revenue Code of 1986, as amended (the "Code"). See "Compliance with Section 162(m) of the Internal Revenue Code" below. The amendment to the Stock Incentive Plan, if approved by shareholders, will be effective December 20, 2000. The Stock Incentive Plan, as amended, will remain in effect until February 7, 2010, unless it is terminated by the Board at an earlier date. The Board of Directors believes that the Stock Incentive Plan plays an integral role in Innotrac's ability to attract and retain key employees and directors and to provide incentives for such persons to promote Innotrac's financial success. The following description of the material features of the Stock Incentive Plan is a summary and is qualified in its entirety by reference to the Stock Incentive Plan, a copy of which will be provided to any shareholder upon written request to Innotrac. The Stock Incentive Plan is not subject to the provisions of the Employee Retirement Income Security Act of 1974. GENERAL Awards granted under the Stock Incentive Plan may be "incentive stock options" ("ISOs"), as defined in Section 422 of the Code, "nonqualified stock options" ("NQSOs"), shares of Common Stock subject to terms and conditions set by the Board of Directors ("restricted stock" or "stock awards"), stock appreciation rights or performance shares. The Compensation Committee of the Board of Directors or its designee, or the Executive Compensation Subcommittee or its designee, generally has discretion to set the terms and conditions of grants and awards, including the term, exercise price, and vesting conditions (including vesting based on Innotrac's performance); to select the persons who receive such grants and awards; and to interpret and administer the Stock Incentive Plan. The maximum number of shares of Common Stock with respect to which awards may be granted under the Stock 6 10 Incentive Plan is 2,800,000 shares, subject to approval by the shareholders of the amendment described above. The Board of Directors may at any time amend or terminate the Stock Incentive Plan, subject to applicable laws and shareholder approval requirements. Innotrac will pay the administrative costs of the Stock Incentive Plan. DESCRIPTION OF AWARDS Options. ISOs may be granted only to employees of Innotrac, including officers. NQSOs may be granted to any person employed by or performing services for Innotrac, including non-employee directors. The option price for each ISO may be not less than 100% of the fair market value of the Common Stock subject to the option. The option price for a NQSO can be less than, equal to, or greater than the fair market value on the date of grant. ISOs 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 (a "principal shareholder") of Innotrac, unless the option price is at least 110% of the fair market value of the Common Stock subject to the option. In addition, an ISO granted to a principal shareholder may not be exercisable more than five years from its date of grant. Full payment of the option price must be made when an Option is exercised. The purchase price may be paid in cash or in such other form of consideration as the Committee may approve, which may include shares of Common Stock valued at their fair market value on the date of exercise, or by any other means which the Committee determines to be consistent with the Stock Incentive Plan's purpose and applicable law. A participant will have no rights as a shareholder with respect to the shares subject to his option until the option is exercised. The maximum number of shares for which options (ISOs and NQSOs) may be granted to any individual during any calendar year is 500,000 shares, subject to anti-dilution and similar provisions. Stock Appreciation Rights. The Committee may grant stock appreciation rights separately or in connection with another stock incentive, and the Committee may provide that the holder may exercise them at any time or that they will be paid at a certain time or times or upon the occurrence or non-occurrence of certain events. Stock appreciation rights may be settled in shares of Common Stock or in cash, according to terms established by the Committee with respect to any particular award. The maximum number of stock appreciation rights which can be granted under the Stock Incentive Plan during any calendar year to any individual is 500,000. Restricted Stock; Stock Awards. Participants may also be awarded shares of Common Stock pursuant to a stock award. The Committee, in its discretion, may prescribe that a participant's rights in a stock award shall be nontransferable or forfeitable or both unless certain conditions are satisfied. These conditions may include, for example, a requirement that the participant continue employment with Innotrac for a specified period or that Innotrac or the participant achieve stated objectives. In addition, the restrictions may lapse incrementally. At the time a grant of restricted stock is made, the Committee shall establish a period or periods of time (the "Restricted Period") applicable to such grant. Subject to certain provisions, at the end of the Restricted Period, all restrictions shall lapse and the restricted stock shall vest in the participant. The Committee may, 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 grant is made. Upon a grant of restricted stock, a stock certificate 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 Innotrac or a bank selected by the Committee for the participant's account. Following such registration, the participant shall, subject to certain restrictions, 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, except 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. The maximum number of shares of restricted stock or stock awards which can be granted under the Stock Incentive Plan during any calendar year to any individual is 500,000. Performance Share Awards. The Stock Incentive Plan also provides for the award of performance shares. A performance share award entitles the participant to receive a payment equal to the fair market value of a specified 7 11 number of shares of Common Stock if certain performance standards are met. The Committee will prescribe the requirements that must be satisfied before a performance share award is earned. The performance share requirements may include, for example, a requirement that the participant continue employment with Innotrac for a specified period or that Innotrac or the participant achieve stated objectives. To the extent that performance shares are earned, the obligation may be settled in cash, in Common Stock or by a combination of the two. No participant shall have, as a result of receiving a performance share award, any rights as a shareholder until and to the extent that the performance shares are earned and Common Stock is transferred to such participant. If the