-----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, C1DRL4TTFo+Pcxuba2ib/JH/YPfaop26y4XCI8E9bCVgOAYNtGS3+tOGkxVI35cn rNxLaCMP4SVFLtnOUe91ow== 0000950144-02-002926.txt : 20020415 0000950144-02-002926.hdr.sgml : 20020415 ACCESSION NUMBER: 0000950144-02-002926 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020328 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: 1934 Act SEC FILE NUMBER: 000-23741 FILM NUMBER: 02590255 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 g74787e10-k.txt INNOTRAC CORPORATION 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 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2001 [ ] 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 18, 2002 was $22,416,988 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 18, 2002, there were 11,674,595 shares of Common Stock, par value $0.10 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's 2001 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, 2001 (the "Report"). Portions of the Registrant's Proxy Statement for the 2002 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. INNOTRAC CORPORATION TABLE OF CONTENTS
PAGE ---- PART I............................................................................................................2 ITEM 1. BUSINESS....................................................................................2 CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS........................................9 EXECUTIVE OFFICERS OF REGISTRANT...........................................................14 ITEM 2. PROPERTIES.................................................................................15 ITEM 3. LEGAL PROCEEDINGS..........................................................................16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................16 PART II..........................................................................................................17 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS..................17 ITEM 6. SELECTED FINANCIAL DATA....................................................................18 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS......18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.................................18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................18 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.......18 PART III.........................................................................................................19 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.........................................19 ITEM 11. EXECUTIVE COMPENSATION.....................................................................19 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............................19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.............................................19 PART IV..........................................................................................................20 ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................20 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES..................................S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS...........................................S-2
PART I ITEM 1. BUSINESS Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and headquartered in Atlanta, Georgia, provides customized, technology-based order fulfillment, call center and total customer relationship management services to large corporations that outsource these functions. In order to perform 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 or core 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: - order management systems - warehouse management systems - electronic data interface, or EDI, integration - interactive voice response, or IVR - chat box capabilities - database management/data warehousing/data mining - 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 - cross-sell/up-sell services 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 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 companies such as BellSouth Corporation ("BellSouth"), SBC 2 Communications, Inc. ("SBC"), Warranty Corporation of America and Qwest Communications International, Inc. ("Qwest") and their customers. As of December 1, 2001, we no longer provided these services to SBC, which represented approximately 15% of our consolidated revenue for the year ended December 31, 2001. During the year ended December 31, 2001, approximately 49% of our revenues were generated from telecommunications clients, 18% of revenues were from DSL and cable modem clients and 33% of revenues were from traditional fulfillment and marketing services clients. Our non-telecommunications clients include such companies as Coca-Cola, National Automotive Parts Association, Tactica, Porsche, Nordstrom.com, Wilsons Leather and Thane International. Approximately 88% of our 2000 revenues were from telecommunications clients. We anticipate that the percentage of our revenues attributable to telecommunications clients will continue to decrease during 2002 due to the loss of SBC and the addition of Martha Stewart Living Omnimedia, Inc. as a fulfillment and call center client, commencing in February 2002. As a result of the loss of the SBC contract, we elected to close our call center operations in Atlanta, Georgia in January 2002 and shifted our Atlanta clients to our call center operations in Pueblo, Colorado. We notified approximately 260 employees at the Atlanta and Pueblo call center facilities on October 31, 2001 regarding termination of employment effective January 2002. We incurred approximately $1.0 million in severance, write-off of assets, and other expenses related to the closure of the Atlanta call center operations during the year ended December 31, 2001. We do not anticipate incurring any additional costs associated with this closure. We continue to operate call center facilities in Pueblo, Colorado and Reno, Nevada. With the conversion of a majority of our clients to a fee-for-service model during 2000, we no longer purchase and sell Caller ID equipped phones, DSL modems and other telecommunications equipment from third party manufacturers for these clients. Instead, we warehouse products on a consignment basis and fulfill equipment on behalf of our customers for a fee. We purchase and own inventory for certain clients, but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. The new model substantially reduces revenues as the pass through cost of purchased equipment is no longer included in revenues. Gross margins have improved since we no longer have inventory risk or cost of equipment. For the year ended December 31, 2001, operating cash flows, while remaining positive, have declined from the same period in 2000 primarily due to the significant increase in inventory levels to provide for the initiation of the consumer phone and wireless pager sales programs with BellSouth. We began these new sales programs during the third and fourth quarters of 2001, and we are indemnified by the client for substantially all risks associated with the ownership of this new inventory. On May 17, 2000, we 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 was converted to a limited liability corporation on December 28, 2000. As of March 31, 2001, we owned 60% of this subsidiary with the remaining 40% owned by MBE. However, due to the announcement in March 2001 that United Parcel Services, Inc. had entered into a definitive agreement to purchase MBE, we elected to acquire from MBE the remaining 40% ownership interest in Return.com and terminate our arrangement with MBE as its exclusive front-end solution. This became effective in April 2001. As a result of our ownership interest in Return.com since the date of inception, we consolidated the results of operations and financial position of Return.com in the accompanying consolidated financial statements. During the year ended December 31, 2001, we utilized a $2.8 million impairment reserve, which was recorded in the first quarter of 2001, to write off the investment in Return.com. At December 31, 2001, Return.com is no longer in operation. In an effort to reduce our industry and client concentration and to expand our national presence, we acquired iFulfillment, Inc. ("iFulfillment") in July 2001 and Universal Distribution Services, Inc. ("UDS") in December 2000. Our iFulfillment subsidiary specializes in fully integrated, automated, order fulfillment services for multi-channel retailers and catalogers including such clients as Nordstrom.com, Wilsons Leather and Archibald Candies. It is located in a 354,000 square foot leased facility in Bolingbrook, Illinois. Our UDS division provides integrated order processing, order management, fulfillment and customer relationship management services. UDS's customer base comprises traditional direct marketing 3 companies as well as retailers including Thane International, Tactica and Gateway Learning. It is located in a 275,000 square foot facility in Reno, Nevada. Since the acquisition of UDS, we were able to expand UDS's business during 2001 by taking advantage of our East Coast capabilities. Under the terms of Innotrac's merger agreement with UDS, the former shareholders of UDS (including one of our executive officers, Patrick J. West) may receive, as part of the consideration paid for their shares, annual contingent payments based on the operating income generated by our UDS division over a three-year period that commenced December 1, 2000. For the first year of the earn-out period, UDS's stockholders received approximately $13 million in cash and 310,000 shares of our common stock pursuant to this arrangement. We do not currently believe any additional contingent payments will be due. We intend to continue our search for other selective acquisitions during the course of 2002 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. MARKETING SUPPORT SERVICES We provide customized, technology-based order fulfillment, call center and total customer relationship management services to 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 fulfillment and call center services to our clients and create 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' systems 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. Customer support is also integrated into our IVR systems so that an end user can obtain answers to service questions from an automated system, rather than a call center representative, regarding the products they purchased. DATABASE MANAGEMENT/DATA MINING. 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 4 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 is one of our core competencies. Our capabilities in this area are described below: FULFILLMENT. We are committed to delivering to 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 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 client 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 monitoring and control of a client's inventory. We provide automated inventory management and reporting to assure real-time stock counts of a client's products, literature, signage and other items. Our 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 and cable 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. CUSTOMER SUPPORT SERVICES Another 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. Our call center representatives take orders for certain clients and resolve questions regarding shipping, billing and order status as well as a variety of other questions. From time to time they may sell equipment, other products, telephone company services and extended warranties to customers who call us. 5 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 are 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. 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 quickly increase data capacity. Our EMC storage solutions provide rapid access to data and the ability to scale quickly depending on business demands. Network connectivity is achieved with 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. We utilize three warehouse management systems depending on our business line and our locations. During 2001, we began the implementation of PKMS, an advanced fulfillment warehouse management system designed to support large volumes of transactions and users, which enable the effective management of high levels of throughput, from receiving through shipping. PKMS will provide efficiencies in inventory management, outbound distribution and task management. We completed implementation of PKMS for all clients at our Pueblo warehouse and for BellSouth Caller ID phone and DSL modem programs in our Atlanta warehouse. Implementation of PKMS for our remaining clients in Atlanta will be completed in 2002. iFulfillment utilizes Optum warehouse management system, which is a highly configurable fulfillment solution for fast-moving, high volume, piece-pick operations suitable for 6 our multi-channel retailers and catalogers. UDS utilizes an internally developed, customized order management, warehouse management and customer relationship management system suitable for its direct marketing and retailer customer base. We believe that these systems allow us to effectively and efficiently manage our warehouse operations to secure a competitive advantage in the fulfillment industry. In 2002, we will begin the conversion of our existing customized order management system ("OMS") to Yantra Distributed OMS in Atlanta. This application will extend our existing supply chain system by managing orders and inventory across multiple divisions, suppliers and marketplaces. Our Pueblo call center utilizes the Rockwell Spectrum Automatic Call Distributor, or ACD, switch to handle call management functions. The ACD system has the capacity to handle approximately 1,200 call center representatives and is currently supporting approximately 220 representatives. Additionally, the ACD system is integrated with software designed to enable management to automatically staff and supervise the call center based on call length and call volume data compiled by the ACD system. Our call center in Reno employs an Aspect ACD Enterprise System switch with the capacity to handle over 1,000 call center representatives and is currently supporting 75 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 and hire primarily full-time employees who are eligible to receive a full range of employee benefits. As of March 8, 2002, we had over 800 employees. 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. COMPETITION In tailoring services to client needs, we compete on the basis of quality, reliability of service, efficiency, technical capabilities, 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. 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 7 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 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 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 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 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 8 frequently incorporate proprietary and confidential information. 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, SBC and Warranty Corporation of America, accounted for an aggregate of approximately 49%, 69% and 91% of net revenues for 2001, 2000 and 1999. 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. 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. As of December 1, 2001, we no longer provided services to SBC, Home Depot or Siemens, which represented approximately 15%, 2% and 1%, respectively, of our consolidated revenue for the year ended December 31, 2001. OUR BUSINESS IS CONCENTRATED IN THE TELECOMMUNICATIONS INDUSTRY. IF WE CANNOT CONTINUE TO DIVERSIFY OUTSIDE OF THE TELECOMMUNICATIONS INDUSTRY, OUR STRATEGY MAY NOT BE SUCCESSFUL AND OUR BUSINESS COULD SUFFER. Approximately half of our revenues in 2001, and 88% in 2000, were attributable to telecommunications clients. Consequently, we are particularly susceptible to negative changes affecting the telecommunications industry in general. To ameliorate this risk, our strategy depends on diversifying our client base across more industries, including through selective acquisitions. We cannot guarantee, however, that we will be successful in expanding into new industries, or that our services will be as attractive to clients in different industries as they have been to telecommunications companies. Success in diversifying the industry base of our clients depends on a number of factors, such as our sales and marketing efforts, the compatibility of our systems and processes with non-telecommunications clients and the cost of integrating or customizing our services to suit those clients. If we fail to expand our business into new industries, we may not be able to implement our strategy, and our future prospects could be negatively impacted. OUR WRITTEN CONTRACTS GENERALLY DO NOT GUARANTEE SPECIFIC VOLUME LEVELS AND CAN USUALLY BE TERMINATED ON LITTLE NOTICE. Although we have written agreements with most of our clients, our agreements generally do not assure specific volume or revenue levels. In addition, some agreements provide for termination for any reason on short notice. Our current agreement with BellSouth may be terminated by BellSouth for any reason upon 90 days notice. 9 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. 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. 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. During 2001 and 2000, 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 also adversely affect our business. 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. 10 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. In 2001, we terminated approximately 260 call center employees at our Atlanta and Pueblo facilities and closed our Atlanta call center. 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 programs or clients. 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. 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 and returns processing, 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: 11 - 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. Subsequent to 2001, negotiations of contract renewals with BellSouth, Warranty Corporation of America and Nordstrom.com have resulted in price concessions due to increased competitive pressures. 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; - changes in the timing and level of client-specific marketing programs, including the timing and nature of promotions; - pricing pressure; - 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. 12 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 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. 13 EXECUTIVE OFFICERS OF REGISTRANT The executive officers of Innotrac are as follows:
NAME AGE POSITION ---- --- -------- Scott D. Dorfman.................. 44 Chairman of the Board, President and Chief Executive Officer David L. Ellin.................... 43 Senior Vice President--Sales Larry C. Hanger................... 47 Senior Vice President--Client Services David L. Gamsey .................. 44 Senior Vice President, Chief Financial Officer and Secretary Christopher H. Shaw............... 29 Vice President--Information Technology Robert J. Toner. Jr. ............. 38 Vice President--Logistics Patrick J. West .................. 37 President and Chief Executive Officer--UDS Division
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 Innotrac in 1986 and currently serves as Senior Vice President--Sales. He has been a director since December 1997. He held the position of Senior Vice President and Chief Operating Officer from November 1997 to December 2001 and 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 Senior Vice President--Client Services since April 1999 and as a director since December 1997. He served as Vice President--Business Development from November 1997 through 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 has served as Senior Vice President, Chief Financial Officer and Secretary since May 2000. In 2001, Mr. Gamsey was appointed to Innotrac's Board of Directors. 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. 14 Mr. Shaw joined Innotrac in July of 2001 as Vice President--Information Technology. From July 2000 through July 2001, he served in that same capacity for Innotrac's subsidiary, Return.com Online LLC. Prior to that he was founder and CEO of BigClix.com, Inc. a company that specialized in online community applications. From 1997 to 1998 Mr. Shaw was the Vice President of Operations for Flagship Net Solutions, a value-added reseller of computer services. Prior to that, Mr. Shaw was Director of Technology for the Atlanta Committee for the Olympic Games for the Athens venue. Mr. Toner joined Innotrac in June of 2001 as Vice President--Logistics. He brings 16 years of distribution, logistics, and transportation experience; 14 of those years were with McMaster-Carr Supply Company, a distributor of industrial supplies. Most recently, Mr. Toner was the General Manager for Webvan Group Inc., an Internet retailer, where he held the position of General Manager for East Coast operations. Mr. West joined Innotrac in December of 2000 when Innotrac acquired Universal Distribution Services (UDS). Mr. West currently serves as President and Chief Executive Officer - UDS Division for Innotrac. Mr. West founded UDS in 1992 and has served as its President and Chief Executive Officer since that time. 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. As a result of the loss of the SBC contract, we elected to close our call center operations in Duluth, Georgia in January 2002 and shifted our Atlanta clients to our call center facility in Pueblo, Colorado. The lease will expire in May 2002. 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 call center, as well as quality assurance, administrative, training and management space. This call center supports 390 workstations and utilizes 220 of the workstations at present. It currently operates twenty-four hours a day, seven days a week. 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. In August 2000, the Company filed a lease extension and modification that expanded the facility space from approximately 52,000 square feet to 82,000 square feet. This lease extension has a four-year term. This facility provides 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 250 workstations. UDS leases this facility through two lease agreements, which were initiated in August 1999 and October 2000. These agreements have lease terms of three years and seven 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. With the acquisition of iFulfillment, we operate a 354,000 square foot facility in Bolingbrook, Illinois. The lease for this facility was initiated at the date of acquisition in July 2001 and expires on December 31, 2002. This lease contains two five-year renewal options. This facility is used for fulfillment. 15 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. 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. 16 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 ---- --- 2001 First Quarter................................................... $ 6.250 $ 3.250 Second Quarter.................................................. $ 7.510 $ 6.130 Third Quarter................................................... $ 8.920 $ 5.550 Fourth Quarter.................................................. $ 8.000 $ 5.000 Fiscal Year Ended December 31, 2001............................. $ 8.920 $ 3.250 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
The approximate number of holders of record of Common Stock as of March 18, 2002 was 71. The approximate number of beneficial holders of our Common Stock as of that date was 2080. 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. RECENT SALES OF UNREGISTERED SECURITIES The Company acquired UDS through a merger on December 8, 2000. In connection with the merger, the Company issued 150,000 shares of its unregistered Common Stock to two shareholders of UDS, in exchange for their UDS shares, and a warrant to purchase 150,000 shares of Common Stock to a customer of UDS, in exchange for the customer's waiver of a right of first refusal with respect to UDS. Based on a formula for valuing the stock consideration paid by the Company set forth in the merger agreement, the total value of the shares of Common Stock issued to UDS's shareholders in connection with the merger was $742,500. The exercise price per share of Common Stock subject to the warrant is $6.50. The warrant is exercisable from December 8, 2001 through December 8, 2010, inclusive, based on a vesting schedule of 20% per year for the first 5 years that the warrant is outstanding. Under the terms of the merger agreement, the former shareholders of UDS may receive, as part of the consideration paid for their shares, annual contingent payments ("earnouts") based on the operating income generated by the Company's UDS Division over a three-year period that commenced December 1, 2000. Based on an agreement reached between the Company and one former UDS shareholder, such shareholder agreed to receive a portion of their "earnout" for the first year of the earnout period in the form of 310,000 shares of unregistered Common Stock. These shares were issued on February 1, 2002 and were valued at $5.00 per share for purposes of the earnout. The shares issued in connection with the merger and earnout were issued in reliance upon the exemptions from registration contained in Sections 4(2) and/or 4(6) of the Securities Act of 1933, as amended, and/or Regulation D promulgated thereunder. In determining that such exemptions were available, the Company relied upon certain representations and certifications made by the UDS 17 shareholders and the UDS customer. The description of the terms of the merger agreement herein is qualified in its entirety by the full text of the merger agreement, filed as an exhibit to this Annual Report on Form 10-K. ITEM 6. SELECTED FINANCIAL DATA The information contained under the heading "Selected Financial Data" in the Company's 2001 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 2001 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 2001 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. 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 2001 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. 18 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 2002 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 2002 Annual Meeting of Shareholders, to be 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 2002 Annual Meeting of Shareholders, to be 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 2002 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. 19 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, 2001 and 2000 Consolidated Statements of Operations for the years ended December 31, 2001, 2000, and 1999 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2001, 2000, and 1999 Consolidated Statements of Cash Flows for the years ended December 31, 2001, 2000, and 1999 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 - -------------- ----------------------- 2.1* Agreement and Plan of Merger dated December 8, 2000, by and among the Registrant, UDS, Patrick West, Daniel Reeves and The Estate of John R. West 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
20 November 30, 2000 (incorporated by reference to Exhibit 4.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) 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 William 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
21 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. (incorporated by reference to Exhibit 4.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) 10.9(a) Master Lease Agreement and Addendums, dated March 20, 2000, by and between Computer Sales International, Inc. and the Registrant (incorporated by reference to Exhibit 4.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) (b) First Amendment to Master Lease Agreement dated June 8, 2000, by and between Computer Sales International, Inc. and the Registrant (incorporated by reference to Exhibit 4.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) (c) Second Amendment to Master Lease Agreement dated September 28, 2000, by and between Computer Sales International, Inc. and the Registrant (incorporated by reference to Exhibit 4.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) 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)
22 (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+* 2002 Senior Executive Incentive Compensation Plan 10.15 (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 (incorporated by reference to Exhibit 4.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) 10.16+ 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) 10.17+ 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) 10.18+ 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) 10.19 Operating Agreement dated December 28, 2000, by and among the Registrant, Return.com Online, LLC, and Mail Boxes Etc., USA, Inc. (Incorporated by reference to Exhibit 10.22 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) 10.20 Agreement to Discharge Debt, dated April 17, 2001, between Return.com Online LLC 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 May 14, 2001) 10.21 Agreement to Terminate Services and Marketing Agreement, dated April 17, 2001, between Return.com Online LLC, Mail Boxes Etc., USA, Inc. 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 May 14, 2001) 10.22 Letter of Amendment to Amended and Restated Loan and Security Agreement by and between the Registrant and SouthTrust Bank, N.A. effective September 10, 2001 (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, 2001) 10.23* Lease, dated July 23, 2001, by and between The Lincoln National Life Insurance Company and iFulfillment, Inc.
23 10.24+* Employment Agreement dated December 31, 2001, by and between Robert J. Toner, Jr. and the Registrant 10.25+* Employment Agreement dated December 8, 2000, by and between Patrick J. West and the Registrant 13.1* Portions of the Registrant's Annual Report to Shareholders for 2001 incorporated into this Form 10-K 21.1* List of Subsidiaries 24.1* Power of Attorney (included on signature page) 99.1* Letter Pursuant to Temporary Note 3T to Regulation S-X
* Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit. (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 2001 fiscal year. 24 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES We have audited in accordance with auditing standards generally accepted in the United States, the consolidated financial statements of INNOTRAC CORPORATION AND SUBSIDIARIES included in this Form 10-K and have issued our report thereon dated February 8, 2002. 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 8, 2002 S-1 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, 2001 ......................................... $ 3,416 $ 3,813 $ 50 $ (4,016) $ 3,263 2000 ......................................... 1,177 3,325 1,254 (2,340) 3,416 1999 ......................................... 4,935 5,552 0 (9,310) 1,177 Provisions for returns and allowances Year ended December 31, 2001 ......................................... $ 725 $ 211 $ 843 $ (1,586) $ 193 2000 ......................................... 297 5,697 12,428 (17,697) 725 1999 ......................................... 602 6,301 15,836 (22,442) 297 Provision for restructuring charge (e-commerce exit costs) Year ended December 31, 2001 ......................................... $ 2,831 $ 0 $ (100) $ (900) $ 1,831 2000 ......................................... 0 4,618 0 (1,787) 2,831
S-2 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 28th day of March, 2002. INNOTRAC CORPORATION By: /s/ Scott D. Dorfman ------------------------------------ Scott D. Dorfman Chairman of the Board, President and Chief Executive Officer POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Scott D. Dorfman and 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 28th day of March, 2002.
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, - ------------------------------------------------- Secretary (principal financial and accounting David L. Gamsey officer) and Director /s/ David L. Ellin Senior Vice President--Sales and Director - ------------------------------------------------- David L. Ellin /s/ Larry C. Hanger Senior Vice President--Client Services and Director - ------------------------------------------------- Larry C. Hanger /s/ Bruce V. Benator Director - ------------------------------------------------- Bruce V. Benator /s/ Martin J. Blank Director - ------------------------------------------------- Martin J. Blank
EX-2.1 3 g74787ex2-1.txt AGREEMENT AND PLAN OF MERGER EXHIBIT 2.1 ================================================================================ AGREEMENT AND PLAN OF MERGER BY AND AMONG INNOTRAC CORPORATION, UDS AND CERTAIN SHAREHOLDERS OF UDS DECEMBER 8, 2000 ================================================================================ TABLE OF CONTENTS
Page ---- 1. THE MERGER............................................................................................. 1 1.1 The Merger.................................................................................... 1 1.2 Effect of the Merger.......................................................................... 1 2. THE SURVIVING CORPORATION.............................................................................. 1 2.1 Articles...................................................................................... 1 2.2 Bylaws........................................................................................ 1 2.3 Board of Directors............................................................................ 2 2.4 Officers...................................................................................... 2 3. MERGER CONSIDERATION; ADJUSTMENT; EARNOUT.............................................................. 2 3.1 Merger Consideration.......................................................................... 2 3.2 Merger Consideration Adjustment............................................................... 3 3.3 Earnout Payments.............................................................................. 4 3.4 No Fractional Shares.......................................................................... 9 3.5 Earnout Payment Not Contingent Upon Employment................................................ 9 3.6 Thane Participation in First Year Earnout Matters............................................. 9 4. CLOSING................................................................................................ 10 4.1 Closing....................................................................................... 10 4.2 Sellers Shares................................................................................ 10 4.3 Transactions Interdependent; Default by One Seller............................................ 10 5. ADDITIONAL AGREEMENTS.................................................................................. 11 5.1 Expenses...................................................................................... 11 5.2 Brokers....................................................................................... 11 5.3 Publicity..................................................................................... 11 5.4 Access and Inspection......................................................................... 11 5.5 Cooperation................................................................................... 12 5.6 Buyer's Public Documents and Access to Information............................................ 12 5.7 Legending of Common Stock..................................................................... 12 5.8 Non-Solicitation of Third Party Offers........................................................ 13 5.9 Covenants Against Competition................................................................. 13 5.10 Registration Rights........................................................................... 14 5.11 Lockup of Initial Buyer Shares................................................................ 15 5.12 Certain Tax Matters........................................................................... 16 5.13 Subsequent Change of Control.................................................................. 17 5.14 Earnout Period Operating Matters.............................................................. 18 5.15 Litigation Support............................................................................ 18 5.16 Efforts to Consummate......................................................................... 19 5.17 Notice of Adverse Changes in Condition........................................................ 19
5.18 Stock Options of Surviving Corporation......................................................... 19 5.19 UDS Division Access to Surviving Corporation Resources......................................... 20 5.20 Assumption of Sellers' Guaranties.............................................................. 20 5.21 Purchase of Thane Waiver of Right of First Refusal............................................. 20 5.22 Termination of Stock Transfer Restrictions and Buy-Out Agreement............................... 20 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLERS AND THE COMPANY................................ 21 6.1 Organization, Qualification and Authority...................................................... 21 6.2 Ownership of Shares; Subsidiaries.............................................................. 22 6.3 Capacity; Estate; Inconsistent Obligations..................................................... 23 6.4 Consents....................................................................................... 24 6.5 No Violation; Compliance with Laws............................................................. 24 6.6 Possession of Licenses......................................................................... 24 6.7 Financial Statements, Financial Condition...................................................... 24 6.8 Liabilities.................................................................................... 25 6.9 Title to Properties............................................................................ 25 6.10 Receivables.................................................................................... 25 6.11 Inventories; Consigned Property................................................................ 25 6.12 Personal Property.............................................................................. 26 6.13 Real Property.................................................................................. 26 6.14 Ability to Conduct Business and Intellectual Property Rights................................... 27 6.15 Contracts...................................................................................... 28 6.16 Insurance...................................................................................... 28 6.17 Litigation; Contingencies...................................................................... 28 6.18 Taxes.......................................................................................... 28 6.19 Employment and Labor Relations................................................................. 29 6.20 Employee Benefit Plans......................................................................... 31 6.21 Environmental Matters.......................................................................... 32 6.22 Absence of Certain Business Practices.......................................................... 33 6.23 Agreements and Transactions with Related Parties............................................... 33 6.24 Absence of Changes............................................................................. 34 6.25 Bank Accounts and Safety Deposit Boxes......................................................... 35 6.26 Products Liability............................................................................. 35 6.27 Customer Relations............................................................................. 35 6.28 Investment Representations..................................................................... 36 6.29 Transfer Claims................................................................................ 36 6.30 OSHA and Other Filings......................................................................... 36 6.31 Full Disclosure................................................................................ 36 7. REPRESENTATIONS AND WARRANTIES OF BUYER................................................................. 37 7.1 Organization................................................................................... 37 7.2 Authorization; No Inconsistent Agreements...................................................... 37
-ii- 7.3 Inconsistent Obligations....................................................................... 37 7.4 Consents....................................................................................... 37 7.5 Authorization of Common Stock; Capitalization.................................................. 38 7.6 Financial Statements in SEC Documents.......................................................... 38 7.7 SEC Filings.................................................................................... 38 7.8 Company or UDS Division Employees.............................................................. 38 8. CONDUCT OF BUSINESS OF THE COMPANY PENDING CLOSING...................................................... 38 8.1 Business in the Ordinary Course................................................................ 38 8.2 Compensation................................................................................... 41 9. CONDITIONS TO OBLIGATIONS OF BUYER...................................................................... 41 9.1 Representations and Warranties................................................................. 41 9.2 Compliance with Agreements and Conditions...................................................... 41 9.3 Certificates................................................................................... 41 9.4 Resolutions.................................................................................... 42 9.5 Government Consents............................................................................ 42 9.6 Other Consents................................................................................. 42 9.7 Employment Agreements.......................................................................... 42 9.8 Assumption Agreement........................................................................... 42 9.9 Board Approval................................................................................. 42 9.10 No Inconsistent Requirements................................................................... 42 9.11 Related Party Matters.......................................................................... 43 9.12 Opinion of Counsel............................................................................. 43 9.13 Due Diligence Review; Customer Visits.......................................................... 43 9.14 Regulation D Certification..................................................................... 43 9.15 Proceedings and Documents Satisfactory......................................................... 43 9.16 Sale of Aircraft............................................................................... 43 9.17 Thane Agreements............................................................................... 43 10. CONDITIONS TO OBLIGATIONS OF THE SELLERS AND THE COMPANY................................................ 43 10.1 Representations and Warranties................................................................. 44 10.2 Compliance with Agreements and Conditions...................................................... 44 10.3 Certificates of Buyer.......................................................................... 44 10.4 Opinion of Counsel............................................................................. 44 10.5 Resolutions.................................................................................... 44 10.6 Employment Agreements.......................................................................... 44 10.7 No Adverse Change.............................................................................. 44 11. INDEMNITIES............................................................................................. 44 11.1 Indemnification by the Sellers................................................................. 44 11.2 Indemnification by Surviving Corporation....................................................... 45
-iii- 11.3 Limitations and Payment on Claims.............................................................. 45 11.4 Survival....................................................................................... 46 11.5 No Liability or Contribution by the Company or the UDS Division................................ 46 11.6 Recoupment From Earnout........................................................................ 47 12. TERMINATION............................................................................................. 47 12.1 Termination of Agreement....................................................................... 47 12.2 Termination of Obligations..................................................................... 47 13. APPOINTMENT OF SELLERS' AGENT........................................................................... 48 13.1 Appointment of Agent........................................................................... 48 13.2 Liability of Agent............................................................................. 48 13.3 Irrevocable; Binding on Successors, Etc........................................................ 48 14. MISCELLANEOUS........................................................................................... 48 14.1 Notices........................................................................................ 48 14.2 Counterparts and Facsimiles.................................................................... 49 14.3 Governing Law.................................................................................. 49 14.4 Successors and Assigns......................................................................... 49 14.5 Partial Invalidity and Severability............................................................ 49 14.6 Waiver......................................................................................... 49 14.7 Headings....................................................................................... 50 14.8 Number and Gender.............................................................................. 50 14.9 Entire Agreement............................................................................... 50 15. DEFINITIONS............................................................................................. 50
-iv- Exhibits A-1. West Employment Agreement A-2. Reeves Employment Agreement B. Assumption Agreement C. Opinion of McDonald, Carano, Wilson, McCune, Bergin, Frankovich & Hicks LLP D. Regulation D Certificate E. Bill of Sale for Aircraft F. Opinion of Kilpatrick Stockton LLP G. Examples of Earnout Calculations DISCLOSURE SCHEDULES 6.1(a) Organization, Qualification and Authority 6.2 Ownership of Shares; Subsidiaries 6.3 Capacity; Estate; Inconsistent Obligations 6.4 Consents 6.7 Financial Matters 6.8 Company Liability 6.9 Title to Properties 6.10 Receivables 6.11 Inventories; Consigned Property 6.14(a) Intellectual Property Rights 6.15 Company Contracts 6.16 Insurance Policies 6.19 Employment and Labor Relations 6.20 Employee Benefit Plans 6.21 Environmental Matters 6.24 Changes Since Reference Date 6.25 Bank Accounts 6.26 Customers 8.1 Business in the Ordinary Course 9.6 Other Consents The Registrant agrees to provide a copy of any of the above exhibits or disclosure schedules upon the request of the Commission. AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (the "AGREEMENT") is made and entered into as of the 8th day of December, 2000, by and among INNOTRAC CORPORATION, a Georgia corporation ("BUYER"), UDS, a Nevada corporation ("COMPANY"), PATRICK WEST ("WEST"), DANIEL REEVES ("REEVES") and THE ESTATE OF JOHN L. WEST (the "ESTATE") (West, Reeves and the Estate are referred to herein collectively as "SELLERS" and individually as "SELLER"). WITNESSETH: WHEREAS, Buyer and Company are engaged in various marketing support services, including, among other things, order processing, payment processing, warehousing, fulfillment, customer service, call center service and website development; WHEREAS, Sellers are the record and beneficial owners of all of the issued and outstanding shares of capital stock of the Company (the "SELLERS SHARES"); and WHEREAS, Buyer and Sellers deem it advisable and in their respective best interests to effect the merger of the Company with and into, Buyer, all on the terms and subject to the conditions set forth herein; NOW, THEREFORE, for and in consideration of the premises, and the mutual covenants and agreements contained herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. THE MERGER 1.1 THE MERGER. At the Effective Time, upon the terms and subject to the conditions set forth herein, the Company shall be merged with and into Buyer, the separate existence of the Company shall cease, and Buyer shall continue as the surviving corporation (the "MERGER"). Buyer after the Merger is sometimes hereafter referred to as the "SURVIVING CORPORATION." 1.2 EFFECT OF THE MERGER. At the Effective Time, the Surviving Corporation shall continue its corporate existence under the Laws of its state of incorporation and shall succeed to all rights, privileges, immunities, franchises and powers, and be subject to all duties, liabilities, debts and obligations, of the Company in accordance with the provisions of the Laws of its state of incorporation. 2. THE SURVIVING CORPORATION 2.1 ARTICLES. The articles of incorporation of Buyer as in effect immediately prior to the Effective Time shall be the articles of incorporation of the Surviving Corporation until thereafter amended in accordance with applicable Law and such articles of incorporation. 2.2 BYLAWS. The bylaws of Buyer as in effect immediately prior to the Effective Time shall be the bylaws of the Surviving Corporation until thereafter amended in accordance with applicable Law, the articles of incorporation of such Surviving Corporation and such bylaws. 2.3 BOARD OF DIRECTORS. The board of directors of Buyer immediately prior to the Effective Time shall be the board of directors of the Surviving Corporation, each of such persons to serve until his or her successor, if there is to be one, is duly elected and qualified. 2.4 OFFICERS. The officers of Buyer immediately prior to the Effective Time shall be the officers of the Surviving Corporation, each of such officers to serve until his or her successor, if there is to be one, is duly qualified. In addition, the Sellers shall be officers of the UDS Division pursuant to employment agreements referenced in PARAGRAPHS 9.7 AND 10.6. 3. MERGER CONSIDERATION; ADJUSTMENT; EARNOUT 3.1 MERGER CONSIDERATION. (a) The "MERGER CONSIDERATION" is the Initial Merger Consideration and the Earnout Payments, if any, determined in accordance with, and payable upon the occurrence of, the conditions described in PARAGRAPH 3.3, subject to adjustment pursuant to PARAGRAPH 3.2. The Merger Consideration shall be allocated 45% to West, 10% to Reeves and 45% to the Estate, except as otherwise provided in PARAGRAPH 3.1(B). (b) The "INITIAL MERGER CONSIDERATION" is the sum of (i), (ii), (iii) and (iv) of this PARAGRAPH 3.1(B) as set forth below: (i) $750,000 to be paid by Buyer in cash in immediately available funds to be paid as provided for in PARAGRAPH 3.1(C); (ii) 150,000 shares of newly issued shares of Buyer's Common Stock, $0.10 par value per share (the "COMMON STOCK," the shares being delivered to the Sellers pursuant to this PARAGRAPH 3.1(B)(II), PARAGRAPHS 3.1(B)(III) and (IV) being referred to herein as "INITIAL BUYER SHARES") to be delivered as provided for in PARAGRAPH 3.1(C); and (iii) An amount (the "INITIAL MERGER CONSIDERATION BALANCE") to be paid or delivered as provided for in PARAGRAPH 3.1(C) equal to: (A) $2,000,000 minus (B) the product of (x) 150,000 and (y) the average of the closing prices, without regard to trading volume, for shares of the Common Stock on the Nasdaq National Market as reported on the Internet website "www.nasdaq.com," or if such website is unavailable, as reported in The Wall Street Journal, for each of the 15 consecutive trading days immediately preceding the third Business Day before Closing. (v) The Initial Merger Consideration shall be paid or delivered to the Sellers as follows: - 2 -
---------------------------------------------------------- SELLER CASH PORTION INITIAL BUYER SHARES ---------------------------------------------------------- Reeves $ 251,000 20,000 ---------------------------------------------------------- Estate $ 556,500 130,000 ---------------------------------------------------------- West $1,200,000 -0- ---------------------------------------------------------- Total: $2,007,500 150,000 ----------------------------------------------------------
