-----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, NCokLMhp8AZWBupnVebdl4qnDXk+RQQ4ltUztFDfOlelTxZZtroT+lh63h8Ybpdz 3HexI3vT+rgngql8JT92Mw== 0000950144-03-004097.txt : 20030331 0000950144-03-004097.hdr.sgml : 20030331 20030328191543 ACCESSION NUMBER: 0000950144-03-004097 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 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: 03626812 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 g81419e10vk.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, 2002 / / 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 incorporation or organization) (I.R.S.Employer 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 checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes No X . 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 June 28, 2002, the last business day of the Registrant's most recently completed second fiscal quarter was $29,097,113 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, 2003, 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 2002 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, 2002 (the "Report"). Portions of the Registrant's Proxy Statement for the 2003 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....................................... 8 EXECUTIVE OFFICERS OF REGISTRANT........................................................... 14 ITEM 2. PROPERTIES................................................................................. 15 ITEM 3. LEGAL PROCEEDINGS.......................................................................... 15 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS........................................ 15 PART II ......................................................................................................... 16 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.................. 16 ITEM 6. SELECTED FINANCIAL DATA.................................................................... 16 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS...... 16 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. 16 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA................................................ 17 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE....... 17 PART III ........................................................................................................ 18 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT......................................... 18 ITEM 11. EXECUTIVE COMPENSATION..................................................................... 18 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS.................................................................................... 18 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................................. 18 ITEM 14. CONTROLS AND PROCEDURES.................................................................... 18 PART IV ......................................................................................................... 19 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K............................ 19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES................................... S-1 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS............................................ S-2
PART I ITEM 1. BUSINESS Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and headquartered in Atlanta, Georgia, provides order processing, order fulfillment and call center 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 efficiently manage their logistics, distribution and call center services by leveraging our technology platform and our core competencies: - Fulfillment Services: - sophisticated warehouse management technology - automated shipping solutions - real-time inventory tracking and order status - purchasing and inventory management - channel development - zone skipping for shipment cost reduction - product sourcing and procurement - packaging solutions - back-order management - returns management - Call Center 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 - collaborative chat - intuitive e-mail response We receive most of our clients' orders either through inbound call center services, electronic data interchange ("EDI") or the internet. On a same day basis, depending on product availability, the Company picks, packs, verifies and ships the item, tracks inventory levels through an automated, integrated perpetual inventory system, warehouses data and handles customer support inquiries. During the 1990s, we had a high focus on the telecommunications industry because of its growth characteristics and increasing marketing needs. These characteristics have changed quite dramatically in the last several years as growth in the telecommunications industry has slowed and the industry has contracted. However, we continue to provide customer support services and fulfillment of telephones, Caller ID equipment, Digital Subscriber Line ("DSL") and Cable Modems and other telecommunications products to companies such as BellSouth Corporation ("BellSouth"), Warranty Corporation of America ("WACA") and Qwest Communications International, Inc. ("Qwest") and their customers. During the year ended December 31, 2002, approximately 26.5% of our revenues were generated from telecommunications clients and 19.3% of revenues were from DSL and cable modem clients. Approximately 59.6% of our 2001 revenues were from telecommunications and DSL clients. We anticipate that the percentage of our revenues attributable to telecommunications and DSL clients will continue to decrease during 2003 due to the addition of more retail clients. 2 During 2002, 54.2% of revenues were from retail, catalog and direct marketing clients which include such companies as Coca-Cola, Ann Taylor, Smith & Hawken, Tactica, Porsche, Nordstrom.com, Wilsons Leather, Martha Stewart Omnimedia, Books are Fun (a division of Readers' Digest) and Thane International. We take orders for our retail, catalog and direct marketing clients via the internet, through a customer service representative at our Pueblo and Reno call centers or through direct electronic transmission from our clients. These orders are processed through one of our order management systems and then transmitted to one of our seven fulfillment centers located across the country and are shipped to the end consumer typically within 24 hours of when the order is received. Inventory is held on a consignment basis, with minor exceptions, and includes items such as shoes, clothing, accessories, books and outdoor furniture. With the conversion of a majority of our clients to a fee-for-service model during 2000 and 2001, we generally no longer purchase and sell products from third party manufacturers for our clients. Instead, we provide fulfillment and warehousing services for our clients on a fee for service basis. We continue to purchase and own inventory for certain clients (primarily BellSouth), but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. This model substantially reduces revenues as the pass through cost of purchased equipment is no longer included in revenues. This was the primary reason for decreased revenues in 2000 and 2001 as compared to prior years. During 2002, the Company began applying the consensus reached in Emerging Issues Task Force ("EITF") No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred" which requires the presentation of reimbursed out-of-pocket expenses on a gross basis as revenues and expenses. As required, the Company reclassified the prior period financial information presented herein to comply with the guidance in EITF 01-14. Accordingly, freight and postage charges in the Company's fulfillment business during the years ended December 31, 2002, 2001 and 2000 totaling $13.5 million, $27.1 million and $28.9 million, respectively, have been presented as revenues and cost of revenues in the corresponding Consolidated Statements of Operations. The 2001 and 2000 reclassification had no impact on net income. 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 Martha Stewart Omnimedia. It is located in a 354,000 square foot leased facility in Bolingbrook, Illinois. Due to the addition of a sizable new client, in September 2002 we leased an additional 150,204 square feet in a nearby facility. This new facility has expansion space of an additional 105,357 square feet that we expect to utilize in 2003. Our UDS division provides integrated order processing, order management, fulfillment and customer relationship management services. UDS's customer base comprises traditional direct marketing companies including Thane International and Tactica. It is located in a 275,000 square foot facility in Reno, Nevada. During 2001, we expanded UDS's business by taking advantage of our East Coast capabilities. Under the terms of Innotrac's merger agreement with UDS, the former shareholders of UDS 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 $13.7 million in cash and 310,000 shares of our common stock pursuant to this arrangement. No earnout amounts were earned in the second year. We do not currently believe any additional contingent payments will be due. In August 2002 we leased a 396,000 square foot fulfillment center near Cincinnati, in Hebron, Kentucky. This facility provides fulfillment for Smith & Hawken. Capital expenditures associated with this facility were approximately $4.6 million and were funded through our bank line of credit. With our national footprint virtually complete, 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 diverse industries. 3 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 our clients' products to their customers on a timely and accurate basis. Our personnel pick, pack, verify and ship product orders and requests for promotional, technical and educational literature, shoes, clothing, accessories, books and outdoor furniture for clients. We use several custom-designed, semi-automated packaging and labeling lines to pack and ship products as well as highly automated, conveyorized systems utilizing RF scanning and pick-to-light technologies. By utilizing these technologies, 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. Our Atlanta operations earned ISO 9001:2000 certification in 2002. We are dedicated to providing quality service to our clients at every step in the fulfillment process. To ensure order accuracy we have implemented procedures that require three out of every 100 boxes to be randomly reopened and inspected to prove the contents exactly match the order prior to shipment. In addition, we have highly sensitive scales at the end of our packaging lines that also assist in ensuring the accuracy of every order. Our 2002 order accuracy rate exceeded 99%. PURCHASING MANAGEMENT. For certain 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 fulfillment 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. We also perform cycle counts throughout the year to check system-maintained item balances against physical item balances. In addition, we complete bin validations on a quarterly basis. Our facilities have several layers of security. When necessary, we dispose of clients' products utilizing established guidelines. Disposal procedures vary depending on the product and client business rules. PRODUCT CONSIGNMENT AND WAREHOUSING. For a majority of our clients, we no longer purchase and sell products from third party manufacturers. Instead, we warehouse products on a consignment basis and fulfill orders on behalf of our customers for a fee. In certain cases (primarily BellSouth), 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 order processing and order fulfillment solution. Our customer support services are described below. INBOUND CALL CENTER SERVICES. Our customer service 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 4 to customers who call us. To properly handle the call, 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 customer service representative. If the caller is placing an order they are immediately transmitted to a customer service representative trained to take the order and enter it into our systems for transmittal to the appropriate fulfillment center. If the customer has a question, complaint or needs return information, the interactive voice response ("IVR") system attempts to resolve these 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 customer service representatives who are specially trained in the applicable client's business and products and answer using the client's name. Our customer service 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 service representatives are also trained to handle introductory level technical support issues. Customer requests are generally resolved with a single call, whether answered by a trained representative or our automated systems. 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 fulfillment and customer 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 two primary warehouse management systems depending on our business line and our locations. In 2002, we continued 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 provides efficiencies in inventory management, outbound distribution and task management. We completed implementation of PKMS for clients at our Pueblo, Atlanta and Chicago-Romeoville warehouses. Our Chicago-Bolingbrook and Cincinnati-Hebron facilities utilize an Optum warehouse management system, which is a highly configurable fulfillment solution for fast-moving, high volume, piece-pick operations suitable for our multi-channel retailers and catalogers. Our Reno facility utilizes an internally developed, customized order management, warehouse management and customer relationship management system suitable for its direct 5 marketing 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. As part of our UDS acquisition in December 2000 we acquired their internally-developed, customized order management system ("OMS") that is fully integrated with a customized warehouse management solution and includes front-end customer relationship management ("CRM") capabilities. In addition to existing Reno clients, in 2002, we added Martha Stewart Omnimedia and Smith & Hawken to that system. As part of the migration of those two new clients onto the system we added the requisite functionality and customization. The customized nature of the system required significant resources to properly scale the system to meet our clients' needs and resulted in a considerable upswing in IT costs in 2002. 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 as of December 31, 2002 was supporting approximately 300 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 approximately 50 representatives. Our integrated systems allow the customer service representatives to enter orders received via telephone into their computer which transmits the data over T1 lines to one of our seven fulfillment centers' order management systems where it is processed. Shortly thereafter the product is picked, packed, verified and shipped to the customer. 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 fulfillment and customer 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 1, 2003, we had over 800 full time employees supported by part time staff on an as needed basis. 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, scope of locations, efficiency, technical capabilities, speed 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 and call center operations. 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. 