award agreement so provides, a participant may receive a cash payment equal to the dividends that would have been payable with respect to the number of shares of Common Stock covered by an award between (a) the date that the performance shares are awarded and (b) the date that a transfer of Common Stock to the participant, cash settlement, or combination thereof is made pursuant to the performance share award. TERMINATION OF AWARDS. The terms of an award may provide that it will terminate, among other reasons, upon the holder's termination of employment or other status with Innotrac or its subsidiaries, upon a specified date, upon the holder's death or disability, or upon the occurrence of a change in control. Also, the Committee may, within the terms of the Stock Incentive Plan, provide in the award agreement for the acceleration of vesting for any of the above reasons. COMPLIANCE WITH SECTION 162(m) OF THE INTERNAL REVENUE CODE Section 162(m) of the Code denies a deduction by an employer for certain compensation in excess of $1 million per year paid by a publicly traded corporation to the Chief Executive Officer or any of the four most highly compensated executive officers other than the Chief Executive Officer (the "Named Executive Officers"). Compensation realized with respect to stock options, including upon exercise of an NQSO or upon a disqualifying disposition of an ISO, as described below under "Certain Federal Income Tax Consequences", will be excluded from this deduction limit if it satisfies certain requirements, including a requirement that the Stock Incentive Plan be approved by Innotrac's shareholders. CERTAIN FEDERAL INCOME TAX CONSEQUENCES Options. Under current tax law, a holder of an ISO under the Stock Incentive Plan does not, as a general matter, realize taxable income upon the grant or exercise of the ISO. (Depending upon the holder's income tax situation, however, the exercise of the ISO may have alternative minimum tax implications.) In general, a holder of an ISO will only recognize income at the time that Common Stock acquired through exercise of the ISO is sold or otherwise disposed of. In that situation, the amount of income that the optionee must recognize is equal to the amount by which the value of the Common Stock on the date of the sale or other disposition exceeds the option exercise price. If the optionee disposes of the stock after the required holding period--that is, no earlier than a date that is two years after the date of grant of the option and one year after the date of exercise -- the income is taxed as capital gains. If disposition occurs prior to expiration of the holding period, the optionee will recognize ordinary income equal to the difference between the fair market value of the shares at the exercise date and the option exercise price; any additional increase in the value of option shares after the exercise date will be taxed as capital gain. Innotrac is entitled to a tax deduction equal to the amount of ordinary income recognized by the optionee. An optionee will not realize income when an NQSO option is granted to him or her. Upon exercise of such option, however, the optionee must recognize ordinary income to the extent that the fair market value of the Common Stock on the date the option is exercised exceeds the option exercise price. Any such gain is taxed in the same manner as ordinary income in the year the option is exercised. Thereafter, any additional gain recognized upon the disposition of the shares of stock obtained by the exercise of an NQSO will be taxed as short or long-term capital gain, depending on the optionee's holding period. Innotrac will not experience any tax consequences upon the grant of an NQSO, but will be entitled to take an income tax deduction equal to the amount that the option holder includes in income (if any) when the NQSO is exercised. 8 12 Stock Awards; Restricted Stock. With respect to outright grants of Common Stock under the Stock Incentive Plan, Innotrac is of the opinion that the participant will realize compensation income at the time of grant in an amount equal to the fair market value of the Common Stock less any amount paid for such Common Stock. Innotrac is also of the opinion that it will be entitled to a deduction under the Code in the amount and at the time that compensation income is realized by the participant. With respect to the grant of restricted stock under the Stock Incentive Plan, Innotrac is of the opinion that the participant will realize compensation income in an amount equal to the fair market value of the restricted stock (whether received as a grant or as a dividend), less any amount paid for such restricted stock, at the time when the participant's rights with respect to such restricted stock are no longer subject to a substantial risk of forfeiture, unless the participant elected, pursuant to a special election provided in the Code, to be taxed on the restricted stock at the time it was granted or received as a dividend, as the case may be. Dividends paid to the participant during the Restricted Period will be taxable as compensation income, rather than as dividend income, unless the election referred to above was made. Innotrac is also of the opinion that it will be entitled to a deduction under the Code in the amount and at the time that compensation income is realized by the participant. Performance Share Awards. Unless an election is made under Section 83(b) of the Code, a participant will recognize income on account of the settlement of a performance share award. The amount of such income will be equal to any cash that is paid and the fair market value of Common Stock (on the date that the shares are first transferable or not subject to a substantial risk of forfeiture) that is received in settlement of the award, and Innotrac will generally be entitled to claim a deduction of such amount for tax purposes. NEW STOCK INCENTIVE PLAN BENEFITS As of March 19, 2001, options for 1,797,325 shares of Common Stock and a restricted stock award for 50,000 shares of Common Stock were outstanding under the Stock Incentive Plan and Innotrac's former 1997 stock option plan. Subject to the approval by the shareholders of the increase in the number of shares of Common Stock reserved for issuance under the Stock Incentive Plan, future awards will be made at the discretion of the Committee. The number of options and awards that may be granted in the future to eligible participants is not currently determinable. RECOMMENDATION OF THE BOARD The Board of Directors, which unanimously approved the Stock Incentive Plan, recommends a vote "FOR" approval of the amendment to the Stock Incentive Plan. 9 13 EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued by Innotrac for services rendered during the fiscal years ended December 31, 2000, 1999 and 1998, to