(c) Initial Merger Consideration Payment Procedures. At least 2 Business Days prior to the Closing, Sellers shall notify the Buyer in writing of (i) the U.S. account or accounts they desire any cash portion of the Initial Merger Consideration to be deposited in, accompanied by wiring instructions; (ii) how much of the Initial Merger Consideration Balance they desire to receive in Common Stock, and in how many certificates, and (iii) how much of the Initial Merger Consideration Balance they desire to receive in cash. 3.2 MERGER CONSIDERATION ADJUSTMENT. (a) Preliminary Closing Balance Sheet. Within 30 days after the date of the Closing, the Sellers shall prepare and deliver to the Surviving Corporation a balance sheet of the Company as of immediately prior to the Closing prepared in conformity with generally accepted accounting principles in the United States ("GAAP") (such balance sheet being referred to as the "PRELIMINARY CLOSING BALANCE SHEET"). Without limiting the generality of the requirement that the Preliminary Closing Balance Sheet be prepared in conformity with GAAP, the Preliminary Closing Balance Sheet shall reflect all reserves and accruals required by GAAP including those set forth in the Disclosure Schedules in response to PARAGRAPH 6.7 hereto, provided, however, any footnotes required by GAAP need not be included. (b) Dispute Resolution by the Parties. (i) The Surviving Corporation shall have 15 days following receipt of the Preliminary Closing Balance Sheet in which to notify the Sellers of any dispute of any item contained therein, which notice shall set forth in reasonable detail the basis for such dispute. The Surviving Corporation and Sellers shall cooperate in good faith to resolve any dispute as promptly as possible, and upon such resolution, the Preliminary Closing Balance Sheet shall be revised in accordance with the agreement of the Surviving Corporation and Sellers, and shall thereupon become the "FINAL CLOSING BALANCE SHEET" and shall become final and binding upon the Surviving Corporation and Sellers. (ii) If the Surviving Corporation does not notify the Sellers of any dispute within such 15-day period, the Preliminary Closing Balance Sheet shall be deemed to be the Final Closing Balance Sheet without revision or change, and shall become final and binding upon the Surviving Corporation and Sellers. (c) Dispute Resolution by Independent Accounting Firm. If the Surviving Corporation and Sellers are unable to resolve any such dispute within such 15-day period (or such longer period as the Surviving Corporation and Sellers shall mutually agree in writing) of - 3 - delivery of such notice, such dispute shall be resolved by a mutually acceptable accounting firm of national standing in the United States ("INDEPENDENT ACCOUNTING FIRM"). If the Surviving Corporation and Sellers are unable to agree on the choice of an Independent Accounting Firm, they will select an Independent Accounting Firm by lot from a pool comprised of the "Big 5" accounting firms in the United States, provided, however, there shall be excluded from the pool the parties' regular accounting firms, any accounting firms involved in Buyer's review of the Company prior to the consummation of the transactions contemplated by this Agreement and any accounting firms involved in the preparation, review or audit of the Preliminary Closing Balance Sheet. If no national accounting firm shall be willing to serve as the Independent Accounting Firm, then an arbitrator shall be selected to serve as such, such selection to be according to the above procedures. The Independent Accounting Firm shall be instructed to use every reasonable effort to perform its services within 30 days of submission of the disputed issues to it and, in any case, as promptly as practicable after such submission. The Preliminary Closing Balance Sheet shall be revised in accordance with the decision of the Independent Accounting Firm, and shall thereupon become the Final Closing Balance Sheet and shall become final and binding upon the Surviving Corporation and Sellers. (d) Working Capital Adjustment. If the current assets minus the current liabilities, excluding the current portion of long-term debt, of the Company as set forth in the Final Closing Balance Sheet ("WORKING CAPITAL") is less than $(703,000), the Merger Consideration shall be reduced, on a dollar-for-dollar basis, by an amount equal to the difference between $(703,000) and the Working Capital, but after netting against such reduction the amount if any by which Funded Debt (as defined below) is less than $421,623. (e) Funded Debt Adjustment. If the debt of the Company for borrowed funds as set forth in the Final Closing Balance Sheet ("FUNDED DEBT") is greater than $421,623, the Merger Consideration shall be reduced, on a dollar-for-dollar basis, by an amount equal to the difference between $421,623 and the Funded Debt, but after netting against such reduction the amount by which the Working Capital is greater than $(703,000). (f) Shortfall. If the operation of PARAGRAPHS 3.2(D) AND (E) above result in a decrease in the Merger Consideration (such amount is hereinafter referred to as the "SHORTFALL"), then within 5 Business Days after the Preliminary Closing Balance Sheet becomes the Final Closing Balance Sheet in accordance with the provisions of this PARAGRAPH 3.2, Sellers shall cause the Shortfall to be paid in cash in immediately available funds to a U.S. account or accounts designated in writing by the Surviving Corporation. (g) Fees and Expenses of Independent Accounting Firm. If the Independent Accounting Firm resolves the disputes submitted to it pursuant to PARAGRAPH 3.2(C) in favor of the Surviving Corporation, the Sellers will be responsible for all the fees and expenses of the Independent Accounting Firm. If the Independent Accounting Firm resolves the disputes submitted to it pursuant to PARAGRAPH 3.2(C) in favor of the Sellers, the Surviving Corporation will be responsible for all the fees and expenses of the Independent Accounting Firm. 3.3 EARNOUT PAYMENTS. - 4 - (a) Calculation of Operating Income. For each Year during the Earnout Period, the chief financial officer of the Surviving Corporation shall prepare or cause to be prepared, and to deliver or cause to be delivered to Sellers and the Surviving Corporation, (i) a statement of income of the UDS Division for the Year then ended in accordance with GAAP (the "PRELIMINARY UDS DIVISION INCOME STATEMENT"); and (ii) a statement setting forth the calculation of the Operating Income for the Year then ended and all adjustments to the Preliminary UDS Division Income Statement necessary to make the calculation of Operating Income for the Year then ended (the "PRELIMINARY OPERATING INCOME DETERMINATION"). A copy of the Preliminary UDS Division Income Statement and Preliminary Operating Income Determination shall be delivered to the Sellers not later than 45 days after the end of the Year to which such documents relate. The cost of preparing the Preliminary UDS Division Income Statement and the Preliminary Operating Income Determination shall be borne by the Surviving Corporation. The Surviving Corporation shall permit Sellers and their accountants and other representatives to examine and make copies of workpapers, ledgers, accounting records, trial balances and such other information as Sellers shall reasonably request in order to verify the Preliminary UDS Division Income Statement and the Preliminary Operating Income Determination. (b) Dispute Resolution by the Parties. (i) For each Year during the Earnout Period, the Sellers shall have 30 days following the delivery of the Preliminary UDS Division Income Statement and the Preliminary Operating Income Determination in which to notify the Surviving Corporation of any dispute of any item contained therein, which notice shall set forth in reasonable detail the basis for such dispute. The Surviving Corporation and Sellers shall cooperate in good faith to resolve any dispute as promptly as possible, and upon such resolution, the Preliminary UDS Division Income Statement and the Preliminary Operating Income Determination shall be revised in accordance with the agreement of the Surviving Corporation and Sellers, and shall thereupon become the "FINAL UDS DIVISION INCOME STATEMENT" and "FINAL OPERATING INCOME DETERMINATION," respectively, and shall become final and binding upon the Surviving Corporation and Sellers. (ii) If the Sellers do not notify the Surviving Corporation of any dispute within such 30-day period, the Preliminary UDS Division Income Statement and the Preliminary Operating Income Determination shall be deemed to be the Final UDS Division Income Statement and Final Operating Income Determination, respectively, without revision or change, and shall become final and binding upon the Surviving Corporation and Sellers. (c) Dispute Resolution by Independent Accounting Firm. For each Year during the Earnout Period, if the Surviving Corporation and Sellers are unable to resolve any such dispute within 30 days (or such longer period as the Surviving Corporation and Sellers shall mutually agree in writing) of delivery of such notice, such dispute shall be resolved by an Independent Accounting Firm selected in the manner provided for in PARAGRAPH 3.2(C). The Independent Accounting Firm shall be instructed to use every reasonable effort to perform its services within 30 days of submission of the disputed issues to it and, in any case, as promptly as practicable after such submission. The Preliminary UDS Division Income Statement and the Preliminary Operating Income Determination shall be revised in accordance with the decision of the Independent Accounting Firm, and shall thereupon become the Final UDS Division Income - 5 - Statement and Final Operating Income Determination, respectively, and shall become final and binding upon the Surviving Corporation and Sellers. (d) Year One Earnout. If the Operating Income for Year One as set forth in the Final Operating Income Determination for Year One exceeds $800,000, then the Surviving Corporation shall cause an amount equal to (i) such excess multiplied by 3 (ii) minus the Year One Earnout Adjustment, if any (the "YEAR ONE EARNOUT") to be paid or delivered as provided for in PARAGRAPH 3.3(H). If the Operating Income for Year One as set forth in the Final Operating Income Determination for Year One does not exceed $800,000, the Surviving Corporation shall not pay or deliver any portion of the Year One Earnout. For clarification, the operation of the earnout mechanisms reflected in PARAGRAPHS 3.3(D), (E) and (F) is illustrated in EXHIBIT G. (e) Year Two Earnout. If the Operating Income for Year Two as set forth in the Final Operating Income Determination for Year Two exceeds the greater of (i) the Operating Income for Year One as set forth in the Final Operating Income Determination for Year One or (ii) $800,000 (such greater amount being referred to as the "YEAR TWO OPERATING INCOME HURDLE"), then the Surviving Corporation shall cause an amount equal to such excess multiplied by 3 (the "YEAR TWO EARNOUT") to be paid or delivered as provided for in PARAGRAPH 3.3(H). If the Operating Income for Year Two as set forth in the Final Operating Income Determination for Year Two does not exceed the Year Two Operating Income Hurdle, the Surviving Corporation shall not pay or deliver any portion of the Year Two Earnout. (f) Year Three Earnout. If the Operating Income for Year Three as set forth in the Final Operating Income Determination for Year Three exceeds the greater of (i) the Year Two Operating Income Hurdle or (ii) the Operating Income Determination for Year Two as set forth in the Final Operating Income Determination for Year Two (such greater amount being referred to as the "YEAR THREE OPERATING INCOME HURDLE"), then the Surviving Corporation shall cause an amount equal to such excess multiplied by 3 (the "YEAR THREE EARNOUT") to be paid or delivered as provided for in PARAGRAPH 3.3(H). If the Operating Income for Year Three as set forth in the Final Operating Income Determination for Year Three does not exceed the Year Three Operating Income Hurdle, the Surviving Corporation shall not pay or deliver any portion of the Year Three Earnout. (g) Earnout Definitions. (i) "EARNOUT PAYMENT" shall mean any of the Year One Earnout, Year Two Earnout or Year Three Earnout, and "EARNOUT PAYMENTS" shall mean all of them. (ii) "EARNOUT PERIOD" shall mean the period commencing on the first day of a calendar month that is closest to the Closing and ending on the last day of the 36th month thereafter. (iii) "OPERATING INCOME" shall mean for any period the operating income (or loss) from continuing operations of the UDS Division for such period, calculated as a separate entity, as determined in accordance with GAAP, after eliminating all items required to be eliminated in the course of the preparation of financial statements of the - 6 - UDS Division in accordance with GAAP, provided, however, that, in calculating Operating Income, notwithstanding GAAP: (A) The income (or loss) of any person in which the UDS Division has an ownership interest shall be excluded, except to the extent that any such income has been actually received by the UDS Division in the form of cash dividends or similar cash distributions; (B) Any restoration to income of any contingency reserve or opening balance sheet accrual or reserve shall be excluded, except to the extent that provision for such reserve was previously charged to the income statement during such period; (C) Any aggregate gain or losses during such period arising from the sale, conversion, exchange or other disposition of capital assets shall be excluded; (D) Any gains resulting from any write-up, or any loss resulting from any write-down, of any assets shall be excluded; (E) Any gain from the collection of the proceeds of life insurance policies shall be excluded; (F) Any income or gain, or any loss, during such period from (w) any change in accounting principles or estimates in accordance with GAAP, (x) any prior period adjustments resulting from any change in accounting principles in accordance with GAAP, (y) any extraordinary items, or (z) any discontinued operations or the disposition thereof, shall be excluded; (G) Any portion of such income that cannot be freely converted into United States Dollars shall be excluded; (H) Any write-off or amortization of goodwill or other intangible assets related to this transaction shall be excluded; (I) Any loss from business or operations referred or transferred from the Surviving Corporation to the UDS Division shall be excluded, except to the extent such business or operations would otherwise be profitable but for operational inefficiencies or errors attributable to the UDS Division; (J) Profits from business or operations referred or transferred from the Surviving Corporation to the UDS Division shall be included; (K) Any loss from business or operations referred or transferred from the UDS Division to the Surviving Corporation shall be included, except to the extent such business or operations would otherwise be profitable but for operational inefficiencies or errors attributable to the Surviving Corporation; - 7 - (L) Profits from business or operations referred or transferred from the UDS Division to the Surviving Corporation shall be included, except that such referrals or transfer will be subject to a customary intracompany charge to the UDS Division based on the Surviving Corporation's costs; (M) Management fees, allocation of administrative overhead, legal or accounting services or other similar charges incurred, charged or allocated by the Surviving Corporation to the UDS Division shall be excluded (except for charges for the cost of services actually rendered by third parties jointly to the Surviving Corporation and the UDS Division, or the Surviving Corporation for the benefit of the UDS Division, and fairly allocated to the recipients of such services, including without limitation, the cost of insurance); (N) Any effects of the Tax Election shall be excluded; and (O) Any effects of the payment of $750,000 by the Company at the Closing to Thane International, Inc., a Delaware corporation ("THANE") in connection with the waiver, release and relinquishment of Thane's right of first refusal with respect to any offer by a third person for at least a majority of the issued and outstanding capital stock of the Company, or the payment of $500,000 by Buyer or the Surviving Corporation to Thane in connection with the extension and amendment of Thane's fulfillment agreement with the Company shall be excluded. (iv) "UDS DIVISION" shall mean the business and operations of the Company post-Closing, maintained as a separate division of the Surviving Corporation with separate financial statements. (v) "YEAR" shall mean any of Year One, Year Two or Year Three. (vi) "YEAR ONE" shall mean the period commencing on the first day of the Earnout Period and ending on the last day of the 12th month of the Earnout Period. (vii) "YEAR ONE EARNOUT ADJUSTMENT" shall mean the amount in dollars by which the Operating Income for Year One as set forth in the Final Operating Income Determination for Year One exceeds $1,250,000; provided, however, the Year One Earnout Adjustment shall not exceed $750,000. If the Operating Income for Year One as set forth in the Final Operating Income Determination for Year One does not exceed $1,250,000, there shall be no Year One Earnout Adjustment. The Year One Earnout Adjustment reflects the amounts of future payments that may be made by the Company at the Closing to Thane in connection with the waiver, release and relinquishment of Thane's right of first refusal with respect to any offer by a third person for at least a majority of the issued and outstanding capital stock of the Company. (viii) "YEAR TWO" shall mean the period commencing on the first day of the 13th month of the Earnout Period and ending on the last day of the 24th month of the Earnout Period. - 8 - (ix) "YEAR THREE" shall mean the period commencing on the first day of the 25th month of the Earnout Period and ending on the last day of the Earnout Period. (h) Earnout Payment Procedures. (i) Within 5 Business Days after the Preliminary Operating Income Determination for any Year becomes the Final Operating Income Determination for that Year, Sellers shall notify the Surviving Corporation in writing as to how they desire to receive the Earnout Payment for that year, if any is due, setting forth (A) how much of the Earnout Payment they desire to receive in Common Stock, and in how many certificates, (B) how much they desire to receive in cash, (C) delivery instructions for certificates of Common Stock, and (D) the U.S. account or accounts, with wiring instructions, to which they desire any cash portion to be paid (the "SELLERS NOTICE"). The cash portion of any Earnout Payment shall be paid, and certificates representing the Common Stock portion of any Earnout Payment shall be delivered, by the Surviving Corporation within 5 Business Days of receipt of Sellers Notice. To the extent Sellers have not paid the Surviving Corporation any Shortfall pursuant to PARAGRAPH 3.2(F) or any Indemnified Losses pursuant to PARAGRAPH 11.1, the Surviving Corporation may deduct such unpaid amounts from any Earnout Payment without prejudice to any other rights the Surviving Corporation may have against the Sellers with respect to the Shortfall or the Indemnified Losses. (ii) If Sellers elect to receive any portion of the Year One Earnout in Common Stock, the number of shares they shall receive shall be equal to (A) the portion of the Year One Earnout so designated divided by (B) $9. If Sellers elect to receive any portion of the Year Two Earnout in Common Stock, the number of shares they shall receive shall be equal to (A) the portion of the Year Two Earnout so designated divided by (B) $12. If Sellers elect to receive any portion of the Year Three Earnout in Common Stock, the number of shares they shall receive shall be equal to (A) the portion of the Year Three Earnout so designated divided by (B) $15. The denominators used in each of the preceding three sentences of this PARAGRAPH 3.3(H)(II) shall be adjusted for any stock splits or other reclassifications and any transaction in which the Common Stock is replaced with or exchanged for the capital stock of a successor subsequent to the execution of this Agreement. (iii) Fees and Expenses of Independent Accounting Firm. If the Independent Accounting Firm resolves the disputes submitted to it pursuant to PARAGRAPH 3.3(C) in favor of the Surviving Corporation, the Sellers will be responsible for all the fees and expenses of the Independent Accounting Firm. If the Independent Accounting Firm resolves the disputes submitted to it pursuant to PARAGRAPH 3.3(C) in favor of the Sellers, the Surviving Corporation will be responsible for all the fees and expenses of the Independent Accounting Firm. 3.4 NO FRACTIONAL SHARES. In lieu of any fractional shares of Common Stock that might otherwise be delivered as any part of the Merger Consideration, cash will be paid. 3.5 EARNOUT PAYMENT NOT CONTINGENT UPON EMPLOYMENT. Earnout Payments pursuant to this Article 3 shall not be contingent upon the continued employment of Reeves or West by the UDS Division or the Surviving Corporation during the Earnout Period. 3.6 THANE PARTICIPATION IN FIRST YEAR EARNOUT MATTERS. Notwithstanding anything herein to the contrary, the parties acknowledge and agree that Thane shall have the right and - 9 - reasonable opportunity, pursuant to and subject to the terms and conditions of that certain Waiver Agreement by and among the Buyer and Thane of even date herewith, to: (i) receive the Preliminary and Final UDS Division Income Statements and Operating Income Determinations in connection with the determination and delivery of the First Year Earnout within the same time periods prescribed for the delivery of such documents for the parties hereto; and (ii) cause independent accountants of its own choosing and at its own expense to audit or review any financial statement relating to the First Year Earnout. 4. CLOSING 4.1 CLOSING. Subject to termination of this Agreement pursuant to ARTICLE 12, the consummation of the transactions contemplated in this Agreement (the "CLOSING") shall take place at the offices of McDonald, Carano, Wilson, McCune, Bergin, Frankovich & Hicks LLP, 241 Ridge Street, 4th Floor, Reno, Nevada at 10:00 a.m., Reno time, on the later of (a) December 8, 2000 or (b) the first Business Day after all the conditions set forth in ARTICLES 9 and 10 hereof have been satisfied or waived. On the date of the Closing, the Company and Buyer shall file the documents required by the Laws of their respective states of incorporation to effect the Merger. The Merger shall become effective at 8:59 PM Nevada time on December 8, 2000 (the "EFFECTIVE TIME"). 4.2 SELLERS SHARES. (a) At the Effective Time, by virtue of the Merger, and without any action on the part of the Sellers, all of the Sellers Shares issued and outstanding immediately prior to the Effective Date shall be canceled, retired and converted into and become the right to receive the Merger Consideration described in ARTICLE 3. (b) At the Closing, the Sellers shall surrender the certificates representing at least 90% of the Sellers Shares, accompanied by blank stock powers and all necessary transfer taxes and other revenue stamps, to Buyer, and Buyer shall deliver the Initial Merger Consideration to the Sellers. Within 50 days after the Closing, the Sellers shall surrender the certificates representing the remaining Sellers Shares, accompanied by blank stock powers and all necessary transfer taxes and other revenue stamps. Delivery of the Initial Buyer Shares shall be deemed to have been made if the Buyer causes a letter of instruction to be issued to the Buyer's transfer agent and registrar at the Closing instructing such transfer agent and registrar to issue certificates representing the Initial Buyer Shares to the Sellers in such denominations as requested by the Sellers pursuant to PARAGRAPH 3.1(C). 4.3 TRANSACTIONS INTERDEPENDENT; DEFAULT BY ONE SELLER. (a) All deliveries, payments, and other transactions and documents relating to the Closing shall be interdependent and none shall be effective unless and until all are effective (except to the extent that the party entitled to the benefit thereof has waived satisfaction or performance thereof as a condition precedent to Closing). (b) If any Seller shall fail or refuse to deliver to Buyer, at the Closing, any of the Sellers Shares to be delivered by him hereunder, such failure or refusal shall not relieve the other Seller of any obligation under this Agreement, and Buyer, at its option and without prejudice to its rights against such defaulting Seller, may either purchase the remaining Sellers Shares, or - 10 - refuse to make such purchase and thereby terminate all of its obligations hereunder, without any liability to any of the Sellers as a result of such termination. 5. ADDITIONAL AGREEMENTS 5.1 EXPENSES. Except as otherwise provided herein, all expenses incurred by Buyer in connection with the negotiations among the parties, and the authorization, preparation, execution and performance of this Agreement and the transactions contemplated hereby shall be paid by Buyer. Except as otherwise provided herein, all expenses incurred by the Sellers and the Company in connection with the negotiations among the parties, and the authorization, preparation, execution and performance of this Agreement and the Closing of the transactions contemplated hereby shall be paid by the Sellers. 5.2 BROKERS. The Surviving Corporation shall indemnify the Sellers and hold them harmless from and against all claims or demands for commissions or other compensation by any broker, finder, or similar agent claiming to have been employed by or on behalf of Buyer. The Sellers (and, if the Merger is not consummated, the Company) shall, jointly and severally, indemnify Buyer and the Surviving Corporation and hold them harmless from and against all claims or demands for commissions or other compensation by any broker, finder, or similar agent claiming to have been employed by or on behalf of the Sellers or the Company. Without limiting the generality of the foregoing, the Sellers shall pay any fees, commissions or other demands of NewCap Partners Inc. 5.3 PUBLICITY. After the execution of this Agreement, the Buyer or Surviving Corporation may in their discretion make any press releases and other public announcements respecting the subject matter hereof they deem necessary or desirable, provided however, that Sellers shall have a reasonable opportunity to review and comment upon any proposed such press release and other public announcement prior to dissemination thereof. After the execution of this Agreement, the Company or the Sellers may disseminate an announcement respecting the subject matter hereof for use in the marketing efforts of the Company or the UDS Division, provided, however, that the Buyer or the Surviving Corporation must approve the form and content of such announcement prior to dissemination thereof. 5.4 ACCESS AND INSPECTION. The Sellers and the Company shall provide Buyer and their authorized representatives full access during normal business hours from and after the date hereof until the Closing to the books, records, properties and personnel of the Company for the purpose of making such investigation as they may reasonably desire, and the Sellers and the Company shall furnish such information concerning the Company as they may reasonably request. The Sellers and the Company shall assist Buyer in making such investigation and shall cause their counsel, accountants, consultants and other non-employee representatives to be reasonably available for such purposes. The Sellers and the Company shall also cause mutually agreed upon employees of the Company to be reasonably available. No investigation made heretofore or hereafter by Buyer or their authorized representatives shall limit or affect the representations, warranties, covenants and indemnities of the Sellers and the Company hereunder. - 11 - 5.5 COOPERATION. (a) The parties shall cooperate fully with each other and with their respective counsel and accountants in connection with any steps required to be taken as part of their respective obligations hereunder, and all parties shall use commercially reasonable efforts to consummate the transactions contemplated herein and to fulfill their obligations hereunder, including, without limitation, causing to be fulfilled at the earliest practical date the conditions precedent to the obligations of the parties to consummate the transactions contemplated hereby. From time to time and at any time, at the Surviving Corporation's request, whether on or after the date hereof, and without further consideration, the Sellers shall, at their expense, execute and deliver such further documents and instruments of conveyance, assignment, and transfer and shall take such further reasonable actions as may be necessary or desirable, in the opinion of the Surviving Corporation, in connection with the consummation of the transactions described herein. (b) In connection with the issuance from time to time of Common Stock pursuant to any Earnout Payment, the Sellers shall execute and deliver such further documents, questionnaires and certificates and shall take such further reasonable actions as may be necessary or desirable, in the opinion of the Surviving Corporation, to ensure compliance with applicable securities Laws. 5.6 BUYER'S PUBLIC DOCUMENTS AND ACCESS TO INFORMATION. Buyer has delivered to the Company and the Sellers true and complete copies of (a) Buyer's Annual Report on Form 10-K for the year ended December 31, 1999, (b) Buyer's definitive Proxy Statement relating to its 2000 annual meeting of shareholders, (c) Buyer's 1999 annual report to shareholders, (d) Buyer's Prospectus dated July 26, 1999 offering for sale to the public 2,500,000 shares of Common Stock, and (e) Buyer's Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, June 30 and September 30, 2000, each as amended (such documents are referred to as the "SEC DOCUMENTS"). In addition to the SEC Documents, Buyer has provided, through its Chief Financial Officer and other officers, the Company and the Sellers with opportunities to become familiar with the business, financial condition, management, prospects and operations of Buyer, including reasonable opportunities to ask questions of, receive answers from and obtain information regarding Buyer and its business which is material to their investment decision. 5.7 LEGENDING OF COMMON STOCK. Each Seller acknowledges and agrees that all shares of Common Stock received by him hereunder (whether as part of the Initial Merger Consideration or any Earnout Payment) shall not have been registered under the Securities Act of 1933, as amended and the rules and regulations promulgated thereunder (the "SECURITIES ACT"), or the securities Laws of any state. Each Seller acknowledges that there shall be placed on all certificates representing the shares of Common Stock issued to each Seller pursuant to this Agreement appropriate restrictive legends referencing the restrictions imposed by applicable securities Laws. Each Seller hereby acknowledges and agrees that the shares of Common Stock shall be subject to the holding period, volume limitations and other restrictions provided in Rule 144 (or any successor provision thereto) promulgated under the Securities Act. Each Seller agrees that he will not offer to sell, sell or otherwise dispose of any Common Stock issued to him pursuant to this Agreement except pursuant to an effective registration statement or the applicable requirements of Rule 144 or another exemption from the registration requirements of the Securities Act and applicable state securities Laws. With respect to any such sale or disposition, each Seller agrees to furnish to the Surviving Corporation or Buyer upon request - 12 - such information as its counsel may deem necessary to assure that such sale or disposition is made in full compliance with this Agreement, such rule and all applicable federal and state securities Laws. 5.8 NON-SOLICITATION OF THIRD PARTY OFFERS. Except in connection with the right of first refusal of Thane, the Sellers and the Company agree that neither any Seller nor any of his relatives, Affiliates, heirs or representatives, nor the Company, or any of its respective officers, directors, management employees, Affiliates, related Persons or agents, will, directly or indirectly (a) negotiate or discuss with any other Person any other transaction involving a merger of the Company, or the sale of any shares in or assets of the Company or any other business combination involving the Company, (b) reveal the terms of this Agreement to any Person except for the purpose of carrying out the transactions contemplated herein, or (c) solicit, encourage, negotiate, discuss or accept any offer, bid or proposal from any other Person respecting any transaction involving a merger of the Company, the sale of any shares in or assets of the Company or any other business combination involving the Company. If the Company or any Seller receives a proposal of the kind described in PARAGRAPH 5.8(C) prior to the date of the Closing, then the Company or the Sellers (as the case may be) shall immediately notify Buyer of the receipt of such proposal and shall promptly provide Buyer with a copy of such proposal (or if such proposal is not in writing, a written summary of its terms). 5.9 COVENANTS AGAINST COMPETITION. (a) In order to induce Buyer to enter into this Agreement and to tender the Merger Consideration as provided herein, each Seller agrees that he will not, without the prior written consent of the Surviving Corporation, for his own account or jointly with another, directly or indirectly, for or on behalf of any Person, as principal, agent, shareholder, participant, partner, promoter, director, officer, manager, employee, consultant, sales representatives or otherwise, except on behalf of the Surviving Corporation: (i) for a period of 2 years from the date of the Closing, engage or invest in, or own, control, manage or participate in the ownership, control or management of, or render services or advice to, or lend his name to, any business engaged, or which he reasonably knows is undertaking to become engaged, within Nevada and California (which is the territory in which the Company currently does business and the territory into which the parties reasonably expect the business to expand), in marketing support services, including, among other things, order processing, payment processing, warehousing, fulfillment, customer service, call center service and website development (the "BUSINESS"); provided, however, it shall not be a breach of the covenant contained herein for any Seller to own not more than 2% of the equity interests of any Person whose equity interests are publicly traded; (ii) for a period of 2 years from the date of the Closing, solicit, or assist in the solicitation of, any Person having an office or place of business within the United States to whom any Seller sold or provided any services pursuant to the Business during the 2 year period ending on the date of the Closing, for the purpose of obtaining the patronage of such Person for the Business; - 13 - (iii) for a period of 2 years from the date of the Closing, solicit, or assist in the solicitation of, any Person employed by the Surviving Corporation, including the UDS Division, (as an employee, independent contractor or otherwise), to terminate such employment, whether or not such employment is pursuant to a contract and whether or not such employment is at will; or (iv) use, or disclose or reveal to any Person, any Confidential Information of the Surviving Corporation. (b) Although the parties have, in good faith, used their best efforts to make the provisions of this PARAGRAPH 5.9 reasonable in both geographic area and in duration, and it is not anticipated, nor is it intended, by any of the parties hereto that a Forum of competent jurisdiction would find it necessary to reform the provisions hereof to make it reasonable in both geographic area and in duration, or otherwise, the parties understand and agree that if a Forum of competent jurisdiction determines it necessary to reform the scope of this PARAGRAPH 5.9 in order to make it reasonable in either geographic area or duration, or otherwise, damages, if any, for a breach hereof, as so reformed, would be deemed to accrue to the Surviving Corporation as of and from the date of such a breach only insofar as the damages for such breach relate to an action which occurred within the scope of the geographic area and duration as so reformed. 5.10 REGISTRATION RIGHTS. (a) Piggyback Rights. After the Effective Date, if the Surviving Corporation shall prepare and file one or more registration statements under the Securities Act with respect to a public offering of shares of Common Stock by the Surviving Corporation or by its shareholders (other than a registration statement on Form S-4, Form S-8 or any similar form considered inappropriate for general use by selling shareholders), the Surviving Corporation agrees to include in any such registration statement such information as is required, and such number of shares of Common Stock held by Sellers (including the Initial Buyer Shares and any shares of Common Stock that may be issued as any part of an Earnout Payment) as may be requested, to permit a public offering of the Sellers' Common Stock; provided, however, that if, in the opinion of the managing underwriter for such offering, the inclusion of the Sellers' Common Stock requested to be registered would materially and adversely affect the entire offering, then the Surviving Corporation may exclude from such offering all or any portion of the Sellers' Common Stock requested to be so registered. The Surviving Corporation shall bear all fees and expenses incurred by it in connection with the preparation and filing of such registration statement. In the event of such a proposed registration, the Surviving Corporation shall furnish the Sellers not less than 30 days' notice prior to the proposed or expected effective date of such registration statement. Such notice shall continue to be given by the Surviving Corporation to Sellers with respect to subsequent registration statements filed by the Surviving Corporation until the earlier to occur of (i) all shares of the Sellers' Common Stock have been registered and sold, (ii) all shares of the Sellers' Common Stock may be sold without registration pursuant to Rule 144 promulgated under the Securities Act or any successor provision thereto or (iii) the third anniversary of the Effective Date. The Sellers shall exercise the rights provided for in this PARAGRAPH 5.10 by giving written notice to the Surviving Corporation within 10 days of receipt of the Surviving Corporation's notice. Sellers shall not have "demand" rights to compel the Surviving Corporation to prepare any registration statement. - 14 - (b) Information to be Furnished by Sellers. In connection with the registration of Sellers' Common Stock, and as a condition to the Surviving Corporation's obligations under this PARAGRAPH 5.10, each Seller will furnish to the Surviving Corporation in writing such information with respect to such Seller and its proposed disposition as shall be reasonably necessary in order to assure compliance with the Securities Act and with other federal and applicable state securities Laws. Without limiting the generality of the foregoing, in connection with an underwritten public offering, any Seller electing such method of disposition shall be required to enter into a written agreement with the managing underwriter in such form and containing such provisions as is customary for such an arrangement, and to complete and execute all questionnaires, powers of attorney, indemnities, and other documents or instruments, all may be reasonably required under such terms of the underwriting arrangements. (c) Expenses of Sellers. All underwriting discounts and selling commissions applicable to the sale of any Sellers' Common Stock, as well as fees and expenses of any counsel, accountant, or other advisor to any Seller, shall be borne by such Seller. (d) Certain Restrictions. Notwithstanding anything to the contrary contained herein, if there is a firm commitment underwritten offering of securities for the Surviving Corporation pursuant to a registration statement, and if any Seller does not elect to sell its Common Stock to the underwriters of the Surviving Corporation's securities in connection with such offering, then the Sellers (if requested by the managing underwriter) shall agree to refrain from selling or otherwise disposing of any of their Common Stock for a period not to exceed 90 days after the commencement of the offering pursuant to such registration statement. 5.11 LOCKUP OF INITIAL BUYER SHARES. (a) Notwithstanding anything herein to the contrary, without the prior written consent of the Surviving Corporation, the Sellers will not during the period commencing on the Effective Date and ending on the first anniversary thereof, (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, any of the Initial Buyer Shares, or (ii) enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of any of the Initial Buyer Shares, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of the Initial Buyer Shares or other securities, in cash or otherwise. (b) Notwithstanding anything herein to the contrary, without the prior written consent of the Surviving Corporation, the Sellers will not during the period commencing on the Effective Date and ending on the second anniversary thereof, (i) offer, pledge, announce the intention to sell, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, or otherwise transfer or dispose of, directly or indirectly, over 50% of the Initial Buyer Shares, or (ii) enter into any swap, option, future, forward or other agreement that transfers, in whole or in part, any of the economic consequences of ownership of over 50% of the Initial Buyer Shares, whether any such transaction described in clause (i) or (ii) above is to be settled by delivery of the Initial Buyer Shares or other securities, in cash or otherwise. - 15 - (c) Notwithstanding PARAGRAPHS 5.11(A) OR (B), any Seller may transfer any Initial Buyer Shares either during his lifetime or on death by will or by intestacy to his spouse, lineal descendant, father, mother, brother or sister or to a trust or other entity the beneficiaries or equity holders of which are exclusively the Seller and/or one of the foregoing persons; provided, however, that in any such case it shall be a condition to the transfer that the transferee execute an agreement stating that the transferee is receiving and holding the Initial Buyer Shares transferred subject to the provisions of this PARAGRAPH 5.11, and there shall be no further transfer of such Initial Buyer Shares except in accordance with this paragraph. 5.12 CERTAIN TAX MATTERS. (a) Section 338(h)(10) Election. At the Buyer's or Surviving Corporation's option, either prior to or after the Closing, the Company and each of the Sellers will join with Buyer or the Surviving Corporation in making an election under Section 338(h)(10) of the Code (and any corresponding election under state or local tax law) (a "TAX ELECTION") with respect to the transactions contemplated by this Agreement. Sellers will include any income, gain, loss, deduction, or other tax item resulting from a Tax Election on their Returns to the extent required by applicable Law. The Surviving Corporation shall pay any Tax imposed on the Company, the Surviving Corporation or the Sellers attributable to the making of the Tax Election, provided, however, Sellers shall cooperate with the Surviving Corporation to minimize any such Tax. (b) Allocation of Purchase Price. Buyer and Sellers agree that the Merger Consideration and the Liabilities of the Company (plus other relevant items) will be allocated to the assets of the Company for all purposes (including Tax and financial accounting) in a manner consistent with such assets' net book value as recorded for tax purposes. The parties will file all Returns (including amended Returns and claims for refund) and information reports in a manner consistent with such values. (c) S Corporation Status. The Company and Sellers will not revoke the Company's election to be taxed as an S corporation within the meaning of Sections 1361 and 1362 of the Code. The Company and Sellers will not take or allow any action (other than the consummation of the transactions contemplated by this Agreement if no Tax Election will be made) that would result in the termination of the Company's status as a validly electing S corporation. (d) Tax Periods Ending on or before the Closing. The Sellers shall prepare or cause to be prepared and file or cause to be filed all Returns for the Company for all periods ending on or prior to the date of the Closing which are filed after the date of the Closing. All such Returns shall show the correct and proper amount due. The Sellers shall permit the Surviving Corporation to review and comment on each such Return described in the preceding sentence prior to filing. To the extent permitted by applicable Law, Sellers shall include any income, gain, loss, deduction or other tax items for such periods on their Returns in a manner consistent with the Schedule K-1s furnished by the Company to the Sellers for such periods. Sellers shall pay any Taxes of the Company with respect to such periods. (e) Cooperation on Tax Matters. - 16 - (i) The parties shall cooperate fully, as and to the extent reasonably requested by another party, in connection with the filing of Returns and any audit, litigation or other proceeding with respect to Taxes. Such cooperation shall include the retention and (upon the other party's request) the provision of records and information which are reasonably relevant to any such audit, litigation or other proceeding and making employees available on a mutually convenient basis to provide additional information and explanation of any material provided hereunder. (ii) Buyer and Sellers further agree, upon request, to use their best efforts to obtain any certificate or other document from any Government or any other Person as may be necessary to mitigate, reduce or eliminate any Tax that could be imposed (including, but not limited to, with respect to the transactions contemplated hereby). (f) Tax Sharing Agreements. All tax sharing agreements or similar agreements with respect to or involving the Company shall be terminated as of the Effective Date and, after the Effective Date, the Surviving Corporation shall not be bound thereby or have any liability thereunder. (g) Certain Taxes. All transfer, documentary, sales, use, stamp, registration and other such taxes and fees (including any penalties and interest) incurred in connection with this Agreement shall be paid by Sellers when due, and Sellers will, at their own expense, file all necessary Returns, and other documentation with respect to all such transfer, documentary, sales, use, stamp, registration and other taxes and fees, and, if required by applicable law, the Surviving Corporation will, and will cause its Affiliates to, join in the execution of any such Returns. (h) Taxable Transaction. All parties acknowledge and agree that the Merger is a taxable transaction under the Code, and does not qualify as a reorganization as defined in Section 368 of the Code or as a transfer to a controlled corporation under Section 351 of the Code. 5.13 SUBSEQUENT CHANGE OF CONTROL. (a) If the Surviving Corporation shall undergo a Change in Control after the Effective Date, the Surviving Corporation shall require any purchaser or acquiror of, or successor to, the Surviving Corporation, as a condition to such transaction, to succeed to and perform in accordance with the terms of this Agreement, the Other Agreements and the obligations and benefits thereunder. A "CHANGE IN CONTROL" is a transaction, mutually negotiated and agreed upon by the Surviving Corporation and another Person, whereby the Surviving Corporation consolidates or merges with or into another Person, or is otherwise reorganized, in any such case if after such transaction, any Person that did not own 50% or more of the then outstanding shares of Common Stock prior to such transaction then owns, directly or indirectly, more than 50% of the then outstanding shares of the Common Stock or more than 50% of the assets of the Surviving Corporation. (b) The Buyer and the Surviving Corporation acknowledge that the failure of any purchaser or acquiror of, or successor to, the Surviving Corporation to succeed to and perform in accordance with the terms of this Agreement and the Other Agreements shall cause substantial and irreparable harm to the Sellers. Accordingly, the Buyer and the Surviving Corporation agree that the Sellers shall be entitled, in addition to all other remedies available at law or in equity, to injunctive and equitable relief to enjoin any activity or omission of any purchaser or acquiror of, - 17 - or successor to, the Surviving Corporation that constitutes a breach of any covenant of the Buyer or the Surviving Corporation in this Agreement or the Other Agreements. 5.14 EARNOUT PERIOD OPERATING MATTERS. (a) During the Earnout Period, the Surviving Corporation will operate the UDS Division as a separate division of the Surviving Corporation and maintain separate income statements sufficient to prepare the income statements required to be delivered under, and calculate Operating Income as provided in, PARAGRAPH 3.3. (b) During the Earnout Period, the Surviving Corporation shall allocate $1,200,000 per Year for capital expenditure purposes ("CAPITAL") to the UDS Division. Draws and uses of Capital shall be at the reasonable discretion of West (so long as he is Chief Executive Officer of the UDS Division), provided, however, that any individual use of Capital exceeding $150,000 requires the consent and agreement of the President, Chief Executive Officer, Chief Operating Officer or Chief Financial Officer of the Surviving Corporation, which consent will not be unreasonably withheld. Notwithstanding the foregoing, the Surviving Corporation shall be under no obligation to allocate (i) over $600,000 of Capital during Year One if the UDS Division is not on budget to achieve Operating Income for Year One of at least $800,000 or (ii) any Capital during Year Two or Year Three if the Operating Income as set forth in the Final Operating Income Determination for the Year preceding the then current Year did not equal or exceed $800,000. (c) During the Earnout Period, West (so long as he is Chief Executive Officer of the UDS Division) shall have the reasonable opportunity to review any business or operations that the Surviving Corporation proposes to refer or transfer to the UDS Division. After good faith consultation with appropriate officers of the Surviving Corporation concerning any such proposed referral or transfer, West may reject such referral or transfer for any commercially reasonable justification, which justification West shall provide in writing to the Surviving Corporation. (d) During the Earnout Period, the Surviving Corporation, the UDS Division and the Sellers shall cooperate with each other in good faith in the conduct of the business and operations of the Surviving Corporation and the UDS Division. (e) During the Earnout Period, West shall serve as Chief Executive Officer of the UDS Division with day-to-day decision-making authority with respect to the operations of the UDS Division, subject to and upon the terms of West's employment agreement with the Surviving Corporation, in substantially the form attached hereto as EXHIBIT A-1. (f) The Buyer and Surviving Corporation will not discharge or terminate any employees of the Company or the UDS Division at Closing. 5.15 LITIGATION SUPPORT. In the event and for so long as any party actively is contesting or defending against any Action or other dispute in connection with (a) any transaction contemplated under this Agreement or (b) any fact, situation, circumstance, status, condition, activity, practice, occurrence, event, incident, action, failure to act, or transaction on or prior to the date of the Closing involving the Company, each of the parties will cooperate with - 18 - the contesting or defending party and its or their counsel in the contest or defense, all at the sole cost and expense of the contesting or defending party (except to the extent the contesting or defending party is entitled to indemnification under this Agreement). 5.16 EFFORTS TO CONSUMMATE. Subject to the terms and conditions of this Agreement, each party hereto shall use reasonable efforts to take or cause to be taken all actions and do or cause to be done all things required under applicable Law in order to consummate the transactions contemplated hereby, including, without limitation, (a) obtaining all authorizations, consents and approvals of any person or authority that are required for or in connection with the consummation of the transactions contemplated hereby and by the other documents describing the transactions contemplated hereby (b) taking any and all reasonable actions necessary to satisfy all of the conditions to such party's obligations hereunder as set forth in ARTICLES 9 and 10, and (c) executing and delivering all agreements and documents required by the terms hereof to be executed and delivered by such party on or prior to the Closing. 5.17 NOTICE OF ADVERSE CHANGES IN CONDITION. Sellers agree to give written notice promptly to Buyer upon becoming aware of the occurrence or impending occurrence of any event or circumstance relating to the Company which (a) is reasonably likely to have, individually or in the aggregate, a material adverse effect on the business, properties, financial condition or prospects of the Company, (b) would cause or constitute a material breach of any of the representations and warranties contained in ARTICLE 6 hereof, or (c) which is reasonably likely to result in Sellers or the Company's inability to perform their or its obligations under this Agreement. 5.18 STOCK OPTIONS OF SURVIVING CORPORATION. The Surviving Corporation agrees to allocate up to 50,000 shares of the authorized and unissued Common Stock reserved under the Surviving Corporation's 2000 Stock Option and Incentive Award Plan (or any successor plan thereto) for grants and awards of incentive and nonqualified stock options, restricted or unrestricted stock awards, stock appreciation rights or performance shares to employees of the UDS Division. West and the appropriate executive officers of the Surviving Corporation shall mutually determine the types, amounts, recipients and other terms of the grants and awards to UDS Division employees to be recommended to the Board of Directors of the Surviving Corporation, or an appropriate committee or subcommittee thereof, for approval. Such grants and awards shall generally be subject to and in accordance with: (a) the Surviving Corporation's prevailing vesting schedule for stock options and incentive awards, as set forth in the following table:
--------------------------------------------------------------- ANNIVERSARY OF GRANT/AWARD DATE PERCENTAGE OF GRANT/AWARD (YEARS) VESTED (%) --------------------------------------------------------------- 2 50 --------------------------------------------------------------- 3 25 --------------------------------------------------------------- 4 25 ---------------------------------------------------------------
- 19 - and (b) the Surviving Corporation's prevailing guidelines for the amounts of grants and awards to be granted and awarded to employees within particular salary ranges, as set forth in the following table:
------------------------------------------------------ NUMBER OF SHARES OF COMMON STOCK SALARY ($) UNDERLYING GRANTS/AWARDS ------------------------------------------------------ 30,000 to 45,000 1,000 ------------------------------------------------------ 45,001 to 60,000 3,000 ------------------------------------------------------ 60,001 to 70,000 5,000 ------------------------------------------------------ 70,001 to 80,000 8,000 ------------------------------------------------------ 80,001 and above 10,000 ------------------------------------------------------