6 GOVERNMENT REGULATION The Caller ID services offered by our telecommunications clients are subject to various federal and state regulations. The legality of Caller ID has been challenged in cases decided under the Electronic Communications Privacy Act, or the ECPA, and several state statutes. In March 1994, a Federal Communications Commission, or FCC, report preempted certain state regulation of interstate calling party number parameter, or CPN, based services, the technology underlying Caller ID. This report requires certain common carriers to transmit CPN and its associated privacy indicator (which allows telephone callers to block the display of their phone numbers on Caller ID display units) on an interstate call to connecting carriers without charge (the "Free Passage" rule). In connection with this report, the Department of Justice issued a memorandum which concluded that the installation or use of interstate Caller ID service is not prohibited by any federal wiretap statute and that, in general, the FCC has authority to preempt state laws that the FCC finds would hinder federal communications policy on Caller ID services. Court decisions since the FCC issued its March 1994 report have consistently held that Caller ID does not violate any state or federal wiretap statute. In May 1995, the FCC narrowed its March 1994 preemption of state public utilities blocking regulations by permitting subscribers to choose per-line blocking or per-call blocking on interstate calls, provided that all carriers were required to adopt a uniform method of overriding blocking on any particular call. At the same time, the FCC specifically preempted a California Public Utilities Commission, or CPUC, per-line blocking default policy, which required that all emergency service organizations and subscribers with nonpublished numbers, who failed to communicate their choice between per-call blocking and per-line blocking, be served with 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, in most cases, we outsource to another company. The few cases where Innotrac does conduct outbound teleservices are related solely to the support of our clients with catalog sales programs, and thus are exempt from the regulations most commonly associated with outbound teleservices. 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 as amended 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 7 whether the status of the regulation of Caller ID services or e-commerce will change and what affect, if any, this change would have on us or our industry. INTELLECTUAL PROPERTY We have used the service mark "Innotrac" since 1985 and have registered it and other marks used by us in our business through the US Patent and Trademark Office. The "innotrac.com" domain name has been a registered domain name since 1995. We also own several other internet domain names. Due to the possible use of identical or phonetically similar service marks by other companies in different businesses, there can be no assurance that our service marks will not be challenged by other users. Our operations frequently incorporate proprietary and confidential information. 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. A relatively small number of our clients account for a significant portion of our revenues. 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. 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. The expansion of our business with retailers and catalogers in 2002 adds an element of risk in these areas. 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. Furthermore, we are contractually bound to our facility leases until their term expires. If a client terminates their contract suddenly, we will still have an obligation under our leasing contracts. OUR BUSINESS HAS HISTORICALLY BEEN CONCENTRATED IN THE TELECOMMUNICATIONS, DSL AND CABLE INDUSTRIES. IF WE CANNOT CONTINUE TO DIVERSIFY OUTSIDE OF THESE INDUSTRIES, OUR STRATEGY MAY NOT BE SUCCESSFUL AND OUR BUSINESS COULD SUFFER. Approximately 46% of our revenues in 2002 and more than half of our revenues in 2001 were attributable to telecommunications, DSL and cable clients. Consequently, we are particularly susceptible to negative changes affecting these industries in general. The telecommunications industry has suffered a material downturn since mid 2000 which has had a significant negative impact on 8 our business. 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 historically 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. IF THE MARKET FOR TELECOMMUNICATIONS PRODUCTS OR SERVICES CHANGES, OR THE DSL AND WIRELESS 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, DSL modems and wireless pagers to the end user customers of our telecommunications clients for our revenues. We also depend upon these clients to promote Caller ID, DSL and wireless 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; - 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. If the internet develops as a commercial medium more slowly than we expect, it could adversely affect our business. IF WE ARE NOT ABLE TO CONTINUE TO MANAGE OUR INFRASTRUCTURE AND VOLUME GROWTH, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our operations, number of facilities and volume of packages shipped 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; - maintain pricing and margins; - continue to develop our sales infrastructure; - attract, train, motivate and retain management and other personnel; and - maintain the high quality of our services. 9 IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE ADVERSELY AFFECTED. We believe there has recently been a significant increase in businesses outsourcing services not directly related to their principal business activities. Our business, results of operations and financial condition could be materially adversely affected if the outsourcing trend declines or reverses, or if corporations bring previously outsourced functions back in-house. Particularly during general economic downturns, businesses may bring in-house previously outsourced functions in order to avoid or delay layoffs. IF WE ARE NOT ABLE TO RETAIN OR EMPLOY QUALIFIED EMPLOYEES, INCLUDING KEY EXECUTIVES, OUR EMPLOYMENT-RELATED COSTS MAY RISE AND OUR RESULTS OF OPERATIONS COULD SUFFER. WE MAY NOT BE ABLE TO RETAIN OR EMPLOY QUALIFIED MANAGERS. We depend in large part on the abilities and continuing efforts of our executive officers and senior management. Our business and prospects could be materially adversely affected if (1) current officers and managers do not continue in their key roles and we cannot attract and retain qualified replacements or (2) we cannot attract and retain additional qualified personnel to sustain growth. We have employment agreements with our key executive officers. We cannot assure you that we will be able to retain them. We only maintain key man life insurance on Scott D. Dorfman, in the amount of $3.5 million. In order to support growth, we must effectively recruit, develop and retain additional qualified management personnel. We cannot assure you that in the future we will be able to recruit and retain additional qualified managers. WE MAY NOT BE ABLE TO RETAIN OR EMPLOY OTHER QUALIFIED EMPLOYEES. Our success depends largely on our ability to recruit, hire, train and retain qualified employees. If we cannot do so, our business, results of operations or financial condition could be materially adversely affected. Our industry is very labor-intensive and has experienced high personnel turnover. If our employee turnover rate increases significantly, our recruiting and training costs could rise and our operating effectiveness and productivity could decline. New clients or new large-scale fulfillment or customer 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. 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 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 10 existing or potential clients' in-house operations are also significant competitors. Our performance and growth could be negatively impacted if: - existing clients decide to provide, in-house, services they currently outsource; - potential clients retain or increase their in-house capabilities; or - existing clients consolidate their outsourced services with other companies. In addition, competitive pressures from current or future competitors could result in significant price erosion, which could in turn materially adversely affect our business, financial condition and results of operations. In 2002, 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. Our Reno systems, which house several of our largest clients, are completely customized and therefore not supported by third party providers. We are heavily reliant on a few developers. If these developers leave, it could materially adversely affect our business. Furthermore, if our clients require additional enhancements to the system as they did in 2002, our business could be materially adversely affected. 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 retail industry; - changes in the fulfillment and call center services industries; - 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 other 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. 11 OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES OR INCREASE OUR COSTS. In connection with any outbound telemarketing services that we provide, we must comply with federal and state regulations. These include the Federal Communications Commission's rules under the Federal Telephone Consumer Protection Act of 1991 and the Federal Trade Commission's regulations under the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both of which govern telephone solicitation. If we conduct outbound telemarketing services, these rules and regulations would apply to that portion of our business. Furthermore, there may be additional federal and state legislation or changes in regulatory implementation. These changes could include interpretations under the Telecommunications Act of 1996 restricting the ability of telecommunications companies to use consumer proprietary network information, or CPNI. New legislation or regulatory implementation in the future may significantly increase compliance costs or limit our activities, our clients' activities or the activities of companies to which we outsource outbound telemarketing functions. Additionally, we could be responsible for failing to comply with regulations applicable to our clients or companies to which we outsource telemarketing. If unfavorable federal or state legislation or regulations affecting Caller ID service, internet service or other technology related to products we fulfill and provide customer support for are adopted, our business, financial condition and results of operations could be materially adversely affected. See "Business -- Government Regulation" in this Item 1 for further information about government regulation of our business. IF 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. DUE TO THE NATURE OF OUR BUSINESS WE HAVE A SIGNIFICANT AMOUNT OF UNSKILLED LABOR AND A HIGH TURNOVER RATE THEREBY INCREASING OUR EXPOSURE TO EMPLOYEE RELATED LITIGATION. Our fulfillment and call centers employ a sizable amount of unskilled labor and generate a high turnover rate. Furthermore, due to the downturn in the economy and its adverse affects on our business, we have had to terminate employees from time to time. Our exposure to litigation as a result of employee matters has recently increased. We are currently involved in litigation associated with several employee related matters. Management believes this litigation is currently immaterial, though it could become material in the future. IF OUR GOODWILL IS DEEMED IMPAIRED AS PART OF OUR ANNUAL (OR EARLIER) IMPAIRMENT TEST, THE IMPAIRMENT CHARGE WOULD RESULT IN A DECREASE IN OUR EARNINGS AND NET WORTH. Current accounting rules require that goodwill no longer be amortized but be tested for impairment at least annually. We have a significant amount of goodwill which, based upon a negative outcome of any impairment test in the future, could result in the write-down of all or a portion of goodwill and a corresponding reduction in earnings and net worth. 12 IF ESTIMATES OF FUTURE TAXABLE INCOME THAT ARE EXPECTED TO ALLOW FOR REALIZATION OF OUR NET DEFERRED TAX ASSET ARE REDUCED DURING THE CARRYFORWARD PERIOD, THE AMOUNT OF OUR NET DEFERRED TAX ASSET CONSIDERED REALIZABLE COULD BE REDUCED. We have a tax net operating loss carryforward of $27.6 million at December 31, 2002 that expires between 2018 and 2020. Our ability to generate the expected amounts of taxable income in excess of this amount from future operations is dependent upon general economic conditions, competitive pressures on sales and margins and other factors beyond our control. We can not assure that we will meet our expectations for future taxable income in the carryforward period. If estimates of future taxable income during the carryforward period are reduced, the amount of our net deferred tax asset considered realizable could be reduced; this would require us to record a valuation allowance for this asset and would result in a decrease in our earnings and net worth. NONCOMPLIANCE WITH ANY OF THE COVENANTS UNDER OUR REVOLVING CREDIT AGREEMENT ALLOWS THE LENDER TO DECLARE ANY OUTSTANDING BORROWING AMOUNTS TO BE IMMEDIATELY DUE AND PAYABLE. Our revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. Noncompliance with any of the covenants allows the lender to declare any outstanding borrowing amounts to be immediately due and payable. Our minimum tangible net worth requirement is our most restrictive covenant under the revolving credit agreement. Our tangible net worth, as defined in the credit agreement, exceeded the covenant requirement by approximately $100,000 at December 31, 2002. Tangible net worth is defined as shareholders' equity less goodwill, other intangible assets and certain deferred costs. Included in the tangible net worth calculation is the carrying amount of the Company's deferred tax asset (discussed immediately above). In addition, in February 2003, the Company and its lender agreed to modify the credit agreement, including relaxing the tangible net worth requirement. This agreement was to have been reflected in an amendment to the credit agreement, which has not yet been finalized. Unless the credit agreement is so amended, the Company may not comply with this covenant in the near term. 13 EXECUTIVE OFFICERS OF REGISTRANT The executive officers of Innotrac are as follows:
NAME AGE POSITION ---- --- -------- Scott D. Dorfman.................. 45 Chairman of the Board, President and Chief Executive Officer David L. Gamsey................... 45 Senior Vice President, Chief Financial Officer, Treasurer and Secretary David L. Ellin.................... 44 Senior Vice President--Sales Larry C. Hanger................... 48 Senior Vice President--Client Services Robert J. Toner................... 39 Vice President--Logistics
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. (Paymaster), 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. 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. 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. 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. 14 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. In June 1999, we entered into a lease for a 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 370 workstations and utilized 300 of the workstations at December 31, 2002. It currently operates twenty-four hours a day, seven days a week. The remaining 42,000 square feet is used for fulfillment services. In October 1999, we entered into a lease for an additional fulfillment facility in Duluth, Georgia with an initial term of five years with one three-year renewal option. In August 2000, the Company entered into 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. 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 administrative office space, a 250,000 square foot fulfillment center and a call center that can support 200 workstations. UDS leases this facility through two lease agreements, which were initiated in October 2002 and October 2000. These agreements have lease terms of five years and seven years, respectively. Currently, the call center is configured with approximately 120 workstations. The call center operates twenty-four hours a day, seven days a week. 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 we renewed for an additional five years commencing January 1, 2003. This lease contains one additional five-year renewal option. This facility is used exclusively for fulfillment services. In August 2002, we entered into a lease for a new facility in Hebron, Kentucky with an initial term of five years with two renewal options; the first for one year and the second for three years. The facility provides approximately 396,000 square feet of fulfillment and warehouse space. In September 2002, we entered into a lease for a new facility in Romeoville, Illinois with an initial term of five years and two months with two five-year renewal options. The facility provides approximately 150,204 square feet of fulfillment and warehouse space. 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. Our fulfillment and call centers employ a sizable amount of unskilled labor and generate a high turnover rate. Furthermore, due to the downturn in the economy and its adverse affects on our business, we have had to terminate employees from time to time. Our exposure to litigation as a result of employee matters has increased. Although, 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 there can be no guarantee that it will not become material in the future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered by this Report. 15 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 ---- --- 2002 First Quarter................................................... $7.220 $3.400 Second Quarter.................................................. $6.350 $4.119 Third Quarter................................................... $5.719 $2.200 Fourth Quarter.................................................. $3.140 $1.800 Fiscal Year Ended December 31, 2002............................. $7.220 $1.800 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