or for Innotrac's Named Executive Officers. The total amount of perquisites, personal benefits and other annual compensation paid to the Named Executive Officers do not in any case exceed the lesser of $50,000 or ten per cent of such officer's total salary and bonus. SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION ----------------------- ------------------------ RESTRICTED SECURITIES FISCAL STOCK UNDERLYING ALL OTHER NAME YEAR SALARY BONUS AWARDS OPTIONS(#) COMPENSATION - ------------------------------- ------ -------- -------- ---------- ---------- ------------ Scott D. Dorfman 2000 $302,607 $ 67,500 -- 100,000 $47,134(1) Chairman of the Board, 400,000(2) President and Chief 1999 383,675 325,000 -- -- 58,625 Executive Officer 1998 356,855 250,000 -- -- 26,218 David L. Ellin 2000 173,708 55,500 $200,000(3) 100,000 12,137(4) Senior Vice President and 400,000(2) Chief Operating Officer 1999 163,825 119,755 -- 6,000 11,357 1998 145,000 87,000 -- -- 10,241 Larry C. Hanger 2000 144,451 45,000 -- 100,000 2,923(5) Senior Vice President-- 180,000(2) Business Development 1999 120,440 100,000 -- 3,500 766 1998 100,000 100,000 -- -- 500 David L. Gamsey (5) 2000 148,246 80,000 -- 150,000 -- Senior Vice President, Chief 225,000(2) Financial Officer and Secretary William F. Hendrick, Jr. (6) 2000 122,693 40,000 -- 100,000 40,616(3) Vice President-- 180,000(2) Telecommunications 1999 86,308 65,925 -- 25,000 5,394
- --------------- (1) Includes (i) Innotrac's matching contribution to deferred compensation plan in the approximate amount of $45,280 and (ii) the full dollar amount of premiums, $1,854, paid by Innotrac with respect to split-dollar life insurance on the life of Mr. Dorfman. (2) Represents options to acquire membership interests in Innotrac's subsidiary, Return.com Online, LLC. (3) As required by the rules of the Securities and Exchange Commission, the value of restricted stock awards is calculated by multiplying the numbers of shares of restricted stock granted (50,000) by the closing sale price ($4.00) of the Common Stock on the Nasdaq National Market on the date of grant (December 20, 2000). Using this same calculation, the value of this award on the last trading day of Innotrac's 2000 fiscal year, December 29, 2000, was $175,000. This award vests entirely on the fourth anniversary of the date of grant. It is the only outstanding restricted stock award to any of the Named Executive Officers. (4) Represents Innotrac's matching contribution to deferred compensation plan. (5) Mr. Gamsey's employment commenced May 2000. (6) Mr. Hendrick's employment commenced April 1999. 10 14 The following table sets forth option grants to Named Executive Officers during fiscal 2000. OPTION GRANTS IN FISCAL 2000
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL RATES OF STOCK PRICE APPRECIATION FOR INDIVIDUAL GRANTS OPTION TERM - ------------------------------------------------------------------------------------------ ---------------------- PERCENT OF TOTAL SHARES OPTIONS GRANTED TO UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION NAME OPTIONS FISCAL YEAR(1) PRICE DATE 5% 10% - ------------------------ ---------- ------------------ -------- ----------- -------- -------- Scott D. Dorfman 50,000 3.79% $7.13 3/28/2010 $224,201 $568,169 50,000 3.79 3.13 12/22/2010 98,422 249,421 400,000(2) 9.1 0.35 6/6/2010 88,045 223,124 David L. Ellin 50,000 3.79 7.13 3/28/2010 224,201 568,169 50,000 3.79 3.13 12/22/2010 98,422 249,421 400,000(2) 9.1 0.35 6/6/2010 88,045 223,124 Larry C. Hanger 50,000 3.79 7.13 3/28/2010 224,201 568,169 50,000 3.79 3.13 12/22/2010 98,422 249,421 180,000(2) 4.1 0.35 6/6/2010 39,620 100,406 David L. Gamsey 100,000 7.58 6.19 5/8/2010 389,286 986,527 50,000 3.79 3.13 12/22/2010 98,422 249,421 225,000(2) 5.1 0.35 6/6/2010 49,525 125,507 William F. Hendrick, Jr. 50,000 3.79 7.13 3/28/2010 224,201 568,169 50,000 7.58 3.13 12/22/2010 98,422 249,421 180,000(2) 4.1 0.35 6/6/2010 39,620 100,406
- --------------- (1) Based on options for 1,320,000 shares of Innotrac Common Stock granted to employees in fiscal 2000 or options to acquire 4,400,000 membership interests in Innotrac's subsidiary, Return.com Online, LLC, granted in fiscal 2000, as appropriate. (2) Represents options to acquire membership interests in Innotrac's subsidiary, Return.com Online, LLC. 11 15 No options were exercised by any Named Executive Officers during fiscal 2000. The following table sets forth the year-end value of unexercised options held by the Named Executive Officers at the fiscal year ended December 31, 2000. FISCAL YEAR-END OPTION VALUES
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR END AT FISCAL YEAR END(1) ------------------------------- --------------------------------- NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE - ---------------------- ----------- ------------- ----------- ------------- Scott D. Dorfman -- 100,000 -- $18,500 -- 400,000(2) -- -- David L. Ellin 134,642 176,358 -- 18,500 -- 400,000(2) -- -- Larry C. Hanger 20,500 108,000 -- 18,500 -- 180,000(2) -- -- David L. Gamsey -- 150,000 -- 18,500 -- 225,000(2) -- -- William F. Hendrick, Jr. 12,499 112,501 -- 18,500 -- 180,000(2) -- --
- --------------- (1) As required by the rules of the Securities and Exchange Commission, the value of unexercised in-the-money options for Innotrac Common Stock is calculated based on the closing sale price of the Common Stock on the Nasdaq National Market as of the last trading day of its fiscal year, December 29, 1999, which was $3.50 per share. For options to acquire membership interests in Innotrac's subsidiary, Return.com Online, LLC, the value of unexercised-in-the-money is calculated based on the most recent transaction in Return.com membership interests. (2) Represents options to acquire membership interests in Innotrac's subsidiary, Return.com Online, LLC. EXECUTIVE CONTRACTS, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS In 2000, Innotrac entered into employments agreements with Messrs. Dorfman, Ellin, Hanger and Gamsey. Scott D. Dorfman. Mr. Dorfman has entered into an agreement to serve as Innotrac's Chairman of the Board, President and Chief Executive Officer. His employment agreement expires on December 31, 2005. Mr. Dorfman will receive a salary of no less than $425,000 for fiscal 2001 and is eligible for annual increases and a performance-based bonus which can be up to 100% of his salary. He may participate in such benefit plans as Innotrac maintains from time to time for senior executives, and receives customary perquisites. Mr. Dorfman's employment agreement may be terminated by either party if he dies or becomes disabled, by Innotrac for "good cause" (as defined) or for any reason by either party upon 90 days' notice. Upon any termination of his employment, he is entitled to all compensation and benefits accrued through the