5.19 UDS DIVISION ACCESS TO SURVIVING CORPORATION RESOURCES. (a) During the Earnout Period, the UDS Division shall have access, subject to capacity restrictions and customary intracompany charges based on the Surviving Corporation's costs, to the Surviving Corporation's: Atlanta and Pueblo call centers; Atlanta distribution center; and information technology staff and resources, including without limitation the Surviving Corporation's enterprise resource planning systems and programming staff. (b) To the extent the Surviving Corporation develops other call center and distribution capabilities, including international capabilities, the UDS Division shall be allowed access to such facilities, subject to capacity restrictions and customary intracompany charges based on the Surviving Corporation's costs. (c) The Surviving Corporation shall seek to cause or permit the UDS Division to have access to the services and products of Return.com Online, Inc. upon substantially the same terms that the Surviving Corporation receives for comparable services and products. 5.20 ASSUMPTION OF SELLERS' GUARANTIES. The Surviving Corporation shall use its commercially reasonable efforts to assume or secure the release of the guaranties securing obligations of the Company set forth in the Disclosure Schedules as soon as practicable after the Closing. 5.21 PURCHASE OF THANE WAIVER OF RIGHT OF FIRST REFUSAL. The parties acknowledge and agree that in order to consummate the transactions contemplated hereby, the Buyer and the Company are entering into with Thane that certain Waiver Agreement of even date herewith, pursuant to which, among other things, it is contemplated that Thane will waive, release and relinquish its right of first refusal with respect to any offer by a third person for at least a majority of the issued and outstanding capital stock of the Company in exchange for good and valuable consideration to be tendered to Thane by Buyer and the Company. It is further acknowledged and agreed by the parties that the transactions contemplated hereby cannot be consummated without securing said waiver, release and relinquishment from Thane. 5.22 TERMINATION OF STOCK TRANSFER RESTRICTIONS AND BUY-OUT AGREEMENT. The Sellers agree to terminate that certain Stock Transfer Restrictions and Buy-Out Agreement made - 20 - and entered into on March 20, 1996 by and among UDS and the shareholders of UDS effective immediately prior to the Closing and hereby waive any and all rights, claims or Actions arising thereunder. 6. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE SELLERS AND THE COMPANY The Sellers and the Company have delivered to Buyer the Disclosure Schedules attached hereto (the "DISCLOSURE SCHEDULES") which contain certain information regarding the Company and the Sellers. The information contained in the Disclosure Schedules shall be deemed to be part of and qualify only those sections of this Agreement which correspond to or are referred to in the sections of the Disclosure Schedules. In addition to the Disclosure Schedules, the Sellers and the Company have delivered to Buyer certain documents and materials pursuant to this Agreement, and the Disclosure Schedules and all such documents and materials are or were true, correct and complete as of the date furnished, and any and all modifications or amendments thereto have been or will be delivered to Buyer. At all times prior to and including the date of the Closing, the Sellers and the Company shall promptly provide Buyer with written notification of any event, occurrence or other information of any kind whatsoever which affects, or may affect, the continued truth, correctness or completeness of any representation or warranty made in this Agreement or any information contained in the Disclosure Schedules. For convenience, references to the Disclosure Schedules in this Agreement are underlined. To induce Buyer to enter into and perform this Agreement, the Sellers and the Company, jointly and severally, represent and warrant to Buyer as follows: 6.1 ORGANIZATION, QUALIFICATION AND AUTHORITY. (a) The Company is a corporation duly organized and validly existing under the Laws of the State of Nevada. The Company has offices and places of business at the locations specified in the Disclosure Schedules. The Company has full corporate power and authority and is entitled to own or lease its properties and to carry on its business as and in all places where such business is conducted and such properties are owned or leased. The Company is qualified to do business as a foreign corporation in the jurisdictions set forth in the Disclosure Schedules. The Company is not required to be qualified as a foreign corporation in any other jurisdiction. The Company and the Sellers have previously furnished to Buyer true, correct and complete copies of the articles or certificate of incorporation and bylaws of the Company, as amended to date. The Company and the Sellers have previously furnished to Buyer true, correct and complete copies of: (i) the minutes and other similar records of meetings of the shareholders of the Company and its board of directors, which contain all records of meetings and actions taken in lieu thereof by the Company's shareholders and show all corporate actions taken by the Company's shareholders, the board of directors, or any committees thereof, and (ii) the share transfer records, which reflect fully all issuances, transfers and redemptions of the Company's shares since the date of its incorporation. (b) The Company has the corporate power and authority to execute, deliver and perform this Agreement and any other agreements or instruments contemplated by this Agreement ("OTHER AGREEMENTS") to which it is (or at the Closing will be) a party. The execution, delivery and performance by the Company of this Agreement and the Other - 21 - Agreements and the consummation of the transactions contemplated thereby have been (or will be) duly approved and authorized by all necessary action of the Company and its shareholders. This Agreement has been and the Other Agreements have been (or at the Closing will be) duly and validly executed and delivered by the Company and constitute (or will when executed constitute) the valid and legally binding obligations of the Company, subject to general equity principles, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization or similar Laws affecting the rights of creditors generally. 6.2 OWNERSHIP OF SHARES; SUBSIDIARIES. (a) The total authorized capital stock of the Company is set forth in the Disclosure Schedules. (b) All of the issued and outstanding shares of capital stock of the Company are owned of record and beneficially by the Sellers as set forth in the Disclosure Schedules. (c) All of the issued and outstanding shares of capital stock of the Company are duly authorized, validly issued, fully paid and nonassessable and were authorized, offered, issued and sold in accordance with all applicable securities and other Laws and all rights of the Company's shareholders and other Persons. No Person has any preemptive rights with respect to shares of capital stock of the Company. There are no outstanding securities convertible into the capital stock or rights to subscribe for or to purchase, or any options for the purchase of, or any agreements or arrangements providing for the issuance (contingent or otherwise) of, or any Actions relating to, the capital stock of the Company. Except with respect to the right of first refusal of Thane, there are no voting trusts, proxies or other agreements or understandings with respect to the voting of the capital stock of the Company. The Company is not subject to any obligation to repurchase or otherwise acquire or retire any of its capital stock, and the Company has no Liability for dividends declared or accrued, but unpaid, with respect to its capital stock. The Company has not purchased or redeemed any of its capital stock, and except as set forth in the Disclosure Schedules has not paid any dividend or made any other payment to the Sellers or other Related Parties within the past year. (d) The Company has no subsidiaries. The Company does not own or have an interest, direct or indirect, or any commitment to purchase or otherwise acquire, any capital stock or other equity interest, direct or indirect, in any other Person, except as set forth in the Disclosure Schedules. All such interests so set forth are owned of record and beneficially by the Company as set forth in the Disclosure Schedules and are duly authorized, validly issued, fully paid and nonassessable, and were authorized, offered, issued and sold in accordance with all applicable securities and other Laws. (e) Each Seller is the legal and beneficial owner of the Sellers Shares as set forth in the Disclosure Schedules, free and clear of any and all Liens. The Sellers Shares held by the Estate were previously the separate property of John L. West (the "DECEDENT") and not subject to any claim under any Laws, including the community property laws of the State of Nevada. The Company is the owner of all investments disclosed under PARAGRAPH 6.2(D), free and clear of any and all Liens. There are no outstanding contracts, demands, commitments or other - 22 - agreements or arrangements under which any Seller or the Company is or may become obligated to sell, transfer or assign any of the Sellers Shares or such investments. 6.3 CAPACITY; ESTATE; INCONSISTENT OBLIGATIONS. (a) Each Seller has the full right, power and legal capacity to execute, deliver and perform his obligations under this Agreement and the Other Agreements to which he or it is (or at the Closing will be) a party. This Agreement and the Other Agreements have been (or at the Closing will be) duly and validly executed and delivered by each Seller and constitute (or will when executed constitute) the valid and legally binding obligations of each Seller, subject to general equity principles, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency or similar Laws affecting the rights of creditors generally. The Company has full corporate power and authority to execute, deliver, and perform this Agreement and the Other Agreements to which it is (or at the Closing will be) a party. This Agreement has been, and such Other Agreements have been (or at the Closing will be) duly and validly executed and delivered by the Company and constitute (or will when executed constitute) the valid and legally binding obligations of the Company, subject to general equity principles, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, or similar laws affecting the rights of creditors generally. (b) The Estate is a valid and permissible shareholder of an S corporation under all applicable federal and state Laws. The executor or personal representative of the Estate (the "EXECUTOR") is a valid and permissible executor or personal representative of the Estate under the Laws of the State of Nevada and is the executor or personal representative appointed in the Last Will and Testament of the Decedent dated July 21, 1992 (the "WILL"). The Decedent died testate on April 7, 2000, survived by his spouse, who is the Executor. The Decedent's domicile was in Washoe County, Nevada and the Will was duly admitted to probate in the Second Judicial District Court of the State of Nevada In and For the County of Washoe (the "WILL FORUM") on June 22, 2000. The Will Forum is the appropriate Forum for probate of the Will. The Executor was duly qualified to act as executor or personal representative and was authorized to act as such under the Will and letters testamentary from the Will Forum issued June 23, 2000. The Executor on behalf of the Estate has full power and authority under the Will (subject to the obtaining of any necessary or desirable consents or approvals of any Forum) to execute, deliver, and perform this Agreement and the Other Agreements to which it is (or at the Closing will be) a party, to hold and use the Estate's property for the benefit of the Estate's beneficiaries and to conduct its estate purpose. This Agreement has been, and such Other Agreements have been (or at the Closing will be) duly and validly executed and delivered by the Executor on behalf of the Estate and constitute (or will when executed constitute) the valid and legally binding obligations of the Executor on behalf of the Estate, subject to general equity principles, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization, or similar laws affecting the rights of creditors generally. The execution, delivery and performance by the Executor on behalf of the Estate has been (or at the Closing will be) approved or consented to by the beneficiaries of the Estate or by any Forum, to the extent such approvals or consents are deemed either necessary or desirable. Without limiting the generality of the representation and warranty in the foregoing sentence, the execution, delivery and performance of this Agreement and the Other Agreements has been duly approved by an Order issued from the Will Forum and a consent from the beneficiaries of the Estate. - 23 - (c) Except as set forth in the Disclosure Schedules, the execution, delivery and performance of this Agreement and the Other Agreements to which any Seller or the Company is (or at the Closing will be) a party will not (i) result in a violation of the Company's articles or certificate of incorporation or bylaws, the Will or any Law, or (ii) result in a breach of, conflict with or default under any term or provision of any indenture, note, mortgage, bond, security agreement, loan agreement, guaranty, pledge, Lien or other instrument, contract, agreement or commitment or any Order, to which the Company or any such Seller is a party or by which any of them or any of their respective assets and properties, including, without limitation, the Sellers Shares, is subject or bound; nor will such actions result in (A) the creation of any Lien on any of the Sellers Shares or any of the Company's or the Estate's assets or properties, (B) the acceleration or creation of any Liability of the Company, (C) the forfeiture of any right or privilege of the Company, or (D) the forfeiture of any right or privilege of any Seller which may affect his ability to perform under this Agreement. 6.4 CONSENTS. The execution, delivery and performance by each Seller and the Company of this Agreement and the Other Agreements to which he or it is (or at the Closing will be) a party, and the consummation of the transactions contemplated herein and therein does not (a) require the consent, approval or action of, or any filing with or notice to, any Government or other Person, other than with respect to: the right of first refusal of Thane; filings of articles or certificates of merger with the Secretaries of State of the States of Nevada and Georgia; any necessary or desirable consents or approvals of the beneficiaries of the Estate; any necessary or desirable consents or approvals of any Forum with respect to the Estate; and any filings necessitated by the securities laws of the United States or any State; or (b) impose any other term, condition or restriction on the Surviving Corporation pursuant to any business combination or takeover Law. 6.5 NO VIOLATION; COMPLIANCE WITH LAWS. The Company is not in default under or in violation of (a) its articles or certificate of incorporation or bylaws or (b) any Order. Neither the Estate nor the Executor is in default under or in violation of (a) the Will or (b) any Order, including of the Will Forum. The operations of the Company and the Estate and the Executor and their predecessors have been conducted in all material respects in compliance with all applicable Laws. (For purposes of this paragraph, any violation of applicable Law that could result in imposition of a fine or other monetary penalty upon the Company shall be deemed to be a material non-compliance). Neither the Company nor any Seller has received any notification of any asserted past or present failure by the Company to comply with any applicable Law. 6.6 POSSESSION OF LICENSES. The Company possesses all franchises, certificates, licenses, permits and other authorizations from Governments and all other Persons, free from burdensome restrictions, that are necessary for the ownership, maintenance and operation of its properties and assets and the conduct of its business, and the Company is not in violation thereof. 6.7 FINANCIAL STATEMENTS, FINANCIAL CONDITION. (a) Prior to the date hereof, the Sellers have delivered to Buyer copies of the Company's financial statements and related documents as of and for the years ended December 31, 1998 and 1999, the Company's Balance Sheet (the "REFERENCE DATE BALANCE SHEET") at October 31, 2000 (the "REFERENCE DATE"), which is the most recent balance sheet of the Company, and the Company's statement of income for the ten-month period then ended (collectively, the "FINANCIAL STATEMENTS"). The Financial - 24 - Statements are true and correct, in all material respects, have been prepared in accordance with GAAP (except for the absence of footnotes and except as set forth in the Disclosure Schedules), present fairly the financial condition of the Company as at the respective dates thereof and the results of the Company's operations for the periods then ended, and are consistent with the books and records of the Company. The books and records of the Company are maintained in accordance with GAAP and are true, correct and complete in all material respects. (b) The Company has no Seller Debt. All items of Indebtedness, together with the principal balance thereof on the date thereof and accrued interest thereon through the date hereof are set forth in the Disclosure Schedules. (c) Other than any normal and customary monthly draws as set forth in the Disclosure Schedules, from the Reference Date through the date hereof, the Company has not declared or paid any dividends or made any other distributions on the outstanding capital stock of the Company, including for the payment of Taxes. 6.8 LIABILITIES. The Company has no Liability, except (i) those reflected on the Reference Date Balance Sheet, (ii) Liabilities incurred in the ordinary course of business since the Reference Date consistent with the Company's past experience during the periods covered by the Financial Statements (none of which results from, arises out of, relates to, is in the nature of, or was caused by any breach of contract, breach of representation or warranty, tort, product liability, infringement or violation of Law or Order), and (iii) as may be set forth in the Disclosure Schedules. 6.9 TITLE TO PROPERTIES. The Company has good and complete title to all properties and assets reflected in the Reference Date Balance Sheet, except immaterial assets which have been disposed of in the ordinary course of business since the Reference Date, and all other properties and assets necessary to conduct its business as currently being conducted and as conducted during the periods covered by the Financial Statements (other than any leased property), free and clear of Liens, except as may be set forth in the Disclosure Schedules. All prepaid expenses of the Company have been duly and properly paid for goods or services the Company expects to receive from vendors or suppliers. All deposits of the Company are recoverable or refundable. 6.10 RECEIVABLES. Except as set forth in the Disclosure Schedules, all notes and accounts receivable shown on the Reference Date Balance Sheet and all such receivables now held by the Company are valid and collectible obligations and were not and are not subject to any offset or counterclaim. 6.11 INVENTORIES; CONSIGNED PROPERTY. (a) The Company owns no inventory for sale. (b) Except as set forth in the Disclosure Schedules, all consigned or "sale or return" property ("CONSIGNED PROPERTY") is separated from other items of personal property of the Company and is properly marked with such signs, other notices, or labels or tags as are necessary to indicate clearly under applicable Law and the terms of the consignment that any Consigned Property is the property of consignors and not of the Company. The Company has filed all - 25 - financing statements required by consignors and applicable Law. The Company has otherwise taken all actions in accordance with Law to establish the priority of consignors over the Company's creditors with respect to Consigned Property. The Company has not granted any Lien to any party other than consignors with respect to Consigned Property. All Consigned Property is merchantable or returnable to the consignor in accordance with the terms of the consignment. 6.12 PERSONAL PROPERTY. (a) All machinery, equipment, vehicles and other items of tangible personal property which are owned or leased by the Company are in good condition and repair, subject to normal wear and tear, suited for the use intended and are and have been operated in conformity with all applicable Laws. To the knowledge of the Company and the Sellers, there are no defects or conditions which would cause such tangible personal property to be or become inoperable or unsafe. (b) To the knowledge of the Company and the Sellers, all lessors of machinery, equipment or other tangible personal property leased by the Company have performed and satisfied their respective duties and obligations under such leases. The Company has not brought or threatened any Action against any such lessor for failure to perform and satisfy its duties and obligations thereunder. 6.13 REAL PROPERTY. (a) The Company owns no real property. (b) Each parcel or tract of real property which is used by the Company in its business (the "LEASED REAL PROPERTY") is subject to a written lease or sublease to which the Company is a party as lessee or sublessee (individually a "REAL PROPERTY LEASE"). All such Real Property Leases are valid and in full force and effect in accordance with their terms. The Sellers have previously furnished Buyer with true, correct and complete copies of all Real Property Leases. There is not, with respect to any Real Property Lease (i) any default by the Company, or any event of default or event which with notice or lapse of time, or both, would constitute a default by the Company or (ii) to the knowledge of the Company and the Sellers, any existing default by any other party to any Real Property Lease, or event of default or event which with notice or lapse of time, or both, would constitute a default by any other party to any Real Property Lease. (c) All Leased Real Property is free from development, use or occupancy restrictions, except those set forth in the Real Property Leases or imposed by applicable Law, and from special taxes or assessments, except those generally applicable to other properties in the tax districts in which the Leased Real Property is located. No options have been granted to others to purchase, lease or otherwise acquire any interest in the Leased Real Property. The Company has the exclusive right of possession of each area comprising its Leased Real Property. (d) The present use, occupancy and operation of the Leased Real Property, and all aspects of the Improvements to the Leased Real Property are in compliance with all Laws and private restrictive covenants, and to the Company's and the Sellers' knowledge there has not been any proposed change thereto that would affect any of the Leased Real Property or its use, occupancy or - 26 - operation. There exists no conflict or dispute with any Government or other Person relating to any Leased Real Property or the activities thereon. No portion of the Leased Real Property is subject to any classification, designation or preliminary determination of any Government or pursuant to any Law which would restrict its use, development, occupancy or operation in connection with the Company's business. All Improvements are in good condition and repair, and are suited for the operation of the Company's business. (e) Neither the Company nor any other Person has caused any work or Improvements to be performed upon or made to any of the Leased Real Property for which there remains outstanding any payment obligation that would or might serve as the basis for any Lien in favor of the Person who performed the work. (f) All requisite certificates of occupancy and other permits and approvals required with respect to the Leased Real Property or the Improvements and the use, occupancy and operation thereof have been obtained and paid for and are currently in effect and free of restrictions. 6.14 ABILITY TO CONDUCT BUSINESS AND INTELLECTUAL PROPERTY RIGHTS. (a) The Company has the means, rights and information required to sell, offer for sale and use the items and perform the services as presently being offered for sale, sold, used or performed by Company, including, without limitation, the means, rights and information required to offer for sale, sell and use all such items and perform all such services without incurring any liability for license fees or royalties or any claims of infringement of patents, trade secrets, copyrights, trademark, service mark or other proprietary rights. The Disclosure Schedules describes all proprietary inventions, designs, ideas, processes, methods and other know-how of Company which are valuable in the operation of the Company's business and, with respect to each such item, indicates whether Company holds any patent or patent application therefor (in each such case, identifying the date(s) and jurisdiction(s) in which the patent was granted or applied for and the number of such patent or application) or has sought any advice as to the patentability of the same (in each such case, summarizing such advice) or believes it has trade secret protection therefor (in each such case, providing a description of the measures which have been taken to protect the secrecy of the item). The Company is not a party to, either as licensor or licensee, and is not bound by or subject to, any license agreement for any patent, process, trademark, service mark, trade secrets, trade name, service name or copyright, except as described in the Disclosure Schedules. All patents, copyrights, trademarks, service marks and trade names, and applications therefor or registrations thereof, owned or used by Company are listed in the Disclosure Schedules and, to the extent indicated thereon, have been duly registered in, filed in or issued by the Patent and Trademark Office, the Copyright Office or the corresponding agency or office of the Forum identified therein. The Company has complied with all applicable Laws relating to the filing or registration of "fictitious names" or trade names. (b) Except as set forth in the Disclosure Schedules, the Company has not interfered with, infringed, misappropriated or otherwise come into conflict with any intellectual property rights of any other Person, and neither the Company nor its respective officers and directors has ever received any charge, complaint, claim, demand or notice alleging any such interference, infringement, misappropriation or violation. To the Company's and the Sellers' knowledge, no Person has interfered with, infringed, misappropriated, or otherwise come into conflict with the proprietary inventions, designs, ideas, processes, methods and other know-how or other intellectual property of the Company which are owned or used in the operation of its business. There are no rights of third parties with respect to any patent, patent application, invention, - 27 - copyrights, trademark, service mark, trade secrets, trade name or device which would have an adverse effect on the operations or prospects of Company's business. 6.15 CONTRACTS. (a) All Company Contracts have been entered into in the ordinary course of the Company's business on commercially reasonable terms, are valid and enforceable in all material respects in accordance with their terms, are in full force and effect, and will continue to be valid and enforceable and in full force and effect on identical terms following the Effective Date. To the Company's and the Sellers' knowledge, no Company Contract is likely to result in an operating loss of $100,000 or more to the Company upon completion of performance, and all Company Contracts can be fulfilled or performed by the Company in accordance with their respective terms. All Company Contracts are listed on the Disclosure Schedules, and true, correct and complete copies of all Company Contracts have been delivered to Buyer. (b) To the Company's and the Sellers' knowledge, there are no existing material defaults, events of default or events which, with the giving of notice or lapse of time, or both, would constitute a material default by the Company under any Company Contract. No event has occurred which may hereafter give rise to any right of termination, acceleration, damages or any other remedy under any Company Contract. (c) To the Company's and the Sellers' knowledge, neither this Agreement, the Merger or its consummation or the relationship between the Company and Buyer has caused or is likely to cause the termination or nonrenewal of any Company Contract. 6.16 INSURANCE. The Company has obtained and maintains insurance policies which provide adequate coverage to insure its assets, properties and business against such risks and in such amounts as are prudent and customary in the industry in which the Company operates, and all such policies are in full force and effect. All premiums due on such policies have been paid, and the Company has not received any notice of cancellation with respect thereto. The Company has no Liability for premiums or for retrospective premium adjustments for any period. The Disclosure Schedules lists the types, amounts of coverage and deductibles of all such insurance policies, and true, correct and complete copies thereof have been delivered to Buyer prior to the date hereof. Notwithstanding the foregoing, Sellers acknowledge and agree that any Liability for premiums or for retrospective premium adjustments is a Seller Assumed Liability. 6.17 LITIGATION; CONTINGENCIES. No action is pending or, to the knowledge of the Sellers and the Company, threatened against, by or affecting the Company or the Sellers. There are no unsatisfied judgments or Orders against the Company or the Sellers to which either of them or their assets and properties are subject. Notwithstanding the foregoing, Sellers acknowledge and agree that any Liability for such actions, judgments and Orders is a Seller Assumed Liability. 6.18 TAXES. (a) The Company and any entity at any time eligible or required to file a consolidated or combined Tax return with the Company (individually, an "AFFILIATED ENTITY" and collectively, the "AFFILIATED ENTITIES"), has duly and timely filed all federal, state, municipal, local and foreign, if any, Tax returns and reports (including returns for estimated tax), and all reports and returns of all other Governments having jurisdiction (collectively, "RETURNS") with - 28 - respect to all Taxes (including, without limitation, consolidated or combined Tax returns of some or all of the Company and the Affiliated Entities); all such Returns show the correct and proper amount due; and the Taxes shown on all Returns and all Tax assessments received by the Company or any Affiliated Entities have been paid to the extent that such Taxes or estimates are due. The Company has previously provided to Buyer true, correct and complete copies of all Returns filed with respect to the 2 tax years preceding the date hereof. All Taxes imposed on the Company and its Affiliated Entities by any Government (including all deposits in connection therewith required by applicable Law, and all interest and penalties thereon) which have become due and payable by the Company for all periods through the date hereof have been paid in full. There is not now any proposed assessment against the Company or any Affiliated Entity of additional Taxes of any kind. The Company is not a party to any Tax sharing or Tax allocation agreement, understanding, arrangement or commitment. There is no dispute or Action concerning any Tax Liability of the Company raised by a Government in writing. Notwithstanding the foregoing, Sellers acknowledge and agree that any Liability for Taxes for all period through the Closing is a Seller Assumed Liability. (b) The Company (and any predecessor of the Company) has been a validly electing S corporation within the meaning of Sections 1361 and 1362 of the Code and applicable state and local Laws at all times during its existence and the Company will be an S corporation up to and including the Effective Date (or the day prior to the Effective Date if no Tax Election will be made). (c) Neither the Company nor the Surviving Corporation will be liable for any Tax under Section 1374 of the Code in connection with the deemed sale of the Company's assets. The Company has not, in the past 10 years, (i) acquired assets from another corporation in a transaction in which the Company's Tax basis for the acquired assets was determined, in whole or in part, by reference to the Tax basis of the acquired assets (or any other property) in the hands of the transferor or (ii) acquired the stock of any corporation which is a qualified subchapter S subsidiary. 6.19 EMPLOYMENT AND LABOR RELATIONS. Except to the extent set forth in the Disclosure Schedules: (a) No Independent Contractor Dispute. To the Company's and the Sellers' knowledge, no employee, agent, consultant or independent contractor who performs services on a regular basis for the Company plans to discontinue such relationship with the Company after the Closing. (b) Union Matters. The Company is not a party to any agreement of any kind which deals with wages, conditions of employment, benefits or other matters affecting the employer/employee relationship with any union, labor organization or employee group. There are no controversies pending, or to the Company's and the Sellers' knowledge threatened, between the Company and any union, labor organization or employee group representing, or seeking to represent, any of its employees, and there has been no attempt by any union, labor organization or employee group to organize any of the Company's employees at any time in the past 3 years. - 29 - (c) No Pay Delinquencies. During the 3 years immediately preceding the date of the Closing, the Company has not failed to pay when due any wages, bonuses, commissions, taxes, penalties or assessments, owed to, or arising out of the employment of, any officer, director or employee. (d) Employment Law Compliance. The Company is in compliance in all material respects with all applicable Laws respecting employment and employment practices, terms and conditions of employment, wages and hours, occupational safety and health, and is not engaged in any unfair labor or unfair employment practices. (e) No Labor Actions. There is no unfair labor practice charge or complaint or any other similar matter or Action against or involving the Company pending or, to the knowledge of the Company and the Sellers, threatened before the National Labor Relations Board or any other Government authority. (f) No EEOC Actions. There are no Actions, Orders, administrative proceedings, formal complaints or, to the Company's and the Sellers' knowledge, investigations, of discrimination (including discrimination based upon sex, age, marital status, race, national origin, sexual preference, religion, medical condition, handicap or veteran status) pending before the Equal Employment Opportunity Commission or any other Forum against or involving the Company. (g) No OSHA Actions. There are no Actions, Orders, citations, administrative proceedings, formal complaints or, to the Company's and the Sellers' knowledge, investigations, of violations of local, state or federal occupational safety and health laws pending before the Occupational Safety and Health Review Commission or any other Forum against or involving the Company or any Seller. (h) No Restrictions on Relocation. No agreement, arbitration or court decision or Order (other than the Worker Advance Retraining and Notice Act and the regulations promulgated thereunder, and any similar state or local Law) which is binding on the Company in any way limits or restricts the Company, the UDS Division or the Surviving Corporation from relocating or closing any of the operations of the Company or the UDS Division. (i) No Pending Adverse Employee Matters. To the knowledge of the Company and the Sellers, there is no condition or state of facts which could reasonably be expected to materially and adversely affect the Company's relations with its employees. No current employee of the Company, the loss of whom would have an adverse effect on the business of the Company, has notified the Company or Sellers within the 1-year period prior to the date hereof of his or her intent to terminate his or her relationship with the Company. (j) FMLA Compliance. The Company has complied in all material respects with the requirements of the Family Medical Leave Act ("FMLA"). There are no Actions, Orders, citations, administrative proceedings, formal complaints or, to the knowledge of the Company and the Sellers, investigations, relating to the FMLA pending against or involving the Company. (k) Employment Agreements. The Disclosure Schedules list all contracts, agreements or arrangements (written or oral) concerning the employment of any individual by - 30 - the Company, including each such individual's title, compensation and duties. True and correct copies of such agreements were delivered to Buyer prior to the date of the Closing. 6.20 EMPLOYEE BENEFIT PLANS. (a) The Disclosure Schedules list all practices, commitments, arrangements and agreements pursuant to which the Company provides, directly or indirectly, any benefits for employees, including pension, bonus, medical, insurance, profit sharing or any other employee benefits, under any agreement or Law. The Disclosure Schedules also list separately all employee benefit plans within the meaning of Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") maintained by the Company or to which the Company contributes or is required to contribute (the "ERISA PLANS"). True, correct and complete copies of all ERISA Plans, together with related trusts, insurance contracts, summary plan descriptions, annual reports and Form 5500 filings for the past three years, have been delivered to Buyer. (b) Of the ERISA Plans, the "employee pension benefit plans" within the meaning of Section 3(2) of ERISA (the "EMPLOYEE PENSION BENEFIT PLANS") are separately identified on the Disclosure Schedules. With respect to each Employee Pension Benefit Plan, except as set forth on the Disclosure Schedules: (i) such Employee Pension Benefit Plan constitutes a qualified plan within the meaning of Section 401(a) of the Code and the trust is exempt from federal income tax under Section 501(a) of the Code; (ii) all contributions required by such plan have been made; and (iii) no termination, partial termination or discontinuance of contributions has occurred without a determination by the IRS that such action does not affect the tax-qualified status of such plan. The Company is not required to contribute, and has never been required to contribute, to any multi-employer plan within the meaning of Section 3(37)(A) of ERISA. The Company does not maintain or contribute to, nor within the past six years has it maintained or contributed to, an employee pension benefit plan as defined in Section 3(2) of ERISA that is or was subject to Title IV of ERISA. (c) Each ERISA Plan has been operated and administered in all material respects in accordance with all applicable Laws, including, without limitation, ERISA and the Code. Neither the Company nor the Sellers nor any of the directors, officers, employees or agents of the Company, nor to the Company's and the Sellers' knowledge any "party in interest" or "disqualified person" (as such terms are defined in Section 3(14) of ERISA and Section 4975 of the Code) has been engaged in or been a party to any "prohibited transaction" (as such term is defined in Section 406 of ERISA or Section 4975 of the Code). Each ERISA Plan that is a group health plan within the meaning of Section 607(1) of ERISA and Section 4980B of the Code is in compliance with the continuation coverage requirements of Section 601 of ERISA and Section 4980B of the Code. There are no pending claims or, to the Company's and the Sellers' knowledge threatened claims relating to any of the ERISA Plans, by or on behalf of any employee or beneficiary covered under such ERISA Plan or by any Government or otherwise involving such ERISA Plan or any of its fiduciaries (other than for routine claims for benefits). The Company has not entered into any pay arrangement, plan or program which is an ERISA Plan. (d) The Company is not bound to provide, and the Company does not provide, benefits, including, without limitation, death, health or medical benefits (whether or not insured), with respect to current or former employees of the Company beyond their retirement or other - 31 - termination of service with the Company other than (i) coverage mandated by applicable Law, (ii) deferred compensation benefits accrued as liabilities on the Reference Date Balance Sheet, or (iii) benefits the full cost of which is borne by the current or former employee or his beneficiary. (e) As of the Closing, with respect to each ERISA Plan, the Company will have provided adequate reserves, or insurance or qualified trust funds, to provide for all payments and contributions required, or reasonably expected to be required, to be made under the provisions of such ERISA Plan or required to be made under applicable laws, rules and regulations, with respect to any period prior to the Closing to the extent reserves are required under generally accepted accounting principles, based on an actuarial valuation satisfactory to the actuaries of the Company representing a projection of claims expected to be incurred under such ERISA Plan. (f) Except as provided in any of the employment agreements referred to in PARAGRAPHS 9.7 and 10.6 and provided that the employees referred to therein and the Surviving Corporation shall have entered into such employment agreements, neither this Agreement nor the consummation of the transactions contemplated by this Agreement will (i) entitle any current or former employee or officer of the Company to severance pay, unemployment compensation or any other payment, or (ii) accelerate the time of payment or vesting, or increase the amount, of compensation due any such employee or officer. 6.21 ENVIRONMENTAL MATTERS. (a) Definitions. For purposes of this Agreement, the following terms shall have the following meanings: (i) "ENVIRONMENTAL LAWS" means Laws, regulations and codes, and applicable principles of common law now or at any time hereafter in effect or amended, as well as Orders, decrees, judgments or injunctions issued, promulgated, approved or entered thereunder, relating to pollution, protection of the environment or public health and safety, including the Release or threatened Release of Hazardous Substances into the environment or otherwise relating to the presence, manufacture, processing, distribution, use, generation, treatment, storage, disposal, transport or handling of Hazardous Substances. (ii) "HAZARDOUS SUBSTANCES" means, without limitation, any explosive or radioactive material, asbestos, wastewater and sludges derived from wastewater urea formaldehyde foam insulation, polychlorinated biphenyls, petroleum and petroleum based products methane, hazardous waste, toxic or hazardous substances or related materials, as defined in the Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (42 U.S.C. ss.9601 et seq.), the Resource Conservation and Recovery Act, as amended (42 U.S.C. ss.6901 et seq.,), the Toxic Substances Control Act, as amended (15 U.S.C. ss.2601 et seq.), and any other applicable federal, state or local Environmental Laws or regulations. (iii) "RELEASE" means any release, spill, emission, leaking, pumping, injection, deposit, disposal, discharge, dispersal, leaching or migration into the - 32 - indoor or outdoor environment or into or out of any property, including the movement of Hazardous Substances through or in the air, soil, surface water, ground water or property. (b) Environmental Representations and Warranties. Except as set forth in the Disclosure Schedules: (i) The Company is in compliance with all Environmental Laws with respect to its properties, assets, operations and business. (ii) The Company has obtained and adhered to all necessary permits and other approvals, necessary to conduct its business as presently conducted and to store, dispose of and otherwise handle Hazardous Substances and has reported, to the extent required by Environmental Laws, all past and present sites owned, leased or operated by the Company where Hazardous Substances have been treated, stored or disposed of. (iii) No Hazardous Substance has been released by the Company at or on any of the property owned, leased or operated by the Company. (iv) The Company has not received any written notice, claim or request for information relating to any on-site or off-site locations to which the Company has transported Hazardous Substances or arranged for the transportation of Hazardous Substances, alleging that the Company is liable for any clean-up cost, remedial work, damage to natural resources or personal injury. (v) There is no Action or claim for violation of any Environmental Law pending or threatened against the Company. Notwithstanding the foregoing and PARAGRAPH 6.21(B)(IV), Sellers acknowledge and agree that any Liability for any such violation of any Environmental Law is a Seller Assumed Liability. 6.22 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Company nor any officer, employee or agent of the Company, nor any other person acting on behalf of the Company, has, directly or indirectly, within the past five years, given or agreed to give any (a) bribe, kickback or similar payment or benefit to any person or (b) any gift or similar benefit to any Person who is or may be in a position to help or hinder the Company's business (or assist the Company in connection with any actual or proposed transaction) which (1) might subject the Company to any material damage or penalty in any Action or which might have a material adverse effect on the Company or its assets and properties, (2) if not given in the past, might have had a material adverse effect on the Company's business or its assets and properties, or (3) if not continued in the future, might have a material adverse effect on the Company or which might subject the Company to any material damage or penalty in any Action. 6.23 AGREEMENTS AND TRANSACTIONS WITH RELATED PARTIES. The Company is not directly or indirectly a party to any contract, agreement or lease with, or any other commitment to, (a) any Person owning, or formerly owning, beneficially or of record, directly or indirectly, any of the issued and outstanding shares of or other equity interest in the Company, including the Sellers, (b) any Affiliate of such Person, (c) any director or officer of the Company, (d) any Person in which any of the foregoing Persons has, directly or indirectly, at least a 3% beneficial - 33 - interest in the capital stock or other type of equity interest of such Person, or (e) any partnership in which any of the foregoing Persons is a general partner or has at least a three percent 3% beneficial interest (any or all of the foregoing being referred to herein as "RELATED PARTIES"). Without limiting the generality of the foregoing, (x) no Related Party, directly or indirectly, owns or controls any assets or properties which are or have been used in the Company's business, and (y) no Related Party, directly or indirectly, engages in or has any significant interest in or connection with any business (1) which is or which within the last 3 years has been a competitor, customer or supplier of the Company or has done business with the Company, or (2) which as of the date hereof sells or distributes products or services which are similar or related to the Company's products or services. 6.24 ABSENCE OF CHANGES. Except as expressly provided for in this Agreement, or as set forth in the Disclosure Schedules, since the Reference Date: (a) There has been no change in the business, assets, properties, Liabilities, affairs, results of operations, condition (financial or otherwise), cash flows or prospects of the Company or in its respective relationships with suppliers, customers, employees, lessors or others, other than changes in the ordinary course of business, none of which have had or will have a material adverse effect on the Company, in the aggregate; (b) There has been no damage, destruction or loss to the assets, properties or business of the Company, whether or not covered by insurance; (c) The business of the Company has been operated in the ordinary course and consistent with its prior practices; (d) The books, accounts and records of the Company have been maintained in the usual, regular and ordinary manner on a basis consistent with prior years and in accordance with GAAP, and there has been no amendment to the articles or certificate of incorporation or bylaws of the Company; (e) Other than any normal and customary monthly draws as set forth in the Disclosure Schedules, there has been no declaration, setting aside or payment of any dividend or other distribution on or in respect of the capital stock of the Company, including for the payment of Taxes, nor has there been any direct or indirect redemption, retirement, purchase or other acquisition of any of the capital stock or other securities of the Company; (f) No Liability of the Company has been discharged or satisfied, other than in the ordinary course of business and consistent with prior practice; (g) The Company has not discontinued or determined to discontinue selling any products or services previously sold by the Company, the sales of which have been material to the Company; (h) There has been no Lien (other than Liens for current Taxes which are not yet due and payable) created on or in the assets of the Company; - 34 - (i) There has been no sale, transfer, lease or other disposition of any asset of the Company to any Related Party or, except in the ordinary course of the Company's business, to any other Person, and no debt to, or material claim or right of, the Company has been canceled, compromised, waived or released; (j) There has been no amendment, termination or waiver of, or any notice of any amendment, termination or waiver of, any right of the Company under any Company Contract or under any franchise, certificate, license, permit or authorization from any Government; (k) The Company has not entered into any agreement, contract, lease or license outside the ordinary course of business; (l) The Company has not delayed or postponed the payment of any accounts payable or other Liabilities outside the ordinary course of business; (m) The Company has not paid or committed to pay any bonus, profit-share or other extraordinary compensation payment or other arrangement (except in the ordinary course of business and consistent with past practices), nor has the Company entered into any agreement, contract or commitment with any Seller or any Related Party or amended the terms of any existing agreement, contract or commitment with any Seller or any Related Party; and (n) There has been no change in the authorized, issued or outstanding capital stock or other securities of the Company. 6.25 BANK ACCOUNTS AND SAFETY DEPOSIT BOXES. The Disclosure Schedules list each bank in which the Company maintains an account or safety deposit box, the account numbers, and the names of all persons authorized to draw thereon or have access thereto. 6.26 PRODUCTS LIABILITY. No action is pending by or before any Government or Forum, and to the Company's and Sellers' knowledge, no Action has been threatened against or involving the Company in connection with any product sold or service provided by the Company, including Consigned Property, alleging that the product has a defect in manufacture, design or installation, or alleging any failure to warn of any defect; nor is there any reasonable basis therefor; and there has not been any accident, happening or event caused or allegedly caused by any hazard or defect or alleged hazard or alleged defect in the manufacture, design, materials, workmanship or installation, or any failure or alleged failure to warn of the hazard, defect or alleged hazard or alleged defect, of any product sold or distributed or service provided by the Company. 6.27 CUSTOMER RELATIONS. The Disclosure Schedules set forth for the Company all customers who accounted for 5% or more of the Company's gross revenues in the year ended December 31, 1999 and in the eight-month period ended August 31, 2000. Except as set forth in the Disclosure Schedules, no such customer of the Company has advised the Company or the Sellers in writing, orally or otherwise that it is (a) removing or considering removing the Company from any approved bidder list; (b) terminating or considering terminating the handling of its business by the Company as a whole or in respect of any particular project or service; (c) planning to reduce its future annual spending with the Company by an amount of $100,000 or more in net revenues; or (d) that such customer has any dispute or disagreement with the - 35 - Company with respect to services performed for such customer, or with respect to any other matter. 6.28 INVESTMENT REPRESENTATIONS. Notwithstanding the preamble to this ARTICLE 6, each Seller makes the following representations and warranties severally and not jointly. Each Seller will be receiving shares of Common Stock, whether as part of the Initial Merger Consideration or part of any Earnout Payment, for investment for the Seller's own account, not on behalf of others, and not with a view to sell or otherwise distribute such shares except in accordance with all applicable securities Laws. Each Seller acknowledges that such shares of Common Stock have not been and will not be registered under the Securities Act or under any state securities Laws, and, therefore, can not be resold unless registered under the Securities Act and applicable state securities Laws or unless an exemption from registration is available; and, as a result, each such Seller must bear the risk of an investment in the Common Stock for a period of time. The financial condition of each Seller is currently adequate to bear the economic risk of an investment in the Common Stock. Each Seller has sufficient knowledge and experience in investment and business matters to understand the economic risk of such an investment and the risk involved in a commercial enterprise such as the Surviving Corporation. Each Seller has received and carefully read the SEC Documents. Each Seller has had an opportunity to ask questions of, and receive answers from, officers of the Buyer concerning the Buyer and the Common Stock and to obtain any additional information which each Seller reasonably requested and is material to its investment decision. Each Seller has had the opportunity to review public filings of the Company available on "www.sec.gov" and other websites generally available to him or it. Each Seller is either an "accredited investor" within the meaning of Regulation D under the Securities Act, or has such knowledge and experience in financial and business matters, either alone or with a purchaser representative (as such term is defined in Regulation D under the Securities Act) that such Seller is capable of evaluating the merits and risks of an investment in the Common Stock. 6.29 TRANSFER CLAIMS. Except with respect to the right of first refusal of Thane, no prior offer, issue, redemption, call, purchase, sale, transfer, negotiation or other transaction of any nature or kind with respect to any of the capital stock of the Company (including shares, offers, options, warrants, or debt convertible into any shares of capital stock) has given or may give rise to any valid claim or action by any Person which is enforceable against the Company, Sellers or the Surviving Corporation, and, to the knowledge of Sellers, no fact or circumstance exists which could give rise to any such right, claim or action on behalf of any person. 6.30 OSHA AND OTHER FILINGS. The Company has made all filings required by the Occupational Safety and Health Act, Executive Order 11246 and other similar federal, state and local Laws and Orders, including all required filings with the Equal Employment Opportunity Commission and any other required filings relating to affirmative action or similar program. The Company has made all filings required by the Environmental Laws and other similar federal, state and local Laws. The Company has previously delivered to Buyer all material reports and filings made or filed by the Company with respect to such matters. 6.31 FULL DISCLOSURE. No representation or warranty of the Company or any Seller contained in this Agreement, the Other Agreements, the Disclosure Schedules, or any instrument, certificate, agreement or other writing delivered by or on behalf of the Company or any Seller - 36 - pursuant to this Agreement or any Other Agreement or in connection with the transactions contemplated herein or therein contains any untrue or incomplete statement of a material fact or omits (or will omit) to state a material fact necessary to make the statements contained herein and therein not misleading. To the Company's and the Sellers' knowledge, there is no fact which materially adversely affects, or in the future may materially adversely affect, the business, assets, properties, Liabilities, affairs, results of operations, condition (financial or otherwise), cash flows or prospects of the Company which has not been or is not disclosed in this Agreement, the Disclosure Schedules or in the other instruments, certificates, agreements or writings furnished to Buyer by or on behalf of any Seller pursuant to this Agreement or the Other Agreements or in connection with the transactions contemplated herein. 7. REPRESENTATIONS AND WARRANTIES OF BUYER As an inducement to the Company and the Sellers to enter into and perform this Agreement, Buyer hereby represents and warrant as follows: 7.1 ORGANIZATION. Buyer is a corporation duly organized and validly existing under the Laws of the State of Georgia. 7.2 AUTHORIZATION; NO INCONSISTENT AGREEMENTS. Buyer has full corporate power and authority to execute, deliver and perform this Agreement and the Other Agreements to which it is (or will be) a party, to own and use its assets and to conduct its business. The execution, delivery and performance by the Buyer of this Agreement and the Other Agreements and the consummation of the transactions contemplated thereby have been (or will be) duly approved and authorized by all necessary action of the Buyer. This Agreement and such Other Agreements have been (or will be) duly and validly executed and delivered by Buyer and constitute (or will constitute) the valid and legally binding obligations of Buyer, subject to general equity principles, enforceable in accordance with their respective terms, except as the same may be limited by bankruptcy, insolvency, reorganization or similar Laws affecting the rights of creditors generally. 7.3 INCONSISTENT OBLIGATIONS. The execution, delivery and performance of this Agreement and the Other Agreements to which Buyer is (or will be) a party, will not (i) result in a violation its articles of incorporation or bylaws or any Law, or (ii) result in a breach of, conflict with or default under any term or provision of any indenture, note, mortgage, bond, security agreement, loan agreement, guaranty, pledge or other instrument, contract, agreement or commitment or any Order to which Buyer is a party or by which any of the assets of Buyer is subject or bound, nor will such actions result in the creation of any Lien on any of the assets of Buyer or the acceleration or creation of any Liability. 7.4 CONSENTS. The execution, delivery and performance by Buyer of this Agreement and the Other Agreements to which Buyer is (or will be) a party, and the consummation of the transactions contemplated herein and therein does not (a) require the consent, approval or action of, or any filing with or notice to, any Government or other Person, other than with respect to filings of articles or certificates of merger with the Secretaries of State of the States of Nevada and Georgia and any filings necessitated by the securities laws of the United States or any State - 37 - or (b) impose any other term, condition or restriction on Buyer pursuant to any business combination or takeover Law. 7.5 AUTHORIZATION OF COMMON STOCK; CAPITALIZATION. (a) The shares of Common Stock which may be issued as part of the Initial Merger Consideration to Sellers pursuant to this Agreement will be duly authorized and reserved for issuance at or before the Closing and, upon issuance to the Sellers in the Merger as contemplated herein, will be fully paid and nonassessable, and the issuance thereof is not subject to any preemptive or other similar right. (b) As of November 7, 2000, the total authorized capital stock of the Buyer consisted of (i) 50,000,000 shares of Common Stock authorized for issuance, 11,184,595 of which were issued and outstanding, and (ii) 10,000,000 shares of preferred stock, par value $0.10 per share, authorized for issuance, none of which were issued and outstanding. 7.6 FINANCIAL STATEMENTS IN SEC DOCUMENTS. The financial statements of Buyer included or incorporated by reference in the SEC Documents were prepared in accordance with GAAP and present fairly, in all material respects, in accordance with GAAP, the consolidated financial condition, results of operations and changes in financial position of Buyer as of the dates thereof. 7.7 SEC FILINGS. (a) Buyer has filed with the U.S. Securities and Exchange Commission all material forms, statements, reports and documents (the "SEC Filings") required to be filed by it under the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "EXCHANGE ACT"). (b) As of its filing date, each SEC Filing complied as to form in all material respects with the applicable requirements of the Exchange Act. (c) As of its filing date, each SEC Filing and SEC Document did not contain any untrue statement of material fact or omit to state any material fact necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading. 