The approximate number of holders of record of Common Stock as of March 18, 2003 was 72. The approximate number of beneficial holders of our Common Stock as of that date was 2,000. The Company has never declared cash dividends on the Common Stock. The Company intends to retain its earnings to finance the expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon such factors as earnings, capital requirements, the Company's financial condition, restrictions in financing agreements and other factors deemed relevant by the Board of Directors. The payment of dividends by the Company is restricted by its revolving credit facility. Item 12 of Part III contains information concerning the Company's equity compensation plan. ITEM 6. SELECTED FINANCIAL DATA The information contained under the heading "Selected Financial Data" in the Company's 2002 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 2002 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 2002 Annual Report to Shareholders, filed as an exhibit hereto, is incorporated herein by reference. 16 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 2002 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 On April 22, 2002 the Board of Directors, upon the recommendation of the Audit Committee, dismissed its independent accountants, Arthur Andersen LLP, and appointed Deloitte & Touche LLP as its new independent accountants, effective April 22, 2002. This matter was previously reported on a Form 8-K filed April 24, 2002. 17 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 2003 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 2003 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 AND RELATED SHAREHOLDER MATTERS The information contained under the headings "Voting Securities and Principal Shareholders" and "Equity Compensation Plan" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2003 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 2003 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. ITEM 14. CONTROLS AND PROCEDURES Our management, including the Chief Executive and Chief Financial Officers, supervised and participated in an evaluation of our disclosure controls and procedures (as defined in federal securities rules) within the 90 days before we filed this report. Based on that evaluation, our CEO and CFO have concluded that our disclosure controls and procedures were effective as of the date of that evaluation as defined in Exchange Act Rules 13a-14(c) and 15d-14(c). There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their last evaluation. 18 PART IV ITEM 15. 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. Reports of Independent Public Accountants Consolidated Balance Sheets as of December 31, 2002 and 2001 Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2002, 2001 and 2000 Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 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 (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-k for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the commission on March 28, 2002) 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) 19 (b) First Amendment to the Rights Agreement dated as of November 30, 2000 between the Company, Reliance Trust Company and SunTrust Bank, dated as of November 30, 2000 10.1+ 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) 10.2 (a) 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) (b)* Lease, dated March 23, 2000 by and between Dermody Industrial Group and Universal Distribution Services, Inc. 10.3 (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) (d)* Third Amendment to Master Lease Agreement dated October 9, 2002, by and between Computer Sales International, Inc. and the Registrant 10.4(a) Amended and Restated Loan and Security Agreement between the Registrant and SouthTrust Bank, N.A., dated January 25, 1999 (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 0-23741), filed with the Commission on March 26, 1999) (b) First Amendment to Amended and Restated Loan and Security Agreement by and between the Registrant and SouthTrust Bank, N.A., dated April 29, 1999 (incorporated by reference to Exhibit 10.14(b) to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929), filed with the Commission on June 3, 1999) (c) Letter Modification/Waiver to Amended and Restated Loan and Security Agreement, as amended, effective August 14, 2000 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 0-23741), filed with the Commission on November 13, 2000) 20 (d) 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) (e) Letter Modification/Waiver to Amended and Restated Loan and Security Agreement, as amended, effective May 31, 2002 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 000-23740) filed with the Commission on August 13, 2002) (f) Letter Modification/Waiver to Amended and Restated Loan and Security Agreement, as amended, effective November 13, 2002 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 000-23740) filed with the Commission on November 19, 2002) (g)* Letter Modification to Amended and Restated Loan and Security Agreement, dated February 18, 2003, as amended, effective January 1, 2003 10.5+ 2002 Senior Executive Incentive Compensation Plan (incorporated by reverence to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the Commission on March 28, 2002) 10.6(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) 10.7+ 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) 10.8+ 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) 10.9+ 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) 10.10 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 21 Commission on March 30, 2001) 10.11 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) 10.12 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) 10.13(a) Lease, dated July 23, 2001, by and between The Lincoln National Life Insurance Company and iFulfillment, Inc. (incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-k for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the commission on March 28, 2002) (b)* Lease, dated August 5, 2002, by and between The Lincoln National Life Insurance Company and the Registrant 10.14+ Employment Agreement dated December 31, 2001, by and between Robert J. Toner, Jr. and the Registrant (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-k for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the commission on March 28, 2002) 10.15+ Employment Agreement dated December 8, 2000, by and between Patrick J. West and the Registrant (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-k for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the commission on March 28, 2002) 10.16 (a) Lease, dated April 23, 2002, by and between ProLogis Development Services Incorporated and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q (Commission File No. 000-23740) filed with the Commission on November 19, 2002) (b)* First Amendment to Lease Agreement dated October 15, 2002 by and between ProLogis Development Services Incorporated and the Registrant 10.17* Lease, dated September 17, 2002, by and between The Prudential Insurance Company of America and the Registrant 13.1* Portions of the Registrant's Annual Report to Shareholders for 2002 incorporated into this Form 10-K 21.1* List of Subsidiaries 23.1* Consent of Deloitte & Touche LLP 23.2* Notice Regarding Consent of Arthur Andersen LLP 24.1* Power of Attorney (included on signature page) 99.1* Certification of Chief Executive Officer Pursuant to 18 U.S.C.ss.1350 99.2* Certification of Chief Financial Officer Pursuant to 18 U.S.C.ss.1350 22 * 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 2002 fiscal year. 23 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 2-02 OF REGULATION S-X, THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP, WHICH HAS CEASED OPERATIONS, AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR ANDERSEN LLP REPORTED ON SUCH FINANCIAL STATEMENTS PRIOR TO THE RECLASSIFICATIONS AND REVISIONS DISCUSSED IN NOTE 2 AND NOTE 16 OF THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. We have audited in accordance with auditing standards generally accepted in the United States, the financial statements of INNOTRAC CORPORATION AND SUBSIDIARY included in this Form 10-K and have issued our report thereon dated February 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 000's) Provision for uncollectible accounts Year ended December 31, 2002 .................. $ 3,263 $ (1,329) $ -- $ (975) $ 959 2001 .................. $ 3,416 $ 3,813 $ 50 $ (4,016) $ 3,263 2000 .................. $ 1,177 $ 3,325 $ 1,254 $ (2,340) $ 3,416 Provisions for returns and allowances Year ended December 31, 2002 .................. $ 193 $ 52 $ -- $ (235) $ 10 2001 .................. $ 725 $ 211 $ 843 $ (1,586) $ 193 2000 .................. $ 297 $ 5,697 $ 12,428 $(17,697) $ 725 Provisions for restructuring charge Year ended December 31, 2002 .................. $ 1,831 $ (807) $ -- $ (747) $ 277 2001 .................. $ 2,831 $ -- $ (100) $ (900) $ 1,831 2000 .................. $ -- $ 4,618 $ -- $ (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 31st day of March, 2003. INNOTRAC CORPORATION /s/ Scott D. Dorfman ---------------------------------------------- Scott D. Dorfman Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) /s/ David L. Gamsey ---------------------------------------------- David L. Gamsey Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) CERTIFICATIONS I, Scott D. Dorfman, certify that: 1. I have reviewed this annual report on Form 10-K of Innotrac Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ Scott D. Dorfman -------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) CERTIFICATIONS I, David L. Gamsey, certify that: 1. I have reviewed this annual report on Form 10-K of Innotrac Corporation; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 /s/ David L. Gamsey ------------------- David L. Gamsey Senior Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial and Accounting Officer) EX-10.2(B) 3 g81419exv10w2xby.txt EX-10.2(B) LEASE, DATED MARCH 23, 2000 EXHIBIT 10.2(b) DERMODY PROPERTIES STANDARD INDUSTRIAL LEASE FOR LANDLORD USE ONLY: (NET-NET-NET) BUILDING #: 640B L/A: EGZ Lease Preparation Date: March 23, 2000 Landlord: Dermody Industrial Group, a Nevada joint venture, located at 1200 Financial Boulevard. P. O. Box 7098, Reno, Nevada 89510 Tenant: UPS, a Nevada corporation Trade Name (dba): UDS 1. LEASE TERMS 1.01 Premises: The Premises referred to in this Lease contain approximately 52,500 square feet as shown on Exhibit "A" attached. The address of the Leased Premises is: 4910 Longley Lane, Suite 102, Reno, Nevada. 1.02 Project: The Project in which the Premises are located consist of approximately 333,000 square feet as shown in Exhibit A. 1.03 Tenant's Notice Address: Tenant's Notice Address is the address of the Leased Premises as defined in Section 1.01 unless otherwise specified here: 1.04 Landlord's Notice Address: P. O. Box 7098, Reno, Nevada 89510 1.05 Tenant's Permitted Use: Warehousing, assembling, and distribution of consumer products and related activities in full compliance with the terms of this Lease. 1.06 Lease Term: The Lease Term is for 7 years and commences on October 1, 2000 (the "Lease Commencement Date") and expires September 30, 2007. Tenant shall also be entitled to the options to extend the Lease Term for two (2) additional five (5) year periods (the "Extension Terms" as defined in Section 41.01 below), subject to and in compliance with the terms and conditions specified in Article 41. below. For purposes of this Lease, the terms, "Lease Term," "term of the Lease," and "term," shall mean and include the initial period of the Lease specified above, together with the Extension Term(s) to the extent the Extension Option(s) are exercised by Tenant pursuant to Article 41, below, and the term, "Initial Lease Term," shall mean the initial period of the Lease as specified above. 1.07 Base Monthly Rent shall be paid in lawful money of the United States of America on the following schedule: 2000 Months 1-3: Free of Base Monthly Rent (Additional Rent is still required) Months 4-30: 27(cents) a square foot per month n/n/n $14,175.00 Months 31-60: 28(cents) a square foot per month n/n/n $14,700.00 Months 61-84: 30 (cents) a square foot per month n/n/n $15,750.00 Adjustments to the Base Monthly Rent shall be made NONE. 1.08 Security Deposit: SEVENTEEN THOUSAND, SIXTY-THREE AND 00/100 DOLLARS ($17,063.00) in lawful money of the United States of America. 1.09 Proportionate Share: Tenant's Proportionate Share is 15.77% based upon the total square footage of the Project and the square footage of the Premises. 1.10 Index: The Index for calculating cost of living adjustments in the Base Monthly Rent during the Extension Term(s) shall be the Consumer Price Index for All Urban Consumers, U. S. City Average (1982/84=100). 1.11 Tenant is entitled to COMMON vehicle parking spaces subject to the provisions of Section 8 of the Lease. 1.12 Tenant Improvements: Tenant Improvements to be performed in the Premises, if any, will be performed in accordance with the terms and provisions entitled "Landlord's Work" contained in Exhibit "B" attached if applicable. Thereafter during the Lease Term, Landlord will be under no obligation to alter, change, decorate or improve Premises. 1.13 Guarantee: Tenant's obligations under this Lease shall be unconditionally guaranteed by Patrick West and Laura West, husband and wife, pursuant to the Guarantee (Lease) in the form of Exhibit H attached hereto and made a part hereof. 2. DEMISE AND POSSESSION 2.01 Landlord leases to Tenant and Tenant leases from Landlord the Premises described in 1.01. By entering the Premises, Tenant acknowledges that it has examined the Premises and accepts the Premises in their present condition subject only to any additional work Landlord has agreed to do and Landlord's express warranties as stated on Exhibit B. -1- Landlord expressly reserves its right to lease any other space available in the Project to whom ever it wishes, further Tenant hereby acknowledges that it did not rely on any other tenant remaining a tenant in the Project as a consideration for entering into this Lease. 2.02 If for any reason Landlord cannot deliver possession of the Premises on the date the Lease commences, Landlord shall not be subject to any liability nor shall the validity of this Lease be affected. If Tenant has not caused such delay there shall be a proportionate reduction of the Base Monthly Rent covering the period between the commencement of the Lease Term and the date when Landlord can deliver possession. However. Tenant, unless it is the cause of the delay, has the right to cancel this Lease by written notification if possession of the Premises is not delivered within one hundred eighty (180) days of the date the Lease Term commences. Landlord may terminate this Lease by giving written notice to Tenant if possession of the Premises is not delivered within one hundred eighty (180) days of the date the lease is to commence. 