date of termination plus any bonus earned for the year during which he is terminated, calculated based on the performance of Innotrac through the termination date and prorated for the partial year of employment. If Mr. Dorfman's employment is terminated because he dies or becomes disabled, then in addition to accrued compensation, all of his stock options become vested as of the termination date and will expire in accordance with their respective scheduled expiration dates. If Innotrac terminates his agreement for good cause or if Mr. Dorfman terminates his employment (if there has been no change in control of Innotrac in the 18 months prior to termination), then all his unvested stock options are forfeited 12 16 as of the termination date and his vested options remain exercisable for a period of 90 days after the termination date, after which they will expire. If Innotrac terminates Mr. Dorfman's employment without good cause, then in addition to accrued compensation, Mr. Dorfman is entitled to continue to receive his normal salary for a period of six months following the termination date. Upon termination without good cause, all of his stock options become vested as of the termination date and will expire upon the first anniversary of the termination date. If Innotrac terminates Mr. Dorfman without good cause within 18 months after a change in control of Innotrac, or if Mr. Dorfman terminates his employment for "good reason" (as defined) within the same period, Mr. Dorfman is entitled to continue to receive his normal salary and certain benefits and perquisites for a period of 18 months following the termination date. All his stock options shall become vested on the termination date and remain exercisable for the longer of their respective scheduled expiration dates or three years following the termination date. If Mr. Dorfman terminates his employment without good reason within 18 months after a change in control of Innotrac, he is entitled to all the same compensation and benefits described in this paragraph, except that his salary and other benefits shall only continue for 12 months following the termination date. Mr. Dorfman is subject to customary confidentiality, noncompete and nonsolicitation covenants during the term of his employment and for an additional period of one year following his termination. During this period, Mr. Dorfman must keep Innotrac's confidential information confidential. He is prohibited during this period from engaging in the businesses of selling Caller ID technology and hardware, fulfillment services, e-commerce fulfillment and e-commerce return services as well as other similar services that Innotrac offers, within a 35-mile radius of any of Innotrac's locations. Furthermore, he is prohibited during this period from soliciting Innotrac customers, with some exceptions during the period from his termination to the first anniversary of his termination. Mr. Dorfman is obligated to keep Innotrac's trade secrets confidential for as long as they remain trade secrets. David L. Ellin. Mr. Ellin has entered into an agreement to serve as Innotrac's Senior Vice President and Chief Operating Officer until December 31, 2005. Mr. Ellin will receive a salary of no less than $175,000 for fiscal 2001 and is eligible for annual increases and a performance-based bonus which can be up to 60% of his salary. The other provisions of Mr. Ellin's employment agreement are similar to those described above with respect to Mr. Dorfman's employment agreement. Larry C. Hanger. Mr. Hanger has entered into an agreement to serve as Innotrac's Senior Vice President--Business Development until December 31, 2005. Mr. Hanger will receive a salary of no less than $150,000 for fiscal 2001 and is eligible for annual increases and a performance-based bonus which can be up to 60% of his salary. The other provisions of Mr. Hanger's employment agreement are similar to those described above with respect to Mr. Dorfman's employment agreement. David L. Gamsey. Mr. Gamsey has entered into an agreement to serve as Innotrac's Senior Vice President and Chief Financial Officer until December 31, 2005. Mr. Gamsey will receive a salary of no less than $240,000 for fiscal 2001 and is eligible for annual increases and a performance-based bonus which can be up to 50% of his salary. The other provisions of Mr. Gamsey's employment agreement are similar to those described above with respect to Mr. Dorfman's employment agreement. Mr. Gamsey's agreement provides that he shall be granted options for 100,000 shares of Common Stock effective as of May 9, 2000, which are reflected above in the "Option Grants in Fiscal 2000" table. The agreement also provides that Innotrac shall cause its affiliate, Return.com Online LLC, to issue Mr. Gamsey options for 180,000 shares of its common stock, which are also reflected in the "Option Grants in Fiscal 2000" table. All such options become fully vested if a majority of Innotrac is sold to a third party. 13 17 RELATED PARTY TRANSACTIONS Innotrac leases a single engine aircraft from a company wholly-owned by Scott D. Dorfman pursuant to a lease that provides for annual rent of $72,000. The initial three-year term of the lease expired on February 19, 2001, and automatically renewed for an additional year pursuant to the terms of the lease. Innotrac is responsible for maintenance, insurance, taxes, fuel and other expenses associated with the aircraft. In 2000, Innotrac paid $84,655 in fees to Williams Benator & Libby, LLP, certified public accountants, for tax and consulting services. Bruce V. Benator, one of our directors, is Managing Partner of Williams Benator & Libby, LLP. POLICY RESPECTING RELATED PARTY TRANSACTIONS The Board of Directors has adopted a policy that any transactions between Innotrac and any of its officers, directors, or principal shareholders or affiliates must be on terms no less favorable than those that could be obtained from unaffiliated parties in comparable situations and must be approved by the Audit Committee of the Board of Directors. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Dorfman, Blank and Scott comprised the members of the Compensation Committee during fiscal 2000. Messrs. Blank and Scott comprised the members of the Executive Compensation Subcommittee. While Mr. Dorfman is our Chairman, President and Chief Executive Officer, neither Mr. Blank nor Mr. Scott is a current officer or former officer of Innotrac. We have entered into a transaction with Mr. Dorfman as described in "Related Party Transactions." REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION This report sets forth Innotrac's current compensation policies for its executive officers and describes the basis on which fiscal 2000 compensation determinations were made with respect to the executive officers, including the Chairman, President and Chief Executive Officer, Mr. Dorfman, and the other Named Executive Officers. Messrs. Dorfman, Blank and Scott comprised the Compensation Committee during fiscal 2000 and Messrs. Blank and Scott comprised the Executive Compensation Subcommittee. GENERAL COMPENSATION PHILOSOPHY The programs and policies for the compensation of Innotrac's executive officers are designed to attract and retain capable executive officers, and to link the compensation of executive officers to the attainment of performance goals and increases in Innotrac's stock price. In fiscal 2000, Innotrac entered into employment contracts with Messrs. Dorfman, Ellin, Hanger and Gamsey, as described above under "Executive Compensation--Executive Contracts, Termination and Change-in-Control Arrangements." The Compensation Committee believes employment contracts with Innotrac's most senior executive officers are appropriate and beneficial to Innotrac and its shareholders, as they promote retention of the most valuable and experienced officers and continuity of high level management. The Committee reviews and determines the appropriateness of the compensation paid to each of Innotrac's executive officers at least annually, with the philosophy described above as its guide. While promoting initiative and providing incentives for superior executive management performance, the Committee also seeks to assure that Innotrac is able to compete for and retain talented personnel to lead it in achieving levels of financial performance that enhances shareholder value over the long-term as well as the short-term. 14 18 PRINCIPAL EXECUTIVE COMPENSATION ELEMENTS Our compensation programs consist of the following basic components: - Competitive base salaries, - Annual incentive bonuses, - Long-term incentive stock options, appreciation rights or bonuses and - Customary benefits. Base Salaries. The base salaries of Innotrac's executive officers are generally established without reference to specific company performance or competitive criteria. Salaries for the executive officers who were employed as such throughout fiscal 1999 (other than the Chief Executive Officer) were increased in the beginning of fiscal 2000 because of generally improved financial performance in fiscal 1999 in such areas as gross profit, operating expenses, operating income and net income as compared with prior periods. The employment agreements which several of our senior executive officers entered into in fiscal 2000 guarantee certain minimum salaries determined through a process of arm's length negotiations. Salaries of executive officers are reviewed on at least an annual basis, but increases are not mandated by the employment agreements. Annual Incentive Bonuses. Annual incentive bonuses for executive officers are normally determined under Innotrac's Senior Executive Incentive Compensation Plan (the "Executive Plan"), which Innotrac's shareholders approved in fiscal 2000. The Executive Plan ties the incentive compensation payable to the executive officers directly to the attainment of specific, objective performance targets, thereby aligning the interests of management with the interests of Innotrac's shareholders. The amount of bonuses potentially payable to executive officers is determined as a range of percentages of an individual officer's salary. Bonuses paid in accordance with the Executive Plan can be based on the achievement of any number of enumerated performance criteria, such as earnings before interest and taxes, earnings before interest, taxes, depreciation and amortization, return on capital employed, cash flow, cash flow return, operating income, gross margin, net income, earnings per share, return on equity, return on assets (or net assets), pre-tax profit, market value of the Company's stock and total shareholder return. No bonuses were paid pursuant to the Executive Plan for fiscal 2000. However, based on Innotrac's subjective assessment of competitive conditions and the necessity of bonuses to retain management required them, special cash bonuses were paid to the executive officers for fiscal 2000. See "Summary Compensation Table" for the amounts of bonuses paid to the Named Executive Officers for fiscal 2000. Long-Term Stock Incentives. Innotrac believes that stock options and other stock incentives play an integral role in its ability to attract and retain employees and directors and to provide incentives for such persons to promote Innotrac's financial success. Moreover, stock incentives benefit Innotrac by closely aligning the interests of grantees with the interests of Innotrac's shareholders. In furtherance of this policy, Innotrac's shareholders are being asked to approve at the 2001 Annual Meeting of Shareholders an amendment to the Stock Incentive Plan to increase the number of shares of Common Stock reserved for issuance under the Stock Incentive Plan from 1,300,000 to 2,800,000. This proposal and the Stock Incentive Plan is described under Item No. 2 in this Proxy Statement, "Approval of Amendment to 2000 Stock Incentive Plan." Under the Stock Incentive Plan, employees, including executive officers, non-employee directors and independent advisors and consultants to the Company and its subsidiaries, may be granted long-term stock incentives in the form of stock options, stock appreciation rights, restricted stock and performance shares. Options granted to the Named Executive Officers in fiscal 2000 are set forth under the table captioned "Option Grants in Fiscal 2000." Although incentive grants made in prior periods are taken into account when making grants to the same grantees in subsequent periods, this consideration is only one of several criteria. During fiscal 2000, grants were made to encourage employees to promote increases in the market price of Innotrac's Common Stock. 15 19 COMPENSATION OF THE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER As with the other executive officers, Mr. Dorfman did not receive a bonus pursuant to the Executive Plan for fiscal 2000, although he received a special cash bonus for the reasons described above. Mr. Dorfman's fiscal 2000 salary was decreased from his fiscal 1999 salary due to Innotrac's performance. Mr. Dorfman has generally had a larger percentage of his annual compensation at risk on the basis of Innotrac's performance than have the other executive officers. Mr. Dorfman's employment agreement establishes his annual incentive bonus as the highest percentage of salary among the executive officers with employment agreements. Also in fiscal 2000, Mr. Dorfman was granted stock options to increase his long-term incentive to improve Innotrac's performance and stock price. BENEFITS Executives also participate, on a voluntary basis, in Innotrac's regular employee benefit programs, including group medical and dental coverage, group life insurance and