7.8 COMPANY OR UDS DIVISION EMPLOYEES. The Buyer and the Surviving Corporation have no present intention to discharge or terminate any employees of the Company or the UDS Division. 8. CONDUCT OF BUSINESS OF THE COMPANY PENDING CLOSING The Sellers and the Company covenant and agree that, except as may otherwise be provided herein, without the prior written consent of Buyer, between the date hereof and the date of the Closing: 8.1 BUSINESS IN THE ORDINARY COURSE. The business of the Company shall be conducted only in the ordinary and usual course and consistent with prior practices. Without limiting the generality of the foregoing, except as otherwise required or permitted by this Agreement, or as agreed to by Buyer in writing or as set forth in the Disclosure Schedules, from the date hereof to - 38 - the date of the Closing, the Company shall not, and Sellers shall not take any action to cause the Company, and shall not permit the Company, to: (a) Enter into any material contract, agreement or other arrangement in connection with the business or affecting the assets of the Company, other than those (i) entered into in the ordinary course of the business of the Company at prices and on terms consistent with the prior operating practices of the Company, or (ii) which do not obligate the Company to provide goods or services to any customer or third party for a period in excess of 12 months (unless terminable upon 30 days notice or less) or do not involve the payment of an amount in excess of $100,000; provided, however, that the Company will not enter into any contract or effect any transaction with any Related Party; (b) Except for the disposal of used furniture, fixtures and equipment, the utilization of miscellaneous office supplies and the sale of inventory to customers, all in the ordinary course of the business of the Company in accordance with past practices, the Company shall not sell, assign, transfer, convey, pledge, mortgage, encumber or otherwise dispose of, or cause the sale, assignment, transfer, conveyance, pledge, mortgage, encumbrance or other disposition of, any of the assets or properties of the Company, and in no event shall any of the assets or properties of the Company be disposed of to Related Parties without Buyer's prior written consent; (c) Fail to collect all notes and accounts receivable in the ordinary course in accordance with past practices, and no rebates, discounts or concessions shall be granted after the date of this Agreement other than in the ordinary course in accordance with past practices; (d) Fail to maintain, preserve and protect from any material damage, destruction or other casualty loss (whether or not covered by insurance) all of its assets and properties in good condition, except for ordinary wear and tear; (e) Fail to maintain the books, records and accounts of the Company in the ordinary course of business and in accordance with GAAP; (f) Fail to: (i) preserve the Company's business, (ii) preserve the goodwill of the Company's suppliers, customers and others having business relations with the Company which relate to its business or (iii) assist Buyer in retaining the services of key employees and agents of the Company, to the extent agreed by Buyer and Sellers; (g) Other than any normal and customary monthly draws as set forth in the Disclosure Schedules, declare or pay any dividend or make any distribution in respect of its capital stock whether now or hereafter outstanding, including for the payment of Taxes, or, purchase, redeem or otherwise acquire or retire for value any shares of its capital stock; (h) Take any action which would make any representation or warranty of either of the Sellers or the Company contained herein, untrue, incorrect or misleading in any material respect as of the date when made or at any time through the Closing; (i) Create, incur or assume any Indebtedness, assume or become subject to, whether directly or indirectly, by way of guaranty or otherwise, any obligation or Liability (whether - 39 - absolute, accrued, contingent or otherwise and whether due or to become due), other than in the ordinary course of business consistent with its prior practice; (j) Fail to discharge or to satisfy any material Lien on any property of the Company or pay or satisfy any material claim, obligation or Liability (whether absolute, accrued, contingent or otherwise) of the Company when the same shall become due and payable; (k) Permit or allow any property or asset of the Company to be subjected to any Lien, or enter into any conditional sale or other title retention agreement with respect to any property or asset, other than in the ordinary course of business consistent with its prior practice; (l) Change in any material respect the accounting methods or practices followed by the Company; (m) Amend or modify in any way its articles of incorporation or bylaws; (n) Reclassify, combine, split, subdivide or redeem or otherwise repurchase or acquire any capital stock of the Company, or create, authorize, issue, sell, deliver, pledge or encumber any additional capital stock of the Company (whether authorized but unissued or held in treasury) or other securities equivalent to or exchangeable for capital stock of the Company, or grant or otherwise issue any options, warrants or other rights with respect thereto; (o) Acquire or agree to acquire by merging or consolidating with, or by purchasing any portion of the capital stock, partnership interests, limited liability company member interests or assets of, or by any other manner, any Person or division thereof; (p) Make any loan or advance (whether in cash or other property), or make any investment in or capital contribution to, or extend any, credit to, any Person other than in the ordinary course of business consistent with its prior practice, except short-term investments pursuant to customary cash management policies; (q) Enter into any agreement with any labor union or association representing any, make any wage or salary increase or bonus, agree to the payment of severance to any employee, or increase in any other direct or indirect compensation, for or to any of its officers, directors or employees; (r) Enter into, amend, terminate or fail to renew any Company Contract, except in the ordinary course of business consistent with its prior practices; (s) Make any payment to Sellers or any Affiliate of any Seller or forgive any Seller Debt, except for the payment of wages, reimbursement of business expenses and distributions made in the ordinary course of business consistent with its prior practice; (t) Make any Tax-related election or settle or compromise any Tax liability other than in the ordinary course of business, consistent with its prior practices, and other than the Tax Election; - 40 - (u) Fail to perform in any material respect all of its obligations under all Company Contracts; (v) Fail to use all commercially reasonable efforts to maintain in full force and effect and in the same amounts policies of insurance comparable in amount and scope of coverage to that now maintained by the Company; (w) Fail to prepare and file all Returns or extensions required to be filed by it; (x) Institute or amend any Employee Benefit Plan except as may be required by Law, or enter into or modify any written employment arrangement with any individual; or (y) Enter into any agreement or commitment to do any of the foregoing. 8.2 COMPENSATION. No increase in the compensation or rate of compensation or commissions payable or to become payable with respect to any employee of the Company shall be given to any employee, and no payment of or commitment to pay any bonus, profit-share or other extraordinary compensation payment or other arrangement (whether current or deferred) shall be made to or with any such employee. 9. CONDITIONS TO OBLIGATIONS OF BUYER All obligations of Buyer hereunder to consummate the transactions contemplated herein at the Closing are subject to the fulfillment and satisfaction of each of the following conditions on or prior to the Closing, any or all of which may be waived in whole or in part by Buyer, provided that no such waiver shall be effective unless it is set forth in a writing executed by Buyer: 9.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of the Company and the Sellers contained in this Agreement, any Other Agreement and in the Disclosure Schedules shall have been true and correct as of the date when made and shall be deemed to be made again at and as of the date of the Closing and shall be true and correct in all material respects at and as of such time. 9.2 COMPLIANCE WITH AGREEMENTS AND CONDITIONS. Each Seller and the Company shall have performed and complied with all covenants, agreements and conditions required by this Agreement and the Other Agreements to be performed or complied with by them prior to or on the date of the Closing. 9.3 CERTIFICATES. Each Seller in his or its individual capacity, the Company, certain officers of the Company and the secretary of the Company shall have delivered to Buyer certificates, dated the date of the Closing, certifying in such detail as the Buyer may reasonably request (a) as to the fulfillment and satisfaction of the conditions specified in PARAGRAPHS 9.1 and 9.2, (b) as to the absence of any material adverse change in the business, assets, properties, Liabilities, affairs, results of operations, condition (financial or otherwise), cash flows or prospects of the Company prior to the Closing, (c) that the Company has no Seller Debt, (d) and (e) such other matters as Buyer shall reasonably request and as are customary in transactions of the kind contemplated by the Agreement. - 41 - 9.4 RESOLUTIONS. The Buyer shall have received duly adopted resolutions of the board of directors of the Company, certified by the secretary of the Company, authorizing and approving the execution hereof and all other documents executed by it, including, without limitation, the Other Agreements, and the taking of any and all other actions necessary to enable the Company to comply with the terms hereof and to consummate the transactions contemplated in this Agreement. 9.5 GOVERNMENT CONSENTS. Buyer and the Company shall have received all authorizations, consents and approvals of any Government necessary or desirable for the execution, delivery and performance of this Agreement and the transactions contemplated hereby, all such authorizations, consents and approvals shall be in full force and effect, and all notices required to be given to any Government shall have been given and all applicable waiting periods shall have expired. 9.6 OTHER CONSENTS. The Sellers and the Company shall have delivered to Buyer all authorizations, consents (including estoppel letters from lenders, suppliers, lessors, and others), and approvals from the Persons identified in the Disclosure Schedules, including: consents with respect to the right of first refusal of Thane; authorizations of the shareholders of the Company; consents or approvals of the beneficiaries of the Estate; any necessary or desirable consents or approvals of any Forum with respect to the Estate, including without limitation an Order from the Will Forum; and waivers or releases with respect to the Sellers Shares held by the Estate from Persons who may assert claims arising under the community property laws of the State of Nevada; provided, however, that none of such authorizations, consents or approvals shall be given on terms that adversely affect the business, assets, properties, Liabilities, affairs, results of operations, condition (financial or otherwise), cash flows or prospects of the Company, in the aggregate. 9.7 EMPLOYMENT AGREEMENTS. West and Reeves shall have executed and delivered employment agreements with the Surviving Corporation, in substantially the forms attached hereto as EXHIBITS A-1 and A-2, respectively, and Buyer shall be satisfied that any other key employees and independent contractors of the Company will not terminate their relationship with the Company by reason of the transactions contemplated herein. The employment agreements referred to herein are Other Agreements within the meaning of this Agreement. 9.8 ASSUMPTION AGREEMENT. Each of the Sellers shall have executed and delivered an assumption agreement with the Surviving Corporation, in substantially the form attached hereto as EXHIBIT B. The assumption agreement referred to herein is an Other Agreement within the meaning of this Agreement. 9.9 BOARD APPROVAL. Buyer's board of directors shall have approved this Agreement and the transactions contemplated herein. 9.10 NO INCONSISTENT REQUIREMENTS. No Action shall have been instituted by any Government or other Person (a) against a party hereto to restrain or prohibit the consummation of the transactions herein or (b) which could reasonably be expected to have a material adverse effect on the business, assets, properties, Liabilities, affairs, results of operations, condition (financial or otherwise), cash flows or prospects of the Company, in the aggregate. - 42 - 9.11 RELATED PARTY MATTERS. All agreements and commitments of any kind in effect between the Company and any Related Party shall, in the reasonable opinion of Buyer, be on substantially the same terms as if with an unrelated party and consistent with the reasonable requirements of the Company's business, or shall be terminated or amended in a manner reasonably satisfactory to Buyer. 9.12 OPINION OF COUNSEL. Buyer shall have received from McDonald, Carano, Wilson, McCune, Bergin, Frankovich & Hicks LLP, counsel for the Sellers and the Company, a legal opinion, dated as of the Closing Date, in substantially the form set forth in EXHIBIT C attached hereto. 9.13 DUE DILIGENCE REVIEW; CUSTOMER VISITS. The Buyer shall have completed a satisfactory due diligence review of the Company and the Sellers, and no facts shall have come to the attention of the Buyer in the course of such review that would make the consummation of the transactions contemplated in this Agreement inadvisable, in the sole reasonable discretion of the Buyer. The Buyer shall have participated in visits to such customers of the Company as the Buyer deems necessary and desirable, and no facts shall have come to the attention of the Buyer in the course of such visits that would make the consummation of the transactions contemplated in this Agreement inadvisable, in the reasonable discretion of the Buyer. 9.14 REGULATION D CERTIFICATION. Buyer shall have received from each Seller a duly executed certificate regarding each Seller's status as an "accredited investor" as defined in Regulation D promulgated under the Securities Act in substantially the form set forth as EXHIBIT D attached hereto. 9.15 PROCEEDINGS AND DOCUMENTS SATISFACTORY. All proceedings taken in connection with the consummation of the transactions contemplated herein and all documents and papers reasonably required in connection therewith shall be taken or delivered in a timely manner and shall be reasonably satisfactory to Buyer and its counsel. 9.16 SALE OF AIRCRAFT. Prior to the Closing, the Company shall sell the aircraft identified in the Disclosure Schedules pursuant to a bill of sale in substantially the form set forth in EXHIBIT E attached hereto 9.17 THANE AGREEMENTS. Thane shall have entered into the following agreements with Buyer or the Surviving Corporation, or UDS, as appropriate, all in form and substance satisfactory to Buyer or the Surviving Corporation: a Waiver Agreement pursuant to which, among other things, Thane will agree to waive, release and relinquish its right of first refusal with respect to any offer by a third person for at least a majority of the issued and outstanding capital stock of the Company; and (iii) the agreements attached as exhibits thereto. 10. CONDITIONS TO OBLIGATIONS OF THE SELLERS AND THE COMPANY All obligations of the Sellers and the Company hereunder to consummate the transactions contemplated herein at the Closing are subject to the fulfillment and satisfaction of each of the following conditions on or prior to the Closing, any or all of which may be waived in whole or in part by the Sellers, provided that no such waiver shall be effective unless it is set forth in a writing executed by all Sellers thereby affected: - 43 - 10.1 REPRESENTATIONS AND WARRANTIES. The representations and warranties of Buyer contained in this Agreement and any Other Agreement shall have been true and correct on and as of the date when made and shall be deemed to be made again at and as of the date of the Closing and shall be true and correct in all material respects at and as of such time. 10.2 COMPLIANCE WITH AGREEMENTS AND CONDITIONS. Buyer shall have performed and complied with all covenants, agreements and conditions required by this Agreement and the Other Agreements to be performed or complied with by Buyer prior to or on the date of the Closing. 10.3 CERTIFICATES OF BUYER. Buyer shall have delivered to the Company and the Sellers a certificate executed by one of its officers, dated the date of the Closing, certifying in such detail as the Sellers may reasonably request as to the fulfillment and satisfaction of the conditions specified in PARAGRAPHS 10.1 and 10.2. 10.4 OPINION OF COUNSEL. Sellers and the Company shall have received from Kilpatrick Stockton LLP, counsel for the Buyer, a legal opinion, dated as of the Closing Date, in substantially the form set forth in EXHIBIT F attached hereto. 10.5 RESOLUTIONS. Buyer shall have delivered to the Sellers duly adopted resolutions of the board of directors of Buyer, certified by the secretary or an assistant secretary of Buyer as of the date of the Closing, authorizing and approving the execution hereof and all other documents executed by it, including, without limitation, the Other Agreements, and the taking of any and all other actions necessary to enable the Buyer to comply with the terms hereof and to consummate the transactions contemplated in this Agreement. 10.6 EMPLOYMENT AGREEMENTS. The Surviving Corporation shall have executed and delivered employment agreements with West and Reeves, in substantially the forms attached hereto as EXHIBITS A-1 and A-2. The employment agreements referred to herein are Other Agreements within the meaning of this Agreement. 10.7 NO ADVERSE CHANGE. There shall have been no change in the business, assets, properties, Liabilities, affairs, results of operations, condition (financial or otherwise), cash flows or prospects of the Buyer or in its respective relationships with suppliers, customers, employees, lessors or others, other than changes in the ordinary course of business, none of which have had or will have a material adverse effect on the Buyer, in the aggregate. 11. INDEMNITIES 11.1 INDEMNIFICATION BY THE SELLERS. In accordance with and subject to the provisions of this ARTICLE 11, the Sellers shall, jointly and severally, indemnify and hold harmless Buyer, the Company, the Surviving Corporation and their Affiliates, and the officers, directors, agents, and employees of Buyer, the Company, the Surviving Corporation and their Affiliates (collectively, the "BUYER INDEMNITEES") from and against and in respect of any and all loss, damage, diminution in value, Liability, cost, and expense, including reasonable attorneys' fees and amounts paid in settlement (collectively, the "INDEMNIFIED LOSSES"), suffered or incurred by any one or more of the Buyer Indemnitees by reason of, or arising out of: - 44 - (a) Any misrepresentation or breach of any representation or warranty of the Sellers or the Company contained in this Agreement, the Other Agreements, the Disclosure Schedules, or any certificate, instrument, agreement, or other writing delivered by or on behalf of the Sellers or the Company pursuant to this Agreement or in connection with the transactions contemplated herein, or the breach or nonperformance, partial or total, of any covenant or agreement of the Sellers or the Company contained in this Agreement, any Other Agreement, the Disclosure Schedules, or in any certificate, instrument, agreement, or other writing delivered to Buyer by or on behalf of the Sellers or the Company pursuant to this Agreement or in connection with the transactions contemplated herein; (b) Any Liability of the Sellers or the Company, for unpaid Taxes with respect to any Tax year or portion thereof ending on or before the date of Closing (or for any Tax year beginning before and ending after the date of Closing to the extent allocable to the portion of such period beginning before and ending on the date of Closing), including without limitation, the Taxes described in PARAGRAPH 5.12; (c) Any Liability of the Sellers or the Company, for the unpaid Taxes of any Person under Section 1-1502-6 of the regulations promulgated under the Code (or any similar provision of state, local or foreign law) as a transferee or successor, by contract or otherwise; (d) Any and all Actions, Orders, assessments, fees, and expenses incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnification against the Sellers; and (e) Any Seller Assumed Liability. 11.2 INDEMNIFICATION BY SURVIVING CORPORATION. In accordance with and subject to the provisions of this ARTICLE 11, the Surviving Corporation shall indemnify and hold harmless the Sellers from and against and in respect of any Indemnified Losses suffered or incurred by any one or both of the Sellers by reason of, or arising out of: (a) Any misrepresentation or breach of representation or warranty contained in this Agreement or the Other Agreements, or any certificate, instrument, agreement or other writing delivered by or on behalf of Buyer or the Surviving Corporation pursuant to this Agreement or in connection with the transactions contemplated herein, or the breach or nonperformance, partial or total, of any covenant or agreement of Buyer or the Surviving Corporation contained in this Agreement or any Other Agreement, or in any certificate, instrument, agreement or other writing delivered to Sellers by or on behalf of Buyer or the Surviving Corporation pursuant to this Agreement or in connection with the transactions contemplated herein; and (b) Any and all Actions, Orders, assessments, fees, and expenses incident to any of the foregoing or incurred in investigating or attempting to avoid the same or to oppose the imposition thereof, or in enforcing this indemnification. 11.3 LIMITATIONS AND PAYMENT ON CLAIMS. No claim shall be brought by any Buyer Indemnitee or the Sellers under this ARTICLE 10 for breach of any representation or warranty, and none of them shall be entitled to receive any payment with respect thereto, until and unless and only to the extent that the aggregate amount of such claim(s) that such party has exceeds a - 45 - $50,000 aggregate deductible. No delay in asserting a claim or claims pursuant to this PARAGRAPH 11.3 shall in any way prejudice the Buyer Indemnitees or the Sellers under any statute or period of limitations or similar Law or under any principle of equity. Anything to the contrary notwithstanding, neither the Sellers, on the one hand, nor the Buyer or Surviving Corporation, on the other hand, shall be liable under this ARTICLE 11 for Indemnified Losses, if any, in excess of (a) $3,500,000 plus (b) the total amount of the Earnout Payments (if any), and none of the foregoing limitations in this PARAGRAPH 11.3 shall apply to any Indemnified Loss suffered by the Buyer Indemnitees as a result of any fraudulent misrepresentation of the Sellers, or with respect to an untruth or breach of any agreement, representation or warranty made in PARAGRAPH 5.12 (CERTAIN TAX MATTERS), PARAGRAPHS 6.1 (ORGANIZATION, QUALIFICATION AND AUTHORITY), 6.2 (OWNERSHIP OF SHARES; SUBSIDIARIES), 6.3 (CAPACITY; INCONSISTENT OBLIGATIONS), 6.4 (CONSENTS), 6.7(C) (FINANCIAL STATEMENTS; FINANCIAL CONDITION), 6.18 (TAXES), 6.19 (EMPLOYMENT AND LABOR RELATIONS) or 6.21 (ENVIRONMENTAL MATTERS). 11.4 SURVIVAL. The representations and warranties of the Sellers and the Company contained in this Agreement, any Other Agreement, the Disclosure Schedules or in any certificate, instrument, agreement or other writing delivered by or on behalf of any Seller or the Company pursuant to this Agreement or in connection with the transactions contemplated herein shall survive any investigation heretofore or hereafter made by or on behalf of Buyer and the Surviving Corporation and the consummation of the transactions contemplated herein and shall continue in full force and effect for the periods specified below ("SURVIVAL PERIOD"): (a) The representations and warranties contained in PARAGRAPHS 6.1 (ORGANIZATION, QUALIFICATION AND AUTHORITY), 6.2 (OWNERSHIP OF SHARES; SUBSIDIARIES), 6.3 (CAPACITY; INCONSISTENT OBLIGATIONS) and 6.4 (CONSENTS) and shall survive indefinitely; (b) The representations and warranties contained in PARAGRAPHS 6.18 (TAXES), 6.19 (EMPLOYMENT AND LABOR RELATIONS) and 6.21 (ENVIRONMENTAL MATTERS) and shall survive until the expiration of any applicable statute or period of limitations, and any extensions thereof; and (c) All other representations and warranties shall be of no further force and effect upon March 31, 2003. Anything to the contrary notwithstanding, the Survival Period shall be extended automatically to include any time period necessary to resolve a claim for indemnification which was made but not resolved before expiration of the applicable Survival Period, provided such claim is made in sufficient detail to put the Sellers on reasonable notice of the nature and basis of such claim, and further provided that any such extension shall apply only as to the claims so asserted and not resolved within the applicable Survival Period. Liability for any such item shall continue until such claim shall have been finally settled, decided or adjudicated. 11.5 NO LIABILITY OR CONTRIBUTION BY THE COMPANY OR THE UDS DIVISION. Neither the Company nor the UDS Division shall have any Liability to any Seller as a result of any misrepresentation or breach of representation or warranty by the Company contained in this Agreement, any Other Agreement, the Disclosure Schedules, or any certificate, instrument, agreement or other writing delivered by or on behalf of any Seller or the Company pursuant to this Agreement, any Other Agreement, or in connection with the transactions contemplated - 46 - herein, or the breach of any covenant or agreement of any Seller or the Company contained in this Agreement, any Other Agreement, or the Disclosure Schedules, or any certificate, instrument, agreement or other writing by or on behalf of any Seller or the Company pursuant to the provisions of this Agreement or in connection with the transactions contemplated herein, and no Seller shall have any right of indemnification or contribution against the Company on account of any event or condition occurring or existing prior to or on the date hereof. 11.6 RECOUPMENT FROM EARNOUT. The Surviving Corporation shall have the option of recouping all or any part of any Indemnified Losses it may suffer by notifying the Sellers that the Surviving Corporation is setting-off the amount that may be payable to Sellers pursuant to any Earnout Payment, without prejudice to any other rights the Surviving Corporation may have. Such set-off amounts will be held in escrow and bear customary interest until such time as liability for any Indemnified Losses is finally determined. 12. TERMINATION 12.1 TERMINATION OF AGREEMENT. This Agreement may be terminated at any time prior to the Closing: (a) By the mutual written consent of Buyer and Sellers; (b) By Sellers in writing, without liability, if Buyer shall (i) fail to perform in any material respect its agreements contained herein required to be performed by it on or prior to the date of the Closing or (ii) materially breach any of its representations, warranties or covenants contained herein, which failure or breach is not cured within 30 business days after Seller has notified Buyer in writing of Sellers' intent to terminate this Agreement pursuant to this PARAGRAPH 12.1(B); (c) By Buyer in writing, without liability, if either the Company or Seller shall (i) fail to perform in any material respect their agreements contained herein required to be performed by them on or prior to the date of the Closing or (ii) materially breach any of their representations, warranties or covenants contained herein, which failure or breach is not cured within 30 business days after Buyer has notified Sellers in writing of its intent to terminate this Agreement pursuant to this PARAGRAPH 12.1(C); (d) By either Sellers or Buyer in writing, without liability, if there shall be any Order from any Forum binding on Buyer and/or Seller enjoining or otherwise precluding the parties from consummating the transactions contemplated hereby, provided that Buyer and Sellers shall have used their best efforts to have any such Order lifted and the same shall not have been lifted within 60 days after entry by any such Forum; or (e) By either Seller or Buyer, in writing, without liability, if for any reason the Closing has not occurred by December 31, 2000. 12.2 TERMINATION OF OBLIGATIONS. Termination of this Agreement pursuant to this ARTICLE 12 shall terminate all obligations of the parties hereunder, except for the obligations under PARAGRAPHS 5.1, 5.3 and 12.2, provided, however, that termination pursuant to - 47 - PARAGRAPHS 12.1(B), (C) or (E) shall not relieve a defaulting or breaching party from any liability to any party hereto. 13. APPOINTMENT OF SELLERS' AGENT 13.1 APPOINTMENT OF AGENT. The Sellers, and each of them, hereby irrevocably constitute and appoint West ("AGENT") as their agent and attorney-in-fact to modify, amend or otherwise change this Agreement or any of its terms or provisions (including modifications, amendments or changes subsequent to Closing), to take all actions and to execute all documents necessary or desirable to consummate the transactions contemplated by this Agreement, and to take all actions and to execute all documents which may be necessary or desirable in connection therewith, to give and receive consents and all notices hereunder, to negotiate and settle claims for indemnification under this Agreement, and to perform any other act arising under or pertaining to this Agreement and the transactions contemplated hereby. Notwithstanding the preceding sentence, (a) Agent shall not have the right to so modify, amend or otherwise change this Agreement or any of its terms or provisions after the Sellers have approved the Merger and the transactions contemplated hereby, except in respect of any such modifications, amendments or changes which do not reduce substantially the rights or benefits of the Sellers under this Agreement and (b) the individual Sellers shall have the right to make any permitted elections between the receipt of cash or Common Stock as part of the Merger Consideration. The Sellers, and each of them, agree that service of process upon Agent in any Action arising under or pertaining to this Agreement shall be deemed to be valid service of process upon the Sellers, and each of them, as appropriate, and any claim by any Buyer Indemnitee in respect to this Agreement may be asserted against, and settled with, Agent. Agent shall be deemed to have accepted the appointment herein upon Agent's execution of this Agreement. 13.2 LIABILITY OF AGENT. Nothing contained herein shall be deemed to make Agent personally liable to the Sellers, or any of them, or to impose or enlarge any obligation of Agent to Buyer, the Surviving Corporation or Company in his personal capacity as one of the Sellers, or otherwise, because of service in Agent's capacity as agent and attorney-in-fact. In performing any of Agent's duties hereunder, Agent shall not incur any liability to the Sellers, or any of them, for losses, damages, liabilities, claims or expenses, except for his own willful default. 13.3 IRREVOCABLE; BINDING ON SUCCESSORS, ETC. It is expressly understood and agreed that this power-of-attorney and the agency created hereby is coupled with an interest of the respective parties hereto and shall be binding and enforceable on and against the respective heirs, personal representatives, successors and assigns of the Sellers, and each of them, and this power-of-attorney shall not be revoked or terminated by the death, disability, bankruptcy or incompetency of any of the Sellers, but shall continue to be binding and enforceable by Agent, Buyer, and the Surviving Corporation and their respective successors, and on and against the heirs, personal representatives, successors and assigns of each of the Sellers, in the manner provided herein. 14. MISCELLANEOUS 14.1 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 - 48 - certified or registered mail, return receipt requested, or by facsimile transmission, to the intended recipient thereof at its or his address or facsimile number set out below. 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 PARAGRAPH 14.1 on the date of such facsimile), or 5 days after mailing (if given or made by mail), and in proving the same it shall be sufficient to show that the envelope containing such notice or communication was delivered to the delivery or postal service and duly addressed, or that receipt of a facsimile was confirmed as provided above. The addresses and facsimile numbers of the parties for purposes of this Agreement are set forth on the signature page hereto below their respective signatures. Any party may change the address to which notices or other communications to such parties shall be delivered or mailed by giving notice thereof to the other party hereto in the manner provided herein. 14.2 COUNTERPARTS AND FACSIMILES. This Agreement may be executed in any number of counterparts, each of which shall be deemed an original, and all of which together shall constitute one and the same instrument. Genuine signatures transmitted by telecopier shall be binding, provided that original signatures follow promptly. 14.3 GOVERNING LAW. The validity and effect of this Agreement shall be governed by and construed and enforced in accordance with the Laws of the State of Georgia, without regard to its conflicts of Laws rules. 14.4 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of the parties hereto and their respective permitted successors and assigns. Without limiting the generality of the foregoing, the Estate shall require any beneficiary of the Estate to succeed to and perform in accordance with the terms of this Agreement, the Other Agreements and the obligations and benefits thereunder. Neither the Company nor the Sellers may assign, delegate or otherwise transfer any of their rights or obligations under this Agreement without the written consent by Buyer. This Agreement may be assigned by Buyer to any Affiliate, provided that no such assignment shall relieve Buyer of its obligations hereunder. 14.5 PARTIAL INVALIDITY AND SEVERABILITY. All rights and restrictions contained herein may be exercised and shall be applicable and binding only to the extent that they do not violate any applicable Laws and are intended to be limited to the extent necessary to render this Agreement legal, valid and enforceable. If any term of this Agreement, or part thereof, not essential to the commercial purpose of this Agreement shall be held to be illegal, invalid or unenforceable by a Forum of competent jurisdiction, it is the intention of the parties that the remaining terms hereof, or part thereof, shall constitute their agreement with respect to the subject matter hereof and all such remaining terms, or parts thereof, shall remain in full force and effect. To the extent legally permissible, any illegal, invalid or unenforceable provision of this Agreement shall be replaced by a valid provision which will implement the commercial purpose of the illegal, invalid or unenforceable provision. 14.6 WAIVER. Any term or condition of this Agreement may be waived at any time by the party which is entitled to the benefit thereof, but only if such waiver is evidenced by a writing signed by such party which makes specific reference to this Agreement. No failure on the part of any party hereto to exercise, and no delay in exercising any right, power or remedy - 49 - created hereunder, shall operate as a waiver thereof, nor shall any single or partial exercise of any right, power or remedy by any party preclude any other or further exercise thereof or the exercise of any other right, power or remedy. No waiver by any party hereto of any breach of or default in any term or condition of this Agreement shall constitute a waiver of or assent to any succeeding breach of or default in the same or any other term or condition hereof. 14.7 HEADINGS. The headings of particular provisions of this Agreement are inserted for convenience only and shall not be construed as a part of this Agreement or serve as a limitation or expansion on the scope of any term or provision of this Agreement. 14.8 NUMBER AND GENDER. Where the context requires, the use of the singular form her in shall include the plural, the use of the plural shall include the singular, and the use of any gender shall include any and all genders. 14.9 ENTIRE AGREEMENT. This Agreement supersedes all prior discussions and agreements between the parties with respect to the subject matter hereof, including without limitation that certain Letter of Intent dated August 28, 2000 between the parties, and this Agreement contains the sole and entire agreement between the parties with respect to the matters covered hereby, provided, however, that certain Confidentiality and Non-Disclosure Agreement dated June 1, 2000 executed by Buyer in favor of the Company shall remain in effect until the Effective Time, after which it shall be of no further force or effect. This Agreement shall not be altered or amended except by an instrument in writing signed by or on behalf of the party entitled to the benefit of the provision against whom enforcement is sought. 15. DEFINITIONS For purposes of this Agreement, the following terms shall have the meanings specified with respect thereto below: 15.1 "ACTION" shall mean any action, suit, litigation, complaint, counterclaim, claim, petition, mediation contest, or administrative proceeding, whether at Law, in equity, in arbitration or otherwise, and whether conducted by or before any Government or other Person. 15.2 "AFFILIATE" of any specified Person shall mean any other Person directly or indirectly Controlling, Controlled by, or under direct or indirect common Control with such specified Person. 15.3 "AFFILIATED ENTITY" or "AFFILIATED ENTITIES" shall have the meaning set forth in PARAGRAPH 6.18. 15.4 "AGENT" shall have the meaning set forth in PARAGRAPH 13.1. 15.5 "AGREEMENT" shall have the meaning set forth in the Preamble. 15.6 "BUSINESS DAY" shall mean any day other than a Saturday, a Sunday or a day on which commercial banks in the United States are required or authorized to be closed. 15.7 "BUSINESS" shall have the meaning set forth in PARAGRAPH 5.9. - 50 - 15.8 "BUYER INDEMNITEES" shall have the meaning set forth in PARAGRAPH 11.1. 15.9 "BUYER" shall have the meaning set forth in the Preamble. 15.10 "CAPITAL" shall have the meaning set forth in PARAGRAPH 5.14. 15.11 "CHANGE IN CONTROL" shall have the meaning set forth in PARAGRAPH 5.13. 15.12 "CLOSING" shall have the meaning set forth in PARAGRAPH 4.1. 15.13 "CODE" shall mean the Internal Revenue Code of 1986, as amended. 15.14 "COMMON STOCK" shall have the meaning set forth in PARAGRAPH 3.1. 15.15 "COMPANY CONTRACTS" means all existing written and oral material agreements and commitments of the Company, including, without limitation, all employment and consulting contracts, union contracts, distributorship agreements, agreements with suppliers and customers (except purchase or sale orders entered into in the ordinary course of business and involving the purchase or sale of goods or services for not more than $100,000), leases, licenses, employee benefit plans, deferred compensation agreements, indentures, notes, bonds, mortgages, security agreements, loan agreements, guarantees, franchise agreements, agreements in respect of the issuance, sale, repurchase or transfer of the Company's capital stock, bonds or other securities, performance bonds, powers of attorney, and any contract which involves a payment of more than $100,000 or has a term or requires performance over a period of more than 180 days. 15.16 "COMPANY" shall have the meaning set forth in the Preamble and, when such term is used in ARTICLES 5, 6, 8 AND 9 (except PARAGRAPH 6.2), it shall also mean such corporation and all Persons required to be disclosed in the Disclosure Schedules pursuant to PARAGRAPH 6.2(D) or any of them as the context requires or permits, and the use of the possessive form of the term shall mean things belonging or relating to such corporation or any such Person. The Disclosure Schedules shall identify the specific Person(s) in any disclosure relating to the Company as so defined, and general references to the Company as such shall not be acceptable. 15.17 "CONSIGNED PROPERTY" shall have the meaning set forth in PARAGRAPH 6.11. 15.18 "CONTROL" means a Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of another Person, whether through the ownership of voting securities, by contract or otherwise. 15.19 "DISCLOSURE SCHEDULES" shall have the meaning set forth in the introduction to ARTICLE 6. 15.20 "DECEDENT" shall have the meaning set forth in PARAGRAPH 6.2. 15.21 "EARNOUT PAYMENT" and "EARNOUT PAYMENTS" shall have the meanings set forth in PARAGRAPH 3.3. - 51 - 15.22 "EARNOUT PERIOD" shall have the meaning set forth in PARAGRAPH 3.3. 15.23 "EFFECTIVE TIME" shall have the meaning set forth in PARAGRAPH 4.1. 15.24 "EMPLOYEE BENEFITS PENSION PLANS" shall have the meaning set forth in PARAGRAPH 6.20. 15.25 "ENVIRONMENTAL LAWS" shall have the meaning set forth in PARAGRAPH 6.21. 15.26 "ERISA PLANS" shall have the meaning set forth in PARAGRAPH 6.20. 15.27 "ERISA" shall have the meaning set forth in PARAGRAPH 6.20. 15.28 "ESTATE" shall have the meaning set forth in the Preamble. 15.29 "EXCHANGE ACT" shall have the meaning set forth in PARAGRAPH 7.7. 15.30 "EXECUTOR" shall have the meaning set forth in PARAGRAPH 6.2. 15.31 "FINAL CLOSING BALANCE SHEET" shall have the meaning set forth in PARAGRAPH 3.2. 15.32 "FINAL OPERATING INCOME DETERMINATION" shall have the meaning set forth in PARAGRAPH 3.3. 15.33 "FINAL UDS DIVISION INCOME STATEMENT" shall have the meaning set forth in PARAGRAPH 3.3. 15.34 "FINANCIAL STATEMENTS" shall have the meaning set forth in PARAGRAPH 6.7. 15.35 "FMLA" shall have the meaning set forth in PARAGRAPH 6.19. 15.36 "FORUM" shall mean any federal, national, state, local, municipal or foreign court, governmental agency, administrative body or agency, tribunal, private alternative dispute resolution system, or arbitration panel. 15.37 "FUNDED DEBT" shall have the meaning set forth in PARAGRAPH 3.2. 15.38 "GAAP" shall have the meaning set forth in PARAGRAPH 3.2. 15.39 "GOVERNMENT" shall mean any federal, national, state, provincial, local, municipal, or foreign government or any department, commission, board, bureau, agency, instrumentality, unit, or taxing authority thereof. 15.40 "HAZARDOUS SUBSTANCES" shall have the meaning set forth in PARAGRAPH 6.21. 15.41 "HEREOF," "HEREIN," "HEREUNDER" and words of similar import when used in this Agreement shall refer to this Agreement as a whole and not to any particular provision of this - 52 - Agreement, and "ARTICLE," "PARAGRAPH," "EXHIBIT" and like references are to this Agreement unless otherwise specified. 15.42 "IMPROVEMENTS" shall mean all buildings, structures and other improvements of any and every nature located on the Leased Real Property and all fixtures attached or affixed, actually or constructively, to the Leased Real Property or to any such buildings, structures or other improvements. 15.43 "INDEBTEDNESS" shall mean all obligations of the Company (i) for money borrowed, (ii) under or pursuant to bank indebtedness, notes payable, drafts accepted, bank overdrafts or other extensions of credit (other than accounts payable incurred in the ordinary course of business and the Seller Debt), (iii) guaranties of the Liabilities of any other Person, and (iv) any other obligation or Liability that, under GAAP or in economic effect, constitutes any of the foregoing. 15.44 "INDEMNIFIED LOSSES" shall have the meaning set forth in PARAGRAPH 11.1. 15.45 "INDEPENDENT ACCOUNTING FIRM" shall have the meaning set forth in PARAGRAPH 3.2. 15.46 "INITIAL BUYER SHARES" shall have the meaning set forth in PARAGRAPH 3.1. 15.47 "INITIAL MERGER CONSIDERATION" shall have the meaning set forth in PARAGRAPH 3.1. 15.48 "INITIAL MERGER CONSIDERATION BALANCE" shall have the meaning set forth in PARAGRAPH 3.1. 15.49 "KNOWN," "TO THE KNOWLEDGE OF," "AWARE" or words of similar import employed in this Agreement with reference to any individual or entity shall be conclusively presumed to mean that the individual or entity has made reasonable and diligent efforts under the circumstances to become knowledgeable; in the case of the Company, "knowledge" shall be deemed to be the individual and collective knowledge (as defined above) of its directors and senior officers and managers. 15.50 "LAW" shall mean all federal, national, state, provincial, local, municipal or foreign constitutions, statutes, rules, regulations, norms, ordinances, acts, codes, legislation, treaties, conventions, common law principles, judicial decisions and similar laws and legal requirements, whether of the United States of America or any other jurisdiction as in effect from time to time. 15.51 "LEASED REAL PROPERTY" shall have the meaning set forth in PARAGRAPH 6.13. 15.52 "LIABILITY" shall mean any liability or obligation whether known or unknown, asserted or unasserted, absolute or contingent, accrued or unaccrued, liquidated or unliquidated and whether due or to become due. - 53 - 15.53 "LIEN" shall mean any mortgage, pledge, hypothecation, security interest, encumbrance, claim, restriction on use, lien or charge of any kind, or any rights of others, however evidenced or created (including any agreement to give any of the foregoing, any conditional sale or other title retention agreement, any lease in the nature thereof, and the filing of or agreement to give any financing statement under the lien notice records or other similar legislation of any jurisdiction. 15.54 "MERGER CONSIDERATION" shall have the meaning set forth in PARAGRAPH 3.1. 15.55 "MERGER" shall have the meaning set forth in PARAGRAPH 1.1. 15.56 "OPERATING INCOME" shall have the meaning set forth in PARAGRAPH 3.3. 15.57 "ORDERS" shall mean all applicable orders, writs, judgments, injunctions, decrees, rulings, consent agreements, and awards of or by any Forum or entered by consent of the party to be bound. 15.58 "OTHER AGREEMENTS" shall have the meaning set forth in PARAGRAPH 6.1. 15.59 "PERSON" shall include an individual, a partnership, a joint venture, a corporation, a limited liability company, a trust, an unincorporated organization and a Government. 15.60 "PRELIMINARY CLOSING BALANCE SHEET" shall have the meaning set forth in PARAGRAPH 3.2. 15.61 "PRELIMINARY OPERATING INCOME DETERMINATION" shall have the meaning set forth in PARAGRAPH 3.3. 15.62 "PRELIMINARY UDS DIVISION INCOME STATEMENT" shall have the meaning set forth in PARAGRAPH 3.3. 15.63 "REAL PROPERTY LEASE" shall have the meaning set forth in PARAGRAPH 6.13. 15.64 "REEVES" shall have the meaning set forth in the Preamble. 15.65 "REFERENCE DATE BALANCE SHEET" shall have the meaning set forth in PARAGRAPH 6.7. 15.66 "REFERENCE DATE" shall have the meaning set forth in PARAGRAPH 6.7. 15.67 "RELATED PARTIES" shall have the meaning set forth in PARAGRAPH 6.23. 15.68 "RELEASE" shall have the meaning set forth in PARAGRAPH 6.21. 15.69 "RETURNS" shall have the meaning set forth in PARAGRAPH 6.18. 15.70 "SEC DOCUMENTS" shall have the meaning set forth in PARAGRAPH 5.6. 15.71 "SEC FILINGS" shall have the meaning set forth in PARAGRAPH 7.7. - 54 - 15.72 "SECURITIES ACT" shall have the meaning set forth in PARAGRAPH 5.7. 15.73 "SELLER ASSUMED LIABILITY" shall mean any Liability of the Company assumed by the Sellers pursuant to the assumption agreement referred to in PARAGRAPH 9.8, and "SELLER ASSUMED LIABILITIES" shall mean all such assumed liabilities. (a) The Seller Assumed Liabilities include all Liabilities of the Company other than the following Liabilities, which the Company will retain and the Surviving Corporation will succeed to: (i) All obligations of the Company with respect to Liabilities reflected or reserved against on the Final Closing Balance Sheet, unless any such Liability is specifically excluded under PARAGRAPH 15.73(B) below; (ii) All obligations of the Company under the Real Property Leases arising and to be performed only on or after the date of the Closing, and excluding any obligations under the Real Property Leases arising or to be performed prior to the date of the Closing; (iii) All obligations of the Company under its contracts, personal property leases and licenses, including the Company Contracts arising and to be performed only on or after the date of the Closing, and excluding any obligations thereunder arising or to be performed prior to the date of the Closing; and (iv) All obligations of the Company to its employees arising or to be performed only on and after the date of the Closing, and excluding any obligations to the Company's employees arising or to be performed prior to the date of the Closing. (b) Without limiting the generality of PARAGRAPH 15.73(A), the Seller Assumed Liabilities include the following Liabilities: (i) Any Liability for Taxes for periods ending on or prior to the date of the Closing payable by the Company or any Seller; (ii) Any Liability of the Company under any employee benefit plan (including, without limitation, the ERISA Plans, any profit sharing plan, any employee pension benefit plan or any employee welfare benefit plan) relating to any time period on or prior to the date of the Closing; (iii) Any Liability of the Company or the Sellers for any of Sellers' attorney's accountant's, finder's, broker's or advisor's fees and expenses or the like incurred in connection with the transactions contemplated by this Agreement; (iv) Any Liability of the Company arising as a result of the failure of the Company to comply with any applicable Law prior to the date of the Closing (including, without limitation, any antitrust Law or Environmental Law, and any Laws concerning leased employees or similar arrangements); - 55 - (v) Any Action (and any Liabilities with respect thereto) now pending or hereafter instituted with respect to events occurring or acts or omissions of the Company or the Sellers existing prior to the Closing, including without limitation, any Liability with respect to or arising out of the right of first refusal of Thane (except with respect to any Liability which may hereafter arise in connection with that certain First Amendment to Exclusive Order Fulfillment Agreement of even date herewith between Buyer and Thane and that certain Common Stock Purchase Warrant issued this date by Innotrac to Thane) and any Liability with respect to or arising out of any potential claim by United Parcel Service, Inc. related to the Company's use of and trademark application for the name "UDS" and accompanying design; and (vi) Any Liability arising out of losses or expenses due that are incurred by the Company prior to the Closing or that are incurred after the Closing as a result of events occurring or acts or omissions existing prior to the Closing (whether or not such losses or events have been reported as of the Closing), including, without limitation, workers compensation claims and any losses which (as a result of deductibles, policy exclusions, retroactively rated policy adjustments, premium audits, penalty charges, policy limits or otherwise) are not covered by insurance policies of the Company in effect as of the Closing. 15.74 "SELLER DEBT" shall mean all outstanding indebtedness and obligations of the Sellers and their Affiliates to the Company, including accrued interest. 15.75 "SELLER" and "SELLERS" shall have the meanings set forth in the Preamble. 15.76 "SELLERS NOTICE" shall have the meaning set forth in PARAGRAPH 3.3. 15.77 "SELLERS SHARES" shall have the meaning set forth in the Recitals. 15.78 "SHORTFALL" shall have the meaning set forth in PARAGRAPH 3.2. 15.79 "SURVIVAL PERIOD" shall have the meaning set forth in PARAGRAPH 11.4. 15.80 "SURVIVING CORPORATION" shall have the meaning set forth in PARAGRAPH 1.1. 15.81 "TAX ELECTION" shall have the meaning set forth in PARAGRAPH 5.12. 15.82 "TAXES" shall mean any present or future taxes, levies, imposts, duties, fees, assessments, deductions, withholdings or other charges of whatever nature, including without limitation income, gross receipts, excise, property, sales, use, customs, value added, consumption, transfer, license, payroll, employee income, withholding, social security, and franchise taxes, now or hereafter imposed or levied by the United States of America or any Government or by any department, agency or other political subdivision or taxing authority thereof or therein, all deposits required in connection therewith, and all interests, penalties, additions to tax, and other similar Liabilities with respect thereto. 15.83 "THANE" shall mean Thane International, Inc., a Delaware corporation. - 56 - 15.84 "UDS DIVISION" shall have the meaning set forth in PARAGRAPH 3.3. 15.85 "WEST" shall have the meaning set forth in the Preamble. 15.86 "WILL" shall have the meaning set forth in PARAGRAPH 6.3. 15.87 "WILL FORUM" shall have the meaning set forth in PARAGRAPH 6.3. 15.88 "WORKING CAPITAL" shall have the meaning set forth in PARAGRAPH 3.2. 15.89 "YEAR ONE EARNOUT" shall have the meaning set forth in PARAGRAPH 3.3. 15.90 "YEAR ONE" shall have the meaning set forth in PARAGRAPH 3.3. 15.91 "YEAR ONE EARNOUT ADJUSTMENT" shall have the meaning set forth in PARAGRAPH 3.3. 15.92 "YEAR THREE EARNOUT" shall have the meaning set forth in PARAGRAPH 3.3. 15.93 "YEAR THREE OPERATING INCOME HURDLE" shall have the meaning set forth in PARAGRAPH 3.3. 15.94 "YEAR THREE" shall have the meaning set forth in PARAGRAPH 3.3. 15.95 "YEAR TWO EARNOUT" shall have the meaning set forth in PARAGRAPH 3.3. 15.96 "YEAR TWO OPERATING INCOME HURDLE" shall have the meaning set forth in PARAGRAPH 3.3. 15.97 "YEAR TWO" shall have the meaning set forth in PARAGRAPH 3.3. 15.98 "YEAR" shall have the meaning set forth in PARAGRAPH 3.3. [SIGNATURES BEGIN ON NEXT PAGE] - 57 - IN WITNESS WHEREOF, the parties have caused this Agreement to be duly executed as of the day and year first above written. BUYER: INNOTRAC CORPORATION By: /s/ David L. Gamsey ------------------------------------ David L. Gamsey Senior Vice President, Chief Financial Officer and Secretary Innotrac Corporation 6655 Sugarloaf Parkway Duluth, Georgia 30097 Tel: (678) 584-4020 Fax: (678) 584-8978 COMPANY: UDS By: /s/ Patrick West ------------------------------------ Patrick West President and Chief Executive Officer UDS 4910 Longley Lane, Suite 101 Reno, Nevada 89502 Tel: (775) 332-5700 Fax: (775) 332-5710 SELLERS: /s/ Patrick West --------------------------------------- Patrick West C/o UDS 4910 Longley Lane, Suite 101 Reno, Nevada 89502 Tel: (775) 332-5700 Fax: (775) 332-5710 [SIGNATURES CONTINUE] - 58 - /s/ Daniel Reeves -------------------------------- Daniel Reeves C/o UDS 4910 Longley Lane, Suite 101 Reno, Nevada 89502 Tel: (775) 332-5700 Fax: (775) 332-5710 The Estate of John L. West By: /s/ Jean M. West -------------------------------- Jean M. West Executor C/o UDS 4910 Longley Lane, Suite 101 Reno, Nevada 89502 Tel: (775) 332-5700 Fax: (775) 332-5710 - 59 - EXHIBIT A-1 WEST EMPLOYMENT AGREEMENT [FOLLOWS THIS PAGE] EXHIBIT A-2 REEVES EMPLOYMENT AGREEMENT [FOLLOWS THIS PAGE] EXHIBIT B ASSUMPTION AGREEMENT [FOLLOWS THIS PAGE] EXHIBIT C OPINION OF MCDONALD, CARANO, WILSON, MCCUNE, BERGIN, FRANKOVICH & HICKS LLP [FOLLOWS THIS PAGE] EXHIBIT D REGULATION D CERTIFICATE [FOLLOWS THIS PAGE] EXHIBIT E BILL OF SALE FOR AIRCRAFT [FOLLOWS THIS PAGE] EXHIBIT F OPINION OF KILPATRICK STOCKTON LLP [FOLLOWS THIS PAGE] EXHIBIT G EXAMPLES OF EARNOUT EXAMPLES [FOLLOWS THIS PAGE] EX-10.14 4 g74787ex10-14.txt 2002 SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN EXHIBIT 10.14 INNOTRAC CORPORATION SENIOR EXECUTIVE INCENTIVE COMPENSATION PLAN 2002 PLAN RULES FOR EXECUTIVES These 2002 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 March 1, 2002. The Committee has determined that compliance with the performance-based exception under Code Section 162(m) is not necessary for 2002. 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 2002 (or, as applicable, a subsequent Plan Year): Scott D. Dorfman David L. Ellin David L. Gamsey Larry C. Hanger Robert Toner Patrick West Paul Chisholm Chris Shaw 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 Before Interest, Taxes, Depreciation and Amortization" or "EBITDA" shall mean the earnings of the Company (on a consolidated basis) for fiscal 2002 before the associated expenses of interest, taxes, depreciation and amortization. (b) "Revenue" shall mean the gross revenues of the Company for fiscal 2002. 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.