2.03 For the period commencing on the date of mutual execution of this Lease by Landlord and Tenant (the "Early Occupancy Date") and ending on the Lease Commencement Date (the "Early Occupancy Period"), Tenant shall be entitled to occupy the Premises for the limited purposes and subject to the terms and conditions of this Section 2.03. Provided that Tenant's early occupancy rights granted under this Section 2.03 comply with all applicable city code and other governmental and administrative laws, rules, regulations, and requirements, Tenant shall have the right, at Tenant's risk and at Tenant's sole cost and expense, to enter onto the Premises at any time during the Early Occupancy Period, in order to take measurements and prepare specifications for the installation of Tenant's trade fixtures and equipment in the Premises. Landlord shall have no liability or responsibility for loss of or damage or injury to any of Tenant's employees, contractors, representatives, agents, or invitees, or to any of Tenant's property on the Premises during the Early Occupancy Period, except for damages caused by the intentional misconduct of Landlord. Tenant's entry onto and use of the Premises during the Early Occupancy Period pursuant to this Section 2.03 shall be subject to all of the terms and conditions of this Lease, including, without limitation, Tenant's obligation to pay Additional Rent and indemnity obligations hereunder, and excluding only the requirement to pay Base Monthly Rent, except in the event Tenant commences business operations from the Premises, in which case Tenant shall thereafter be responsible for the payment of Base Monthly Rent thereafter for the remainder of the Early Occupancy Period. Notwithstanding the foregoing, Landlord shall have no liability or responsibility with respect to dust resulting from Landlord or Landlord's contractor's construction or other activities which dust affects or damages Tenant's equipment and property on or in the Premises. Tenant agrees to exercise Tenant's rights hereunder during the Early Occupancy Period so as to not interfere in any way with Landlord and Landlord's Contractor's construction of the Premises and Landlord's Work. 3. BASE MONTHLY RENT 3.01 Base Monthly Rent: On the first day of every calendar month of the Lease Term commencing January 1, 2001, Tenant will pay, without deduction or offset, prior notice or demand. Base Monthly Rent at the place designated by Landlord. However, the first month's Base Monthly Rent (Section 1.07), Additional Rent (Section 5.05), and Security Deposit (Section 1.08) is due and payable upon execution of this Lease. In the event, that the Term of this Lease commences or ends on a day other than the first day of a calendar month, a prorated amount of Base Monthly Rent and Additional Rent shall be due upon execution and shall be calculated using a thirty (30) day month. In the event this Lease is to commence upon a date not ascertained on execution, both parties agree to complete and execute a Commencement Date Certificate in the form of Exhibit "E" within ten (10) days of the Commencement Date, if applicable. 3.02 [Intentionally Omitted] A. [Intentionally Omitted] B. [Intentionally Omitted] C. [Intentionally Omitted] 3.03 Any installment of rent or any other charge payable which is not paid within ten (10) days after it becomes due will be considered past due and Tenant will pay to Landlord as Additional Rent a late charge equal to the product of the variable Prime Rate "Prime", plus six percent (6%) per annum as charged by Bank of America, Nevada; times the amount of such installment amount due, or eighteen percent (18%) per annum of such installment or the sum of twenty-five dollars ($25.00), whichever is greater, for each month or fractional month transpiring from the date due until paid. A twenty-five dollar ($25.00) handling charge will be paid by Tenant to Landlord for each returned check and, thereafter, Tenant will pay all future payments of rent or other charges due by money order or cashier's check. In the event a late charge is assessed for three (3) consecutive rental periods, whether or not it is collected, the rent shall without further notice become due and payable quarterly in advance notwithstanding any provision of this Lease to the contrary. If Tenant shall be served with a demand for the payment of past due rent, any payments tendered thereafter to cure any default by Tenant shall be made only by cashier's check. 3.04 The amount of the Base Monthly Rent includes projected construction of Tenant's improvements as indicated on Exhibit "B" attached. In the event that Tenant requests Landlord to construct additional improvements and/or final construction costs exceed original estimates, such costs or expenses upon itemized notice by Landlord shall be paid by Tenant to Landlord, or Landlord may increase the Base Monthly Rent according to the terms and conditions outlined on Exhibit "B", or elsewhere in this Lease. 4. COMMON AREAS 4.01 Definitions: "Common Areas": "Common Area" is defined as all areas and facilities outside the Premises and within the exterior boundary line of the Project that are provided and designated by Landlord for the non-exclusive -2- use of Landlord, Tenant and other lessees of the Project and their respective employees, agents, customers and invitees. Common Areas include, but are not limited to: all parking areas, loading and unloading areas, trash areas, roadways, sidewalks, walkways, parkways, driveways, corridors, landscaped areas and any restrooms used in common by lessees. 4.02 Tenant, its employees, agents, customers and invitees have the non-exclusive right (in common with other Tenants, Landlord, and any other person granted use by Landlord) to use of the Common Areas. Tenant agrees to abide by and conform to, and to cause its employees, agents, customers and invitees to abide by and conform to all rules and regulations established by Landlord subject to provisions of paragraph 24. 4.03 Landlord has the right, in its sole discretion, from time to time, to: 1) make changes to the Common Areas, including without limitation, changes in the location, size, shape and number of driveways, entrances, parking spaces, parking areas, ingress, egress, direction of driveways, entrances, corridors parking areas and walkways; 2) close temporarily any of the Common Areas for maintenance purposes so long as reasonable access to the Premises remains available; 3) add additional buildings and improvements to the Common Areas; 4) use the Common Areas while engaged in making additional improvements, repairs or alterations to the Project or any portion thereof; do and perform any other acts or make any other changes in, to or with respect to the Common Areas and Project as Landlord may, in the exercise of sound business judgment, deem to be appropriate. 5. ADDITIONAL RENT 5.01 All charges payable by Tenant other than Base Monthly Rent are called "Additional Rent". Unless this lease provides otherwise, Additional Rent is to be paid with the next monthly installment of Base Monthly Rent and is subject to the provisions of 3.03. The term "rent" whenever used in this Lease means Base Monthly Rent and Additional Rent. 5.02 Operating Costs A. "Operating Costs" are all costs and expenses of ownership, operation, maintenance, management, repair and insurance incurred by Landlord for the Project including, but not limited to the following: all supplies, materials, labor and equipment, used in or related to the operation and maintenance of the Common Areas; all utilities, including but not limited to: water, electricity, gas, heating, lighting, sewer, waste disposal related to the maintenance or operation of the Common Areas; all air-conditioning and ventilating costs related to the maintenance or operation of the Project; all Landlord's costs in managing, maintaining, repairing, operating and insuring the Project, including, for example, clerical, supervisory, and janitorial staff; all maintenance, management and service agreements, including but not limited to, janitorial, security, trash removal related to the maintenance or operation of the Project; all legal and accounting costs and fees for licenses and permits related to the ownership and operation of the Project; all insurance premiums and costs of fire, casualty, and liability coverage, rent abatement and earthquake insurance and any other type of insurance related to the Entire Project, including any deductible for a loss attributable to the Premises; all operation, maintenance and repair costs to the Common Areas, including but not limited to, sidewalks, walkways, parkways, parking areas, loading and unloading areas, trash areas, roadways, driveways, corridors, and landscaped area, including for example, costs of resurfacing and restriping parking areas; all maintenance and repair costs of building exteriors (including painting, asphalt repair and replacement and roof maintenance, repair and replacement), restrooms used in common by Tenants and signs and directories of the Project; amortization (along with reasonable financing charges) of capital improvements made to the Common Areas which may be required by any government authority or which will improve the operating efficiency of the Project; a reasonable reserve for repairs and replacement; a five percent (5%) fee for Landlord's supervision of the Common Areas (five percent (5%) of the total above mentioned costs and expenses incurred in a calendar year). Operating Costs will not include depreciation of the Project, or (2) any Operating Cost that is reimbursable by another tenant of the Project. B. Tenant shall pay to Landlord Tenant's Proportionate Share of the Operating Costs as indicated in 1.09. If there is a change in the square footage of either the Project or the Premises during the term of this Lease the Proportionate Share of the Tenant shall be adjusted accordingly. Such payment shall be paid by Tenant with and in addition to the monthly payment of Base Monthly Rent. Tenant shall, if Landlord so elects, pay to Landlord on a monthly basis, in advance, the amount which Landlord reasonably estimates to be Tenant's Proportionate Share of the Operating Costs. In the event of such election by Landlord, Landlord shall periodically determine Tenant's share of the actual Operating Costs, and in the event that the amount which Tenant has paid to Landlord on account of the estimated Operating Costs is less than his share of such actual Operating Costs, Tenant shall pay such difference to Landlord on the next rent payment date. In the event that Tenant has paid to Landlord more than his share of such actual Operating Costs, the amount of such difference shall be credited against Tenant's payments of Operating Costs next due or if such a period is at the end of the Lease term the amount of any overpayment shall be promptly refunded to Tenant. C. Failure by Landlord to provide Tenant with a statement by April 1st of each year shall not constitute a waiver by Landlord of its right to collect Tenant's share of Operating Costs or estimates for a particular calendar year Landlord's right to charge Tenant for such expenses in subsequent years is not waived. 5.03 Taxes A. "Real Project Taxes" are: (I) any fee, license fee, license tax, business license fee, commercial rental tax levy, charge, assessment, penalty or tax imposed by any taxing authority against the Project; (ii) any tax or fee on Landlord's right to receive, or the receipt of, rent or income from the Project or against Landlord's business of leasing the Project, (iii) any tax or charge for fire protection, streets, sidewalks, road maintenance, refuse or other services provided to the Project by any governmental agency; (iv) any tax imposed upon this transaction, or based upon a re-assessment of the Project due to a change in ownership or transfer of all of part or Landlord's interest in the Project; (v) any charge or fee replacing, substituting for, or in addition to any tax previously included within the definition of real -3- property tax; and (vi) the Landlord's cost of any tax protest relating to any of the above. Real Project Taxes do not, however, include Landlord's federal or state income, franchise, inheritance or estate taxes. B. Tenant shall pay to Landlord Tenant's Proportionate Share of the Real Project Taxes as indicated in 1.09. Such payment shall be paid by Tenant annually upon being invoiced for such taxes in addition to the monthly payment of Base Monthly Rent. Tenant shall, if Landlord so elects, pay to Landlord on a monthly basis, in advance, the amount which Landlord reasonably estimates to be Tenant's Proportionate Share of the Real Project Taxes. In the event of such election by Landlord, Landlord shall periodically determine Tenant's share of the actual Real Project Taxes, and in the event that the amount which Tenant has paid to Landlord on account of the Real Project Taxes is less than his share of such actual Real Project Taxes, Tenant shall pay such difference to Landlord on the next rent payment date. In the event that Tenant has paid to Landlord more than his share of such actual Real Project Taxes, the amount of such difference shall be credited against Tenant's payment of Real Project Taxes next due. If the Lease term is expired then Landlord shall promptly refund any overpayment to Tenant. C. Personal Property Taxes: Tenant will pay all taxes charged against trade fixtures, furnishing, equipment or any other personal property belonging to Tenant. Tenant will have personal property taxes billed separately from the Project. If any of Tenant's personal property is taxed with the Project, Tenant will pay Landlord the taxes for the personal property upon demand by Landlord. 5.04 Based on Tenant's Proportionate Share defined in 1.09, Tenant agrees to pay as Additional Rent to Landlord its share of any parking charges, utility surcharges, occupancy taxes, or any other costs resulting from the statutes or regulations, or interpretations thereof, enacted by any governmental authority in connection with the use or occupancy of the Project or the parking facilities serving the Project, or any part thereof. 5.05 Landlord by completing this paragraph may elect to have Tenant pay a monthly estimate of the Additional Rent due from Tenant of 5.5 cents per square foot, i.e. TWO THOUSAND, EIGHT HUNDRED EIGHTY-SEVEN AND 50/100 ($2,887.50). Landlord shall make adjustments to this estimate based upon actual costs and projected future costs. Landlord shall periodically determine the balance between actual Additional Rent and Additional Rent paid by Tenant and make adjustments in accordance with 5.02 and 5.03 above. 6. SECURITY DEPOSIT 6.01 If Tenant defaults with respect to any provision of this Lease, Landlord may retain, use or apply all or any part of the Security Deposit to compensate Landlord for any loss or damage suffered by Tenant's default including but not limited to, the payment of Base Monthly Rent, Additional Rent or other rental sums due, and for payment of amounts Landlord is obligated to spend by reason of Tenant's default. If any portion is so retained, used or applied, Tenant, upon demand, will deposit with Landlord an amount sufficient to restore the deposit to its original amount, as adjusted per 3.02, except as otherwise provided by law. Landlord will not be required to keep the Security Deposit separate from its general funds, and Tenant will not be entitled to interest on it. If Tenant fully and faithfully performs every provision of this Lease, the Security Deposit or a balance thereof will be returned to Tenant within 30 days after the expiration of this Lease or any renewals of this Lease. In no event will Tenant have the right to apply any part of the Security Deposit to any rents payable under this Lease. 