group long-term disability insurance. In addition, executive officers can participate in a deferred compensation plan with respect to which Innotrac provides matching contributions. The rate of match depends upon the officer's number of years in service, and ranges from 25% of a participant's contribution for less than 5 years of service to 100% for 10 years or more, although in no case will the appropriate percentage apply to an amount in excess of 30% of a participating executive's compensation (excluding bonuses). EXECUTIVE COMPENSATION SUBCOMMITTEE AND COMPENSATION DEDUCTIBILITY POLICY The Executive Compensation Subcommittee was constituted to (1) achieve certain securities law advantages with respect to stock-based compensation to Innotrac's officers and directors and (2) maintain the tax deductibility of certain annual compensation in excess of $1 million to Innotrac's Named Executive Officers under Section 162(m) of the Internal Revenue Code. During meetings of the full Compensation Committee, Mr. Dorfman normally recuses himself from discussions and votes regarding his own compensation, or in circumstances where his participation, as an Innotrac employee, would affect compliance with such securities laws or Section 162(m). See "Compliance with Section 162(m) of the Internal Revenue Code" above under Item No. 2 in this Proxy Statement, "Approval of Amendment to 2000 Stock Incentive Plan." Although Innotrac's policy is to maintain the tax deductibility of compensation to executive officers under Section 162(m), Innotrac and the Committee retain the discretion to make compensation decisions without regard to deductibility when it is in the best interests of Innotrac and its shareholders to do so. Scott D. Dorfman--Martin J. Blank--William H. Scott, III (Members of the Compensation Committee during fiscal 2000) 16 20 STOCK PERFORMANCE GRAPH Set forth below is a line graph comparing the percentage change in the cumulative total shareholder return of Innotrac's Common Stock against the cumulative total return of The Nasdaq Stock Market (U.S.) Index and the Nasdaq Non-Financial Index for the period commencing on May 7, 1998 and ending on December 31, 2000. (GRAPH)
CUMULATIVE TOTAL RETURN -------------------------------------------------------------- 05/07/1998 12/1998 12/1999 12/2000 ---------- ------- ------- ------- Innotrac Corporation............................. 100 138 105 27 Nasdaq Stock Market (U.S.) Index................. 100 121 224 135 Nasdaq Non-Financial Index....................... 100 123 241 141
17 21 INDEPENDENT PUBLIC ACCOUNTANTS The Board of Directors, upon recommendation of the Audit Committee, appoints each year the firm that will serve as Innotrac's independent public accountants. The Board has appointed Arthur Andersen LLP, which firm served as independent public accountants for Innotrac during the past fiscal year, to serve as such accountants for the current fiscal year. Such appointment is not subject to ratification or other vote by the shareholders. A representative of Arthur Andersen LLP is expected to be present at the Annual Meeting, with the opportunity to make a statement if he or she desires to do so, and is expected to be available to respond to appropriate questions. FEES The aggregate fees billed for professional services by Arthur Andersen LLP for the audit of Innotrac's annual financial statements for fiscal 2000 and for the reviews of Innotrac's quarterly financial statements during fiscal 2000 was $88,000. Arthur Andersen LLP billed no other fees to Innotrac during fiscal 2000, including for financial information systems design or implementation, and performed no non-audit services. REPORT OF THE AUDIT COMMITTEE The Board of Directors, in its business judgment, has determined that all three members of the Audit Committee are "independent", as required by applicable listing standards of The Nasdaq Stock Market. The Committee operates pursuant to an Audit Committee Charter that was adopted by the Board on May 15, 2000, a copy of which is attached to this Proxy Statement as Appendix A. Innotrac's management is responsible for its internal accounting controls and the financial reporting process. Innotrac's independent accountants, Arthur Andersen LLP, are responsible for performing an audit of Innotrac's consolidated financial statements in accordance with auditing standards generally accepted in the United States and for expressing an opinion as to their conformity with generally accepted accounting principles. The Audit Committee's responsibility is to monitor and oversee these processes. In keeping with that responsibility, the Audit Committee has reviewed and discussed Innotrac's audited consolidated financial statements with management and the independent accountants. In addition, the Audit Committee has discussed with Innotrac's independent accountants the matters required to be discussed by Statement on Auditing Standards No. 61, "Communications with Audit Committee," as currently in effect. In addition, the Audit Committee has received the written disclosures from the independent accountants required by Independence Standards Board Standard No. 1, "Independence Discussions with Audit Committees," and has discussed with the independent accountants their independence. Other than Mr. Benator, the members of the Audit Committee are not professionally engaged in the practice of auditing or accounting and are not experts in the fields of accounting or auditing. None of the members are experts in respect of auditor independence. Members of the Committee rely without independent verification on the information provided to them and on the representations made by management and the independent accountants. Accordingly, the Audit Committee's oversight does not provide an independent basis to determine that management has maintained appropriate accounting and financial reporting principles or appropriate internal control and procedures designed to assure compliance with accounting standards and applicable laws and regulations. Furthermore, the Audit Committee's considerations and discussions referred to above do not assure that the audit of the Company's financial statements has been carried out in accordance with generally accepted auditing standards, that the financial statements are presented in accordance with generally accepted accounting principles or that the Company's auditors are in fact "independent". Based on the reports and discussions described in this report, and subject to the limitations on the role and responsibilities of the Committee referred to above and in the Audit Committee Charter, the Committee 18 22 recommended to the Board of Directors that the audited consolidated financial statements of Innotrac be included in the Annual Report on Form 10-K for the year ended December 31, 2000 for filing