- -------------------------------------------------------------------------------- TARGET AWARD PARTICIPANT (% OF BASE ANNUAL SALARY) ---------------- ------------------------- SCOTT D. DORFMAN 100% - -------------------------------------------------------------------------------- Patrick West 100% - -------------------------------------------------------------------------------- David Ellin* 60% - -------------------------------------------------------------------------------- David L. Gamsey 50% - -------------------------------------------------------------------------------- Larry Hanger 60% - -------------------------------------------------------------------------------- Robert Toner 50% - -------------------------------------------------------------------------------- Chris Shaw 50% - -------------------------------------------------------------------------------- Paul Chisholm 50% - --------------------------------------------------------------------------------
* commissions paid throughout the year and earned in 2002 will be applied against, and reduce, any bonus amount to be paid. Performance Criteria. A Participant's Award will be computed using three factors: (1) Revenues, (2) EBITDA, 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 $76.3 million (as budgeted), the Participant shall be entitled to 50% of the 25% of the Participant's Target Award. For the first ten percent (10%) that Revenues fall below $76.3 million (rounded to the closest whole percentage), the amount payable under this portion of Participant's Award shall decrease by ten percent (10%), for the second ten percent (10%) that Revenues fall below $76.3 million, the amount payable under this portion of Participant's Award shall decrease by an additional fifteen percent (15%), for the third ten percent (10%) that Revenues fall below $76.3 million, the amount payable under this portion of Participant's Award shall decrease by an additional ten percent (10%), and if Revenues fall by an additional 5% (to 65% of $76.3 million), then the amount payable under this portion of Participant's Award shall decrease by an additional ten percent (10%) to a total of 5% provided that a threshold level of $48.1 million of Revenues must be attained for any amount to be payable under this portion of the Award. For each ten percent (10%) that Revenues exceed $76.3 million (rounded to the closest whole percentage), the amount payable under this portion of the Award shall increase by ten percent (10%) up to a maximum of 150% paid for Revenues of $152.6 million. (2) 50% of the Participant's Target Award shall be based upon the EBITDA achieved by the Company. If the Company attains EBITDA of $7.5 million (as budgeted), the Participant shall be entitled to 50% of the 50% of the Participant's Target Award. For the first ten percent (10%) that EBITDA falls below $7.5 million (rounded to the closest whole percentage), the amount payable under this portion of Participant's Award shall decrease by ten percent (10%), for the second ten percent (10%) that EBITDA falls below $7.5 million, the amount payable under this portion of Participant's Award shall decrease by an additional fifteen percent (15%), for the third ten percent (10%) that EBITDA falls below $7.5 million, the amount payable under this portion of Participant's Award shall decrease by an additional ten percent (10%), and if EBITDA falls by an additional 5% 2 (to 65% of $7.5 million), then the amount payable under this portion of Participant's Award shall decrease by an additional ten percent (10%) to a total of 5% provided that a threshold level of $4.725 million of EBITDA must be attained for any amount to be payable under this portion of the Award. For each ten percent (10%) that EBITDA exceeds $7.5 million (rounded to the closest whole percentage), the amount payable under this portion of the Award shall increase by ten percent (10%) up TO A MAXIMUM OF 150% PAID FOR EBITDA OF $15.0 MILLION. (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. The target is 50% of this 25%. Examples Participant A has a Base Annual Salary of $200,000. Participant A's Target Award is 50% The Company's Revenues for 2002 were $85.0 million The Company had EBITDA equal to $5.9 million The Participant met his individual goals and objectives. The Participant's Award for 2002 equals $45,000, calculated as follows: Actual Target = $50,000 (50% x 50% x $200,000) Revenues Portion: 50% of 25% of $100,000 = $12,500 Target. Revenues of $85 million = 11.4% above budget (rounded to 10% above Target), so award = 110% of Target. $12,500 x 110% = $13,750. EBITDA Portion: 50% of 50% of $100,000 = $25,000 Target. EBITDA of $5.9 million = 78.7% of target (rounded to 20% below Target), so award = 75% of Target. $25,000 x 75% = $18,750. Individual Performance Portion: 50% of 25% of $100,000 = $12,500 Target. Met individual goals, so entitled to $12,500. 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. 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 45 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 EBITDA, generally accepted accounting principles 3 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 45 days after the close of the Company's fiscal year or as soon as practical thereafter. 4 EX-10.23 5 g74787ex10-23.txt LEASE, DATED JULY 23, 2001 EXHIBIT 10.23 NAPER CROSSINGS COMMERCE CENTER II BOLINGBROOK, ILLINOIS STANDARD INDUSTRIAL LEASE AGREEMENT By and Between THE LINCOLN NATIONAL LIFE INSURANCE COMPANY as Landlord and iFulfillment, Inc. as Tenant i LEASE INDEX
PAGE ---- ARTICLE I - LEASED PREMISE ..................................................................1 1.1 DEMISE OF LEASED PREMISES ..........................................................1 1.2 CONDITION OF LEASED PREMISES .......................................................1 ARTICLE II - TERM ..........................................................................1 2.1 TERM ...............................................................................1 2.2 DELAY IN OCCUPANCY .................................................................1 2.3 EARLY OCCUPANCY ....................................................................1 ARTICLE III - RENT ..........................................................................2 3.1 BASE RENT ..........................................................................2 3.2 ADDITIONAL RENT ....................................................................2 3.3 LATE CHARGES .......................................................................2 3.4 PROPORTIONATE SHARE ................................................................2 3.5 REAL PROPERTY TAXES ................................................................2 3.6 INSURANCE ..........................................................................3 3.7 COMMON EXPENSES ....................................................................3 3.8 VERIFICATION AND OPERATING STATEMENT ...............................................3 3.9 INTEREST ON PAST DUE AMOUNTS .......................................................3 ARTICLE IV - COMMON AREAS ...................................................................4 4.1 COMMON AREAS .......................................................................4 4.2 USE OF COMMON AREAS ................................................................4 4.3 VEHICLE PARKING ....................................................................4 4.4 COMMON AREA MAINTENANCE ............................................................4 ARTICLE V - USE .............................................................................4 5.1 USE ................................................................................4 5.2 ADA ................................................................................5 ARTICLE VI - SECURITY DEPOSIT ...............................................................5
II ARTICLE VII - OPERATIONS: UTILITIES: SERVICES ...............................................6 7.1 UTILITIES ..........................................................................6 7.2 NO INTERFERENCE ....................................................................6 ARTICLE VIII - REPAIRS AND MAINTENANCE ......................................................6 8.1 LANDLORD'S OBLIGATIONS .............................................................6 8.2 TENANT'S OBLIGATIONS ...............................................................7 ARTICLE IX - ALTERATIONS: TENANT'S PROPERTY .................................................7 9.1 ALTERATIONS BY TENANT ..............................................................7 9.2 CONTRACTORS INSURANCE REQUIREMENTS .................................................7 9.3 TENANT'S PROPERTY ..................................................................8 ARTICLE X - HAZARDOUS MATERIALS .............................................................8 10.1 USE OF HAZARDOUS MATERIALS ....................................................... 8 10.1 (A) TENANT'S OBLIGATIONS AND LIABILITIES ..........................................8 10.1 (B) DEFINITION ....................................................................9 10.1 (C) INSPECTION ....................................................................9 10.1 (D) DEFAULT........................................................................9 ARTICLE XI - ASSIGNMENT AND SUBLETTING ......................................................9 11.1 ASSIGNMENT, SUBLETTING AND ENCUMBERING ............................................9 11.2 INVOLUNTARY ASSIGNMENT ...........................................................12 ARTICLE XII - CASUALTY OR CONDEMNATION .....................................................12 12.1 PARTIAL DAMAGE OF LEASED PREMISES ................................................12 12.2 TOTAL OR SUBSTANTIAL DESTRUCTION .................................................13 12.3 TEMPORARY REDUCTION OF RENT ......................................................13 12.4 CONDEMNATION .....................................................................13 ARTICLE XIII - INDEMNIFICATION AND INSURANCE ...............................................13 13.1 INDEMNIFICATION BY TENANT ........................................................13 13.2 TENANT'S INSURANCE ...............................................................14 13.3 SURVIVAL OF INDEMNITIES ..........................................................14 13.4 LANDLORD'S INSURANCE .............................................................14 13.5 LANDLORD'S INDEMNIFICATION .......................................................14 13.6 WAIVER OF SUBROGATION ............................................................14 ARTICLE XIV - RIGHT OF ENTRY ...............................................................15
III ARTICLE XV - PROPERTY LEFT ON THE LEASED PREMISES ..........................................15 ARTICLE XVI - SIGNS AND ADVERTISEMENTS .....................................................15 ARTICLE XVII - NOTICES .....................................................................15 ARTICLE XVIII - MECHANIC'S LIENS ...........................................................16 ARTICLE XIX - SUBORDINATION: ATTORNMENT ....................................................16 19.1 SUBORDINATION ....................................................................16 19.2 ATTORNMENT .......................................................................17 19.3 NON-DISTURBANCE ..................................................................17 19.4 CONFIRMING AGREEMENT .............................................................17 19.5 MORTGAGEE PROTECTION .............................................................17 ARTICLE XX - COMPLIANCE WITH LAW AND RULES AND REGULATIONS ...........................................................................17 20.1 COMPLIANCE WITH LAWS .............................................................17 20.2 RULES AND REGULATIONS ............................................................17 ARTICLE XXI - LANDLORD'S LIEN ..............................................................18 ARTICLE XXII - ESTOPPEL CERTIFICATE ........................................................18 ARTICLE XXIII - HOLDING OVER ...............................................................19 ARTICLE XXIV - TENANT'S STATUS .............................................................19 24.1 POWER AND AUTHORITY ..............................................................19 24.2 AUTHORIZATION ....................................................................19 ARTICLE XXV - DEFAULTS AND REMEDIES ........................................................19 25.1 DEFAULT BY TENANT ................................................................19 25.2 LANDLORD REMEDIES ................................................................20 25.3 LANDLORD'S COSTS; ATTORNEYS FEES .................................................21 25.4 REMEDIES CUMULATIVE ..............................................................21 25.5 NON-WAIVER .......................................................................21 ARTICLE XXVI - MISCELLANEOUS ...............................................................21 26.1 NO PARTNERSHIP ...................................................................21 26.2 NO REPRESENTATIONS BY LANDLORD ...................................................21
IV 26.3 WAIVER OF JURY TRIAL ............................................................21 26.4 SEVERABILITY PROVISIONS .........................................................21 26.5 INTERIOR CONSTRUCTION ...........................................................22 26.6 BENEFITS AND BURDENS ............................................................22 26.7 LANDLORD'S LIABILITY ............................................................22 26.8 BROKERAGE........................................................................22 26.9 RECORDING........................................................................22 26.10 GOVERNMENTAL SURCHARGE ..........................................................22 26.11 SURRENDER OF PREMISES ...........................................................23 26.12 INTERPRETATION ..................................................................23 26.13 SPECIAL PROVISIONS ..............................................................23 26.14 ENTIRE AGREEMENT ................................................................23 26.15 FORCE MAJEURE ...................................................................23 26.16 CHOICE OF LAW ...................................................................23 26.17 SUBMISSION OF LEASE .............................................................23 26.18 TIME OF ESSENCE .................................................................24 26.19 FINANCIAL STATEMENTS ............................................................24 26.20 FIRST RENEWAL OPTION ............................................................24 EXHIBITS: EXHIBIT A - LEGAL DESCRIPTION .........................................................26 EXHIBIT B - FLOOR PLAN ................................................................27 EXHIBIT C -INTENTIONALLY OMITTED EXHIBIT D - RULES AND REGULATIONS .....................................................29 EXHIBIT E-1 - TENANT ESTOPPEL CERTIFICATE .............................................33 EXHIBIT E-2 - LANDLORD ESTOPPEL CERTIFICATE ...........................................35 EXHIBIT F - TENANT CONSTRUCTION .......................................................37 EXHIBIT G - SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT .................................................................39 EXHIBIT H - LANDLORD'S LIEN WAIVER ....................................................46
v INDUSTRIAL BUILDING LEASE THIS LEASE, is made and entered into on this 23rd day of July, 2001, between The Lincoln National Life Insurance Company, an Indiana corporation, ("Landlord") and iFulfillment, Inc., a Georgia corporation ("Tenant"). ARTICLE I - LEASED PREMISES 1.1 DEMISE OF LEASED PREMISES. Landlord, in consideration of the rents and of the terms and conditions hereinafter contained, does hereby lease to Tenant, and Tenant, does hereby rent from Landlord the building known as Naper Crossings Commerce Center II, located in Bolingbrook, Illinois and containing approximately three hundred fifty-four thousand four hundred (354,400) rentable square feet ("Leased Premises" or "Building" or "Property"). The Building is located on the land described on Exhibit "A" and the floor plans of the Leased Premises are attached as Exhibit "B" and incorporated by reference. 1.2 CONDITION OF LEASED PREMISES. Tenant accepts the Leased Premises in its "as is" condition as of the execution of this Lease, subject to all recorded matters, laws, ordinances, and governmental regulations and orders. Tenant acknowledges that neither Landlord, any employee of Landlord, Landlord's property manager, or any agent of Landlord has made any representation as to the condition of the Leased Premises or the suitability of the Leased Premises for Tenant's intended use. The taking of possession of the Leased Premises by Tenant shall be conclusive evidence that the Leased Premises were in good and satisfactory condition and suitable for the use intended by Tenant at the time such possession was taken. Upon request by Landlord, Tenant shall execute a commencement letter signifying such acceptance. ARTICLE II - TERM 2.1 TERM. The term of this Lease shall be for a period of one (1) year, seven (7) months and nine (9) days (the "Term"), commencing July 23, 2001 (the "Commencement Date") and ending on December 31, 2002 (the "Expiration Date"), unless sooner terminated pursuant to any provision hereof. 2.2 DELAY IN OCCUPANCY. Intentionally deleted. 2.3 EARLY OCCUPANCY. Intentionally deleted. 1 ARTICLE III - RENT 3.1 BASE RENT Tenant shall pay rent to Landlord starting with the Commencement Date of the Lease through the Expiration Date for the use and occupancy of the Leased Premises as follows ("Base Rent"), payable in advance, on the first day of each month:
Date Monthly Payment ---- --------------- 7/23/01 - 7/31/01 20,522.36 8/1/O1 - 10/31/O1 70,688.14 11/1/01 - 11/30/01 70,985.00 12/1/01 - 12/31/01 71,229.48 l/1/02 - 6/30/02 142,458.95 7/1/02 - 10/31/02 144,218.95 11/1/02 - 11/30/02 142,289.36 12/1/02 - 12/31/02 140,700.28
Base Rent and all other sums, whether designated additional rent or otherwise, payable to Landlord under this Lease shall be payable in U.S. Dollars at the office of Landlord, or at such other place or places as Landlord may in writing direct. All rent payable under this Lease shall be paid by Tenant without notice or demand, both of which are expressly waived by Tenant. Base Rent due under this Lease shall be paid by Tenant without demand, offset or deduction. 3.2 ADDITIONAL RENT. Tenant shall pay to Landlord additional rent as provided in this Article III. All charges due and payable by Tenant other than Base Rent are herein called "Additional Rent". The term "Rent" shall mean Base Rent and Additional Rent. 3.3 LATE CHARGES. Tenant's failure to pay Rent promptly may cause Landlord to incur unanticipated costs. The amount of such costs are difficult to ascertain, and therefore on any Rent payment not made within ten (10) days after it is due, Tenant shall pay Landlord a late charge equal to fifteen percent (15%) per annum of the overdue amount. The parties agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of such late payment. 3.4 PROPORTIONATE SHARE. For purposes of this Lease, Tenant's Proportionate Share is 100% of this Building's expenses. 3.5 REAL PROPERTY TAXES. As Additional Rent, Tenant shall reimburse Landlord for the Real Property Taxes payable during any calendar year the Tenant occupies the Leased Premises, within thirty (30) days of receipt of an invoice from Landlord. Real Estate taxes are paid twice per year and will be billed to Tenant upon payment of the tax bill by Landlord. A tax bill submitted by Landlord to Tenant shall be conclusive evidence of the, amount of Real Property Taxes, as well as the items taxed. (b) "Real Property Taxes" shall mean: (i) any fee, license fee, license tax, business license fee, commercial rental tax, levy, charge, assessment, government charge or tax imposed by any taxing authority against the Building or land upon which the Building is located; (ii) any tax on the 2 Landlord's right to receive, or the receipt of, rent or income from the Building or against Landlord's business of leasing the Building; (iii) any tax, or charge, or assessment, or any assessment for repayment of bonds for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Building for any governmental agency; (iv) any charge or fee replacing any tax previously included within the definition of real property tax; and (v) any costs incurred by Landlord in contesting such Real Property Taxes, whether successful or not. Real Property Taxes does not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. Tenant shall pay when due all taxes charged against trade fixtures, furnishings, equipment or any other personal property belonging to Tenant. 3.6 INSURANCE. As Additional Rent, Tenant shall pay monthly one-twelfth (1/12th) of all premiums paid for property damage, general and umbrella liability insurance for any calendar year, with the monthly Proportionate Share payments being paid in such amount as Landlord may reasonably estimate. If the amount paid by Tenant toward insurance premiums exceeds or is less than the actual amount due, the excess shall be credited against or the amount underpaid shall be added to Tenant's next succeeding payment due under this Section. Documentation supporting the insurance premium allocations to the Property provided by Landlord will be conclusive evidence of insurance premiums.paid for the Property. 3.7 COMMON EXPENSES. Tenant shall be responsible for all common area maintenance and all Common Expenses (as hereinafter defined). Common Expenses shall mean all costs in repairing, maintaining and operating the Building and the Common Areas (as hereinafter defined), other than expenses recoverable under Sections 3.5 or 3.6 above. Common Expenses shall include, but are not limited to, the following: gardening and landscaping, including maintenance and repair of irrigation systems; maintaining ponds and/or fountains; electrical, gas, water and sewer service and maintenance, repair and replacement of the facilities providing the same, to the extent not separately metered to tenants of the Building; maintenance, repair and replacement of signs; premiums for liability, property damage; charges and assessments by the owners' association, if any, for the Property; all personal property taxes and assessments levied on or attributable to the Common Areas and all improvements thereon; all personal property taxes levied on or attributable to personal property used in connection with the Common Areas, the Building or the Property; fees for required licenses and permits; repairing, replacing, resurfacing, repaving, maintaining, painting the paved areas of the Project, parking lot sweeping, snow removal, lighting, cleaning, refuse removal, security and similar items; and exterior painting. 3.8 VERIFICATION OF OPERATING STATEMENT Intentionally Omitted. 3.9 INTEREST ON PAST DUE AMOUNTS. Any amount owed by Tenant to Landlord which is not paid when due shall bear interest at the rate of fifteen percent (15%) per annum from the due date of such amount, in addition to any late charges due under this Lease. If the interest rate specified in this Lease is higher than the rate permitted by law, the interest rate is hereby decreased to the maximum legal interest rate permitted by law. 3 ARTICLE IV - COMMON AREAS 4.1 COMMON AREAS. In this Lease, "Common Areas" shall mean all exterior areas of the Property including the parking lot, drive lanes, landscaped areas, sidewalks, and ponds. Landlord may from time to time change the size, location, nature and use of any of the Common Areas. Tenant acknowledges that such activities may result in occasional inconvenience and such activities and changes shall be expressly permitted if they do not materially affect Tenant's use of the Property. 4.2 USE OF COMMON AREAS. Tenant shall have the exclusive right to use the Common Areas for the purposes intended, subject to such reasonable rules and regulations as Landlord may establish from time to time. Tenant shall abide by such rules and regulations and shall use its best effort to cause others who use the Common Areas with Tenant's expressed or implied permission to abide by Landlord's rules and regulations. Tenant shall not, at any time, interfere with the rights of Landlord, other tenants, or any other person entitled to use the Common Areas. 4.3 VEHICLE PARKING. Tenant shall be entitled to use all of the vehicle parking spaces on the Property without paying any additional rent. Tenant's parking, other than for loading dock(s) adjacent to the Leased Premises, shall not be reserved and shall be limited to vehicles no larger than standard size automobiles or pickup utility vehicles. Tenant shall not cause large trucks or other large vehicles to be parked in any area on the Property or on the adjacent public streets except for the loading dock(s) adjacent to the Leased Premises. Temporary parking of large delivery vehicles on the Property may be permitted by the rules and regulations established by Landlord. Vehicles shall be parked only in striped parking spaces and not in driveways, loading areas or other locations not specifically designated for parking. 4.4 COMMON AREA MAINTENANCE. Tenant shall maintain the Common Areas in good order, condition and repair. ARTICLE V - USE 5.1 USE. Tenant shall use the Leased Premises for a distribution center, warehouse facility, fulfillment center and office purposes, and for no other purpose without the prior written consent of Landlord. Tenant will not use or occupy the Leased Premises for any unlawful purpose, and will comply with all present and future laws, ordinances, regulations, and orders of the United States of America, the state in which the Leased Premises are located, and all other governmental units or agencies having jurisdiction over the property and the Leased Premises. Tenant shall not cause, maintain or permit any outside storage on or about the Leased Premises, shall not commit or suffer any waste upon the Leased Premises, or any nuisance or other act or thing which may disturb the quiet enjoyment of any other tenant in the Building. No use shall be made or permitted to be made of the Leased Premises, nor acts done, which will increase the existing rate of insurance upon the Building or cause the cancellation of any insurance policy covering the Building, or any part thereof. Tenant shall not sell, or permit to be kept, used, in or about the Leased Premises, any article which may be prohibited by the standard form of fire insurance policy. Tenant shall, at its sole cost and expense, comply with any and all requirements, pertaining to the Leased Premises, of any insurance organization or company, necessary for the maintenance or reasonable fire and public 4 liability insurance covering the Leased Premises, Building and appurtenances. Tenant shall not place on any floor a load exceeding the floor load per square foot which such floor was designed to carry. 5.2 ADA. Tenant shall at its expense make any improvements or alterations to the Leased Premises and Landlord shall at its expense make any improvements or alterations to the Common Areas required to conform with the Americans With Disabilities Act of 1990 ("ADA") and any other laws, ordinances, orders or regulations of any governmental body or authority presently required or hereinafter enacted. Tenant represents and warrants that the use and occupancy of the Leased Premises as contemplated by this Lease comply or will comply fully with all such laws, ordinances, and other governmental requirements. ARTICLE VI - SECURITY DEPOSIT 6.1 As an additional inducement to enter into this Lease and as evidence of Tenant's intention to comply with the terms and conditions of this Lease, Tenant shall deposit with Landlord an irrevocable Letter of Credit in the face amount of Five Hundred Thousand and no/100 Dollars ($500,000) (the "Letter of Credit") as a security deposit. The Letter of Credit shall be in the form attached hereto as Exhibit "I" and shall provide for partial draws against the face amount thereof. Provided Tenant is not in default of the terms of this Lease, the Letter of Credit requirement shall end as of the date this Lease terminates or expires (including the Renewal Option period identified in paragraph 26.20 herein if renewed and the Letter of Credit shall be returned to its issuing institution (the "Issuer") along with a letter, on the letterhead of Landlord, stating that the Letter of Credit is being surrendered and that Landlord, as beneficiary thereunder, is making no further claim, demand or draw request with respect thereto. 6.2 The security provided by the Letter of Credit shall not be considered an advance payment of Base Rent, Additional Rent or other charges provided for in this Lease, nor shall the face amount of the Letter of Credit serve as a measure of the damages which would be suffered by Landlord in the case of a default by Tenant. 6.3 Landlord may, from time to time, without prejudice to any other remedy draw against the Letter of Credit to the extent necessary to make good any arrearages or nonpayment of Base Rent, Additional Rent or other charges provided for in this Lease, or to satisfy any obligation of Tenant hereunder, provided that Landlord has provided Tenant with the notices of default set forth in Section 25.1 and that the cure periods provided in such section have expired. To effect a draw in accordance with the foregoing sentence, Landlord shall serve both Tenant and the Issuer with a draw request which shall include (i) the amount of the draw, (ii) a calculation identifying the basis for the draw and (iii) the following statement: "The undersigned hereby certifies that Base Rent, Additional Rent, or other sums due pursuant to the terms and provisions of a Lease dated July 23, 2001 between The Lincoln National Life Insurance Company, as landlord, and iFulfillment, Inc., as Tenant, with respect to certain property located at 605 Crossroads Parkway, Bolingbrook, Illinois, have not been paid as agreed and that the time within which tenant was entitled to cure such default under the Lease has passed" 5 6.4 In the event that a draw is made against the Letter of Credit pursuant to Section 6.3, Tenant agrees to increase the face amount of the Letter of Credit, or provide Landlord with a cash security deposit, in the amount of the draw(s) so as to restore the security deposit to the minimum value required by Section 6.1. 6.5 If Landlord transfers Landlord's interest in the Leased Premises, Landlord will surrender the Letter of Credit to its issuer (pursuant to the surrender mechanism described in Section 6.1) and Tenant shall provide the transferee with a substitute irrevocable letter of credit in a face amount equal to the minimum value required by Section 6.1 and on the same terms and conditions otherwise required by this Article VI. ARTICLE VII -OPERATIONS: UTILITIES: SERVICES 7.1 UTILITIES. All heat, electric current, gas, garbage, or special fees, metering charges, sprinkler fees or bonds, or utility charges of any nature used on the Leased Premises shall be paid for by Tenant. Landlord shall not be liable to Tenant for interruption in or curtailment of any utility service, or shall any such interruption or curtailment constitute a construction eviction or grounds for rental abatement in whole or in part. 7.2 SATELLITE SYSTEMS. Tenant shall be allowed to install and operate electrical, internet, satellite, microwave, or other systems, with the prior approval of Landlord, which shall not be unreasonably withheld. Any changes, replacements or additions to the water system, heating system, plumbing system, air-conditioning system or electrical system of the Building made necessary by Tenant's installation or operation of any such systems shall be made at Tenant's expense. ARTICLE VIII - REPAIRS AND MAINTENANCE 8.1 LANDLORD'S OBLIGATIONS. Except for any repairs occasioned by the act or omission of Tenant, Tenant's agents, employees, contractors, licensees or invitees, which repairs shall be the responsibility of Tenant, Landlord shall maintain in good repair the roof, foundations and structural walls of the Leased Premises, not including doors and windows. The cost and expense of any maintenance or repair to the Building necessary due to the acts or omissions of Tenant or Tenant's agents, employees, contractors, invitees, licensees or assignees, shall be reimbursed by Tenant to Landlord upon demand as Additional Rent. Landlord shall not be responsible for ADA compliance with respect to Tenant Work performed. Landlord shall not be obligated to make any repairs until notified in writing by Tenant, and Landlord shall then have a reasonable period of time to make such repairs. Landlord shall not be liable for any damage or loss occasioned by Landlord's failure to repair the Leased Premises unless it shall have failed to make such repair within a reasonable time following written notice from Tenant of the need for such repair. Notwithstanding, Tenant shall be allowed to make emergency repairs in an amount not to exceed Fifteen thousand dollars ($15,000.00) if Tenant's attempts to reach Landlord fail. Landlord shall reimburse Tenant for such costs within thirty (30) days of receipt of paid invoices, lien waivers, and any other appropriate documentation. If Tenant has provided all required documentation to Landlord and Landlord has not reimbursed Tenant within ninety (90) days, Tenant may deduct the cost of the emergency repairs from their Rent payment. 6 8.2 TENANT'S OBLIGATIONS. Tenant, at its sole cost and expense, shall keep and maintain in good repair, condition, and working order the entire Leased Premises, other than those portions for which Landlord shall be responsible as set out in section 8.1 above, including without limitation, interior walls, floors, ceiling, heating and air conditioning, electrical, and plumbing, which devolve from the Building's plumbing mains and master electrical panels. Tenant shall maintain a private maintenance contract providing for the regular inspection and maintenance of the heating and air conditioning system by a licensed heating and air conditioning contractor. Tenant shall not be responsible for major overhaul or replacement of the heating and air conditioning system, unless such major overhaul or replacement was necessitated by Tenant's failure to properly maintain same. The maintenance and repairs of all improvements made by Tenant shall be the sole responsibility of Tenant. Tenant shall keep the Leased Premises and adjacent grounds, including loading docks and parking lots, alongside of and in the vicinity of same in a good, clean, and sanitary condition and appearance. If Tenant fails to maintain and repair the Leased Premises, Landlord may, on ten (10) days prior notice (except that no notice shall be required in case of emergency) enter the Leased Premises and perform such repair and maintenance on behalf of Tenant. In such case, Tenant shall reimburse Landlord for all costs so incurred immediately upon demand. ARTICLE IX - ALTERATIONS: TENANT'S PROPERTY 9.1 ALTERATIONS BY TENANT. Tenant shall be allowed to make non-structural alterations, additions, replacements or improvements to the Leased Premises with Landlord's consent, which shall not be unreasonably withheld. Landlord may require Tenant to provide demolition and/or lien and completion bonds in form and amount satisfactory to Tenant. All alterations, additions or improvements to the Leased Premises made by Tenant will be accomplished in a good and workmanlike manner, in conformity with all applicable laws and regulations, by a contractor approved by Landlord, and shall become the property of the Landlord at the expiration of the Term of this Lease. Landlord reserves the right to require Tenant to remove any alteration, improvement or addition made to the Leased Premises by Tenant, and to repair and restore the Leased Premises to a condition substantially equivalent to the condition of the Leased Premises prior to any such alteration, addition or improvement, with the exception of (i) Tenant's initial office build-out and Warehouse Improvements, and (ii) Improvements subsequently made by Tenant for which the Landlord has given its consent. Tenant shall give Landlord at least ten (10) days' prior written notice of the commencement of any work on the Leased Premises. Landlord may elect to record and post notices of non-responsibility on. the Leased Premises. 9.2 CONTRACTORS' INSURANCE REQUIREMENTS. In the event Landlord gives its approval to Tenant pursuant to Section 9.1, Tenant shall require any third party vendor or contractor performing work on the Leased Premises to carry and maintain at no expense to Landlord: (a) Commercial General Liability Insurance with a combined single limit of $1,000,000 bodily injury and property damage per occurrence; (b) Auto Liability insurance with a combined single limit of $1,000,000; and (c) Workers' Compensation insurance in accordance with applicable state law and Employer's Liability insurance with limits of not less than $100,000/$100,000/$500,000. Tenant shall obtain a Certificate of Insurance prior to commencement of work and Landlord and Tenant are to be additional insureds as respects the liability coverages. 7 9.3 TENANT'S PROPERTY. Provided Tenant is not in default under the terms of this Lease, Tenant, at its expense and at any time and from time to time, may install in and remove from the Leased Premises its trade fixtures, equipment, removable walls and wall systems, furniture and furnishings, provided such installation or removal is accomplished without damage to the Leased Premises or the Building and the installation does not interfere with the other tenants and their guests use of the Building. On or prior to the termination date, Tenant shall remove all of Tenant's property from the Leased Premises and repair any damage to the Leased Premises caused by such removal. All property of Tenant remaining on the Leased Premises after the expiration of the Term of this Lease shall be deemed to have been abandoned and may be removed by Landlord and Tenant shall reimburse Landlord for the cost of such removal. Landlord waives any potential interest in such personal property (Landlord's lien) as documented on Exhibit "H" attached hereto. ARTICLE X - HAZARDOUS MATERIALS 10.1 USE OF HAZARDOUS MATERIALS 10.1(A) TENANT'S OBLIGATIONS AND LIABILITIES: Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the Leased Premises by Tenant, its agents, employees, contractors, or invitees. If Tenant breaches this obligation, the Tenant shall indemnify, defend and hold Landlord harmless from any and all claims, judgments, damages, penalties, fines, costs or liabilities (including, without limitation, diminution in value of the Leased Premises, damages for the loss of restriction on use of rentable or usable space or of any amenity of the Leased Premises, damages arising from any adverse impact on marketing of space, and sum paid in settlement of claims, attorneys' fees, consultant fees and expert fees) which arise during or after the lease Term as a result of such contamination. This indemnification of Landlord by Tenant, includes, without limitation, costs incurred in connection with any investigations of site conditions or any clean-up, remedial, removal or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material present in the soil or ground water on or under the Leased Premises. Without limiting the foregoing, if the presence of Hazardous Material on the Leased Premises caused by Tenant results in any contamination of the Leased Premises, Tenant shall promptly take all actions at its sole expense as are necessary to return the Leased Premises to the conditions existing prior to the introduction of any such Hazardous Material in the Leased Premises, provided that Landlord's approval of such actions shall first be obtained, which approval shall not be unreasonably withheld so long as such actions would not potentially have any material adverse long-term or short-term effect on the Leased Premises. The foregoing indemnity shall survive the expiration or earlier termination of this Lease. Landlord agrees to indemnify Tenant and its officers, employees and agents from any claims, judgments, damages, penalties, fines, costs, liabilities or loss, including attorneys' fees, consultant fees, and expert fees which arise from (i) the existence of Hazardous Materials on the Property prior to the date of this Lease, and (ii) the migration of Hazardous Materials to or from the Property before the date of this Lease or during the Term of this Lease or any extension thereof, unless such migration results from the actions or omissions of Tenant, its officers, employees or agents. This indemnification survives the Term of this Lease. 8 10.1(B) DEFINITION: As used herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste, including, but not limited to those substances, materials and wastes listed in the United States Department of Transportation Hazardous Materials Table (49 CFR 172.101) or by the Environmental Protection Agency as hazardous substances (40 CFR Part 261) and amendments thereto, or such substances, materials and wastes that are or become regulated under any applicable local, state or federal law. 10.1(C) INSPECTION: Landlord and its property manager or agents shall have the right, but not the duty, to inspect the Leased Premises at any time to determine whether Tenant is complying with the terms of this Lease. Landlord shall provide reasonable notice of its intent to inspect the Leased Premises, except in the event of an emergency; such inspections shall take place during Tenant's normal business hours, except in the event of an emergency; and a representative of Tenant's office shall be allowed to accompany Landlord or Landlord's representative or agent during such inspection. If Tenant is not in compliance with this Lease, Landlord shall have the right to immediately enter upon the Leased Premises to remedy any contamination caused by Tenant's failure to comply, notwithstanding any other provisions of this Lease. Landlord shall use its best efforts to minimize interference with Tenant's business but shall not be liable for interference caused thereby. 10.1(D) DEFAULT: Any default under this Paragraph shall be a material default enabling Landlord to exercise any of the remedies set forth in this Lease. ARTICLE XI - ASSIGNMENT AND SUBLETTING 11.1 ASSIGNMENT, SUBLETTING AND ENCUMBERING. Tenant shall not voluntarily assign or encumber its interest in this Lease or in the Leased Premises, or sublease all or any part of the Leased Premises, or allow any other person or entity to occupy or use all or any part of the Leased Premises, without first obtaining Landlord's consent in each instance, which consent shall not be unreasonably withheld, subject to the terms and conditions of this Section 11. Landlord shall respond to Tenant's request within fifteen (15) days. Tenant shall, in each instance of a proposed assignment or subletting, give notice of its intention to assign or sublet to Landlord at least sixty (60) days before the effective date of any such date thereof, and specifically identifying the proposed assignee or sublessee, and such notice shall be accompanied by copies of the proposed assignment document or sublease, current financial statements of the proposed assignee or subtenant, a written business plan which includes the nature of the proposed assignee's, subtenant's or occupant's business to be carried on in the Leased Premises, and detailed documentation relating to the business experience of the proposed assignee or subtenant. At any time within fifteen (15) days after Landlord's receipt of Tenant's notice of its intention to assign or sublet, Landlord may by notice to Tenant elect to (i) consent to the proposed assignment or sublease, (ii) refuse to consent to the proposed assignment or sublease; or (iii) terminate this Lease in full with respect to an assignment, or terminate in part with respect to the portion of the Leased Premises proposed to be subleased and enter into a lease directly with the proposed assignee or sublessee. Landlord and Tenant agree, by way of example and without limitation, that it shall be reasonable for Landlord to withhold its consent if any of the following situations exist or may exist: (a) A conflict of the contemplated use of the Leased Premises by the proposed transferee, 9 assignee or sublessee (hereinafter referred to as the "Transferee") with the "Use of Premises Clause" contained in Section 5 of this Lease; (b) Tenant is in default pursuant to this Lease and Tenant's applicable cure periods have expired and Tenant is not expeditiously attempting in good faith to cure any subject non-monetary defaults; (c) The financial worth and/or financial stability of the Transferee is less than that of the Tenant hereunder at the commencement of the lease term or at the time of such proposed transfer; (d) The Transferee's reputation would have an adverse effect upon the reputation of the Building or the other businesses located therein; or (e) The Transferee would breach any covenant of Landlord or Tenant respecting radius, location, use or exclusivity contained in this or any other lease, financing agreement, or other agreement. If Landlord consents to any proposed assignment or sublease within said fifteen (15) day period, Tenant may enter into such assignment or sublease of the Leased Premises or portion thereof, but only upon the terms and conditions set forth in the agreements and notice furnished by Tenant to Landlord; provided that all sums received by Tenant from its subtenants in excess of the rents and other charges payable by Tenant to Landlord under this Lease shall be paid to Landlord, or any sums to be paid by any assignee to Tenant in consideration of the assignment of this Lease shall be paid to Landlord regardless of how such payments are characterized by Tenant and/or its subtenants, except for the sale of Tenant's personal property and inventory at its then reasonable market value. Any assignment, encumbrance, or sublease without Landlord's consent shall be voidable and, at Landlord's election, shall constitute a default. No consent to any assignment, encumbrance, or sublease shall constitute a waiver of the provisions of this Section 11. No consent by Landlord to any transfer, assignment or subletting by Tenant shall relieve Tenant or any guarantor of Tenant of any obligation to be performed by Tenant under this Lease, whether occurring before or after such consent, transfer, assignment or subletting, including the payment of base rent and all other charges required to be paid by Tenant under this Lease. The consent by Landlord to any transfer, assignment or subletting shall not relieve Tenant from the obligation to obtain Landlord's express prior written consent to any other transfer, assignment or subletting. The acceptance by Landlord of payment from any other person shall not be deemed to be a waiver by Landlord of any provisions of this Lease or to be a consent to any subsequent transfer, assignment or subletting, or to be a release of Tenant or any guarantor of Tenant from any obligation under this Lease. In the event Tenant receives any consideration for any such assignment or the rent payable in connection with any subletting exceeds the rent payable under this Lease (determined on the rent payable hereunder pro rated to the square footage area of the portion of the Leased Premises to be sublet), fifty percent (50%) of the same shall be paid to Landlord as rent. In addition to the foregoing, Tenant agrees that in the event Tenant shall make a Transfer hereunder in accordance with the provisions of this Section 11, Tenant shall repay to Landlord the unamortized balance of the 10 Warehouse Improvements being amortized over the term of the Lease as described on Exhibit "F", if the assignee or sublessee is not obligated to repay such amounts for the benefit of Tenant. In the event Tenant requests Landlord to consent to a proposed assignment, subletting, or encumbrance, Tenant shall pay to Landlord, whether or not such consent is ultimately given, Landlord's reasonable administrative fee in connection with such request, which fee shall be determined by Landlord in its sole discretion, and which shall not be less than Three Hundred Dollars ($300.00) nor more than Five Hundred Dollars ($500.00) for each request for consent, plus Landlord's reasonable attorney's fees and costs incurred in connection with each such request. Tenant shall pay the administrative fee at the same time that it provides notice to the Landlord of Tenant's proposed assignment, subletting or encumbrance. Tenant hereby irrevocably assigns to Landlord all sums received from any subletting of the Leased Premises, and agrees that Landlord, as assignee and attorney-in-fact for Tenant, or a receiver for Tenant appointed upon Landlord's application, may collect such rentals and apply the same to any outstanding balance owed Landlord (in such order as Landlord may determine) upon Tenant's default; provided, however, that until the occurrence of any act of default by Tenant, Tenant shall have the right to collect such rental. Any dissolution, merger, consolidation, or other reorganization of the corporation constituting Tenant, or the sale or other transfer of a Controlling Percentage of the corporate stock of Tenant, or the sale of fifty-one percent (51 %) of the value of the assets of the corporation, shall be deemed an assignment prohibited by this Section unless Landlord's consent is obtained. The term "Controlling Percentage" means the ownership of, and the right to vote, stock possession at least fifty-one percent (51 %) of the total combined voting power of all classes of stock of the corporation issued, outstanding, and entitled to vote for the election of directors, whether such ownership is direct or indirect. This paragraph shall not apply to a corporation the stock of which is traded through an exchange or over the counter. Each assignee, or other transferee, other than Landlord, shall assume, as provided in this paragraph, all obligations of Tenant under this Lease and shall be and remain liable jointly and severally with Tenant for the payment of base rent and all other charges required to be paid by Tenant under this Lease, and for the performance of all of the terms, covenants, conditions and agreements to be performed by Tenant; provided, however, that the assignee, sublessee or other transferee shall be liable to Landlord for rent only in the amount set forth in the assignment or sublease agreement. The Transfer to which the Landlord has consented shall be evidenced by a written instrument in form satisfactory to Landlord, executed by Tenant and the Transferee under which the Transferee shall agree in writing for the benefit of Landlord to assume, to perform and to abide by all of the terms, covenants and conditions of this Lease to be done, kept and performed by Tenant, including the payment of all amounts due or to become due under this Lease directly to Landlord and the obligation to use the Leased Premises only for the purposes specified in Section 5. Tenant shall not mortgage, pledge, hypothecate or otherwise encumber its interest in this Lease or in the Leased Premises. 