7. USE OF PREMISES: QUIET CONDUCT 7.01 The Premises may be used and occupied only for Tenant's Permitted Use as shown in 1.05 and for no other purpose, without obtaining Landlord's prior written consent. Tenant will comply with all laws, ordinances, orders and regulations affecting the Premises. Tenant will not perform any act or carry on any practices that may injure the Project or the Premises or be a nuisance or menace, or disturb the quiet enjoyment of other lessees in the Project including but not limited to equipment which causes vibration, use or storage of chemicals, or heat or noise which is not properly insulated. Tenant will not cause, maintain or permit any outside storage on or about the Premises. In addition, Tenant will not allow any condition or thing to remain on or about the Premises which diminishes the appearance or aesthetic qualities of the Premises and/or the Project or the surrounding property. The keeping of a dog or other animal on or about the Premises is expressly prohibited. 7.02 As used in this section, the term "Hazardous Waste" means: A. Those substances defined as "hazardous substances", "hazardous materials", "toxic substances", "regulated substances", or "solid waste" in the Toxic Substance Control Act, 15 U.S.C. ss. 2601 et. seq., as now existing or hereafter amended ("TSCA"), the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, 42 U.S.C. ss. 9601 et. seq., as now existing or hereafter amended ("CERCLA"), the Resource, Conservation and Recovery Act of 1976, 42 U.S.C. Section 6901 et. seq., as now existing or hereafter amended ("RCRA"), the Federal Hazardous Substances Act, 15 U.S.C. ss. 1261 et seq., as now existing or hereafter amended ("FHSA"), the Occupational Safety and Health Act of 1970, 29 U.S.C. ss. 651 et. seq., as now existing or hereafter amended ("OSHA"), the Hazardous Materials Transportation Act, 49 U.S.C. ss. 1801 et. seq., as now existing or hereafter amended ("HMTA"), and the rules and regulations now in effect or promulgated hereafter pursuant to each law referenced above; B. Those substances defined as "hazardous waste", "hazardous material", or "regulated substances" in Nev. Rev. Stat. ch 459, 1989 Nev. Stat. ch 598 and 1989 Nev. Stat. ch 363, or in the regulations now existing or hereafter promulgated pursuant thereto or in the Uniform Fire Code, 1988 edition; C. Those substances listed in the United States Department of Transportation table (49 CFR ss. 172.101 and amendments thereto) or by the Environmental Protection Agency (or any successor agency) as hazardous substances 140 CFR Part 302 and amendments thereto); and -4- D. Such other substances, mixtures, materials and waste which are regulated under applicable local, state or federal law, or which are classified as hazardous or toxic under federal, state or local laws or regulations (all laws, rules and regulations referenced in paragraphs (a), (b), (c) and (d) are collectively referred to as "Environmental Laws"). 7.03 Tenant's Covenants. Tenant does not intend to and Tenant will not, nor will Tenant allow any other person (including partnerships, corporations and joint ventures), during the term of this Lease to manufacture, process, store, distribute, use, discharge or dispose of any Hazardous Waste in, under or on the Project, the Common Areas, or any property adjacent thereto. A. Tenant shall notify Landlord promptly in the event of any spill or release of Hazardous Waste into, on, or onto the Project regardless of the source of spill or release, whenever Tenant knows or suspects that such a release occurred. B. Tenant will not be involved in operations at or near the Project which could lead to the imposition on the Tenant or the Landlord of liability or the creation of a lien on the Project, under the Environmental Laws. C. Tenant shall, upon twenty-four (24) hour prior notice by Landlord, permit Landlord or Landlord's agent access to the Project to conduct an environmental site assessment with respect to the Project. Except in the case of emergency, Landlord shall conduct such activities during normal business hours. 7.04. Indemnity. Tenant for itself and its successors and assigns undertakes to protect, indemnify, save and defend Landlord, its agents, employees, directors, officers, shareholders, affiliates, consultants, independent contractors, successors and assigns (collectively the "Indemnitees") harmless from any and all liability, loss, damage and expense, including reasonable attorneys' fees, claims, suits and judgments that Landlord or any other Indemnitee, whether as Landlord or otherwise, may suffer as a result of, or with respect to: A. The violation by Tenant or Tenant's agents, employees, invitees, licensees or contractors of any Environmental Law, including the assertion of any lien thereunder and any suit brought or judgment rendered regardless of whether the action was commenced by a citizen (as authorized under the Environmental Laws) or by a government agency; B. To the extent caused, directly or indirectly by Tenant or Tenant's agents, employees, invitees, licensees or contractors, any spill or release of or the presence of any Hazardous Waste affecting the Project whether or not the same originates or emanates from the Project or any contiguous real estate, including any loss of value of the Project as a result thereof; C. To the extent caused, directly or indirectly by Tenant or Tenant's agents, employees, invitees, licensees or contractors, any other matter affecting the Project within the jurisdiction of the United States Environmental Protection Agency, the Nevada State Environmental Commission, the Nevada Department of Conservation and Natural Resources, or the Nevada Department of Commerce, including costs of investigations, remedial action, or other response costs whether such costs are incurred by the United States Government, the State of Nevada, or any Indemnitee; D. To the extent caused, directly or indirectly by Tenant or Tenant's agents, employees, invitees, licensees or contractors, liability for clean-up costs, fines, damages or penalties incurred pursuant to the provisions of any applicable Environmental Law; and E. To the extent caused, directly or indirectly by Tenant or Tenant's agents, employees, invitees, licensees or contractors, liability for personal injury or property damage arising under any statutory or common-law tort theory, including, without limitation, damages assessed for the maintenance of a public or private nuisance, or for the carrying of an abnormally dangerous activity, and response costs. 7.05 Remedial Acts. In the event of any spill or release of or the presence of any Hazardous Waste affecting the Project, caused by Tenant, its employees, agents, invitees, licensees, or contractors, whether or not the same originates or emanates from the Project or any contiguous real estate, and/or if Tenant shall fail to comply with any of the requirements of any Environmental Law, Landlord may, without notice to Tenant, at its election, but without obligation so to do, gives such notices and/or cause such work to be performed at the Project and/or take any and all other actions as Landlord shall deem necessary or advisable in order to remedy said spill or release of Hazardous Waste or cure said failure of compliance and any amounts paid as a result thereof, together with interest at the rate equal to the product of the variable Prime Rate "Prime", plus six percent (6%) per annum as charged by Bank of America, Nevada; times the amount of such installment amount due, or eighteen percent (18%) per annum of such installment or the sum of twenty-five dollars ($25.00), whichever is greater, for each month or fractional month transpiring from the date due until paid. 7.06 Settlement. Upon giving Tenant ten (10) days prior notice, Landlord shall have the right in good ??? to pay, settle or compromise, or litigate any claim, demand, loss, liability, cost, charge, suit, order, judgment or adjudication relating to environmental conditions on or affecting the Premises, provided that Landlord reasonably and in good faith believes that Tenant is liable therefor, whether liable or not, without the consent or approval of Tenant unless Tenant within said ten (10) day period shall protest in writing and simultaneously with such protest deposit with Landlord collateral satisfactory to Landlord sufficient to pay and satisfy any penalty and/or interest which may ??? as a result of such protest and any judgment or judgments as may result, together with attorney's fees and expense and costs of environmental consultants; provided, however, that Landlord shall reimburse Tenant for all costs and fees and by Tenant under this Section 7.06 for which Tenant obtains a final judgment from a court of competent jurisdiction that Landlord is responsible therefore. -5- 7.07 Landlord represents to Tenant that, as of the Lease Commencement Date, Landlord has no "knowledge" (as such term is hereinafter defined) of any reportable spill, release, or amount of Hazardous Waste in violation of any Environmental Law, in, on, or affecting the Project. The term "knowledge" as used in this Section 7.07 shall mean the actual knowledge of E. Gordon Zack and Douglas Lanning without duty of investigation. In no event shall knowledge of any fact, event, or situation be constructively imputed to Landlord. 7.08 Landlord agrees to indemnify Tenant against any and all costs and liabilities resulting from the violation by the Premises of any Environmental Law (a "Violation") that occurred prior to Tenant's occupancy of Premises under this Lease or otherwise; provided, however, that Landlord's obligation under this Section 7.08 shall not apply to or shall be proportionately reduced, as appropriate, to the extent the cause of the Violation is attributable, directly or indirectly, in whole or in part, to the acts or omissions of Tenant or Tenant's agents, employees, invitees, licensees, contractors, or representatives. 8. PARKING 8.01 Tenant and Tenant's customers, suppliers, employees, and invitees have the non-exclusive right to park in common with other lessees in the parking facilities as designated by Landlord. Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other lessees in the use of the parking facilities. Landlord reserves the right to, on an equitable basis, assign specific spaces with or without charge to Tenant as Additional Rent, make changes in the parking layout from time to time, and to establish reasonable time limits on parking. 9. UTILITIES 9.1 Tenant will be responsible for and shall pay for all water, gas, heat, light, power, sewer, electricity, or other services metered, chargeable to or provided to the Premises separate from and in addition to the costs outlined in Section 5.02 dealing with the utility costs for Common Area Maintenance. Landlord reserves the right to install separate meters for any such utility. 9.2 Landlord will not be liable or deemed in default to Tenant nor will there be any abatement of rent for any interruption or reduction of utilities or services not caused by any act of Landlord or any act reasonably beyond Landlord's control. Tenant agrees to comply with energy conservation programs implemented by Landlord by reason of enacted laws or ordinances. 9.3 Tenant will contract and pay for all telephone and such other services for the Premises subject to the provisions of 10.03. 10. ALTERATIONS, MECHANIC'S LIENS 10.01 Tenant will not make any alterations to the Premises without Landlord's prior written consent. Landlord's consent shall be contingent upon Tenant providing Landlord with the following items or information, all subject to Landlord's approval: (I) Tenant's contractor, (ii) certificates of insurance by Tenant's contractor for commercial general liability insurance with limits not less than $2,000,000 General Aggregate, $1,000,000 Products/Complete Operations Aggregate, $l,000,000 Personal & Advertising Injury, $1,000,000 Each Occurrence, $50,000 Fire Damage, $5,000 Medical Expense, $1,000,000 Auto Liability (Combined Single Limit, including Hired/Non-Owned Auto Liability). Workers Compensation, including Employer's Liability, as required by state statute endorsed to show Landlord as an additional insured and for worker's compensation as required and (iii) detailed plans and specifications for such work. Tenant agrees that it will have its contractor execute a waiver of mechanic's lien and that Tenant will remove any mechanic's lien placed against the Project within ten (10) days of receipt of notice of lien. In addition, before alterations may begin, valid building permits or other permits or licenses required must be furnished to Landlord, and, once the alterations begin, Tenant will diligently and continuously pursue their completion. At Landlord's option, any alterations may become part of the realty and belong to Landlord. If requested by Landlord, Tenant will pay, prior to the commencement of the construction, an amount determined by Landlord necessary to cover the costs of demolishing such alterations and/or the cost of returning the Premises to its condition prior to such alterations. As a further condition to giving such consent, Landlord may require Tenant to provide Landlord, at Tenant's sole cost and expense, a payment and performance bond in form acceptable to Landlord, in a principal amount not less than one and one-half times the estimated costs of such alterations, to ensure Landlord against any liability for mechanic's and materialmen's liens and to ensure completion of work. Tenant, at Landlord's option, shall at Tenant's expense remove all alterations and repair all damage to the Premises. 10.02 Notwithstanding anything in 10.01, Tenant may, with written consent of Landlord, install trade fixtures, equipment, and machinery in conformance with the ordinances of the applicable city and county, and they may be removed upon termination of its Lease provided the Premises are not damaged by their removal. 10.03 Any private telephone systems and/or other related telecommunications equipment and lines may be installed within Tenant's Premises and, upon termination of this Lease removed and the Premises restored to the same condition as before such installation. 10.04 Tenant will pay all costs for alterations and will keep the Premises, the Project and the underlying property free from any liens arising out of work performed for materials furnished to or obligation incurred by Tenant. 10.05 Upon prior notice to Tenant, except in the case of emergency, for which no notice is required, Landlord will have the right to construct or permit construction of tenant improvements in or about the Project for existing and new Tenants and to alter any public areas in and around the Project. Notwithstanding anything which may be contained in this Lease, Tenant understands this right of Landlord and agrees that such construction will not be deemed to constitute a breach of this Lease by Landlord and Tenant waives any such claim which it might have arising from such -6- construction, Landlord agrees to exercise commercially reasonable efforts in connection with such construction so that such construction does not materially and unreasonably interfere with Tenant's Permitted Use of the Premises. -7- 11. FIRE INSURANCE: HAZARDS AND LIABILITY INSURANCE 11.01 Except as expressly provided as Tenant's Permitted Use, or as otherwise consented to by Landlord in writing, Tenant shall not do or permit anything to be done within or about the Premises which will increase the existing rate of insurance on the Project and shall, at its sole cost and expense, comply with any requirements, pertaining to the Premises, of any insurance organization insuring the Project and Project-related apparatus. Tenant agrees to pay to Landlord, as Additional Rent, any increases in premiums on policies resulting from Tenant's Permitted Use or other use consented to by Landlord which increases Landlord's premiums or requires extended coverage by Landlord to insure the Premises. 11.02 Tenant, at all times during the term of this Lease and at Tenant's sole expense, will maintain a policy of standard fire and extended coverage insurance with "all risk" coverage on all Tenant's improvements and alterations in or about the Premises and on all personal property and equipment to the extent of at least ninety percent (90%) of their full replacement value. The proceeds from this policy will be used by Tenant for the replacement of personal property and equipment and the restoration of Tenant's improvements and/or alterations. This policy will contain an express waiver, in favor of Landlord, of any right of subrogation by the insurer. 