with the Securities and Exchange Commission. This report is respectfully submitted by the Audit Committee of the Board of Directors. Bruce V. Benator--Martin J. Blank--William H. Scott, III (Members of the Audit Committee during fiscal 2000) SHAREHOLDERS' PROPOSALS FOR 2002 ANNUAL MEETING Any shareholder who wishes to present a proposal appropriate for consideration at Innotrac's 2002 Annual Meeting of Shareholders must submit the proposal in proper form to Innotrac at its address set forth on the first page of this Proxy Statement no later than December 21, 2001 for the proposal to be considered for inclusion in Innotrac's proxy statement and form of proxy relating to such Annual Meeting. Innotrac must be notified of any other shareholder proposal intended to be presented for consideration at the 2002 Annual Meeting not later than March 6, 2002 or else proxies may be voted on such proposal at the discretion of the persons named in the proxy. OTHER MATTERS All of the expenses involved in preparing, assembling, and mailing this Proxy Statement and the materials enclosed herewith and soliciting proxies will be paid by Innotrac. It is estimated that such costs will be nominal. Innotrac may reimburse banks, brokerage firms and other custodians, nominees and fiduciaries for expenses reasonably incurred by them in sending proxy materials to beneficial owners of stock. The solicitation of proxies will be conducted primarily by mail but may include telephone, telegraph or oral communications by directors, officers, or regular employees of Innotrac, acting without special compensation. The Board of Directors is aware of no other matters, except for those incidental to the conduct of the Annual Meeting, that are to be presented to shareholders for formal action at the Annual Meeting. If, however, any other matters properly come before the Annual Meeting or any postponement, adjournment, or adjournments thereof, it is the intention of the persons named in the proxy to vote the proxy in accordance with their judgment. Shareholders are urged to fill in, date and sign the accompanying form of proxy and return it to Innotrac as soon as possible. BY ORDER OF THE BOARD OF DIRECTORS, DAVID L. GAMSEY Secretary 19 23 APPENDIX A: AUDIT COMMITTEE CHARTER I. PURPOSE The primary function of the Audit Committee is to assist the Board of Directors in fulfilling its financial and other oversight responsibilities by: - Serving as an independent and objective party to monitor the Company's financial statements, financial reporting process and internal control system. - Reviewing and appraising the Company's outside auditors and internal financial management. - Providing an open avenue of communication among the Company's outside auditors, management, including internal financial management, and the Board. The Audit Committee will further carry out its purpose by engaging in the activities enumerated in Section IV of this Charter. II. MEMBERSHIP REQUIREMENTS Members of the Audit Committee shall meet the following qualifications, or such other qualifications as may be imposed from time to time by the Board, by law or by the listing requirements of any stock exchange or automated quotation system upon which a security of the Company may be traded or quoted. (A) Independence The Audit Committee shall be comprised of three or more directors as determined by the Board. Except as provided below, the members of the Audit Committee shall be independent directors. "Independent director" shall mean a person other than an officer or employee of the Company or its subsidiaries or any other individual having a relationship which, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The following persons shall not be considered independent: (1) A director who is employed by the Company or any of its affiliates for the current year or any of the past three years. (2) A director who accepts any compensation from the Company or any of its affiliates in excess of $60,000 during the previous fiscal year, other than compensation for Board service, benefits under a tax-qualified retirement plan or non-discretionary compensation. (3) A director who is a spouse, parent, child, sibling, mother-in-law, father-in-law, brother-in-law, sister-in-law, son-in-law, daughter-in-law, or resides in the home of an individual who is, or has been in any of the past three years, employed by the Company or any of its affiliates as an executive officer. (4) A director who is a partner in, or controlling shareholder or an executive officer of, any for-profit business organization to which the Company made, or from which the Company received, payments (other than those arising solely from investments in the Company's securities) that exceed 5% of the Company's or the other business organization's consolidated gross revenues for that year, or $200,000, whichever is more, in any of the past three years. A-1 24 (5) A director who is employed as an executive of another entity where any of the Company's executives serve on that entity's compensation committee. Notwithstanding the preceding limitations, one director who is not otherwise independent and is not a current employee, or an immediate family member (as defined above) of a current employee, may be appointed to the Audit Committee if the Board, under exceptional and limited circumstances, determines that membership on the Audit Committee by the individual is required by the best interests of the Company and its shareholders. (B) Financial Literacy All members of the Audit Committee shall be able to read and understand fundamental financial statements, including the Company's balance sheet, income statement, and cash flow statement or will become able to do so within a reasonable period of time after his or her appointment to the Audit Committee. At least one member shall have past employment experience in finance or accounting, requisite professional certification in accounting, or any other comparable experience or background which results in the individual's financial sophistication. (C) Election, Removal and Replacement The members of the Audit Committee shall be elected by the Board. Unless a Chair is elected by the full Board, the members of the Audit Committee may designate a Chair. In the event a director becomes disqualified from membership on the Audit Committee, such director shall be removed as soon as practicable from service on the Audit Committee by the Board. In the event the removal, resignation, retirement, death or other termination of a director from service on the Audit Committee results in the Audit Committee comprising less than three members, the Board shall elect a new qualified director to the Audit Committee as soon as practicable. If such election to the Audit Committee requires the election by the shareholders of the Company or the directors of