11.2 INVOLUNTARY ASSIGNMENT. No interest of Tenant in this Lease shall be assignable by 11 operation of law (including, without limitation, the transfer of this Lease by testacy or intestacy) each of the following acts shall be considered an involuntary assignment: (a) If Tenant files or has filed against it a petition under the Bankruptcy Code (as defined below), as may be amended, becomes insolvent, or makes an assignment for the benefit of creditors; or, if Tenant is a partnership, if any partner of the partnership files or has filed against such partner a petition under the Bankruptcy Act, as may be amended, or such partner becomes insolvent, or makes an assignment for the benefit of creditors; (b) If a writ of attachment or execution is levied on this Lease; and/or (c) If, in any proceeding or action to which Tenant is a party, a receiver is appointed with authority to take possession of the Leased Premises. (d) Notwithstanding the foregoing, in the event this Lease is assigned to any person or entity pursuant to the provisos of the Bankruptcy Code 11 U.S.C. 101 et seq. (the "Bankruptcy Code"), any and all monies or other considerations payable or otherwise to be delivered in connection with such assignment shall be paid or delivered to Landlord, shall be and remain the exclusive property of Landlord and shall not constitute property of Tenant or of the estate of Tenant within the meaning of the Bankruptcy Code. Any and all monies or other considerations constituting Landlord's property under the preceding sentence not paid or delivered to Landlord shall be held in trust for the benefit of Landlord and be promptly paid or delivered to Landlord. (e) Any person or entity to which this Lease is assigned pursuant to the Bankruptcy Code, shall be deemed without further act or deed to have assumed all of the obligations arising under this Lease on and after the date of such assignment. Any such assignee shall upon demand execute and deliver to Landlord an instrument confirming such assumption. If an involuntary assignment occurs and the cure periods (if any) set out in Section 25 have passed, Landlord shall have the election of any of the remedies provided in Section 25. If Landlord should elect to terminate this Lease, this Lease shall not be treated as an asset of Tenant, and Tenant shall have no further rights under this Lease. ARTICLE XII - CASUALTY OR CONDEMNATION 12.1 PARTIAL DAMAGE OF LEASED PREMISES. Tenant shall notify Landlord in writing immediately upon the occurrence of any damage to the Leased Premises. If the damage can be completely repaired within ninety (90) days from the date of such damage, and the cost of such repairs do not exceed fifty percent (50%) of the value of the Leased Premises, Landlord shall repair the damage as soon as reasonably possible. Otherwise, Landlord may elect either to (a) repair the damage as soon as reasonably possible, or (b) terminate this Lease as of the date the damage occurred. Landlord shall notify Tenant within thirty (30) days after receipt of notice of the occurrence of the damage, whether Landlord elects to repair the damage or terminate the Lease. Notwithstanding, if more than twenty percent (20%) of the Leased Premises is renderdered untenable and the damage can not be repaired within sixty (60) days from the date of the casualty, Tenant shall have the right to terminate this Lease with thirty (30) days notice to Landlord. If the damage to the 12 Leased Premises occurs during the last six (6) months of the Lease Term, and if such damage or destruction is not the result of the act or omission of Tenant, Landlord or Tenant may elect to terminate this Lease. All Rent and Additional Rent attributable to the portion of the Leased Premises which is damaged shall abate during the period of repair. 12.2 TOTAL OR SUBSTANTIAL DESTRUCTION. If the Leased Premises is totally or substantially destroyed by any cause whatsoever, or if the Leased Premises is in a building which is substantially destroyed (even though the Leased Premises is not totally or substantially destroyed), this Lease shall terminate as of the date the destruction occurred. 12.3 TEMPORARY REDUCTION OF RENT. If the Leased Premises is totally or substantially destroyed, or if the Leased Premises is damaged through no fault of Tenant's, and the Leased Premises is repaired pursuant to the provisions of this Article, Rent payable during the period of such damage, repair and/or restoration shall be reduced according to the degree, if any, to which Tenant's use of the Leased Premises is impaired. Tenant shall not be entitled to any other compensation, reduction, or reimbursement from Landlord as a result of any damage, destruction, repair, or restoration of or to the Leased Premises. 12.4 CONDEMNATION. If all or any portion of the Leased Premises is taken through eminent domain or sold under threat of such taking (all of which are called "Condemnation"), this Lease shall terminate as to the part taken or sold on the date the condemning authority takes title or possession, whichever occurs first. In the event more than twenty percent (20%) of the Leased Premises is taken through condemnation, Tenant shall have the right to terminate this Lease with thirty (30) days written notice to Landlord. All income, rent, awards or interest derived from any such taking or condemnation shall belong to and be the property of Landlord, and Tenant hereby assigns Tenant's interest, if any, in such award to Landlord. ARTICLE XIII - INDEMNIFICATION AND INSURANCE 13.1 INDEMNIFICATION BY TENANT. The Landlord shall not in any event be responsible for loss of property from or for damage to person or property occurring in or about the Leased Premises, however caused, including but not limited to any damage from steam, gas, electricity, water, plumbing, rain, snow, leakage, breakage or overflow, whether originating in the Leased Premises, premises of other tenants, or any part of the Building whatsoever. Tenant agrees to indemnify and hold harmless the Landlord from and against all claims of whatever nature arising from any accident, injury or damage to person or property during the Term of this Lease in or about the Leased Premises or arising from any accident, injury or damage to personal property occurring outside the Leased Premises but within the Building or any other property of which the Leased Premises is a part, where such accident, injury or damage results or is claimed to have resulted from an act, omission or negligence on the part of Tenant, or on the part of any of its licensees, agents, invitees, servants or employees. This indemnity agreement shall include indemnity against all costs, claims, expenses, penalties, liens and liabilities including attorney's fees incurred in or in connection with any such claims or proceedings brought thereon and the defense thereof. 13 13.2 TENANT'S INSURANCE. Tenant will maintain Commercial General Liability insurance with respect to the Leased Premises naming Landlord as additional insured, with a combined single limit of $1,000,000 bodily injury and property damage per occurrence and $2,000,000 aggregate limit applicable to this location, and Auto Liability insurance with a combined single limit of $1,000,000. This insurance coverage shall extend to any liability of Tenant arising out of the indemnities provided for in this Lease. Landlord shall be named as an additional insured and the insurance shall be primary to any insurance maintained by Landlord. Tenant shall deliver to Landlord a Certificate of Insurance at least seven (7) days prior to the commencement of the Term of this Lease and a renewal certificate at least seven (7) days prior to the expiration of the Certificate it renews. Said Certificate must provide thirty (30) days prior notice to Landlord in the event of material change or cancellation. Tenant also agrees to maintain broad form Commercial Property insurance coverage under ISO form CP1030 or like coverage under a non-ISO form covering all Tenant's personal property, improvements and betterments to their full replacement value and Worker's Compensation insurance in accordance with applicable state law and Employer's Liability insurance with limits of not less than $100,000/$100,000/$500,000. Tenant agrees that if its use and occupancy of the Leased Premises cause the property insurer to raise premiums as a result of such use or occupancy, then Tenant will directly reimburse the Landlord for the cost of such increased premium. Tenant agrees to comply with all reasonable recommendations from any insurer of the property that result as a direct result of the Tenant's use of the Leased Premises. 13.3 SURVIVAL OF INDEMNITIES. Each indemnity agreement and hold harmless agreement contained herein shall survive the expiration or termination of this Lease. 13.4 LANDLORD'S INSURANCE. Landlord shall carry (I) all-risk property damage insurance including, but not limited to, fire, extended coverage, vandalism, malicious mischief, collapse, and water damage upon all parts of the Property in an amount not less than the full replacement cost, and (ii) commercial general liability insurance covering the Property and containing a contractual liability provision for all indemnities provided by Landlord hereunder and with limits of not less than $1,000,000 per person and per occurrence or bodily injury and $500,000 per occurrence for property damage or a combined single limit of $2,000,000 applicable to this location. 13.5 LANDLORD'S INDEMNIFICATION. Landlord agrees to indemnify Tenant, its agents, employees, guests or invitees, and save it harmless from and against any and all claims, actions, damages, liability and expense in connection with the loss of life, personal injury or damage to property arising from or out of any occurrence in, upon or at the Building, or occasioned wholly or in part by any act or omission of Landlord, its agents, contractors, employees, lessees or concessionaires. In case Tenant shall be made a party to any litigation commenced by or against Landlord, the Landlord agrees to protect and hold Tenant harmless and to pay all costs, expenses and reasonable attorney's fees incurred or paid by Tenant in connection with such litigation. 13.6 WAIVER OF SUBROGATION. Notwithstanding anything contained in this Lease to the contrary, if either party suffers a loss of or damage to property in the Leased Premises or related to this Lease, which is covered by valid and collectible insurance policies (or would be covered by policies which are required hereunder or which would be required but for any specific provisions for self-insurance or for a deductible), that party waives any claim therefor which it may have against the other party or its employees, regardless of whether negligence or fault of the latter party or its 14 employees may have caused the loss or damage. Each party will have its appropriate insurance policies properly endorsed, if necessary, to prevent any invalidation of insurance coverage required hereunder due to these mutual waivers. ARTICLE XIV - RIGHT OF ENTRY The Landlord reserves the right to use the Building and every part thereof, and Tenant shall permit access to the Leased Premises to Landlord, Landlord's property manager or Landlord's agents or attorneys at all reasonable times for inspection and cleaning and from time to time to repair as provided in Article VIII, maintain, alter, and to improve and remodel each part thereof; the Tenant shall not be entitled to any compensation, damages or abatement or reduction in Base Rent on account of any such repairs, maintenance, alterations, improvements or remodeling or adding of additional stories. The Landlord reserves the right at any time and from time to time to enter, and be upon the Leased Premises for the purpose of examining same. The Landlord shall have the right, at reasonable hours, and upon notice to Tenant, to enter upon the Leased Premises or exhibit the same to prospective tenants, lenders or insurers. Notwithstanding, Landlord shall provide reasonable notice of its intent to enter the Leased Premises, except in the event of an emergency; such access shall take place during Tenant's normal business hours, except in the event of an emergency; and a representative of Tenant's office shall be allowed to accompany Landlord or Landlord's representative or agent during such access to the Leased Premises. ARTICLE XV - PROPERTY LEFT ON THE LEASED PREMISES Upon the expiration of this Lease or if the Leased Premises should be vacated at any time, or abandoned by the Tenant, or this Lease should terminate for any cause, and at the time of such termination, vacation, or abandonment, the Tenant or Tenant's agents, or any other person should leave any property of any kind or character on or in the Leased Premises, the property shall be deemed abandoned. Landlord, Landlord's property manager or Landlord's agents or attorneys, shall have the right and authority without notice to Tenant, Tenant's agents, or anyone else, to remove and destroy, or to sell or authorize disposal of such property, or any part thereof, without being in any way liable to the Tenant for the abandoned property. The abandoned property shall belong to the Landlord as compensation for the removal and disposition of said property. ARTICLE XVI - SIGNS AND ADVERTISEMENTS No exterior signs, advertisements, posters on windows, decorations or other fixtures shall be erected by Tenant without the prior written consent of Landlord. ARTICLE XVII - NOTICES Any notice, demand, request, consent, approval or communication under this Lease shall be in writing and shall be deemed to have been duly given and received at the time and on the date when personally delivered, or one (1) day after being delivered to a nationally recognized commercial carrier service for next-day delivery or three (3) days after deposit in the United States mail, certified or registered mail with a return receipt requested, with all postage prepaid, addressed to Landlord or Tenant (as the case may be) as follows: 15 If to Landlord: The Lincoln National Life Insurance Company c/o Delaware Lincoln Investment Advisers Attention: Real Estate Asset Management 200 East Berry Street Fort Wayne, Indiana 46802 Phone: 219-455-3242 Fax: 219-455-4114 E-Mail: cmkonrath@delinvest.com If to Tenant: iFulfillment, Inc. Attn: David Gamsey 6655 Sugarloaf Parkway Duluth, Georgia 30097 Phone: 678-584-4020 Fax: 678-584-8978 E-Mail: dgamsey@innotrac.com ARTICLE XVIII - MECHANIC'S LIENS Tenant and any vendor, contractor or subcontractor performing work on behalf of Tenant shall keep the Building, the Leased Premises, and the improvements at all times during the Term of this Lease, free of mechanic's and materialmen's liens and other liens of like nature. Tenant at all times shall fully protect and indemnify Landlord against all such liens or claims and against all attorneys fees and other costs and expenses growing out of or incurred by reason or on account of any such liens or claims. Should Tenant fail fully to discharge any such lien or claim, Landlord, in its sole discretion, may pay the same or any part thereof, and Landlord shall be the sole judge of the validity of said lien or claim. All amounts so paid by the Landlord, together with interest thereon at the rate of twelve percent (12%) from the time of payment by Landlord until repayment by Tenant, shall be paid by Tenant upon demand, and if not so paid, shall continue to bear interest at the aforesaid rate, payable monthly as Additional Rent. ARTICLE XIX - SUBORDINATION; ATTORNMENT 19.1 SUBORDINATION. Landlord may, from time to time, grant first lien deeds of trust, security deeds, mortgages or other first lien security interests covering its estate in the Project (each a "Mortgage"). Tenant agrees that this Lease shall be subject and subordinate to each Mortgage, including any modifications, extensions or renewals thereof and advances thereunder from time to time in effect. The foregoing provisions shall be self operative, and no further instrument of subordination shall be required to make this Lease subject and subordinate to any Mortgage. Tenant shall, upon request, from time to time execute and deliver to Landlord or the holder of any Mortgage any instrument requested by Landlord or the holder of such Mortgage to evidence the subordination of this Lease to any such Mortgage. 19.2 ATTORNMENT. Tenant agree to recognize and attorn to any party succeeding to 16 the interest of Landlord as a result of the enforcement of any Mortgage (including the transferee as the result of a foreclosure or deed in lieu of foreclosure), and to be bound to such party under all the terms, covenants, and conditions of this Lease, for the balance of the Term of this Lease, including any extended term, with the same force and effect as if such party were the original Landlord under this Lease. 19.3 NON-DISTURBANCE. Provided that no event of default by Tenant has occurred and is not cured by Tenant following notice and the expiration of the applicable cure period in this Lease, Tenant's occupancy, possession, and other rights under this Lease shall not be disturbed, and shall survive any and all actions taken by any mortgagee, ground landlord, or other holder. 19.4 CONFIRMING AGREEMENT. Upon the request of Landlord, Tenant agrees to execute a subordination and attornment agreement incorporating the provisions set forth above and otherwise in form reasonably acceptable to Landlord. 19.5 MORTGAGEE PROTECTION. Tenant agrees to give any mortgagees and/or trust deed holders, by registered mail, a copy of any notice of default served upon Landlord, provided that prior to such notice Tenant has been notified, in writing (by way of Notice of Assignment of Rents and Leases, or otherwise), of the address of such mortgagees and/or trust deed holders. Tenant further agrees that if Landlord shall have failed to cure such default within the time provided for in this Lease, then the mortgagees and/or trust deed holders shall have an additional thirty (30) days within which to cure such default or, if such default cannot be cured within that time, then such additional time as may be necessary, if within such thirty (30) days any mortgagee and/or trust deed holder has commenced and is diligently pursuing the remedies necessary to cure such default (including, but not limited to, commencement of foreclosure proceedings, if necessary to effect such cure), in which event this Lease shall not be terminated while such remedies are being so diligently pursued. ARTICLE XX - COMPLIANCE WITH LAW AND RULES AND REGULATIONS 20.1 COMPLIANCE WITH LAWS. Tenant, at Tenant's expense, shall comply with all laws, rules, orders, ordinances, directions, regulations and requirements of federal, state, county and municipal authorities pertaining to Tenant's use of the Leased Premises and with the recording covenants, conditions and restrictions, regardless of when they became effective, including, without limitation, all applicable federal, state and local laws, regulations or ordinance pertaining to air and water quality Hazardous Materials (as hereinafter defined), waste disposal, air emissions and other environmental matters, all zoning and other land use matters, and utility availability, and with any direction of any public officer or officers, pursuant to law, which shall impose any duty upon Landlord or Tenant with respect to the use or occupation of the Leased Premises. 20.2 RULES AND REGULATIONS. The rules and regulations attached as Exhibit "D" ("Rules and Regulations") are Landlord's Rules and Regulations for the Project. Tenant shall faithfully observe and comply with such Rules and Regulations and such reasonable changes therein (whether by modification, elimination, addition or waiver) as Landlord may hereafter make and communicate in writing to Tenant, which shall be necessary or desirable for the reputation, safety, care or appearance of the Project or the preservation of good order therein or the operation or maintenance 17 of the Project or the equipment thereof for the comfort of tenants or others in the Project. In the event of a conflict between the provisions of this Lease and the Rules and Regulations, the provisions of this Lease shall control. ARTICLE XXI - LANDLORD'S LIEN Landlord waives any interest in Tenant's personal property, trade fixtures, equipment and furnishings and agrees to execute the Landlord's Lien Waiver in the form appended as Exhibit H as a condition of Tenant's obligations under the Lease. ARTICLE XXII - ESTOPPEL CERTIFICATES Tenant shall from time to time, upon not less than ten (10) days prior written notice by Landlord, execute, acknowledge and deliver to Landlord a statement in substantially the form attached hereto as Exhibit "E-1 ": 22(a) Certifying that this Lease is unmodified and in full force and effect (or if there have been modifications, that the Lease is in full force and effect as modified and stating the modifications). 22(b) Stating the dates to which the Base Rent, Additional Rent, and other charges hereunder have been paid by Tenant. 22(c) Stating, to the best knowledge of Tenant, that Landlord is not in default in the performance of any covenant, agreement or condition contained in this Lease, and if Landlord is in default, specifying any such default of which Tenant may have knowledge. 22(d) Stating the address to which notices to Tenant should be sent pursuant to Article XV of this Lease. Landlord shall from time to time, upon not less than ten (10) days prior written notice by Tenant, execute, a statement in substantially the form attached hereto as Exhibit "E-2". The parties agree to add such additional attestations to the attached estoppel certificates as may be reasonably required by the requesting party. Any such statement delivered pursuant hereto may be relied upon by any owner of the Building and/or the Leased Premises, any prospective purchaser of the Building and/or Leased Premises, any mortgagees or prospective mortgagee of the Building and/or Leased Premises, any prospective assignee of any such mortgagee, or any purchaser of Landlord, actual or prospective, of the underlying land upon which the Building and Leased Premises are located. 18 ARTICLE XXIII - HOLDING OVER If Tenant retains possession of the Leased Premises or any part thereof after the termination of this Lease by lapse of time or otherwise without any modification of this Lease or other written agreement between the parties, Tenant shall be a month-to-month tenant at two hundred percent (200%) of the Base Rental Rate in effect on the termination date. In addition, Tenant shall pay to Landlord all direct and consequential damages sustained by Tenant's retention of possession, including but not limited to lost rentals, leasing fees, advertising costs, marketing costs, Tenant finish expense and relocation costs. There shall be no renewal of this Lease by operation of law. ARTICLE XXIV - TENANT'S STATUS Tenant represents and warrants to Landlord that: 24.1 POWER AND AUTHORITY. Tenant has the right, power and authority to execute and deliver this Lease and to perform the provisions hereof, and is, to the extent required, qualified to transact business and in good standing under the laws of the State of Illinois. 24.2 AUTHORIZATION. The execution of the Lease by Tenant, or by the persons or other entities executing them on behalf of Tenant, and the performance by Tenant of Tenant's obligations under the Lease in accordance with the provisions hereof have been, to the extent required, duly authorized by all necessary action of Tenant. ARTICLE XXV - DEFAULTS AND REMEDIES 25.1 DEFAULT BY TENANT. Tenant shall be in default under this Lease if- 25.1(a) - Tenant shall fail to pay when due any Base Rent, Additional Rent, or other payment to be made by Tenant under this Lease within five (5) days after written notice of such failure to pay the same on the due date. Notwithstanding, Landlord shall only be required to provide written notice of any such failures twice per calendar year. 25.1(b) - Tenant violates or breaches, or fails to fully and completely observe, keep, satisfy, perform and comply with, any agreement, term, covenant, condition, requirement, restriction or provision of this Lease where such failure continues for thirty (30) days after written notice thereof by Landlord to Tenant; provided however, that with respect to matters which cannot reasonably be cured within thirty (30) days, Tenant shall not be in default for an additional reasonable period provided Tenant commences such cure and proceeds in good faith to complete the same. 25.1(c) - Tenant fails to take possession of the Leased Premises. 25.1(d) - Tenant becomes insolvent, or makes an assignment for the benefit of creditors; or any action is brought by Tenant seeking its dissolution or liquidation of its assets or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property. 25.1(e) - Tenant commences a voluntary proceeding under the Federal Bankruptcy Code, or [GRAPHIC OMITTED][GRAPHIC OMITTED][GRAPHIC OMITTED] 19 any reorganization or arrangement proceeding is instituted by Tenant for the settlement, readjustment, composition or extension of any of its debts upon any terms; or any action or petition is otherwise brought by Tenant seeking similar relief or alleging that it is insolvent or unable to pay its debts as they mature; or if any action is brought against Tenant seeking its dissolution or liquidations of any of its assets, or seeking the appointment of a trustee, interim trustee, receiver or other custodian for any of its property, and any such action is consented to or acquiesced in by Tenant or is not dismissed within 3 months after the date upon which it was instituted. 25.2 LANDLORD REMEDIES. On the occurrence of any default by Tenant, Landlord may, at any time thereafter, with or without notice or demand, subject to the cure periods described in Sections 25.1 (a) and 25.1 (b), and without limiting Landlord in the exercise of any right or remedy which Landlord may have: 25.2(a) Terminate Tenant's right to Possession of the Leased Premises, in which case Tenant shall immediately surrender possession of the Leased Premises to Landlord. In such event, Landlord shall be entitled to recover from Tenant all damages incurred by Landlord by reason of Tenant's default, including (a) the worth at the time of the court award of the unpaid Base Rent, Additional Rent and other charges which had been earned at the time of the termination; (b) the worth at the time of the court award of the amount by which the unpaid Base Rent, Additional Rent and other charges which would have been earned after termination until the time of the award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; (c) the worth at the time of the court award of the amount by which the unpaid Base Rent, Additional Rent and other charges which would have been paid for the balance of the Term after the time of award exceeds the amount of such rental loss that Tenant proves could have been reasonably avoided; and (d) such other amounts as are necessary to compensate Landlord for the detriment caused by Tenant's failure to perform its obligations under the Lease, including, but not limited to, the cost of recovering possession of the Leased Premises, expenses of reletting, including necessary renovation or alteration of the Leased Premises, Landlord's reasonable attorneys' fees incurred in connection therewith, and any real estate commission paid or payable. As used above, the "worth at the time of the court award' is computed by allowing interest on unpaid amounts at the rate of twelve (12%) per annum, or such lesser amount as may then be the maximum lawful rate; 25.2(b) Maintain Tenant's right to possession, in which case this Lease shall continue in effect whether or not Tenant shall have abandoned the Leased Premises. In such event, Landlord shall be entitled to enforce all of Landlord's rights and remedies under this Lease, including the right to recover the Base Rent and Additional Rent as it becomes due hereunder. 25.2(c) Elect to terminate the Lease. No such termination of this Lease shall affect Landlord's rights to collect Base Rent, Additional Rent or other amounts due for the period prior to termination. In the event of any termination, in addition to any other remedies set forth above, Landlord shall have the right to recover from Tenant upon such termination an amount equal to the excess of the Base Rent, Additional Rent and other amounts to be paid by Tenant during the remaining Term of this Lease over the then reasonable rental value of the Leased Premises for the remaining Term of this Lease, discounted to present value using a reasonable discount rate. 25.2(d) Pursue any other remedy now or hereafter available to Landlord under the laws or 20 judicial decisions of the state in which the Leased Premises is located. Landlord's exercise of any right or remedy shall not prevent it from exercising any other right or remedy. No action taken by or on behalf of Landlord under this section shall be construed to be an acceptance of a surrender of this Lease. 25.3 LANDLORD'S COSTS; ATTORNEYS FEES. Tenant shall pay all costs and expenses incurred by Landlord as a result of any breach or default by Tenant under this Lease, including court costs and attorneys fees paid by Landlord. 25.4 REMEDIES CUMULATIVE. The foregoing remedies are cumulative of, and in addition to, and not restrictive or in lieu of, the other remedies provided for herein or allowed by law or in equity, and may be exercised separately or concurrently, or in any combination, and pursuit of any one or more of such remedies shall not constitute an election of remedies which shall exclude any other remedy available to Landlord. 25.5 NON-WAIVER. Landlord's forbearance in pursuing or exercising one or more of its remedies shall not be deemed or construed to constitute a waiver of any default or any remedy, and no waiver by Landlord of any right or remedy on one occasion shall be construed as a waiver of that right or remedy on any subsequent occasion or as a waiver of any right or remedy then or thereafter existing. No failure of Landlord to pursue or exercise any of its rights or remedies or to insist upon strict compliance by the Tenant with any term or provision of this Lease, and no custom or practice at variance with the terms of this Lease, shall constitute a waiver by Landlord of the right to demand strict compliance with the terms and provisions of this Lease. ARTICLE XXVI - MISCELLANEOUS 26.1 NO PARTNERSHIP. Nothing contained in this Lease shall be deemed or construed to create a partnership or joint venture of or between Landlord and Tenant, or to create any other relationship between the parties hereto other than that of Landlord and Tenant. 26.2 NO REPRESENTATIONS BY LANDLORD. Neither Landlord, Landlord's property manager, or any agent or employee of Landlord has made any representations or promises with respect to the Leased Premises or Building except as set forth in this Lease, and no rights, privileges, easements or licenses are acquired by Tenant except as herein expressly set forth. 26.3 WAIVER OF JURY TRIAL. Landlord and Tenant hereby waive trial by jury in any action, proceeding or counterclaim brought by either of the parties hereto against the other on or in respect to any matter whatsoever arising out of or in any way connected with this Lease, the relationship of Landlord and Tenant hereunder, Tenant's use of occupancy of the Leased Premises, and/or any claim of injury or damage. 26.4 Severability of Provisions. If any clause or provision of this Lease shall be determined to be illegal, invalid or unenforceable under the present or future laws effective during the Term hereof, then and in that event it is the intention of the parties that the remainder of this Lease shall not be affected by the invalid clause and shall be enforceable to the fullest extent of the law, and it is also the intention of the parties to this Lease that in place of any such clause or [GRAPHIC OMITTED][GRAPHIC OMITTED][GRAPHIC OMITTED] 21 provision that is illegal, invalid, or unenforceable there be added as a part of his Lease a clause or provision as similar in terms to such illegal, invalid or unenforceable clause or provision as may be possible and be legal, valid and enforceable. 26.5 INTERIOR CONSTRUCTION. The Leased Premises are leased "as is". 26.6 BENEFITS AND BURDENS. The provisions of this Lease shall be binding upon, and shall inure to the benefit of, the parties hereto and each of their respective representatives, permitted successors and permitted assigns. Landlord shall have the right, at any time and from time to time, to freely and fully assign all or any part of its interest under this Lease for any purpose whatsoever. Neither Landlord nor any owner of any interest in Landlord whether disclosed or undisclosed, shall be under any personal liability with respect to any of the provisions of this Lease. If Landlord is in breach or default with Tenant's obligations under or in connection with this Lease or otherwise, Tenant shall look solely to the equity of Landlord in the Leased Premises for the satisfaction of Tenant's remedies. 26.7 LANDLORD'S LIABILITY. The Obligations of the Landlord under this Lease do not constitute personal obligations of Landlord or of the individual partners, joint venturers, directors, officers, shareholders or beneficial owners of the Landlord, and Tenant shall look solely to the Building and to no other assets of the Landlord for satisfaction of any liability in respect to this Lease. Tenant will not seek recourse against Landlord or such individual entities or such other assets for such satisfaction. As used in this Lease, the term "Landlord" means only the current owner or owners of the fee title to the Leased Premises or the leasehold estate under a ground lease of the Leased Premises at the time in question. Any Landlord who transfers its title or interest is relieved of all liability with respect to the obligations of Landlord under this Lease to be performed on or after the date of transfer. However, each Landlord shall deliver to its transferee, by actual transfer or appropriate credits, all funds previously paid by Tenant if such funds have not yet been applied under the terms of this Lease. 26.8 BROKERAGE. This Lease was negotiated directly between Landlord and Tenant. Landlord and Tenant warrant and represent to each other that no broker was involved with the leasing of the Leased Premises or the negotiation of this Lease or is entitled to any commission in connection herewith. Landlord and Tenant agrees to indemnify and hold each other harmless against any other claims (including court costs and attorneys fees) for commissions by any broker. 26.9 RECORDING. Tenant shall not record this Lease without Landlord's prior written consent, and such recordation shall, at the option of Landlord, constitute a non-curable default of Tenant hereunder. Tenant shall upon request of Landlord, execute, acknowledge and deliver to Landlord a short-form memorandum of this Lease for recording purposes. 26.10 GOVERNMENTAL SURCHARGE. Tenant agrees to pay as Additional Rent upon demand, its pro rata share of any parking charges, regulatory fees, utility surcharges, or any other costs levied, assessed or imposed by, or at the direction of, or resulting from statutes or regulations, or interpretations thereof, promulgated by any federal, state, municipal or local government authority in connection with the use or occupancy of the Leased Premises or the parking facilities serving the Leased Premises. Tenant's pro rata share is to be based upon the square footage set forth in Section 3.4 of this Lease. 22 26.11 SURRENDER OF PREMISES. Upon termination of this Lease, by expiration of Term, or otherwise, Tenant shall redeliver to Landlord the Leased Premises broom clean and in good order and condition, ordinary wear and tear excepted. Tenant shall remain liable for holdover rent until the Leased Premises shall be returned in such order to Landlord. 26.12 INTERPRETATION. The captions of the Sections and Articles of this Lease are to assist the parties in reading this Lease and are not a part of the terms or provisions of this Lease. Whenever required by the contents of this Lease, the singular shall include the plural and the plural shall include the singular. The masculine, feminine and neuter genders shall each include the other. In any provision relating to the conduct, acts or omissions of Tenant, the term "Tenant" shall include Tenant's agents, employees, contractors, invitees, successors or others using the Leased Premises with Tenant's expressed or implied permission. 26.13 SPECIAL PROVISIONS. Special provisions of this Lease numbered - through - are attached hereto and made a part thereof. If none, so state in the following space NONE 26.14 ENTIRE AGREEMENT. It is understood that there are no oral agreements between the parties hereto affecting this Lease, and this Lease supersedes and cancels any and all previous negotiations, arrangements, brochures, agreements and understanding, if any, between the parties hereto and the former iFulfillment, Inc. (a Delaware corporation) or displayed by Landlord to Tenant with respect to the subject matter thereof, and none hereof shall be used to interpret or construe this Lease. All amendments to this Lease shall be in writing and signed by all parties. All waivers must be in writing and signed by the waiving party. Landlord's failure to enforce any provision of this Lease or its acceptance of Rent shall not be a waiver and shall not prevent Landlord from enforcing that provision or any other provision of this Lease in the future. No statement on a payment check from Tenant or in a letter accompanying a payment check shall be binding on Landlord. Landlord may, with or without notice to Tenant, negotiate such check without being bound to the conditions of such statement. 26.15 FORCE MAJEURE. Whenever a period of time is herein prescribed for action to be taken by Landlord or Tenant, the party taking the action shall not be liable or responsible for, and there shall be excluded from the computation for any such period of time, any delays due to strikes, riots, acts of God, shortages of labor or materials, war, governmental laws, regulations or restrictions or any other causes of any kind whatsoever which are beyond the reasonable control of such party; provided, however, in no event shall the foregoing apply to the financial obligations of either Landlord or Tenant to the other under this Lease, including Tenant's obligation to pay Basic Rent, Additional Rent or any other amount payable to Landlord hereunder. 26.16 CHOICE OF LAW. The laws of the State of Illinois shall govern the validity, performance and enforcement of this Lease. 26.17 Submission of Lease. The submission of this Lease to Tenant for examination does not constitute an offer to lease or a reservation of space. No agreement between Landlord and 23 Tenant relating to the leasing of the Leased Premises shall become effective or binding until executed by both parties and received by Tenant. 26.18 TIME OF ESSENCE. Time of the essence with respect to each of Tenant's obligations hereunder. 26.19 FINANCIAL STATEMENTS. Tenant acknowledges that it has provided Landlord with its financial statements) as a primary inducement to Landlord's agreement to lease the Leased Premises to Tenant, and that Landlord has relied on the accuracy of said financial statements) in entering into this Lease. Tenant represents and warrants that the information contained in said financial statements) is true, complete and correct in all material aspects, and agrees that the foregoing representations shall be a precondition to this Lease. At the request of Landlord, Tenant shall, not later than ninety (90) days following the close of each fiscal year of Tenant during the Term of this Lease, furnish to Landlord a balance sheet of Tenant as of the end of such fiscal year and a statement of income and expense for the year then ended, together with an opinion of an independent certified public accountant satisfactory to Landlord or, at the election of Landlord, a certificate of the chief financial officer, owner or partner of Tenant to the effect that the financial statements have been prepared in conformity with generally accepted accounting principles consistently applied and which fairly present the financial condition and results of operations of Tenant as of and for the periods covered. SECTION 26.20 FIRST RENEWAL OPTION. Provided Tenant is not in default in any of the terms, conditions or covenants of this Lease either on the date Tenant gives Landlord the renewal notice required herein or at the end of the initial Term of this Lease, Landlord hereby grants to Tenant an option to renew this Lease for an additional period of five (5) years ("First Renewal Option"). Such option to renew must be exercised by giving written notice to Landlord at least ninety (90) days prior to the termination of the initial Term of this Lease, and once a notice to exercise is given it is irrevocable by Tenant. If Tenant elects to exercise the First Renewal Option, then such renewal term shall be on the same terms and conditions as contained in this Lease, except that Base Rental shall be as follows:
Period Monthly Base Rent ------ ----------------- 1/1/03 - 6/30/03 $ 140,700.28 7/1/03 - 6/30/04 $ 143,948.95 7/1/04 - 6/30/05 $ 147,492.95 7/1/05 - 6/30/06 $ 151,035.95 7/1/06 - 6/30/07 $ 154,876.28 7/1/07 - 12/31/07 $ 158,715.62
SECTION 26.21 SECOND RENEWAL OPTION. Provided Tenant is not in default in any of the terms, conditions or covenants of this Lease either on the date Tenant gives Landlord the renewal notice required herein or at the end of the First Renewal Option Term of this Lease, Landlord hereby grants to Tenant an option to renew this Lease for an additional period of five (S) years ("Second Renewal Option"). Such option to renew must be exercised by giving written notice to Landlord at least ninety (90) days prior to the termination of the First Renewal Option Term of this Lease, and 24 once a notice to exercise is given it is irrevocable by Tenant. If Tenant elects to exercise the Second Renewal Option, then such renewal term shall be on the same terms and conditions as contained in this Lease, except that Base Rental shall be as follows:
Period Monthly Base Rent ------ ----------------- 1/1/08 - 6/30/08 $ 158,715.62 7/1/08 - 6/30/09 $ 162,554.95 7/l/09 - 6/30/10 $ 166,689.62 7/1/10 - 6/30/11 $ 170,856.86 7/1/11 - 6/30/12 $ 175,128.28 7/1/12 - 12/31/12 $ 179,506.49