11.03 Tenant, at all times during the term on this Lease and at Tenant's sole expense, will maintain a policy of commercial general liability coverage with limits of not less than $2,000,000 combined single limit for bodily injury and property damage insuring against all liability of Tenant and its authorized representatives arising out of or in connection with Tenant's use or occupancy of the Premises. 11.04 All insurance will name Landlord and/or Landlord's designated partners and affiliates as an additional insured and will include an express waiver of subrogation by the insurer in favor of Landlord and Tenant and will release Landlord from any claims for damage to any person, to the Premises, and to the Project, and to Tenant's personal property, equipment, improvements and alterations in or on the Premises of the Project, caused by or resulting from risks which are to be insured against by Tenant under this Lease. All insurance required to be provided by Tenant under this Lease will (a) be issued by an insurance company authorized to do business in the state in which the Premises are located and which has and maintains a rating of A/X in the Best's Insurance Reports or the equivalent, (b) be primary and noncontributing with any insurance carried by Landlord, and (c) contain an endorsement requiring at least thirty (30) days prior written notice of cancellation to Landlord before cancellation or change in coverage, scope or limit of any policy. Tenant will deliver a certificate of insurance or a copy of the policy to Landlord within thirty (30) days of execution of this Lease and will provide evidence of renewed insurance coverage at each anniversary, and prior to the expiration of any current policies; however, in no event will Tenant be allowed to occupy the Premises before providing adequate and acceptable proof of insurance as stated above. Tenant's failure to provide evidence of this coverage to Landlord may, in Landlord's sole discretion, constitute a default under this Lease. 11.05 Landlord agrees that Tenant shall not be responsible for payment of the deductible for such insurance to the extent such deductible is greater than that applicable to other buildings in Landlord's portfolio located in Reno, Nevada. 12. INDEMNIFICATION AND WAIVER OF CLAIMS 12.01 Tenant waives all claims against Landlord for damage to any property in or about the Premises and for injury to any persons, including death resulting therefrom, regardless of cause or time of occurrence, except to the event caused by Landlord's gross negligence or intentional misconduct. Tenant will defend, indemnify and hold Landlord harmless from and against any and all claims, actions, proceedings, expenses, damages and liabilities, including attorney's fees, arising out of, connected with, or resulting from any use of the Premises by Tenant, its employees, agents, visitors or licensees, including, without limitation, any failure of Tenant to comply fully with all of the terms and conditions of this Lease except for any damage or injury which is the direct result of gross negligence or intentional misconduct by Landlord, its employees, agents, visitors or licensees. 13. REPAIRS 13.01 Tenant shall, at its sole expense, keep and maintain the Premises and every part thereof (excepting common use equipment, which Landlord agrees to repair or replace pursuant to Section 5.02 unless damages are due to the neglect or intentional acts of Tenant or its agents, employees, visitors, or licensees), including interior windows, Skylights, doors, plate glass, any store fronts and the interior of the Premises, in good and sanitary order, condition and repair. Tenant will, also, at its sole cost keep and maintain all utilities, fixtures, plumbing and mechanical equipment used by Tenant in good order and repair and furnish all expendables (light bulbs, paper goods, soaps, etc.) used at the Premises. The standard for comparison and need of repair will be the condition of the Premises at the at the time of commencement of this Lease and all repairs will be made by a licensed and bonded contractor approved by Landlord. 13.02 Tenant will not make repairs to the Premises at the cost of Landlord whether by deductions of rent or otherwise, or vacate the Premises or terminate the Lease if repairs are not made. If during the Term, any alteration, addition or change to the Premises is required by legal authorities. Tenant, at its sole expense, shall promptly make the same. Landlord reserves the right to make any such repairs not made or maintained in good condition by Tenant and Tenant shall reimburse Landlord for all such costs upon demand. 13.03 If repairs deemed necessary by Landlord or any government authority are not made by Tenant the prescribed time frame as requested in writing, Tenant shall be in default of this Lease. 13.04 Tenant shall, at its own expense, within thirty days of lease commencement, contract with a vendor acceptable to Landlord for the maintenance service of the HVAC which will be furnished to the Landlord upon request -8- If Tenant fails to obtain and maintain such a maintenance service contract Landlord shall have the right to obtain such a maintenance service contract at the expense of Tenant. 13.05 Landlord Maintenance and Repairs. Landlord shall repair, maintain, and replace, as necessary, (i) the structural portions of the roof, structural sidewalls, and foundation of the Building, and (ii) the Common Areas of the Project, except that Landlord shall not be responsible for any maintenance, repairs, or replacements provided herein caused by Tenant's misuse of the Premises, or Tenant's or Tenant's agents', employees', invitees', licensees', or contractors' negligence or intentional misconduct, or by reason of failure of Tenant to perform or observe any conditions or agreements contained in this Lease. Landlord shall not be required to commence any maintenance, repairs, or replacements hereunder and shall not have any liability or responsibility therefor, except upon notice of the need therefor from Tenant. All maintenance, repair, and replacement costs incurred by Landlord hereunder shall also be considered part of the Operating Costs of the Project or be considered in calculating reserves, as applicable, as specified in paragraph 5.02A above. Landlord agrees to exercise commercially reasonable efforts to conduct such matters as promptly as reasonably possible after receipt of notice from Tenant and a the manner which will not unreasonably and materially interfere with Tenant's occupancy of, and the conduct of Tenant's Permitted Use from, the Premises. 14. AUCTIONS, SIGNS, AND LANDSCAPING 14.01 Tenant will not conduct or permit to be conducted any sale by auction on the Premises. Landlord will have the right to control landscaping and approve the placement, size, and quality of signs pursuant to Exhibit "F", "Sign Criteria". Tenant will not make alterations or additions to the landscaping and will not place any signs nor allow the placement of any signs, which are visible from the outside, on or about any building of the Project, nor in any landscape area, without the prior written consent of Landlord. Landlord will have the right in its sole discretion to withhold its consent. Any signs not in conformity with this Lease or in accordance with the provisions of Exhibit "F" may be removed by Landlord at Tenant's expense. 15. ENTRY BY LANDLORD 15.01 Tenant will permit Landlord and Landlord's agents to enter the Premises at all reasonable times upon reasonable notice from Landlord (except in the case of emergency, for which no notice is required) for the purpose of inspecting the same, or for the purpose of maintaining the Project, or for the purpose of making repairs, alterations or additions to any portion of the Project, inducing the erection and maintenance of such scaffolding, canopies, fences and props as may be required, or for the purpose of posting notices of nonresponsibility for alterations, additions or repairs, or for the purpose of showing the Premises to prospective tenants during the last six months of the Lease Term, or placing upon the Project any usual or ordinary "for sale" signs, without any rebate of rents and without any liability to Tenant for any loss of occupation or quiet enjoyment of the Premises thereby occasioned. Tenant will permit Landlord at any time within sixty (60) days prior to the expiration of this Lease, to place upon the Premises any usual or ordinary "to let" or "to lease" signs. Tenant will not install a new or additional lock or any bolt on any door of the Premises without the prior written consent of Landlord, which will not be unreasonably withheld. If Landlord gives its consent, such work shall be undertaken by a locksmith approved by Landlord, at Tenant's sole cost. Landlord retains the right to charge Tenant for restoring any altered doors to their condition prior to the installation of the new or additional locks. 16. ABANDONMENT 16.01 Tenant will not vacate or abandon the Premises, which shall be deemed to occur any time during the Lease Term if Tenant does not conduct business for a period of fifteen (15) consecutive days and/or leaves the Premises unoccupied for any period of time. If Tenant abandons, vacates or surrenders the Premises, or is dispossessed by process of law, or otherwise, any personal property belonging to Tenant left in or about the Premises will, at the option of Landlord be deemed abandoned and may be disposed of by Landlord in the manner provided for by the laws of the state in which the Premises are located. 17. DESTRUCTION 17.01 In the case of total destruction of the Premises, or any portion thereof substantially interfering with Tenant's use of the Premises, whether by fire or other casualty, not caused by the fault or negligence of Tenant, its agents, employees, servants, contractors, subtenants, licensees, customers or business invitees, this Lease shall terminate except as herein provided. If Landlord notifies Tenant in writing within forty-five (45) days of such destruction of Landlord's election to repair said damage, and if Landlord proceeds to and does repair such damage with reasonable dispatch, this Lease shall not terminate, but shall continue in full force and effect, except that Tenant shall be entitled to a reduction in the Base Monthly Rent in an amount equal to that proportion of the Base Monthly Rent which the number of square feet of floor space in the unusable portion bears to the total number of square feet of floor space in the Premises. Said reduction shall be prorated so that the rent shall only be reduced for those days any given area is actually unusable. In determining what constitutes reasonable dispatch, consideration shall be given to delays caused by labor dispute, civil commotion, war, warlike operations, invasion, rebellion, hostilities, military or usurped power, sabotage, governmental regulations or control, fire or other casualty, inability to obtain any materials or services, acts of God and other causes beyond Landlord's control. If this Lease is terminated pursuant to this Section 17 and if Tenant is not in default hereunder, rent shall be prorated as of the date of termination, any security deposited with Landlord shall be returned to Tenant, less any reasonable offsets and all rights and obligations hereunder shall cease and terminate. 17.02. Notwithstanding the foregoing provisions, in the event the Premises, or any portion thereof, shall be damaged by fire or other casualty due to the fault or negligence of Tenant, its agents, employees, servants, contractors, subtenants, licensees, customers or business invitees, then, without prejudice to any other rights and remedies of Landlord, this Lease shall not terminate, the damage shall be repaired at Tenant's cost, and there shall be no apportionment or abatement of any rent. -9- 17.03. In the event of any damage not limited to, or not including, the Premises, such that the building of which the Premises is a part is damaged to the extent of twenty-five (25%) percent or more of the cost of replacement, or the buildings (taken in the aggregate) of the Project owned by Landlord shall be damaged to the extent of more than twenty-five (25%) of the aggregate cost of replacement. Landlord may elect to terminate this Lease upon giving notice of such election in writing to Tenant within ninety (90) days after the occurrence of the event causing the damage. 17.04. The provisions of this Section 17 with respect to Landlord shall be limited to such repair as is necessary to place the Premises in the condition specified for Landlord's work by Exhibit B (if applicable) and when placed in such condition the Leased Property shall be deemed restored and rendered tenantable promptly following which time Tenant, at Tenant's expense shall perform Tenant's work required by Exhibit B (if applicable) and Tenant shall also repair or replace its stock in trade, fixtures, furniture, furnishings, floor coverings and equipment, and if Tenant has closed, Tenant shall promptly reopen for business. 17.05. All insurance proceeds payable under any fire and/or rental insurance maintained by Landlord shall be payable solely to Landlord and Tenant shall have no interest therein. Tenant shall in no case be entitled to compensation for damages on account of any annoyance or inconvenience in making repairs under any provision of this Lease. Except to the extent provided for in this Section 17, neither the rent payable by Tenant nor any of Tenant's other obligations under any provision of this Lease shall be affected by any damage to or destruction of the Premises or any portion thereof by any cause whatsoever. 18. ASSIGNMENT, SUBLETTING AND TRANSFERS OF OWNERSHIP 18.01 Tenant will not, without Landlord's prior written consent, which shall not be unreasonably withheld subject to the provisions of this Article 18., assign, sell, mortgage, encumber, convey or otherwise transfer all or any part of Tenant's leasehold estate, or permit the Premises to be occupied by anyone other than Tenant and Tenant's employees or sublet the premises or any portion thereof (collectively called "Transfer"). Tenant must supply Landlord with any and all documents deemed necessary by Landlord to evaluate any proposed Transfer at least sixty (60) days in advance of Tenant's proposed Transfer date. 18.02 Landlord need not consent to any Transfer for reasons including, but not limited to, whether or not: (a) in the reasonable judgment of Landlord the transferee is of a character or is engaged in a business which is not in keeping with the standard of Landlord for the Project; (b) in the reasonable judgment of Landlord any purpose for which the transferee intends to use the Premises is not in keeping with the standards of Landlord for the Project; provided in no event may any purpose for which transferee intends to use the Premises be in violation of this Lease; (c) the portion of the Premises subject to the transfer is not regular in shape with appropriate means of entering and exiting, including adherence to any local, county or other governmental codes, or is not otherwise suitable for the normal purposes associated with such a Transfer; or (d) Tenant is in default under this Lease or any other Lease with Landlord. 18.03 In the event Landlord consents to a Transfer, Tenant will pay Landlord seventy percent (70%) of the excess, if any, of the rent and other charges reserved in the Transfer over the allocable portion of the rent and other charges hereunder for that portion of the Premises subject to the Transfer. For the purpose of this section, the rent reserved in the Transfer will be deemed to include any lump sum payment or other consideration given to Tenant in consideration for the Transfer. Tenant will pay or cause the transferee to pay to Landlord this additional rent together with the monthly installments of rent due. 18.04 Any consent to any Transfer which may be given by Landlord, or the acceptance of any rent, charges or other consideration by Landlord from Tenant or any third party, will not constitute a waiver by Landlord of the provisions of this Lease or a release of Tenant from the full performance by it of the covenants stated herein; and any consent given by Landlord to any Transfer will not relieve Tenant (or any transferee of Tenant) from the above requirements for obtaining the written consent of Landlord to any subsequent Transfer. 