new director to the Board, the Company and the Board may consult with any stock exchange or automated quotation system upon which a security of the Company may be traded or quoted. III. MEETINGS AND GOVERNANCE The Audit Committee shall meet at least annually in connection with the Company's annual audit, or more frequently as circumstances dictate. In addition, the Audit Committee or its Chair shall meet to review the Company's quarterly or other interim financial statements, as appropriate. Such meetings may be held in or out of the presence of the Company's management, outside auditors or both, as appropriate. Other governance matters not addressed herein shall be governed by the Company's articles of incorporation or bylaws. IV. DUTIES, RESPONSIBILITIES AND ACTIVITIES To fulfill its purpose, the Audit Committee has the following duties and responsibilities and shall engage in the following activities: (A) Review of Charter and Financial Statements and Reports The Audit Committee shall review the Company's financial statements, reports and other financial information, in conjunction with the Company's internal financial management and outside auditors, as appropriate. Such review shall include candid discussions of the quality--not merely the acceptability--of the Company's accounting principles as applied in its financial reporting. Reviews shall occur prior to dissemination of the statement, report or other document to a third party or the public. Without limitation, the Audit Committee shall review: - The annual financial statements and any reports or other financial information, including any certification, report, opinion, or review rendered by the outside auditors. A-2 25 - Any quarterly or other interim financial statements and any reports or other financial information, including any certification, report, opinion, or review rendered by the outside auditors. The Chair of the Audit Committee may represent the entire Audit Committee for purposes of this review. - This Charter on an annual basis, or more frequently as circumstances dictate. - As circumstances dictate and as deemed necessary or advisable from time to time, any material internal financial reports to management prepared by internal financial management. (B) Relationship with Outside Auditors The Audit Committee's and the Board's relationship with the Company's outside auditors shall governed by the following principles: - The Company's outside auditors are ultimately accountable to the Audit Committee and the Board. - The Audit Committee and the Board are ultimately responsible for selecting, evaluating and, where appropriate, replacing the Company's outside auditors. - The Audit Committee is responsible for ensuring receipt from the outside auditors of a formal written statement delineating all relationships between the outside auditors and the Company. The Audit Committee is responsible for actively engaging in a dialogue with the outside auditors with respect to any disclosed relationships or services that may impact the objectivity and independence of the outside auditors. The Audit Committee is further responsible for taking, or recommending that the Board take, appropriate action to oversee the independence of the outside auditors. (C) Relationship with Company and Internal Financial Management The Audit Committee's and the Board's relationship with the Company's management, including its internal financial management, shall governed by the following principles: - The Audit Committee is responsible for reviewing the integrity of the Company's financial reporting process, both internal and external. - The Audit Committee is responsible for reviewing the quality and appropriateness of the Company's accounting principles as applied in its financial reporting. - The Audit Committee is responsible for considering and approving, if appropriate, major changes to the Company's auditing and accounting principles and practices as suggested by the outside auditors or management, including internal financial management. (D) Audit Committee Report The Audit Committee shall prepare an Audit Committee Report annually in connection with the Company's annual audit. The Report shall address such matters as deemed appropriate by the Audit Committee, but shall state whether the Audit Committee: - Reviewed and discussed the Company's audited financial statements with management. - Discussed with the outside auditors such qualitative matters concerning the Company's accounting principles as applied in its financial reporting as are appropriate. A-3 26 - Received from the outside auditors a formal written statement delineating all relationships between the outside auditors and the Company. - Recommends to the Board that the Company's audited financial statements be included in the Company's public filings or other publicly available reports. The names of the members of the Audit Committee shall appear at the end of the Report. (E) Other Activities The Audit Committee may perform such activities from time to time, as the Board deems appropriate. Without limitation, such activities may be assigned to the Audit Committee because of the independence of its members. A-4 27 COMMON STOCK OF INNOTRAC CORPORATION THIS PROXY IS SOLICITED BY THE BOARD OF DIRECTORS FOR THE MAY 21, 2001 ANNUAL MEETING OF SHAREHOLDERS The undersigned hereby appoints Scott D. Dorfman and David L. Gamsey, and each of them, the proxy of the undersigned to vote the Common Stock of the undersigned at the Annual Meeting of Shareholders of Innotrac Corporation (the "Company") to be held on May 21, 2001, and any adjournment or postponement thereof. 1. Election of directors Scott D. Dorfman David L. Ellin [ ] FOR all nominees for director listed above (except as marked to the contrary). [ ] WITHHOLD AUTHORITY to vote for all nominees listed above. [ ] WITHHOLD AUTHORITY to vote for an individual nominee. Write name(s) below. -------------------------------------------------------------- 2. Approval of Amendment to 2000 Stock Incentive Plan. [ ] FOR approval of Amendment. [ ] AGAINST approval of Amendment. [ ] ABSTAIN. 3. In accordance with their best judgment with respect to any other matters that may properly come before the meeting. THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE PERSONS NAMED IN THE PROXY AND ACCOMPANYING PROXY STATEMENT AND "FOR" APPROVAL OF THE AMENDMENT TO THE 2000 STOCK INCENTIVE PLAN, AND UNLESS INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY WILL BE SO VOTED. Date: , 2001 --------------------------- ----------------------------------------- Please sign this Proxy exactly as name appears on the Proxy. Note: When signing as attorney, trustee, administrator, or guardian, please give your title as such. In the case of joint tenants, each joint owner must sign. -----END PRIVACY-ENHANCED MESSAGE-----