IN WITNESS WHEREOF, these presents have been executed as of the day and year first above written. (LANDLORD) The Lincoln National Life Insurance Company By: Delaware Lincoln Investment Advisers, A Series of Delaware Management Business Trust As attorney-in-fact By: /s/ Christine M. Konrath ---------------------------------------- Christine M. Konrath Second Vice President (TENANT) iFulfillment, Inc. By: /s/ David L. Gamsey ---------------------------------------- Name: David L. Gamsey -------------------------------------- Title: CFO ------------------------------------- 25 EX-10.24 6 g74787ex10-24.txt EMPLOYMENT AGREEMENT EXHIBIT 10.24 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into as of this 31st day of December, 2001, by and between ROBERT TONER, an individual resident of the State of Georgia ("Employee"), and INNOTRAC CORPORATION, a Georgia corporation (the "Employer"). WITNESSETH: WHEREAS, the parties hereto desire to enter into an agreement for the Company's continued employment of Employee on the terms and conditions contained herein; NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: Section 1. Employment. Subject to the terms hereof, the Employer hereby employs Employee, and Employee hereby accepts such employment. Employee will serve as Vice President Logistics of the Employer or in such other executive capacity as the Board of Directors of Employer (the "Board of Directors") may hereafter from time to time determine. Employee agrees to devote his full business time and best efforts to the performance of the duties that Employer may assign Employee from time to time; provided that the Employee may also serve as an officer of any subsidiary of the Employer, and may perform services for any subsidiary of the Employer, as directed from time to time by the Board of Directors or the Chief Executive Officer, President or Chief Operating Officer. Section 2. Term of Employment. The term of Employee's employment (the "Term") shall commence on January 1, 2002 and shall continue from such date until the earlier of (a) January 1, 2005 or (b) the occurrence of any of the following events: (i) The death or total disability of Employee (total disability meaning the failure to fully perform his normal required services hereunder for a period of three (3) months during any consecutive twelve (12) month period during the term hereof, as determined by the Board of Directors, by reason of mental or physical disability); (ii) The termination by Employer of Employee's employment hereunder, upon prior written notice to Employee, for "good cause", as determined by the Board of Directors. For purposes of this Agreement, "good cause" for termination of Employee's employment shall exist (A) if Employee is convicted of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (B) if Employee fails to comply with the terms of this Agreement, and, within thirty (30) days after written notice from Employer of such failure, Employee has not corrected such failure or, having once received such notice of failure and having so corrected such failure, Employee at any time thereafter again so fails, (C) if Employee violates any of the provisions contained in Section 4 of this Agreement, or (D) if Employee tests positive for illegal drugs; or (iii) The termination of this Agreement by either party upon at least ninety (90) days prior written notice. Section 3. Compensation. 3.1 Term of Employment. Employer will provide Employee with the following salary, expense reimbursement and additional employee benefits during the term of employment hereunder: (a) Salary. Employee will be paid a salary (the "Salary") of no less than One Hundred Eighty-Five Thousand Dollars ($185,000) per annum, less deductions and withholdings required by applicable law. The Salary shall be paid to Employee in equal monthly installments (or on such more frequent basis as other executives of Employer are compensated). The Salary shall be reviewed by the Board of Directors, Chief Executive Officer, President or Chief Operating Officer of Employer on at least an annual basis. (b) Bonus. Employee will be entitled to a maximum annual bonus (the "Bonus") of 50% of Salary. The Bonus shall be determined and paid as provided in the Plan Rules adopted from time to time pursuant to the Employer's Senior Executive Incentive Compensation Plan, or any successor plan thereto. (c) Vacation. Employee shall receive four (4) weeks vacation time per calendar year during the term of this Agreement. Any unused vacation days in any calendar year may not be carried over to subsequent years. (d) Expenses. Employer shall reimburse Employee for all reasonable and necessary expenses incurred by Employee at the request of and on behalf of Employer. (e) Benefit Plans. Employee may participate in such medical, dental, disability, hospitalization, life insurance and other benefit plans (such as pension and profit sharing plans) as Employer maintains from time to time for the benefit of other senior executives of Employer, on the terms and subject to the conditions set forth in such plans. 3.2 Effect of Termination. (a) Except as hereinafter provided, upon the termination of the employment of Employee hereunder for any reason, Employee shall be entitled to all compensation and benefits earned or accrued under Section 3.1 as of the effective date of termination (the "Termination Date"), but from and after the Termination Date no additional compensation or benefits shall be earned by Employee hereunder. Employee shall be deemed to have earned any Bonus payable with respect to the calendar year in which the Termination Date occurs on a prorated basis (based on the number of days in such 2 calendar year through and including the Termination Date divided by 365) based upon the year to date financials and performance of the Employer and assuming performance at the target level for any individual performance criteria. Any such Bonus shall be payable upon termination. (b) If Employee's employment hereunder is terminated by Employer pursuant to Section 2(b)(iii) hereof, then, in addition to any other amount payable hereunder, Employer shall continue to pay Employee his normal Salary pursuant to Section 3.1 (a) for a six-month period (on the same basis as if Employee continued to serve as an employee hereunder for such applicable period). Except as provided in Section 3.3, in the case of a termination by Employer pursuant to Section 2(b)(iii) hereof, the options will expire on the first anniversary after the effective date of the termination of Employee's employment hereunder. Upon the death of Employee, any options that Employee would otherwise be entitled to exercise hereunder may be exercised by his personal representatives or heirs, as applicable. Except as provided in Section 3.3, if Employee's employment is terminated by Employer pursuant to Section 2(b)(ii) or by Employee pursuant to Section 2(b)(iii), those options which are exercisable as of the date of such termination shall be exercisable for a period of 90 days after such termination (and all other options not then exercisable shall be forfeited as of such date), and after such 90-day period, all unexercised options will expire. To the extent necessary, this provision shall be deemed an amendment of any option agreement between the Employee and the Employer or an affiliate of the Employer. 3.3 Effect of Change in Control. Notwithstanding Section 3.2(b) above, if there is a Change in Control (as defined below) of the Employer and the Employee's employment is terminated within six (6) months following the date of the Change in Control, the following provisions shall apply. (a) If Employee's employment hereunder is terminated by Employer pursuant to Section 2(b)(iii) hereof or by Employee for "Good Reason" as defined below, then, in addition to any other amount payable pursuant to Section 3.2(a), the Employee shall be entitled to received the compensation and benefits set forth in subsections (i) through (iii) below: (i) Base Salary. Employee will continue to receive his Salary as then in effect (subject to withholding of all applicable taxes) for a period of six (6) months from his date of termination in the same manner as it was being paid as of the date of termination. (ii) Health, Dental and Life Insurance Coverage. The health, dental and group term life insurance benefits coverage provided to Employee at his date of termination shall be continued at the same level and in the same manner as if his employment under this Agreement had not terminated (subject to the customary changes in such coverages if Employee retires, reaches age 65 or similar events), beginning on the date of such termination and ending on the date six (6) months from the date of such termination. Any additional coverages Employee had at termination, including dependent coverage, will also be 3 continued for such period on the same terms, to the extent permitted by the applicable policies or contracts. Any costs Employee was paying for such coverages at the time of termination shall be paid by Employee by separate check payable to the Company each month in advance or by reduction of amounts owed to Employee by the Employer. If the terms of any benefit plan referred to in this Section, or the laws applicable to such plan, do not permit continued participation by Employee, then the Company will arrange for other coverage at its expense providing substantially similar benefits. The coverages provided for in this paragraph shall be applied against and reduce the period for which COBRA will be provided. (iii) Stock Options. Notwithstanding any provision in any option agreement, all outstanding stock options granted to Employee by Employer or an affiliate of Employer shall become fully vested on the date of Employee's termination of employment and shall remain exercisable as provided in the applicable option agreement or, if longer, for a period of three (3) years following the date of termination of employment. To the extent necessary, this provision shall be deemed an amendment of any option agreement between the Employee and the Employer or an affiliate of the Employer. (b) If Employee's employment hereunder is terminated by Employee pursuant to Section 2(b)(iii) hereof other than for "Good Reason" as defined below, then, in addition to any other amount payable pursuant to Section 3.2(a), the Employee shall be entitled to receive the compensation and benefits set forth in subsections (i) through (iii) of Subsection 3.3(a) above. 3.4 Definitions. For purposes of this Agreement, the following terms shall have the meanings set forth below: (a) "Change in Control" means any of the following events: (i) The acquisition (other than from the Employer) by any person of beneficial ownership of fifty percent (50%) or more of the combined voting power of the Employer's then outstanding voting securities; provided, however, that for purposes of this Section, person shall not include any person who on the date hereof owns 25% or more of the Employer's outstanding securities, and a Change in Control shall not be deemed to occur solely because fifty percent (50%) or more of the combined voting power of the Employer's then outstanding securities is acquired by (1) a trustee or other fiduciary holding securities under one or more employee benefit plans maintained by the Employer or any of its subsidiaries, or (2) any corporation, which, immediately prior to such acquisition, is owned directly or indirectly by the shareholders of the Employer in the same proportion as their ownership of stock in the Employer immediately prior to such acquisition. (ii) Approval by shareholders of the Employer of (1) a merger or consolidation involving the Employer if the shareholders of the Employer, 4 immediately before such merger or consolidation do not, as a result of such merger or consolidation, own, directly or indirectly, more than fifty percent (50%) of the combined voting power of the then outstanding voting securities of the corporation resulting from such merger or consolidation in substantially the same proportion as their ownership of the combined voting power of the voting securities of the Employer outstanding immediately before such merger or consolidation, or (2) a complete liquidation or dissolution of the Employer, or (3) an agreement for the sale or other disposition of all or substantially all of the assets of the Employer. (iii) A change in the composition of the Board such that the individuals who, as of the date of this Agreement, constitute the Board (such Board shall be hereinafter referred to as the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, for purposes of this Section that any individual who becomes a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Employer's shareholders, was approved by a vote of at least a majority of those individuals who are members of the Board and who were also members of the Incumbent Board (or deemed to be such pursuant to this proviso) shall be considered as though such individual were a member of the Incumbent Board; but, provided, further, that any such individual whose initial assumption of office occurs as a result of either an actual or threatened election contest (as such terms are used in Rule 14a-11 of Regulation 14A promulgated under the Exchange Act, including any successor to such Rule), or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board, shall not be so considered as a member of the Incumbent Board. (iv) The occurrence of any other event or circumstance which is not covered by (i) through (iii) above which the Board determines affects control of the Company and adopts a resolution that such event or circumstance constitutes a Change in Control for the purposes of this Agreement. (b) A "Good Reason" for termination by Employee of Employee's employment shall mean the occurrence (without the Employee's express written consent), within the twelve (12) month period following the date of a Change in Control, of any one of the following acts by the Employer, or failures by the Employer to act, unless, in the case of any act or failure to act described in paragraph (i) or (iv) below, such act or failure to act is corrected within 30 days after notice by the Employee to the Employer of the act or failure to act: (i) the assignment to Employee of any duties inconsistent with Employee's title and status set forth herein, or a substantial adverse alteration in the nature or status of Employee's responsibilities at the Employer from those in effect immediately prior to the Change in Control; (ii) a substantial reduction by the Employer in Employee's Base Salary; 5 (iii) the relocation of Employee's principal office to a place more than 50 miles from Atlanta, Georgia; (iv) the failure by the Employer to continue in effect any compensation or benefit plan or program in which Employee participates immediately prior to the Change in Control, which is material to Employee's total compensation, unless an equitable arrangement (embodied in an ongoing substitute or alternative plan) has been made with respect to such plan, or the failure by the Employer to continue the Employee's participation in such plan (or in such substitute or alternative plan) on a basis not materially less favorable, both in terms of the amount of benefits provided and the level of Employee's participation relative to other participants, as existed at the time of the Change in Control. The Employee's right to terminate the Employee's employment for Good Reason shall not be affected by the Employee's incapacity due to physical or mental illness, except for a total disability as defined in Section 2 above. The Employee's continued employment shall not constitute consent to, or a waiver of rights with respect to, any act or failure to act constituting Good Reason hereunder. Section 4. Partial Restraint on Post-termination Competition. 4.1 Definitions. For the purposes of this Section 4, the following definitions shall apply: (a) "Company Activities" means the business 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 or its subsidiaries is involved in at the date of this agreement. (b) "Competitor" means any business, individual, partnership, joint venture, association, firm, corporation or other entity, other than the Employer or its affiliates or subsidiaries, engaged, wholly or partly, in Company Activities. (c) "Competitive Position" means (i) the direct or indirect ownership or control of all or any portion of a Competitor; or (ii) any employment or independent contractor arrangement with any Competitor whereby Employee will serve such Competitor in any managerial capacity. (d) "Confidential Information" means any confidential, proprietary business information or data belonging to or pertaining to Employer that does not constitute a "Trade Secret" (as hereinafter defined) and that is not generally known by or available through legal means to the public, including, but not limited to, information regarding Employer's customers or actively sought prospective customers, suppliers, manufacturers and distributors gained by Employee as a result of his employment with Employer. 6 (e) "Customer" means actual customers or actively sought prospective customers of Employer during the Term. (f) "Noncompete Period" or "Nonsolicitation Period" means the period beginning the date hereof and ending on the first anniversary of the termination of Employee's employment with Employer. (g) "Territory" means the area within a thirty-five (35) mile radius of any corporate office of Employer or any of its subsidiaries, affiliates or divisions. (h) "Trade Secrets" means information or data of or about Employer, including but not limited to technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, products plans, or lists of actual or potential customers, clients, distributees or licensees, information concerning Employer's finances, services, staff, contemplated acquisitions, marketing investigations and surveys, that (i) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. (i) "Work Product" means any and all work product, property, data documentation or information of any kind, prepared, conceived, discovered, developed or created by Employee for Employer or its affiliates, or any of Employer's or its affiliates' clients or customers. 4.2 Trade Name and Confidential Information. (a) Employee hereby agrees that (i) with regard to each item constituting all or any portion of the Trade Secrets, at all times during the Term and all times during which such item continues to constitute a Trade Secret under applicable law; and (ii) with regard to any Confidential Information, during the Term and the Noncompete Period: (i) Employee shall not, directly or by assisting others, own, manage, operate, join, control or participate in the ownership, management, operation or control of, or be connected in any manner with, any business conducted under any corporate or trade name of Employer or name similar thereto, without the prior written consent of Employer; (ii) Employee shall hold in confidence all Trade Secrets and all Confidential Information and will not, either directly or indirectly, use, sell, lend, lease, distribute, license, give, transfer, assign, show, disclose, disseminate, reproduce, copy, appropriate or otherwise communicate any Trade Secrets or Confidential Information, without the prior written consent of Employer; and (iii) Employee shall immediately notify Employer of any unauthorized disclosure or use of any Trade Secrets or Confidential Information of which 7 Employee becomes aware. Employee shall assist Employer, to the extent necessary, in the procurement or any protection of Employer's rights to or in any of the Trade Secrets or Confidential Information. 4.3 Noncompetition. (a) The parties hereto acknowledge that Employee is conducting Company Activities throughout the Territory. Employee acknowledges that to protect adequately the interest of Employer in the business of Employer it is essential that any noncompete covenant with respect thereto cover all Company Activities and the entire Territory. (b) Employee hereby agrees that, during the Term and the Noncompete Period, Employee will not, in the Territory, either directly or indirectly, alone or in conjunction with any other party, accept, enter into or take any action in conjunction with or in furtherance of a Competitive Position. Employee shall notify Employer promptly in writing if Employee receives an offer of a Competitive Position during the Noncompete Term, and such notice shall describe all material terms of such offer. Nothing contained in this Section 4 shall prohibit Employee from acquiring not more than five percent (5%) of any company whose common stock is publicly traded on a national securities exchange or in the over-the-counter market. 4.4 Nonsolicitation During Employment Term. Employee hereby agrees that Employee will not, during the Term, either directly or indirectly, alone or in conjunction with any other party solicit, divert or appropriate or attempt to solicit, divert or appropriate, any Customer for the purpose of providing the Customer with services or products competitive with those offered by Employer during the Term. 4.5 Nonsolicitation During Nonsolicitation Period. Employee hereby agrees that Employee will not, during the Nonsolicitation Period, either directly or indirectly, alone or in conjunction with any other party solicit, divert or appropriate or attempt to solicit, divert or appropriate, any Customer for the purpose of providing the Customer with services or products competitive with those offered by Employer during the Term; provided, however, that the covenant in this clause shall limit Employee's conduct only with respect to those Customers with whom Employee had substantial contact (through direct or supervisory interaction with the Customer or the Customer's account) during a period of time up to but no greater than two (2) years prior to the last day of the Term. Section 5. Miscellaneous. 5.1 Severability. The covenants in this Agreement shall be construed as covenants independent of one another and as obligations distinct from any other contract between Employee and Employer. Any claim that Employee may have against Employer shall not constitute a defense to enforcement by Employer of this Agreement. 8 5.2 Survival of Obligations. The covenants in Section 4 of this Agreement shall survive termination of Employee's employment, regardless of who causes the termination and under what circumstances. 5.3 Notices. Any notice or other document to be given hereunder by any party hereto to any other party hereto shall be in writing and delivered in person or by courier, by telecopy transmission or sent by any express mail service, postage or fees prepaid at the following addresses: EMPLOYER Innotrac Corporation 6655 Sugarloaf Parkway Duluth, GA 30097 Attention: Mr. Scott Dorfman Chief Executive Officer Telephone No.: (678) 584-4000 EMPLOYEE Mr. Robert Toner -------------------------- -------------------------- or at such other address or number for a party as shall be specified by like notice. Any notice which is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed upon actual receipt by such party or its agent. 5.4 Binding Effect. This Agreement inures to the benefit of, and is binding upon, Employer and their respective successors and assigns, and Employee, together with Employee's executor, administrator, personal representative, heirs, and legatees. 5.5 Entire Agreement. This Agreement is intended by the parties hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by all of the parties hereto. 5.6 Governing Law. This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed, and governed by and in accordance with, the laws of the State of Georgia. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority or by any board of arbitrators by reason of such party or its counsel having or being deemed to have structured or drafted such provision. 9 5.7 Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 5.8 Specific Performance. Each party hereto hereby agrees that any remedy at law for any breach of the provisions contained in this Agreement shall be inadequate and that the other parties hereto shall be entitled to specific performance and any other appropriate injunctive relief in addition to any other remedy such party might have under this Agreement or at law or in equity. 5.9 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. INNOTRAC CORPORATION By: /s/ Scott D. Dorfman ---------------------------------------- Scott D. Dorfman Chief Executive Officer EMPLOYEE /s/ Robert Toner ------------------------------------------- Robert Toner 10 EX-10.25 7 g74787ex10-25.txt EMPLOYMENT AGREEMENT EXHIBIT 10.25 EMPLOYMENT AGREEMENT THIS AGREEMENT ("Agreement") is made and entered into as of this 31st day of December, 2000, by and between PATRICK WEST, an individual resident of the State of Nevada ("Employee"), and INNOTRAC CORPORATION, a Georgia corporation (the "Employer"). WITNESSETH: WHEREAS, UDS, a Nevada corporation (the "Company"), the Employee, Daniel Reeves, the Estate of John L. West, and the Employer entered into an Agreement and Plan of Merger, dated December 8th, 2000 (the "Merger Agreement"), pursuant to which the Employer has agreed, subject to certain terms and conditions, to purchase all of the issued and outstanding shares of capital stock of the Company; WHEREAS, the Company will be merged with and into the Employer simultaneously with the consummation of the transactions contemplated by the Merger Agreement; WHEREAS, the Employee is a key employee of the Company; and WHEREAS, the Employer desires to employ the Employee upon the consummation of the transactions contemplated by the Merger Agreement; NOW, THEREFORE, in consideration of the premises and the mutual promises and agreements contained herein, the parties hereto, intending to be legally bound, hereby agree as follows: 1. EMPLOYMENT. Subject to the terms hereof, the Employer hereby employs the Employee commencing upon the consummation of the transactions contemplated by the Merger Agreement (the date of such consummation being hereinafter referred to as the "Effective Date"), and the Employee hereby accepts such employment as of the Effective Date. Employee will serve as the Chief Executive Officer of the UDS Division of the Employer and shall have such responsibilities, duties and authority as set forth on Exhibit A, hereto (the "Position"). Employee agrees to devote his full business time and best efforts to the performance of the duties relating to the Position. Employee warrants that Employee is not under any obligation, contractual or otherwise, limiting or affecting Employee's ability or right to perform freely services for the Employer. 2. TERM OF EMPLOYMENT. The initial term of Employee's employment (the "Initial Term") shall be from the Effective Date until the earlier of (a) the third (3rd) anniversary of the Effective Date or (b) the occurrence of any of the following events: (i) The death or total disability of Employee (total disability meaning the failure to fully perform his normal required services hereunder for a period of three (3) months during any consecutive twelve (12) month period during the term hereof, as determined in good faith by the Board of Directors of the Employer ("Board of Directors"), by reason of mental or physical disability); (ii) The termination by Employer of Employee's employment hereunder, upon prior written notice to Employee, for "good cause", as determined in good faith by the Board of Directors. For purposes of this Agreement, "good cause" for termination of Employee's employment shall exist (A) if Employee is convicted of, pleads guilty to, or confesses to any felony or any act of fraud, misappropriation or embezzlement, (B) if the Employee has engaged in a dishonest act or in conduct or activities materially damaging to the property, business, or reputation of the Employer or an affiliate of the Employer, (C) if Employee violates any policy of the Employer including, without limitation, any equal employment opportunity policy or harassment policy, (D) if Employee fails to comply with the terms of this Agreement, and, within thirty (30) days after written notice from Employer of such failure, Employee has not corrected such failure or, having once received such notice of failure and having so corrected such failure, Employee at any time thereafter again fails to comply with the terms of this Agreement by reason of the same such failure, (E) if Employee violates any of the provisions contained in Section 4 of this Agreement, or (F) if Employee tests positive for illegal drugs; or (iii) The termination of this Agreement by either party upon at least ninety (90) days prior written notice; This Agreement may be extended for additional consecutive one-year periods ("Renewal Periods") by written agreement of the parties hereto at least 90 days prior to the expiration of the Initial Term or any Renewal Period. The Initial Term and any Renewal Periods are hereinafter referred to collectively as the "Term". 3. COMPENSATION AND BENEFITS. 3.1 Compensation During Term of Employment. Employer will provide Employee with the following salary, expense reimbursement and additional employee benefits during the term of employment hereunder: (a) Salary. Employee will be paid a salary (the "Salary") of no less than One Hundred Twenty-Five Thousand Dollars ($125,000) per annum, less deductions and withholdings required by applicable law. The Salary shall be paid to Employee in equal bi-weekly installments (or on such other basis as other executives of Employer are compensated). The Salary shall be reviewed by the Board of Directors of Employer on at least an annual basis. (b) Bonus. During the 3-year Initial Term of this Agreement (during which time the Employee may be entitled to "Earnout Payments" under the Merger Agreement), no additional bonus shall be payable from the Employer. For fiscal years of the Employer following the end of the Initial Term, the Employee shall be entitled to an incentive bonus of up - 2 - to ______ percent (___%) of Salary based on satisfaction of the performance criteria established by the Employer. (c) Vacation. Employee shall be entitled to four (4) weeks of vacation per calendar year during the term of this Agreement, in accordance with the Employer's vacation pay policy. Any unused vacation days in any calendar year may not be carried over to subsequent years. (d) Expenses. Employer shall reimburse Employee for all reasonable and necessary business expenses incurred by Employee at the request of or on behalf of Employer in accordance with and subject to the Employee's compliance with expense approval and reimbursement policies and procedures in effect from time to time. (e) Benefit Plans. Employee may participate in such medical, dental, disability, hospitalization, life insurance and other benefit plans (such as pension and profit sharing plans) as the Employer maintains from time to time for the benefit of other similarly situated employees of Employer, on the terms and subject to the conditions set forth in such plans. (f) Stock Options. At the first regular meeting of the Board of Directors after the Effective Date, Employer will grant the Employee options to purchase 50,000 shares of common stock of the Employer at a price equal to the fair market value of such shares on the date of grant, subject to the terms and conditions set forth in a separate option agreement and subject to the terms and conditions of the stock option plan. Except as otherwise provided in the option agreement or option plan, 50% of the options will vest on the 2nd anniversary of the date of grant, and an additional 25% of the options will vest on the 3rd and the 4th anniversaries of the date of grant provided the Employee remains employed by the Employer on such dates. 3.2 Effect of Termination. (a) Except as hereinafter provided, upon the termination of the employment of Employee hereunder for any reason, Employee shall be entitled to all compensation and benefits earned or accrued under Section 3.1 as of the effective date of termination (the "Termination Date"), but from and after the Termination Date no additional compensation or benefits shall be earned by Employee hereunder. (b) If Employee's employment hereunder is terminated by Employer pursuant to Section 2(b)(iii) hereof, then, in addition to any other amount payable hereunder, Employer shall continue to pay Employee his normal Salary pursuant to Section 3.1(a) for a six-month period (on the same basis as if Employee continued to serve as an employee hereunder for such applicable period). 4. RESTRICTIVE COVENANTS. 4.1 Definitions. For the purposes of this Section 4, the following definitions shall apply: (a) "Company Activities" means the business of teleservices, fulfillment services, e-commerce fulfillment and e-commerce return services as well as other similar - 3 - services that the Employer or its subsidiaries or the UDS Division of the Employer is involved in at the date of this agreement, but specifically excluding software development and e-commerce consulting services. (b) "Competitor" means any business, individual, partnership, joint venture, association, firm, corporation or other entity, other than the Employer or its affiliates or subsidiaries, engaged, wholly or partly, in Company Activities. (c) "Competitive Position" means (i) the direct or indirect ownership or control of the equity or operations of all or any portion of a Competitor; or (ii) any employment or independent contractor arrangement with any Competitor whereby Employee will serve such Competitor in any managerial capacity. (d) "Confidential Information" means any confidential, proprietary business information or data belonging to or pertaining to Employer that does not constitute a "Trade Secret" (as hereinafter defined) and that is not generally known by or available through legal means to the public, including, but not limited to, information regarding Employer's customers or actively sought prospective customers, suppliers, manufacturers and distributors gained by Employee as a result of his employment with Employer. (e) "Customer" means actual customers or actively sought prospective customers of Employer during the Term. (f) "Noncompete Period" or "Nonsolicitation Period" means the period beginning on the Effective Date and ending on the second anniversary of the termination of Employee's employment with Employer. (g) "Territory" means the area within a thirty-five (35) mile radius of the office of Employer located at 4910 Longley Lane, Suite 101, Reno, Nevada 89502. (h) "Trade Secrets" means information or data of or about Employer, including but not limited to technical or non-technical data, formulas, patterns, compilations, programs, devices, methods, techniques, drawings, processes, financial data, financial plans, products plans, or lists of actual or potential customers, clients, distributees or licensees, information concerning Employer's finances, services, staff, contemplated acquisitions, marketing investigations and surveys, that (i) derive economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from their disclosure or use; and (ii) are the subject of efforts that are reasonable under the circumstances to maintain their secrecy. 4.2 Trade Name and Confidential Information. (a) Employee hereby agrees that (i) with regard to each item constituting all or any portion of the Trade Secrets, at all times during the Noncompete Period and all times during which such item continues to constitute a Trade Secret under applicable law; and (ii) with regard to any Confidential Information, during the Noncompete Period: (i) Employee shall not, directly or by assisting others, own, manage, operate, join, control or participate in the ownership, management, operation or control - 4 - of, or be connected in any manner with, any business conducted under any corporate or trade name of Employer or name similar thereto, without the prior written consent of Employer; (ii) Employee shall hold in confidence all Trade Secrets and all Confidential Information and will not, either directly or indirectly, use, sell, lend, lease, distribute, license, give, transfer, assign, show, disclose, disseminate, reproduce, copy, appropriate or otherwise communicate any Trade Secrets or Confidential Information, without the prior written consent of Employer; and (iii) Employee shall immediately notify Employer of any unauthorized disclosure or use of any Trade Secrets or Confidential Information of which Employee becomes aware. Employee shall assist Employer, to the extent necessary, in the procurement or any protection of Employer's rights to or in any of the Trade Secrets or Confidential Information. 4.3 Noncompetition. (a) The parties hereto acknowledge that Employee is conducting Company Activities throughout the Territory. Employee acknowledges that to protect adequately the interest of Employer in the business of Employer it is essential that any noncompete covenant with respect thereto cover all Company Activities within the entire Territory. (b) Employee hereby agrees that, during the Noncompete Period, Employee will not, in the Territory, either directly or indirectly, alone or in conjunction with any other party, accept, enter into or take any action in conjunction with or in furtherance of a Competitive Position. Nothing contained in this Section 4 shall prohibit Employee from acquiring not more than five percent (5%) of any company whose common stock is publicly traded on a national securities exchange or in the over-the-counter market. (c) Employer agrees that Employee shall not be subject to the provision of this Section 4.3 in the event Employee is terminated by Employer pursuant to Section 2(iii). 4.4 Nonsolicitation of Customers. Employee hereby agrees that Employee will not, during the Nonsolicitation Period, either directly or indirectly, alone or in conjunction with any other party, solicit, divert or appropriate or attempt to solicit, divert or appropriate, any Customer for the purpose of providing the Customer with services or products competitive with those offered by Employer during the Term; provided, however, that following the end of the Term, the covenant in this clause shall limit Employee's conduct only with respect to those Customers with whom Employee had substantial contact (through direct or supervisory interaction with the Customer or the Customer's account) during a period of time up to but no greater than two (2) years prior to the last day of the Term. 4.5 Nonsolicitation of Employees. Employee hereby agrees that during the Nonsolicitation Period, Employee will not, whether voluntarily or involuntarily, act in any way with the purpose or effect of soliciting, recruiting, or encouraging, directly or indirectly, any - 5 - person, with the exception of Laura West, who is or was an employee of the Employer or its affiliates at any time during the one-year period prior to Employee's termination of employment, to leave the employ of the Employer or its affiliates. 4.6 Works. Employee acknowledges that Employee's work on and contributions to documents, programs, methodologies, protocols, and other expressions in any tangible medium (collectively, "Works") are within the scope of Employee's employment and part of Employee's duties, responsibilities or assignment. Employee's work on and contributions to the Works will be rendered and made by Employee for, at the instigation of, and under the overall direction of, Employer, and all such work and contributions, together with the Works, are and at all times shall be regarded, as "work made for hire" as that term is used in the United States Copyright Laws. Without limiting this acknowledgment, Employee assigns, grants, and delivers exclusively to Employer all rights, titles, and interests in and to any such Works, and all copies and versions, including all copyrights and renewals. Employee will execute and deliver to Employer, its successors and assigns, any assignments and documents Employer requests for the purpose of establishing, evidencing, and enforcing or defending its complete, exclusive, perpetual, and worldwide ownership of all rights, titles, and interests of every kind and nature, including all copyrights, in and to the Works, and Employee constitutes and appoints Employer as its agent to execute and deliver any assignments or documents Employee fails or refuses to execute and deliver, this power and agency being coupled with an interest and being irrevocable. 4.7 Inventions and Ideas. Employee shall disclose promptly to Employer, and only to Employer, any invention or idea of Employee (developed alone or with others) conceived or made during Employee's employment by Employer or within six months of his termination of employment with the Employer. Employee assigns to Employer any such invention or idea in any way connected with Employee's employment or related to Employer's business, research or development, or demonstrably anticipated research or development, and will cooperate with Employer and sign all papers deemed necessary by Employer to enable it to obtain, maintain, protect and defend patents covering such inventions and ideas and to confirm Employer's exclusive ownership of all rights in such inventions, ideas and patents, and irrevocably appoints Employer as its agent to execute and deliver any assignments or documents Employee fails or refuses to execute and deliver promptly, this power and agency being coupled with an interest and being irrevocable. This constitutes the Employer's written notification that this assignment does not apply to an invention for which no equipment, supplies, facility or trade secret information of the Employer was used and which was developed entirely on Employee's own time, unless (a) the invention relates (i) directly to the business of the Employer, or (ii) to the Employer's actual or demonstrably anticipated research or development, or (b) the invention results from any work performed by Employee for the Employer. 4.8 Non-Disparagement. Employee shall not at any time make false, misleading or disparaging statements about the Employer, its products, services, management, employees or customers. 5. MISCELLANEOUS. 5.1 Severability. The covenants in this Agreement shall be construed as covenants independent of one another and as obligations distinct from any other contract between Employee and Employer. Any claim that Employee may have against Employer, whether related - 6 - to this Agreement or otherwise, shall not constitute a defense to enforcement by Employer of this Agreement. Rights and restrictions in this Agreement may be exercised and are applicable only to the extent they do not violate any applicable laws, and are intended to be limited to the extent necessary so they will not render this Agreement illegal, invalid, or unenforceable. If any term shall be held illegal, invalid, or unenforceable by a court of competent jurisdiction, the remaining terms shall remain in full force and effect. This Agreement does not in any way limit the Employer's rights under the laws of unfair competition, trade secret, copyright, patent, trademark or any other applicable law(s), which are in addition to rights under this Agreement. 5.2 Survival of Obligations. The covenants and provisions in Sections 4 and 5 of this Agreement shall survive termination of this Agreement and the termination of Employee's employment, regardless of who causes the termination and under what circumstances. 5.3 Notices. Any notice or other document to be given hereunder by any party hereto to any other party hereto 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 the following address or facsimile number: EMPLOYER Innotrac Corporation 6655 Sugarloaf Parkway Duluth, GA 30097 Attention: Mr. Scott Dorfman Chief Executive Officer Telephone No.: (678) 584-4000 Facsimile No.: (678) 584-8978 EMPLOYEE Mr. Patrick West ----------------------- ----------------------- Telephone No.: -------------------- Facsimile No.: -------------------- or at such other address or number for a party as shall be specified by like notice. Any notice which is delivered in the manner provided herein shall be deemed to have been duly given to the party to whom it is directed immediately (if given or made in person or by facsimile confirmed by mailing a copy thereof to the recipient in accordance with this Section 5.3 on the date of such facsimile), or 5 days after mailing (if given or made by mail), and in proving the same it shall be sufficient to show that the envelope containing such notice or communication was delivered to the delivery or postal service and duly addressed, or that receipt of a facsimile was confirmed as provided above. 5.4 Waiver. Failure of either party to insist, in one or more instances, on performance by the other in strict accordance with the terms and conditions of this Agreement shall not be deemed a wavier or relinquishment of any right granted in this Agreement or the future - 7 - performance of any such term or condition or of any other term or condition of this Agreement, unless such waiver is contained in a writing signed by the party making the waiver. 5.5 Binding Effect. This Agreement inures to the benefit of, and is binding upon, Employer and their respective successors and assigns, and Employee, together with Employee's executor, administrator, personal representative, heirs, and legatees. 5.6 Entire Agreement. This Agreement is intended by the parties hereto to be the final expression of their agreement with respect to the subject matter hereof and is the complete and exclusive statement of the terms thereof, notwithstanding any representations, statements or agreements to the contrary heretofore made. This Agreement may be modified only by a written instrument signed by all of the parties hereto. 5.7 Governing Law. This Agreement shall be deemed to be made in, and in all respects shall be interpreted, construed, and governed by and in accordance with, the laws of the State of Nevada. No provision of this Agreement shall be construed against or interpreted to the disadvantage of any party hereto by any court or other governmental or judicial authority or by any board of arbitrators by reason of such party or its counsel having or being deemed to have structured or drafted such provision. 5.8 Headings. The section and paragraph headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. 5.9 Specific Performance. Each party hereto hereby agrees that any remedy at law for any breach of the provisions contained in this Agreement shall be inadequate and that the other parties hereto shall be entitled to specific performance and any other appropriate injunctive relief in addition to any other remedy such party might have under this Agreement or at law or in equity. 5.10 Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original but all of which together shall constitute one and the same instrument. Genuine signatures transmitted by telecopier shall be binding, provided that original signatures follow promptly. 5.11 Public Announcement. Neither party shall disclose that this Agreement has been executed until such time as both parties mutually agree to such disclosure. - 8 - IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first above written. INNOTRAC CORPORATION By: /s/ David L. Ellin ----------------------------------------- David L. Ellin Senior Vice President and Chief Operating Officer EMPLOYEE /s/ Patrick West ---------------------------------------------- Patrick West - 9 - EXHIBIT A The Position PLANNING - Develop and execute overall UDS Division business plan to be presented to an approved by corporate management of the Employer - Monitor performance relative to goals and objectives of the UDS Division - Advise Employer corporate management of variances; recommend corrective action and/or alternate plans for UDS Division - Review daily and monthly operational goals of UDS Division FINANCIAL - Develop UDS Division operating budget to be approved by Employer corporate management - Monitor UDS Division financial and accounting staff - Review UDS Division monthly and annual financial reports and budgets with Employer corporate management - Direct UDS Division financial and accounting staff to make adjustments/corrections COST AND QUALITY CONTROL - Ensure all established cost, quality, and delivery commitments of UDS Division are met BUSINESS DEVELOPMENT MANAGEMENT - Monitor key relationships with UDS Division equipment providers, contractors, vendors, and consultants - Advise and assist Chief Executive Officer of Employer with relationship planning and communications - Review with Employer Business Development team new clients and prospects - Set strategies and goals for business development for UDS Division SYSTEMS AND PROCEDURES - Develop goals for updated systems, procedures and reporting methods - Review, publish and update the UDS Division operations manual - Monitor existing UDS Division operational systems; identify the need for changes Develop, recommend and implement improvements to existing systems of UDS Division HUMAN RESOURCES - Identify staffing needs and recommend staff changes/additions for UDS Division - Implement and/or supervise employee recruitment for UDS Division - Ensure training of all UDS Division assigned employees - Make UDS Division management and director level staffing decisions A-1 EX-13.1 8 g74787ex13-1.txt PORTIONS OF THE ANNUAL REPORT TO SHAREHOLDERS 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, 2001, 2000, 1999, 1998 and 1997 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.