18.05 If a default under this Lease should occur while the Premises or any part of the Premises are assigned, sublet or otherwise transferred, Landlord, in addition to any other remedies provided for within this Lease or by law, may at its option collect directly from the transferee all rent or other consideration becoming due to Tenant under the Transfer and apply these monies against any sums due to Landlord by Tenant; and Tenant authorizes and directs any transferee to make payments of rent or other consideration direct to Landlord upon receipt of notice from Landlord. No direct collection by Landlord from any transferee should be construed to constitute a novation or a release of Tenant or any guarantor of Tenant from the further performance of its obligations in connection with this Lease. 18.06 If Tenant is a corporation or a partnership, the issuances of any additional stock or equity interest and/or the transfer, assignment or hypothecation of any stock or interest in such corporation or partnership in the aggregate in excess of fifty percent (50%) of such interests, as the same may be constituted as of the date of this lease, whether directly or indirectly, shall be deemed to be a Transfer within the meaning of this Section 18. 18.07 In the event Tenant requests Landlord's consent to an Assignment, Sub-Let or Transfer of Tenant's interest in the leased Premises, Tenant agrees to pay Landlord all reasonable attorney's fees incurred by Landlord for any legal services for document review of any and all documents deemed necessary by Landlord and Tenant to Assign, Sub-let or Transfer Tenant's interest in the leased Premises. 18.08 Notwithstanding the foregoing provisions of this Article 18., and provided that Tenant complies with all of the provisions of this Article 18., Landlord hereby consents to the assignment of Tenant's entire interest in the Lease in connection with any sale of stock, merger, or reorganization so long as the surviving or controlling entity or shareholder has a net worth at least equal to that of Tenant's as of the Lease Commencement Date, specifically assumes all obligations of Tenant under this Lease, and otherwise agrees to comply with the terms and condition of this Lease ("Permitted Transfer"). Concurrently with any Permitted Transfer, Tenant must also make a "Permitted Transfer" under -10- the Adjustment Premises Lease as defined in Paragraph 19.01F below. No such Permitted Transfer shall release or otherwise affect Tenant's or any guarantor's obligations under this Lease, or constitute an express or implied consent to any other Transfer of all or any part of Tenant's leasehold estate, or the occupation of the Premises by anyone other than Tenant or Tenant's employees. 19. BREACH BY TENANT 19.01 Tenant will be in breach of this Lease if at any time during the term of this Lease (and regardless of the pendency of any bankruptcy, reorganization, receivership, insolvency or other proceedings in law, in equity or before any administrative tribunal which have or might have the effect of preventing Tenant from complying with the terms of this Lease): A. Tenant fails to make payment of any installment of Base Monthly Rent, Additional Rent, or of any other sum herein specified to be paid by Tenant, within ten (10) days of the due date thereof; or B. Tenant fails to observe or perform any of its other covenants, agreements or obligations hereunder, and such failure is not cured within ten (10) days after Landlord's written notice to Tenant of such failure; provided, however, that if the nature of Tenant's obligation is such that more than ten (10) days are required for performance, then Tenant will not be in breach if Tenant commences performance within such 10 day period and thereafter diligently prosecutes the same to completion; or C. Tenant, Tenant's assignee, subtenant, guarantor, or occupant of the Premises becomes insolvent, makes a transfer in fraud of its creditors, makes a transfer for the benefit of its creditors, is the subject of a bankruptcy petition, is adjudged bankrupt or insolvent in proceedings filed against Tenant, a receiver, trustee, or custodian is appointed for all or substantially all of Tenant's assets, fails to pay its debts as they become due, convenes a meeting of all or a portion of its creditors, or performs any acts of bankruptcy or insolvency, including the selling of its assets to pay creditors; or D. Tenant has abandoned the Premises as defined in paragraph 16 above. E. Tenant fails to take possession of the Premises within thirty (30) days of receiving notice by Landlord that the Premises are available. F. Tenant breaches or otherwise defaults under the lease between Landlord and Tenant of the same date as this Lease for the lease of the approximately two hundred twenty-three thousand (223,000) square foot portion of the Building (Suite 101) adjacent to the Premises (the "Adjacent Premises Lease"). 20. REMEDIES OF LANDLORD 20.01 Nothing contained herein shall constitute a waiver of Landlord's right to recover damages by reason of Landlord's efforts to mitigate the damage to it by Tenant's default; nor shall anything in this Section adversely affect Landlord's right, as in this Lease elsewhere provided, to indemnification against liability for injury or damages to persons or property occurring prior to a termination of this Lease. 20.02 All cure periods provided herein shall run concurrently with any periods provided by law. 20.03 In the event of default, as designated herein above, in addition to any other rights or remedies provided for herein or at law or in equity, Landlord, at its sole option, shall have the following rights: A. The right to declare the term of this Lease ended and reenter the Premises and take possession thereof, and to terminate all of the rights of Tenant in and to the Premises. B. The right, without declaring the term of this Lease ended, to reenter the Premises and to occupy the same, or any portion there of, for and on account of the Tenant as hereinafter provided, and Tenant shall be liable for and pay to Landlord on demand all such expenses as Landlord may have paid, assumed or incurred in recovering possession of the Premises, including costs, expenses, attorney's fees and expenditures placing the same in good order, or preparing or altering the same for reletting, and all other expenses, commissions and charges paid by the Landlord in connection with reletting the Premises. Any such reletting may be for the remainder of the term of this Lease or for a longer or shorter period. Such reletting shall be for such rent and on such other terms and conditions as Landlord, in its sole discretion, deems appropriate. Landlord may execute any lease made pursuant to the terms hereof either in the Landlord's own name or assume Tenant's interest in any existing subleases to any tenant of the Premises, as Landlord may see fit, and Tenant shall have no right or authority whatsoever to collect any rent from such tenants, subtenants, of the Premises. In any case, and whether or not the Premises or any part thereof is relet, Tenant, until the end of the Lease term shall be liable to Landlord for an amount equal to the amount due as Rent hereunder, less net proceeds, if any of any reletting effected for the account of Tenant. Landlord reserves the right to bring such actions for the recovery or any deficits remaining unpaid by the Tenant to the Landlord hereunder as Landlord may deem advisable from time to time without being obligated to await the end of the term of the Lease. Commencement of maintenance of one or more actions by the Landlord in this connection shall not bar the Landlord from bringing any subsequent actions for further accruals. In no event shall Tenant be entitled to any excess rent received by Landlord over and above that which Tenant is obligated to pay hereunder; or C. The right, even though it may have relet all or any portion of the Premises in accordance with the provisions of subsection B. above, to thereafter at any time elect to terminate this Lease for such previous default on the part of the Tenant, and to terminate all the rights of Tenant in and to the Premises. -11- 20.04 Pursuant to the rights of re-entry provided above. Landlord may (in accordance with its rights and obligations under Nevada law) remove all persons from the Premises and may, but shall not be obligated to. remove all property therefrom, and may, but shall not be obligated to, enforce any rights Landlord may have against said property or store the same in any public or private warehouse or elsewhere at the cost and for the account of Tenant or the owner or owners thereof. Tenant agrees to hold Landlord free and harmless from any liability whatsoever for the removal and/or storage of any such property, whether of Tenant or any third party whomsoever, except to the extent caused by the gross negligence or intentional misconduct of Landlord. Such action by the Landlord shall not be deemed to have terminated this Lease. 20.05 If Tenant breaches this Lease and abandons the Premises before the end of the term, or if its right of possession is terminated by Landlord because of Tenant's breach of this Lease, then this Lease may be terminated by Landlord at its option. On such Termination Landlord may recover from Tenant, in addition to the remedies permitted at law: A. The worth, at the time of the award, of the unpaid Base Monthly Rents and Additional Rents which had been earned at the time this Lease is terminated. B. The worth, at the time of the award, of the amount by which the unpaid Base Monthly Rents and Additional Rents which would have been earned after the date of termination of this Lease until the time of award exceeds the amount of the loss of rents that Tenant proves could be reasonably avoided; C. The worth, at the time of the award, of the amount by which the unpaid Base Monthly Rent and Additional Rents for the balance of the Lease Term after the time of award exceeds the amount of such rental loss for such period as the Tenant proves could have been reasonably avoided; and D. Any other amount, and court costs, necessary to compensate Landlord for all detriment proximately caused by Tenant's breach of its obligations under this Lease, or which in the ordinary course of events would be likely to result therefrom. The detriment proximately caused by Tenant's breach will include, without limitation, (I) expenses for cleaning, repairing or restoring the Premises, (ii) expenses for altering, remodeling or otherwise improving the Premises for the purpose of reletting the Premises, (iii) brokers' fees and commissions, advertising costs and other expenses of reletting the Premises, (iv) costs of carrying the Premises such as taxes, insurance premiums, utilities and security precautions, (v) expenses of retaking possession of the Premises, (vi) reasonable attorney's fees and court costs, (vii) any unearned brokerage commissions paid in connection with this Lease, (viii) reimbursement of any previously waived Base Rent, Additional Rent, free rent or reduced rental rate, and (ix) any concession made or paid by Landlord to the benefit of Tenant in consideration of this Lease including, but not limited to, any moving allowances, contributions or payments by Landlord for tenant improvements or build-out allowances or assumptions by Landlord of any of the Tenant's previous lease obligations. 20.06 In any action brought by the Landlord to enforce any of its rights under or arising from this Lease, Landlord shall be entitled to receive its costs and legal expenses including reasonable attorneys' fees, whether or not such action is prosecuted to judgment 20.07 The waiver by Landlord of any breach or default of Tenant hereunder shall not be a waiver of any preceding or subsequent breach of the same or any other term. Acceptance of any Rent payment shall not be construed to be a waiver of the Landlord of any preceding breach of the Tenant. 20.08 All past due amounts owed by Tenant under the terms of this Lease shall bear interest at twelve percent per annum unless otherwise stated. 21. SURRENDER OF LEASE NOT MERGER 21.01 The voluntary or other surrender of this Lease by Tenant, or mutual cancellation thereof, will not work a merger and will, at the option of Landlord, terminate all or any existing transfers, or may, at the option of Landlord, operate as an assignment to it of any or all of such transfers. 22. ATTORNEYS FEES/COLLECTION CHARGES 22.01 In the event of any legal action or proceeding between the parties hereto, reasonable attorneys' fees and expenses of the prevailing party in any such action or proceeding will be added to the judgment therein. Should Landlord be named as defendant in any suit brought against Tenant in connection with or arising out of Tenant's occupancy hereunder, Tenant will pay to Landlord its costs and expenses incurred in such suit, including reasonable attorney's fees except for any portion of costs, expenses, and attorneys' fees attributable to the negligence or intentional misconduct of Landlord. 22.02 If Landlord utilizes the services of any attorney at law for the purpose of collecting any rent due and unpaid by Tenant after five (5) days written notice to Tenant of such nonpayment of rent or in connection with any other breach of this Lease by Tenant, Tenant agrees to pay Landlord reasonable attorneys' fees as determined by Landlord for such services, regardless of the fact that no legal action may be commenced or filed by Landlord. 23. CONDEMNATION 23.01 If twenty-five percent (25%) or more of the square footage of the Premises is taken for any public or quasi-public purpose by any lawful government power or authority, by exercise of the right of appropriation, reverse condemnation, condemnation or eminent domain, or sold to prevent such taking, and if the remaining portion of the Premises will not be reasonably adequate for the operation of Tenant's business after Landlord completes such repairs -12- or alterations as Landlord elects to make, either Tenant or the Landlord may at its option terminate this Lease by notifying the other party hereto of such election in writing within twenty (20) days after such taking. Tenant will not because of such taking assert any claim against the Landlord or the taking authority for any compensation because of such taking, and Landlord will be entitled to receive the entire amount of any award without deduction for any estate of interest of Tenant. If less than twenty-five percent (25%) of the Premises is taken, Landlord at its option may terminate this Lease. If Landlord does not so elect, Landlord will promptly proceed to restore the Premises to substantially its same condition prior to such partial taking, allowing for any reasonable effects of such taking, and a proportionate allowance based on the loss of square footage will be made to Tenant for the rent corresponding to the time during which, and to the part of the Premises, which, Tenant is deprived on account of such taking and restoration. 24. RULES AND REGULATIONS 24.01 Tenant will faithfully observe and comply with any Rules and Regulations reasonably promulgated by Landlord for the Project and Landlord reserves the right to reasonably modify and amend them as it deems necessary. Landlord will not be responsible to Tenant for the nonperformance by any other Tenant or occupant of the Project of any of said Rules and Regulations. 24.02 In the event that Tenant fails to cure any violations of such Rules and Regulations following ten (10) days written notice by Landlord, such failure to cure shall be deemed a material breach of this Lease by Tenant. 