(in 000's, except per share amounts) RESULTS FOR YEAR ENDED DECEMBER 31: 2001 2000 1999 1998 1997 - ----------------------------------- ---------- ---------- ---------- ---------- ---------- Revenues, net $ 94,793 $ 174,085 $ 227,011 $ 139,673 $ 87,978 Cost of revenues 41,087 133,082 175,483 90,195 57,551 Special charges -- 16,462 -- -- -- ---------- ---------- ---------- ---------- ---------- Gross profit 53,706 24,541 51,528 49,478 30,427 ---------- ---------- ---------- ---------- ---------- OPERATING EXPENSES: Selling, general and administrative 43,329 38,209 30,460 31,332 19,296 Special charges -- 17,801 -- -- -- Depreciation and amortization 4,864 4,168 3,414 3,843 4,342 ---------- ---------- ---------- ---------- ---------- TOTAL OPERATING EXPENSES 48,193 60,178 33,874 35,175 23,638 ---------- ---------- ---------- ---------- ---------- Operating income (loss) 5,513 (35,637) 17,654 14,303 6,789 ---------- ---------- ---------- ---------- ---------- Interest (income) expense, net (532) 80 1,370 956 1,788 Other (income) expense (20) 141 60 35 118 ---------- ---------- ---------- ---------- ---------- TOTAL OTHER (INCOME) EXPENSE (552) 221 1,430 991 1,906 ---------- ---------- ---------- ---------- ---------- Income (loss) before income taxes and minority interest 6,065 (35,858) 16,224 13,312 4,883 Income tax (provision) benefit (2,573) 14,084 (6,389) (3,743) 77 ---------- ---------- ---------- ---------- ---------- Net income (loss) before minority 3,492 (21,774) 9,835 9,569 4,960 interest Minority interest, net of income taxes (893) (199) -- -- -- ---------- ---------- ---------- ---------- ---------- NET INCOME (LOSS) $ 4,385 $ (21,575) $ 9,835 $ 9,569 $ 4,960 ========== ========== ========== ========== ========== Net income (loss) per share-basic $ 0.39 $ (1.92) $ 0.99 $ 1.01 $ 0.46 Net income (loss) per share-diluted $ 0.38 $ (1.92) $ 0.98 $ 1.00 $ 0.46 YEAR-END FINANCIAL POSITION: Current assets $ 58,093 $ 76,150 $ 94,810 $ 66,416 $ 24,330 Current liabilities 35,717 34,175 24,930 39,563 22,809 Property and equipment, net 14,500 13,717 8,922 7,463 7,609 Total assets 99,393 97,145 104,218 73,992 32,497 Long-term obligations 393 166 75 135 3,944 Total liabilities 36,110 34,341 25,005 39,698 26,753 Total shareholders' equity $ 63,283 $ 58,635 $ 79,213 $ 34,294 $ 4,827 COMMON STOCK INFORMATION: Average number of common shares 11,318 11,212 9,911 8,096 6,500 outstanding Common stock price per share: High $ 8.92 $ 13.50 $ 26.75 $ 24.38 N/A Low 3.25 3.13 10.00 5.75 N/A Year-end 6.90 3.50 13.75 8.13 N/A Book value per common share $ 5.59 $ 5.23 $ 7.99 $ 4.24 $ 0.74
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 Company's 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; and other factors discussed in more detail under "Business" in our Annual Report on Form 10-K. OVERVIEW Innotrac, founded in 1984 and headquartered in Atlanta, Georgia, provides customized, technology-based 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 clients such as BellSouth Corporation ("BellSouth") and Qwest International, Inc. ("Qwest") and their customers. As of December 1, 2001, the Company no longer provided these services to SBC Communications, Inc. ("SBC"), Home Depot or Siemens, which represented approximately 15%, 2% and 1%, respectively, of the Company's consolidated revenue for the year ended December 31, 2001. However, the Company resumed its fulfillment services of consumer phones and expanded its services to include wireless pager equipment with BellSouth during the third and fourth quarters of 2001, respectively. The Company also provides these services for a significant number of non-telecommunications companies such as Coca-Cola, NAPA, Tactica, Nordstrom.com, Porsche, Wilsons Leather and Thane International. Approximately 49% of the Company's revenues in 2001 were generated from its telecommunications clients, 18% from its DSL equipment clients and 33% from its other traditional fulfillment and marketing services clients. The Company anticipates that the percentage of its revenues attributable to telecommunications clients will decrease in 2002 due to the loss of SBC and the addition of Martha Stewart Living Omnimedia, Inc. as a fulfillment and call center client, commencing in February 2002. With the Company's conversion of a majority of its clients to a fee-for-service model during 2000, the Company no longer purchases and sells Caller ID equipped phones, DSL modems and other telecommunications equipment from third party manufacturers for these clients. Instead, the Company warehouses products on a consignment basis and fulfills equipment on behalf of its customers for a fee. The Company purchases and owns inventory for certain clients, but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. The new model substantially reduces revenues as the pass through cost of purchased equipment is no longer included in revenues. Gross margins have improved since the Company no longer has inventory risk or cost of equipment. For the year ended December 31, 2001, operating cash flows, while remaining positive, have declined from the same period in 2000 primarily due to the significant increase in inventory levels to provide for the initiation of the consumer phone and wireless pager sales programs with BellSouth. The Company began these new sales programs during the third and fourth quarters of 2001, and the Company is indemnified by the client for substantially all risks associated with the ownership of this new inventory. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 was converted to a limited liability corporation on December 28, 2000. As of March 31, 2001, Innotrac owned 60% of this subsidiary with the remaining 40% owned by MBE. However, due to the announcement in March 2001 that United Parcel Services, Inc. had entered into a definitive agreement to purchase MBE, the Company elected to acquire from MBE the remaining 40% ownership interest in Return.com and terminate its arrangement with MBE as its exclusive front-end solution. This became effective in April 2001. As a result of the Company's ownership interest in Return.com since the date of inception, the Company consolidated the results of operations and financial position of Return.com in the accompanying consolidated financial statements. During the year ended December 31, 2001, the Company utilized its $2.8 million impairment reserve, which was recorded in the first quarter of 2001 to write off its investment in Return.com. At December 31, 2001, Return.com is no longer in operation. On July 24, 2001, the Company acquired the assets and assumed specified liabilities of iFullfillment, Inc. ("iFullfillment") for approximately $5.8 million. iFullfillment is located in a 354,000 square foot leased facility in Bolingbrook, Illinois. iFulfillment specializes in fully integrated, automated, order fulfillment services for multi-channel retailers and catalogers including such clients as Nordstrom.com, Wilsons Leather and Archibald Candies. The assets and operating results of iFulfillment have been included in the Company's consolidated financial statements since the date of acquisition. As a result of the loss of the SBC contract, the Company elected to close its call center operations in Atlanta, Georgia in January 2002 and shifted its Atlanta clients to its call center operations in Pueblo, Colorado. The Company notified approximately 260 employees at the Atlanta and Pueblo call center facilities on October 31, 2001 regarding termination of employment effective January 2002. The Company incurred approximately $1.0 million in severance, write-off of assets, and other expenses related to the closure of the Atlanta call center operations during the year ended December 31, 2001. Management does not anticipate incurring any additional costs associated with this closure. The Company continues to operate its call center facilities in Pueblo, Colorado and Reno, Nevada. 2 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, 2001, 2000 and 1999. 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, 2001 2000 1999 ------------------------------------ REVENUES, NET 100.0% 100.0% 100.0% COST OF REVENUES 43.3 76.4 77.3 SPECIAL CHARGES -- 9.5 -- ----------------------------------- GROSS PROFIT 56.7 14.1 22.7 SELLING, GENERAL AND ADMINISTRATIVE 45.7 21.9 13.4 SPECIAL CHARGES -- 10.2 -- DEPRECIATION AND AMORTIZATION 5.2 2.5 1.5 ----------------------------------- OPERATING INCOME (LOSS) 5.8 (20.5) 7.8 OTHER (INCOME) EXPENSE (0.6) 0.1 0.6 ----------------------------------- INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST 6.4 (20.6) 7.2 INCOME TAX (PROVISION) BENEFIT (2.7) 8.1 (2.8) ----------------------------------- NET INCOME (LOSS) BEFORE MINORITY INTEREST 3.7 (12.5) 4.4 MINORITY INTEREST, NET OF INCOME TAXES (0.9) (0.1) -- ----------------------------------- NET INCOME (LOSS) 4.6% (12.4)% 4.4% =================================== - ---------------------------------------------------------------------------------------------------
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 $4.6 million in accruals remaining related to the special charges at December 31, 2001, which include $2.8 million for the Company's shift to a fee-for-service business model and $1.8 million for e-commerce exit costs. Cash payments during 2001 totaled approximately $2.3 million. The majority of the remaining accruals either will be utilized or reversed to income during the year ending December 31, 2002. Any accruals reversed to income will be reported as a special item. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000 REVENUES. The Company's net revenues decreased 45.5% to $94.8 million for the year ended December 31, 2001 from $174.1 million for the year ended December 31, 2000. The decrease in revenue is primarily due to 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 and increased revenues of $19.9 million from the Company's acquisition of Universal Distribution Services ("UDS"), which occurred in December 2000. COST OF REVENUES. The Company's cost of revenues decreased 69.1% to $41.1 million for the year ended December 31, 2001 compared to $133.1 million for the year ended December 31, 2000. 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 sales of Caller ID equipment offset by increased cost of revenues of $10.0 million as a result of the acquisition of UDS in December 2000. SPECIAL CHARGES. The Company recorded a special charge of $16.5 million for inventory write downs and write-offs during 2000, associated with its switch to a fee-for-service business model. GROSS PROFIT. For the year ended December 31, 2001, the Company's gross profit increased to $53.7 million, or 56.7% of revenues, compared to $24.5 million, or 14.1% of revenues, for the year ended December 31, 2000. The increase in gross profit was due primarily to the factors discussed above. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. S,G&A expenses for the year ended December 31, 2001 increased 13.4% to $43.3 million or 45.7% of revenues compared to $38.2 million or 21.9% of revenues for the year ended December 31, 2000. This increase in expenses was primarily attributable to the write-off of the Company's investment in Return.com; expenses incurred from the impairment of certain software development costs and other long-lived assets associated with the termination of the SBC contract; the closure of the Atlanta call center operations; and increased costs incurred from the acquisitions of iFulfillment in July 2001 and UDS in December 2000. The increase in expenses was offset by a reduction in expenditures for technology related to e-commerce applications and internal systems development during 2001. 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 year ended December 31, 2001 and 2000 was 42.4% and 39.3%, respectively. The increase was principally due to the Company no longer investing in tax-exempt securities and certain items not deductible for tax purposes representing a greater percentage of taxable income. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 primarily due to the Company's switch to a fee-for-service model and the decline in the 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 24.2% to $133.1 million for the year ended December 31, 2000 compared to $175.5 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 sales of Caller ID equipment. 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 profit decreased 52.4% to $24.5 million compared to $51.5 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 23.5% as compared to 1999. SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. S,G&A expenses for the year ended December 31, 2000 increased 25.2% to $38.2 million or 21.9% of revenues compared to $30.5 million or 13.4% 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. These expenditures returned to normal levels in 2001 due to a reduction in headcount and expenditures as a result of 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. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES. The Company funds its operations and capital expenditures primarily through cash flow from operations and borrowings under a credit facility with a bank. The Company had cash and cash equivalents of approximately $9.4 million at December 31, 2001. During the year ended December 31, 2001, the Company's prior investment in Return.com was written off against a $2.8 million impairment reserve recorded during the first quarter of 2001 (see Note 1 to the consolidated financial statements). At December 31, 2001, the Company recorded an accrual for approximately $15.3 million for payment to the sellers of UDS in accordance with the earn-out provisions outlined in the December 8, 2000 Merger Agreement by and among the Company and UDS. In February 2002, the payment was made consisting of $13.7 million of cash and 310,000 shares of the Company's common stock valued at $1.6 million. On February 11, 2002, the Board of Directors authorized the repurchase of up to $10 million of the Company's outstanding common stock through February 2003. The Company maintains a $40 million revolving line of credit with a bank, maturing in June 2002. The Company anticipates renewing this line of credit prior to its expiration date under similar terms and conditions. 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, 2001, there was no outstanding balance under the line of credit. During the year ended December 31, 2001, the Company generated $4.5 million in cash flow from operating activities compared to $39.0 million in cash flow from operating activities in the same period in 2000. This decline in the generation of cash flow from operating activities for the year ended December 31, 2001 compared to the same period in 2000 was due primarily to an increase in inventory levels to provide for the start of the consumer phone and wireless pager sales programs with BellSouth initiated during the third and fourth quarters of 2001, respectively. The Company is indemnified by the client for substantially all risks associated with the ownership of this inventory. Management anticipates that these inventory levels will be reduced during 2002. This decline is also attributed to a higher accounts receivable balance and the timing of payables in 2001 as compared to the same period in 2000. During the year ended December 31, 2001, net cash used in investing activities was $13.2 million in 2001 as compared to $15.3 million in 2000. This decrease was primarily due to reduced expenditures for technology related to e-commerce applications and internal systems development during 2001 offset by the acquisition of iFulfillment in July 2001. During the year ended December 31, 2001, the net cash used in financing activities was $0.2 million compared to $6.2 million in the same period in 2000 primarily due to no borrowings and therefore, no repayments made under the Company's line of credit during 2001. The Company estimates that its cash and financing needs through 2002 will be met by cash flows from operations 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. Additionally, the Company's line of credit expires in June 2002. While the Company anticipates that the line of credit will be renewed under similar terms and conditions, there can be no assurances that this will occur. 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's primary long-term contractual commitments consist of capital and operating leases. As previously discussed, the Company has largely transitioned from an inventory ownership to fee-for-service model, so the Company's commitments to purchase inventory have been greatly reduced from historical levels. To the extent the Company commits to purchase and own inventory for certain clients, the Company now generally seeks client guarantees and contractual indemnifications to protect it from inventory risk. As of December 31, 2001, the Company had none of the following: outstanding debt for borrowed funds, material guarantees of other entities' obligations, off-balance sheet or structured finance arrangements, synthetic leases, repurchase obligations or similar commercial or financing commitments. Additionally, the Company does not generally trade in commodity contracts. The following table sets forth payments due under the Company's capital and operating lease commitments by period. For additional information, see Note 5 to the consolidated financial statements.
Payments Due by Period ---------------------------------------------------------------------- Total Less than 1 year 1-3 years 4-5 years After 5 years ------- ---------------- --------- --------- ------------- Capital Leases $ 595 $ 302 $ 235 $ 58 $ 0 Operating Leases $19,221 $ 5,456 $ 6,630 $ 4,317 $ 2,818
7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Management believes the Company's 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 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. Additionally, all of the Company's lease obligations are fixed in nature as noted in Note 5 to the consolidated financial statements, and the Company has no long-term purchase commitments. CRITICAL ACCOUNTING POLICIES Innotrac's significant accounting policies are described in Note 2 to the consolidated financial statements. RECENT ACCOUNTING PRONOUNCEMENTS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS 141 prohibits the use of pooling-of-interest for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 for all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The statement changes the accounting for goodwill and other indefinite life intangible assets from an amortization method to an impairment only approach. Upon adoption of the statement, which for the Company will be the beginning of fiscal year 2002, amortization of current goodwill will cease, thereby reducing amortization expense for 2002 by approximately $0.9 million after factoring in the recent earn-out payment. In 2001, amortization expense associated with goodwill was $0.3 million. The Company plans to complete its impairment analysis during the first quarter of 2002 and will recognize an impairment, if any, at that time. In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations for leases and the associated asset retirement costs. The statement required that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company does not anticipate that the adoption of SFAS 143 will have a material effect on the Company's financial position or results of operations. 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and amends APB No. 51, "Consolidated Financial Statements." SFAS 144 retains many of the requirements of SFAS 121 and the basic provisions of APB Opinion 30; however, it establishes a single accounting model for long-lived assets to be disposed of by sale. SFAS 144 furthermore resolves significant implementation issues related to SFAS 121. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 and are to be applied prospectively. The Company does not anticipate that the adoption of SFAS 144 will have a material effect on the Company's financial position or results of operations. 9 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Innotrac Corporation: We have audited the accompanying consolidated balance sheets of INNOTRAC CORPORATION (a Georgia corporation) AND SUBSIDIARIES as of December 31, 2001 and 2000 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's 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 subsidiaries as of December 31, 2001 and 2000 and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting standards generally accepted in the United States. ARTHUR ANDERSEN LLP Atlanta, Georgia February 8, 2002 10 INNOTRAC CORPORATION CONSOLIDATED BALANCE SHEETS (IN 000'S)
DECEMBER 31, ASSETS 2001 2000 -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 9,413 $ 18,334 Accounts receivable, net (Note 3) 13,662 31,217 Inventories, net 27,264 15,056 Prepaid expenses and other 5,018 7,559 Deferred income taxes (Note 6) 2,736 3,984 -------- -------- TOTAL CURRENT ASSETS 58,093 76,150 -------- -------- PROPERTY AND EQUIPMENT: Rental equipment 2,003 3,464 Computer, machinery and equipment 19,715 16,362 Furniture, fixtures and leasehold improvements 4,005 3,695 -------- -------- 25,723 23,521 Less accumulated depreciation and amortization (11,223) (9,804) -------- -------- 14,500 13,717 -------- -------- Goodwill, net (Notes 2 and 8) 25,213 3,466 Deferred income taxes (Note 6) 438 2,579 Other assets, net (Notes 2 and 8) 1,149 1,233 -------- -------- TOTAL ASSETS $ 99,393 $ 97,145 ======== ======== DECEMBER 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000 -------- -------- CURRENT LIABILITIES: Accounts payable $ 8,581 $ 22,104 Accrued earn-out payment (Note 8) 15,275 0 Accrued expenses and other 11,861 12,071 -------- -------- TOTAL CURRENT LIABILITIES 35,717 34,175 -------- -------- TOTAL NONCURRENT LIABILITIES (NOTE 5) 393 166 Commitments and contingencies (Note 5) Minority interest in subsidiary 0 4,169 SHAREHOLDERS' EQUITY (NOTE 9): Common stock 1,136 1,136 Additional paid-in capital 61,023 60,889 Retained earnings 1,201 (3,184) Accumulated other comprehensive income 178 0 Less: Treasury stock (255) (206) -------- -------- TOTAL SHAREHOLDERS' EQUITY 63,283 58,635 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 99,393 $ 97,145 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 11 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN 000'S, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------------------------------- 2001 2000 1999 ---------- ---------- ---------- Revenues, net $ 94,793 $ 174,085 $ 227,011 Cost of revenues 41,087 133,082 175,483 Special charges (Note 13) 0 16,462 0 --------- --------- --------- GROSS PROFIT 53,706 24,541 51,528 --------- --------- --------- OPERATING EXPENSES: Selling, general and administrative 43,329 38,209 30,460 Special charges (Note 13) 0 17,801 0 Depreciation and amortization 4,864 4,168 3,414 --------- --------- --------- Total operating expenses 48,193 60,178 33,874 --------- --------- --------- OPERATING INCOME (LOSS) 5,513 (35,637) 17,654 --------- --------- --------- OTHER (INCOME) EXPENSE: Interest (income) expense, net (Note 4) (532) 80 1,370 Other (20) 141 60 --------- --------- --------- TOTAL OTHER (INCOME) EXPENSE (552) 221 1,430 --------- --------- --------- Income (loss) before income taxes and minority interest 6,065 (35,858) 16,224 Income tax (provision) benefit (2,573) 14,084 (6,389) --------- --------- --------- Net income (loss) before minority interest 3,492 (21,774) 9,835 Minority interest, net of income taxes (893) (199) 0 --------- --------- --------- NET INCOME (LOSS) $ 4,385 $ (21,575) $ 9,835 ========= ========= ========= EARNINGS PER SHARE: Basic $ 0.39 $ (1.92) $ 0.99 ========= ========= ========= Diluted $ 0.38 $ (1.92) $ 0.98 ========= ========= ========= WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 11,318 11,212 9,911 ========= ========= ========= Diluted 11,690 11,212 10,033 ========= ========= =========
The accompanying notes are an integral part of these consolidated statements. 12 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN 000'S)
ACCUMULATED OTHER COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY STOCK CAPITAL EARNINGS INCOME STOCK TOTAL -------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1998 $ 900 $ 24,838 $ 8,556 $ 0 $ 0 $ 34,294 Proceeds from sale of common stock, net 220 34,694 0 0 0 34,914 Proceeds from exercise of stockholder's options and grants 1 169 0 0 0 170 Net income 0 0 9,835 0 0 9,835 -------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 1999 $ 1,121 $ 59,701 $ 18,391 $ 0 $ 0 $ 79,213 Issuance of common stock 15 1,238 0 0 0 1,253 Purchase of treasury stock 0 0 0 0 (206) (206) Restricted stock grant, net 0 (50) 0 0 0 (50) Net loss 0 0 (21,575) 0 0 (21,575) -------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2000 $ 1,136 $ 60,889 $ (3,184) $ 0 $ (206) $ 58,635 Restricted stock grant, net 0 134 0 0 0 134 Purchase of treasury stock 0 0 0 0 (49) (49) Comprehensive income: Net income 0 0 4,385 0 0 4,385 Unrealized gain on available-to-sale securities 0 0 0 178 0 178 -------------------------------------------------------------------------------------- BALANCE, DECEMBER 31, 2001 $ 1,136 $ 61,023 $ 1,201 $ 178 $ (255) $ 63,283 ======================================================================================
The accompanying notes are an integral part of these consolidated statements. 13 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000'S)
YEAR ENDED DECEMBER 31, ------------------------------------ 2001 2000 1999 ------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ 4,385 $(21,575) $ 9,835 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Depreciation and amortization 4,864 4,168 3,414 Loss on disposal of fixed assets 3,385 6,430 502 Deferred income taxes 3,389 (5,627) 1,824 Minority interest in subsidiary (893) (199) 0 Amortization of deferred compensation 134 38 0 Changes in working capital, net of effect of businesses acquired: Decrease (increase) in accounts receivable 17,659 21,908 (8,077) (Increase) decrease in inventories (12,208) 24,447 (25,122) Increase in prepaid expenses and other assets (180) (2,554) (30) (Decrease) increase in accounts payable (13,562) 9,390 1,143 (Decrease) increase in accrued expenses and other (2,491) 2,538 (6,867) ------------------------------------ Net cash provided by (used in) operating activities 4,482 38,964 (23,378) ------------------------------------ CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (6,914) (13,644) (5,328) Acquisition of businesses, net of cash acquired (5,859) (1,678) 0 Purchase of available-to-sale securities (436) 0 0 ------------------------------------ Net cash used in investing activities (13,209) (15,322) (5,328) ------------------------------------ CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments under line of credit 0 (7,008) (8,728) Repayment of capital lease obligations and other (145) 12 (65) Proceeds from equity offerings, net 0 0 34,914 Proceeds from stock options exercised 0 0 170 Distributions to partners, members and shareholders 0 0 (70) Proceeds from minority interest in subsidiary 0 1,000 0 Purchase of treasury stock shares (49) (206) 0 ------------------------------------ Net cash (used in) provided by financing activities (194) (6,202) 26,221 ------------------------------------ Net (decrease) increase in cash and cash equivalents (8,921) 17,440 (2,485) Cash and cash equivalents, beginning of period 18,334 894 3,379 ------------------------------------ Cash and cash equivalents, end of period $ 9,413 $ 18,334 $ 894 ==================================== Supplemental cash flow disclosures: Cash paid for interest $ 89 $ 429 $ 1,386 ==================================== Cash paid for income taxes, net of refunds received $ 0 $ (5,907) $ 7,364 ====================================
The accompanying notes are an integral part of these consolidated statements. 14 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 handling from its leased facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada and Bolingbrook, Illinois. The Company's facilities represent approximately one million square feet of warehouse space and 600 dedicated call center seats. 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. On December 28, 2000, Return.com was converted to a limited liability company. On April 17, 2001, the Company agreed to reacquire MBE's 40% ownership interest in Return.com resulting in 100% ownership by the Company. The Company wrote off its investment in Return.com during the year ended December 31, 2001 against a $2.8 million impairment reserve recorded in the first quarter of 2001. Return.com is no longer in operation. On December 8, 2000, the Company acquired Universal Distribution Services ("UDS"), located in Reno, Nevada, for approximately $4.3 million in total consideration. The Company's UDS division provides 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, Tactica and Gateway Learning. At December 31, 2001, the Company recorded an accrual for approximately $15.3 million for payment to the sellers of UDS in accordance with the earn-out provisions outlined in the December 8, 2000 Merger Agreement by and among the Company and UDS. In February 2002, the payment was made consisting of $13.7 million of cash and 310,000 shares of the Company's common stock valued at $1.6 million. On July 24, 2001, the Company acquired for $5.8 million the assets and assumed specified liabilities of iFulfillment, Inc. ("iFulfillment"), which includes a 354,000 square foot leased facility located in Bolingbrook, Illinois. The Company's iFulfillment subsidiary specializes in fully integrated, automated, order fulfillment services for multi-channel retailers and catalogers including such clients as Nordstrom.com, Wilsons Leather and Archibald Candies. The assets and operating results of iFulfillment have been included in the Company's consolidated financial statements since the date of acquisition. 15 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2. SIGNIFICANT ACCOUNTING POLICIES BASIS OF FINANCIAL STATEMENT PRESENTATION The consolidated financial statements include the accounts of the Company and its subsidiaries. The financial statements have been prepared on the accrual basis of accounting in conformity with generally accepted accounting principles in the United States. All significant intercompany transactions and balances have been eliminated in consolidation. Certain prior year amounts have been reclassified to conform with current year financial statement presentation. 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 and related call center support services, including DSL modems, accounted for approximately 67%, 92% and 93% of total revenues for the years ended December 31, 2001, 2000 and 1999, respectively. Revenues generated from the fulfillment of DSL equipment accounted for 18%, 22%, and 0% of the aforementioned totals. 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, 2001, 2000 and 1999. Except for the major clients noted in the following table, no single customer provided more than 10% of consolidated revenues during these years.
Year Ended December 31, ---------------------------------------------------------------- 2001 2000 1999 ---- ---- ---- BELLSOUTH - TELECOM EQUIPMENT 13% 11% 39% - DSL EQUIPMENT 10 9 0 SBC 15 45 52 WARRANTY CORPORATION OF AMERICA 11 4 0 ----------------------------------------------------------------
16 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. SHORT-TERM INVESTMENTS Current available-for-sale marketable securities are carried at their estimated fair value based on current market quotes. Any unrealized gains or losses are reported in shareholders' equity as a component of other accumulated comprehensive income (loss). At December 31, 2001, the Company held approximately $436,000 in available-to-sale securities, which is included in "Prepaid expenses and other" in the accompanying Consolidated Balance Sheets. The unrealized gain was not material to the Company's financial position. This short-term investment was sold at a gain in January 2002. INVENTORIES Inventories, consisting primarily of telephones, interactive wireless pagers and DSL and cable 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 indemnified the Company from substantially 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 $0, $103,000 and $502,000 for the years ended December 31, 2001, 2000 and 1999, respectively, and are included in "Depreciation and Amortization" in the accompanying Consolidated Statements of Operations. 17 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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," 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) and the Company's investment in Return.com, which was written off during the year ended December 31, 2001 (see "Minority Interests"). 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 related to business combinations prior to July 1, 2001 were being amortized over 5-20 years on a straight-line basis, which represented management's estimation of the related benefit to be derived from the acquired business. However, goodwill and other acquired intangibles from business combinations occurring after June 30, 2001 are accounted for under the transition provisions for business combinations of SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" which includes iFulfillment (see Note 8). The Company will adopt SFAS 142 effective January 1, 2002, which changes the accounting for goodwill and other indefinite life intangibles from an amortization method to an impairment only approach. During the year ended December 31, 2001 and 2000, amortization expense for goodwill and other acquired intangibles totaled approximately $525,000 and $31,000, respectively (see Note 8). 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 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 11). INCOME TAXES Innotrac 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. 18 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, the Company agreed to reacquire MBE's 40% ownership interest in Return.com on April 17, 2001. The note receivable of $3.4 million due from MBE was forgiven by the Company in exchange for MBE's ownership interest in Return.com, resulting in 100% ownership by the Company. All remaining contractual commitments for additional funding by the Company were also cancelled. As a result of the Company's controlling ownership interest in Return.com, the Company consolidated the results of operations and financial position of Return.com in the accompanying consolidated financial statements. During the year ended December 31, 2001, the Company wrote off its $2.8 million investment in Return.com against an impairment reserve the Company recorded in the first quarter of 2001. At December 31, 2001, Return.com was no longer in operation. 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. 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 2001 and 2000, revenues have 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 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations," and FASB No. 142, "Goodwill and Other Intangible Assets." SFAS 141 prohibits the use of pooling-of-interest for business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS 142 is effective for fiscal years beginning after December 15, 2001 for all goodwill and other intangible assets recognized in an entity's statement of financial position at that date, regardless of when those assets were initially recognized. The statement changes the accounting for goodwill and other indefinite life intangible assets from an amortization method to an impairment only approach. Upon adoption of the statement, which for the Company will be the beginning of fiscal year 2002, amortization of 19 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS current goodwill will cease, thereby reducing amortization expense for 2002 by approximately $0.9 million after factoring in the recent earn-out payment. In 2001, amortization expense associated with goodwill was $0.3 million. The Company plans to complete its impairment analysis during the first quarter of 2002 and will recognize an impairment, if any, at that time. In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement Obligations," effective for fiscal years beginning after June 15, 2002. SFAS 143 addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets that result from the acquisition, construction, development, and/or the normal operation of a long-lived asset, except for certain obligations for leases and the associated asset retirement costs. The statement required that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The Company does not anticipate that the adoption of SFAS 143 will have a material effect on the Company's financial position or results of operations. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," and amends APB No. 51, "Consolidated Financial Statements." SFAS 144 retains many of the requirements of SFAS 121 and the basic provisions of APB Opinion 30; however, it establishes a single accounting model for long-lived assets to be disposed of by sale. SFAS 144 furthermore resolves significant implementation issues related to SFAS 121. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001 and are to be applied prospectively. The Company does not anticipate that the adoption of SFAS 144 will have a material effect on the Company's financial position or results of operations. 20 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. ACCOUNTS RECEIVABLE Accounts receivable were composed of the following at December 31, 2001 and 2000 (in 000's):
2001 2000 -------- -------- Billed receivables $ 16,846 $ 31,933 Unbilled receivables 79 2,700 -------- -------- 16,925 34,633 Less: Allowance for doubtful accounts (3,263) (3,416) -------- -------- $ 13,662 $ 31,217 ======== ========
4. FINANCING OBLIGATIONS The Company has a revolving credit agreement with a bank for borrowings up to $40 million. An amendment to the revolving credit agreement was entered into during 2001 that eliminated borrowings based on specified advance rates resulting in availability of the entire $40 million line of credit. Interest is payable monthly at rates equal to the prime rate, or at the Company's option, LIBOR plus up to 225 basis points. The line of credit is secured by all assets of the Company and expires on June 1, 2002. At December 31, 2001 and 2000, the Company had no balance outstanding on the line of credit. The Company incurred unused revolving credit facility fees of approximately $85,000 during the year ended December 31, 2001. During the years ended December 31, 2000 and 1999, the Company incurred interest expense related to the line of credit of $0.5 million and $1.3 million, respectively, based on weighted average interest rates of 7.49% and 6.26%, respectively. The revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. At December 31, 2001, the Company was in compliance with all covenants. 21 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. COMMITMENTS AND CONTINGENCIES OPERATING LEASES Innotrac leases office and warehouse space and equipment under various operating leases. The primary office and warehouse operating leases provide for escalating payments over the lease term. Innotrac recognizes rent expense on a straight-line basis over the lease term. The Company also has capital lease obligations that expire over the next three years primarily for warehouse equipment and computer hardware. Aggregate future minimum lease payments under noncancellable operating and capital leases with original periods in excess of one year as of December 31, 2001 are as follows (in 000's):
CAPITAL OPERATING LEASES LEASES ------- --------- 2002 ......................... $ 302 $ 5,456 2003 ......................... 138 3,542 2004 ......................... 97 3,088 2005 ......................... 58 2,147 2006 ......................... 0 2,170 Thereafter ................... 0 2,818 ------ ------- Total minimum lease payments... $ 595 $19,221 ======= Amount related to interest (75) ------ Capital lease obligations 520 Current portion (302) ------ Long-term portion $ 218 ======
Rent expense under all operating leases totaled approximately $4.2 million, $3.1 million and $2.0 million during the years ended December 31, 2001, 2000 and 1999, 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. 6. INCOME TAXES Details of the income tax (provision) benefit for the years ended December 31, 2001, 2000 and 1999 are as follows (in 000's):
2001 2000 1999 -------- -------- -------- Current $ 815 $ 8,457 $ (4,565) Deferred (3,388) 5,627 (1,824) -------- -------- -------- $ (2,573) $ 14,084 $ (6,389) ======== ======== ========
22 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, 2001 and 2000 are as follows (in 000's):
2001 2000 -------- -------- Current deferred tax assets: Allowance for doubtful accounts 1,466 1,351 Reserve for returns and equipment losses 413 1,512 Other reserves 857 1,121 ------- ------- 2,736 3,984 ------- ------- Noncurrent deferred tax assets (liabilities): Net operating loss carryforwards $ 1,910 3,428 Depreciation (1,454) (810) Other (18) (39) ------- ------- 438 2,579 ------- ------- Net deferred tax asset $ 3,174 $ 6,563 ======= =======
Management believes that sufficient income will be earned in the future to realize the net deferred tax assets. At December 31, 2001, the Company had net operating loss ("NOL") carryforwards of approximately $5.0 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. A reconciliation of the income tax (provision) benefit computed at statutory rates to the income tax (provision) benefit for the years ended December 31, 2001, 2000 and 1999 is as follows:
2001 2000 1999 ----- ----- ------- Federal statutory rate (34.0)% 35.0% (35.0)% (Increase) decrease in taxes resulting from: State income taxes, net of federal benefit (4.0) 4.0 (4.0) Items not deductible for tax purposes (4.3) 0.7 (0.6) Other (0.1) (0.4) 0.2 ----- ---- ----- (42.4)% 39.3% (39.4)% ===== ==== =====
23 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. 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):
2001 2000 1999 ------ ------ ------ Diluted earnings per share: Weighted average shares outstanding 11,318 11,212 9,911 Employee and director stock options 372 -- 122 ------ ------ ------ Weighted average shares 11,690 11,212 10,033 assuming dilution ====== ====== ======
8. ACQUISITIONS On July 24, 2001, the Company acquired the assets and assumed specified liabilities of iFulfillment, Inc. ("iFulfillment") for approximately $5.8 million. iFulfillment is located in a 354,000 square foot leased facility in Bolingbrook, Illinois and specializes in fully integrated, automated order fulfillment services for multi-channel retailers and catalogers, including such clients as Nordstrom.com, Wilsons Leather and Archibald Candies. The transaction was accounted for under the purchase method of accounting and, accordingly, the operating results of iFulfillment have been included since the date of acquisition in the Company's consolidated results of operations. The Company has accounted for this transaction in accordance with the provisions of SFAS 141 and SFAS 142. 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 $5,813 Current assets 207 Current liabilities (2,094) Property 1,417 Other liabilities (632) Customer contract 250 Goodwill 6,665
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. 24 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On December 8, 2000, the Company acquired UDS, which was accounted for under the purchase method of accounting. At December 31, 2001, the Company recorded an accrual for approximately $15.3 million for payment to the sellers of UDS under the terms of an earn-out provision contained in the December 8, 2000 Merger Agreement. The earn-out accrual was recorded as additional purchase price consideration. In February 2002, the payment was made consisting of $13.7 million of cash and 310,000 shares of the Company's common stock valued at $1.6 million. As a result, goodwill related to UDS amounted to $18.8 million, net of accumulated amortization of $0.3 million. Neither of the transactions was deemed to be material at the time of the acquisitions; accordingly, no proforma results are presented herein. However, as according to the transition provisions of SFAS 142, the Company's consolidated proforma net income and diluted earnings per share for 2001 with non-amortization of goodwill would have been $4.5 million and $0.39 per share, respectively. There was no material impact for the year ended December 31, 2000. 9. 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. At December 31, 2001 and 2000, there were 11,674,595 shares of common stock and no shares of preferred stock outstanding. 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. During the years ended December 31, 2001 and 2000, the Company had repurchased approximately 6,400 and 45,000 shares at a total cost of $49,000 and $206,000, respectively. The repurchased shares are recorded at cost as treasury stock and result in a reduction of shareholder's equity. Subsequent to December 31, 2001, the Company's Board of Directors authorized the repurchase, at the direction of senior management, of up to an additional $10.0 million of the Company's common stock. 10. EMPLOYEE RETIREMENT PLAN Innotrac employees may participate in a 401(k) defined contribution plan. The plan covers all employees 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 year ended December 31, 2001 was approximately $108,000. The Company's matching for the years ended December 31, 2000 and 1999 were not material. 25 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 11. 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, as amended, provide for the issuance of options to purchase up to an aggregate of 800,000 shares and 2,800,000 shares of common stock, respectively. 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, 2001 is as follows (shares in 000's):
Options Outstanding Options Exercisable ------------------- ------------------- Weighted Average Weighted Range of As of Remaining Weighted Average As of Average Exercise Prices December 31, 2001 Contractual Life Exercise Price December 31, 2001 Exercise Price --------------- ----------------- ---------------- ---------------- ----------------- -------------- $1.77 - $3.54 440 9.0 $ 3.13 -- $ -- $3.54 - $5.31 322 8.4 4.86 -- -- $5.31 - $7.07 343 8.9 6.53 -- -- $7.07 - $8.84 345 8.8 7.37 -- -- $8.84 - $10.61 239 5.8 9.10 239 9.10 $10.61 - $12.38 30 6.3 12.00 30 12.00 $12.38 - $14.15 37 5.1 13.31 25 13.52 $15.92 - $17.68 35 7.2 16.71 25 17.00 --------------------------------------------------------------------------------------------------- 1,791 8.2 $ 6.33 319 $10.34 ===================================================================================================
26 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of the status of the Company's two stock option plans as of December 31, 2001, 2000 and 1999 is as follows (shares in 000's):
Shares Weighted Average Price -------- ---------------------- 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 1,730 5.01 Forfeited (459) 7.14 -------- -------- Outstanding at December 31, 2000 1,799 6.19 Granted 454 7.35 Forfeited (462) 6.98 -------- -------- Outstanding at December 31, 2001 1,791 $ 6.33 ======== ======== Options exercisable at December 31, 2001 319 $ 10.34 ======== ========
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 income (loss) and net income (loss) per share would have been the following pro forma amounts (in 000's, except per share data):
YEAR ENDED DECEMBER 31, ----------------------------------------- 2001 2000 1999 -------- -------- -------- Net income (loss) $ 4,385 $(21,575) $ 9,835 Pro forma net income (loss) adjusted for the impact of SFAS No. 123 $ 3,350 $(22,347) $ 9,048 Diluted net income (loss) per share $ 0.30 $ (1.92) $ 0.98 Pro forma net income (loss) per share adjusted for the impact of SFAS No. 123 $ 0.29 $ (1.99) $ 0.90
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:
2001 2000 1999 -------- -------- -------- Risk-free interest rate 5.45% 5.44% 6.34% Expected dividend yield 0% 0% 0 Expected lives 2.7 Years 2.7 Years 2.7 Years Expected volatility 84.3% 90.4% 80.5%
27 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In 000's, except per share data) First Second Third Fourth --------- -------- --------- -------- 2001 Quarters: Revenues, net $ 24,921 $ 26,025 $ 22,406 $ 21,441 Operating income (loss) (824) 1,782 1,940 2,615 Net income 500 1,035 1,264 1,586 Net income per share-basic 0.04 0.09 0.11 0.15 Net income per share-diluted $ 0.04 $ 0.09 $ 0.11 $ 0.14 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
13. 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 $4.6 million in remaining accruals related to the special charges at December 31, 2001, which include $2.8 million for the Company's shift to a fee-for-service business model and $1.8 million for e-commerce exit costs. Cash payments during 2001 totaled approximately $2.3 million. The Company expects that substantially all of the remaining accruals either will be utilized or reversed to income during the year ended December 31, 2002. Any accruals reversed to income will be reported as a special item. 28 EX-21.1 9 g74787ex21-1.txt LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES - - Return.com Online, LLC - - iFulfillment, Inc. EX-99.1 10 g74787ex99-1.txt ARTHUR ANDERSEN LLP REPRESENTATION LETTER EXHIBIT 99.1 LETTER PURSUANT TO TEMPORARY NOTE 3T TO REGULATION S-X Securities and Exchange Commission 450 Fifth Street, N.W. Washington, DC 20549 Ladies and Gentlemen: In accordance with the requirements of the Securities and Exchange Commission, Innotrac Corporation has received the following written representation from Arthur Andersen LLP, dated as of March 18, 2002: "We represent that this audit was subject to our quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, that there was appropriate continuity of Arthur Andersen personnel working on the audit, availability of national office consultation, and availability of personnel at foreign affiliates of Arthur Andersen to conduct the relevant portions of the audit." If you have any questions, please direct them to the undersigned at (678) 584-4000. Innotrac Corporation By: /s/ David L. Gamsey ---------------------------------------- Title: Senior Vice President, Chief Financial Officer and Secretary -----END PRIVACY-ENHANCED MESSAGE-----