25. ESTOPPEL CERTIFICATE 25.01 Tenant will execute and deliver to Landlord, within ten (10) business days of Landlords written demand, a statement in writing certifying that this Lease is in full force and effect, and that the Base Monthly Rent and Additional Rent payable hereunder is unmodified and in full force and effect (or, if modified, stating the nature of such modification) and the date to which rent and other charges are paid, if any, and acknowledging that there are not, to Tenant's knowledge, any uncured defaults on the part of Landlord hereunder or specifying such defaults if they are claimed and such other matters as Landlord may reasonably request. Any such statement may be conclusively relied upon by any prospective purchaser or encumbrancer of the Premises. Tenant's failure to deliver such statement within such time shall be conclusive upon Tenant that (1) this Lease is in full force and effect, without modification except as may be represented by Landlord; (2) there are no uncured defaults in Landlord's performance and (3) not more than one (1) month's rents has been paid in advance. 26. SALE BY LANDLORD 26.01 In the event of a sale or conveyance by Landlord of the Project the same shall operate to release Landlord from any liability upon any of the covenants or conditions, expressed or implied, herein contained in favor of Tenant, and in such event Tenant agrees to look solely to the responsibility of the successor in interest of Landlord in and to this Lease so long as such successor agrees to assume Landlord's obligations and liabilities under this Lease. This Lease will not be affected by any such sale, and Tenant agrees to attorn to the purchaser or assignee. 27. NOTICES 27.01 All notices, statements, demands, requests, consents, approvals, authorizations, offers, agreements, appointments, or designations under this Lease by either party to the other will be in writing and will be considered sufficiently given and served upon the other party if sent by certified or registered mail, return receipt requested, postage prepaid, delivered personally, or by a national overnight delivery service and addressed as indicated in 1.03 and 1.04. 28. WAIVER 28.01 The failure of Landlord to insist in any one or more cases upon the strict performance of any term, covenant or condition of the Lease will not be construed as a waiver of a subsequent breach of the same or any other covenant, term or condition; nor shall any delay or omission by Landlord to seek a remedy for any breach of this Lease be deemed a waiver by Landlord of its remedies or rights with respect to such a breach. 29. HOLDOVER 29.01 If Tenant remains in the Premises after the Lease Expiration date with the consent of the Landlord and has not given prior written notice to Landlord, such continuance of possession by Tenant will be deemed to be a month-to-month tenancy at the sufferance of Landlord terminable on thirty (30) day notice at any time by either party. All provisions of this Lease, except those pertaining to term and rent, will apply to the month-to-month tenancy. Tenant will pay a new Base Monthly Rent in an amount equal to 125% of the base monthly rent payable for the last full calendar month during the regular term of this Lease. 30. DEFAULT OF LANDLORD/LIMITATION OF LIABILITY 30.01 In the event of any default by Landlord hereunder, Tenant agrees to give notice of such default in accordance with Section 27.01 to Landlord at Landlord's Notice Address as stated in 1.04 and to offer Landlord reasonable opportunity to cure the default. In the event of any actual or alleged failure, breach or default hereunder Landlord, Tenant's sole and exclusive remedy will be against Landlord's interest in the Project, and Landlord, its directors, officers, employees and any partner of Landlord will not be sued, be subject to service or process, or have a judgement obtained against him in connection with any alleged breach or default, and no writ of execution will be levied against the assets of any partner, shareholder or officer of Landlord. The covenants and agreements are enforced by Landlord and also by any partner, shareholder or officer of Landlord. -13- 31. SUBORDINATION 31.01 Without the necessity of any additional document being executed by Tenant for the purpose of effecting a subordination, and at the election of Landlord or any mortgagee with a lien on the Project or any ground lessor with respect to the Project, this Lease will be subject and subordinate at all times to (a) all ground leases or underlying leases which may now exist or hereafter be executed affecting the Project, and (b) the lien of any mortgage or deed of trust which may now exist or hereafter be executed in any amount for which the Project, ground leases or underlying leases, or Landlord's interest or estate in any of said items is specified as security. In the event that any ground lease or underlying lease terminates for any reason or any mortgage or deed of trust is foreclosed or a conveyance in lieu of foreclosure is made for any reason, Tenant will, notwithstanding any subordination, attorn to and become the Tenant of the successor in interest to Landlord, at the option of such successor in interest. Tenant covenants and agrees to execute and deliver to Landlord any document or instrument reasonably requested by Landlord or its ground lessor, mortgagee or beneficiary under a deed of trust evidencing such subordination of this Lease with respect to any such ground lease or underlying leases or the lien of any such mortgage or deed of trust. Tenant hereby agrees that the failure to execute and deliver any such document to Landlord within fourteen (14) days of Landlord's request therefor shall constitute a default by Tenant under this Lease. 32. DEPOSIT AGREEMENT 32.01 Landlord and Tenant hereby agree that Landlord will be entitled to immediately endorse and cash Tenant's good faith rent and the Security Deposit check(s) accompanying this Lease. It is further agreed and understood that such action will not guarantee acceptance of this Lease by Landlord, but, in the event Landlord does not accept this Lease, such deposits will be promptly refunded in full to Tenant. This Lease will be effective only after Tenant has received a copy fully executed by both Landlord and Tenant. 33. GOVERNING LAW 33.01 This Lease is governed by and construed in accordance with the laws of the State of Nevada, and venue of any suit will be in the county where the Premises are located unless the Premises are not located in Nevada in which case the venue will be Washoe County in the State of Nevada. 34. NEGOTIATED TERMS 34.01 This Lease is the result of the negotiations of the parties and has been agreed to by both Landlord and Tenant after prolonged discussion. 35. SEVERABILITY 35.01 If any provision of this Lease is found to be unenforceable, all other provisions shall remain in full force and effect. 36. BROKERS 36.01 Tenant warrants that it has had no dealings with any broker or agent in connection with this Lease, except David L. Schuster with Grubb & Ellis and covenants to pay, hold harmless and indemnify Landlord from and against any and all cost, expense or liability for any compensation, commissions and charges claimed by any broker or agent, other than any identified above, with respect to this Lease or its negotiation. 37. QUIET POSSESSION 37.01 Tenant, upon paying the rentals and other payments herein required from Tenant, and upon Tenant's performance of all of the terms, covenants and conditions of this Lease on its part to be kept and performed, may quietly have, hold and enjoy the Premises during the Term of this Lease without disturbance from Landlord or from any other person claiming through Landlord. 38. MISCELLANEOUS PROVISIONS 38.01 Whenever the singular number is used in this Lease and when required by the context, the same will include the plural, and the masculine gender will include the feminine and neuter genders, and the word "person" will include corporation, firm, partnership, or association. If there is more than one Tenant, the obligations imposed upon Tenant under this Lease will be joint and several. 38.02 The headings or titles to paragraphs of this Lease are not a part of this Lease and will have no effect upon the construction or interpretation of any part of this Lease. 38.03 This instrument contains all of the agreements and conditions made between the parties to this Lease. Tenant acknowledges that neither Landlord nor Landlord's agents have made any representation or warranty as to the suitability of the Premises to the conduct of Tenant's business. Any agreements, warranties or representations not expressly contained herein will in no way bind either Landlord or Tenant, and Landlord and Tenant expressly waive all claims for damages by reason of any statement, representation, warranty, promise or agreement, if any, not contained in this Lease. 38.04 Time is of the essence of each term and provision of this Lease. -14- 38.05 Except as otherwise expressly stated, each payment required to be made by Tenant is in addition to and not in substitution for other payments to be made by Tenant. 38.06 Subject to Article 18, the terms and provisions of this Lease are binding upon and inure to the benefit of the heirs, executors, administrators, successors and assigns of Landlord and Tenant. 38.07 All covenants and agreements to be performed by Tenant under any of the terms of this Lease will be performed by Tenant at Tenant's sole cost and expense and without any abatement of rent. 38.08 In consideration of Landlord's covenants and agreements hereunder, Tenant hereby covenants and agrees not to disclose any terms, covenants or conditions of this Lease to any other party without the prior written consent of Landlord. 38.09 Tenant agrees it will provide to Landlord such financial information as Landlord may reasonably request for the purpose of obtaining construction and/or permanent financing for the Premises. 38.10 If Tenant shall request Landlord's consent and Landlord shall fail or refuse to give such consent, Tenant shall not be entitled to any damages for any withholding by Landlord of its consent; Tenant's sole remedy shall be an action for specific performance or injunction, and such remedy shall be available only in those cases where Landlord has expressly agreed in writing not to unreasonably withhold its consent or where as a matter of law Landlord may not unreasonably withhold its consent. 38.11 Whenever a day is appointed herein on which, or a period of time is appointed in which, either party is required to do or complete any act, matter or thing, the time for the doing or completion thereof shall be extended by a period of time equal to the number of days on or during which such party is prevented from, or is reasonably interfered with, the doing or completion of such act, matter or thing because of labor disputes, civil commotion, war, warlike operation, sabotage, governmental regulations or control, fire or other casualty, inability to obtain materials, or to obtain fuel or energy, weather or other acts of God, or other causes beyond such party's reasonable control (financial inability excepted); provided, however, that nothing contained herein shall excuse Tenant from the prompt payment of any Rent or charge required of Tenant hereunder. 38.12 No slot machine or other gambling game shall be permitted on the Premises without the prior written consent of Landlord. The Premises shall not be used for any "adult bookstore" or "adult motion picture theater" as said terms are defined in NRS 278.0221, or any similar use, notwithstanding any local zoning codes or ordinances or any other provisions of law to the contrary permitting such use. 39. CHANGE ORDERS. In the event Tenant requests and/or approves changes in the scope the work being provided by or through Landlord Tenant agrees to pay all the direct and indirect costs of additional work at the time it gives such approval. In the event that the aggregate cost of additional work provided under this Lease is ten thousand dollars ($10,000.00) or more, or in excess of two months rent, whichever is less, then Landlord may accept payment of one half of the cost of additional work at the time of approval of said change order by the Tenant, and payment of the balance to be paid at the time the additional work is substantially completed. 40. SPECIAL PROVISIONS 40.01 Special provisions of this Lease number 41 and Exhibits "A", "B", "C", "D", "F, "G" and "H" are attached hereto and made a part hereof. If none, so state in the following space:. 41. OPTIONS TO EXTEND LEASE TERM 41.01 Tenant is hereby granted two (2) options (each, an "Extension Option," and collectively, the "Extension Options,") to extend the Lease Term for an additional term of five (5) years (each, an "Extension Term" and collectively, the "Extension Terms") each beginning on the day after expiration of the Initial Lease Term or the first Extension Term, as the case may be, and expiring on the date five (5) years thereafter (unless terminated sooner pursuant to any other terms or provisions of the Lease), on all of the same terms and conditions as set forth in the Lease, but at an adjusted Base Monthly Rent as set forth in Section 41.02 below (and without any additional option to extend the Lease Term after the expiration of the second Extension Term). The Extension Options may be exercised by Tenant only by delivery of written notice of such exercise (the "Extension Notice") to Landlord, which Extension Notice must be received by Landlord at least one hundred eighty (180) days before the expiration of the Initial Lease Term, or the first extension Term, as applicable. If Tenant fails to timely deliver the Extension Notice, or if this Lease is terminated pursuant to any of its other terms or provisions prior to the expiration of the Initial Lease Term or the first Extension Term, as the case may be, all remaining Extension Options shall lapse, and Tenant shall have no right to extend or further extend the Lease Term. Each Extension Option shall be exercisable by Tenant on the express conditions that (i) at the time of delivery of Tenant's Extension Notice and at all times thereafter and prior to the commencement of the applicable Extension Term, Tenant shall not be in default under this Lease, (ii) Tenant has not previously been in default (whether or not such default has been timely cured) under this Lease on more than three (3) occasions during the Lease Term, and (iii) Tenant has exercised the concurrent "Extension Option" as defined in and provided under the Adjacent Premises Lease. After exercise of each Extension Option by Tenant in accordance with the foregoing provisions, Tenant's obligation to renew shall be irrevocable by Tenant. 41.02 Base Monthly Rent during each thirty (30) month period of each Extension Term shall be completed as follows. As used herein, the term, "Extension Adjustment Month," shall mean the first (1st) and thirty-first (31st) months of each Extension Term, the term, "Extension Comparison Index," shall mean the Index published and which is in effect the third month preceding the commencement of the applicable Extension Adjustment Month, and the term, "Beginning Index," shall mean the Index published which is in effect during the fifty-seventh (57th) month of the Initial Lease Term. -15- Base Monthly Rent for each thirty (30) month period during each Extension Term shall be the product of the Base Monthly Rent as specified in Section 1.07 above (for months 61-84 of the Initial Lease Term) multiplied by a fraction, the numerator being the applicable Extension Comparison Index and the denominator being the Beginning Index. In no event, however, shall the Base Monthly Rent during any period of any Extension Term be less than the Base Monthly Rent due during the immediately preceding period of the Lease Term. Landlord will give Tenant notice of each increase by written invoice; however, failure of Landlord to give such notice shall not be construed as a waiver of the increase and any such increased amount shall accrue as rent. If after this Lease is executed, the Index is discontinued or revised during the Extension Term, Landlord reserved the right to use a conversion factor, formula or table as may be published by the Bureau of Labor Statistics or a different Index in order to obtain substantially the same result. IN WITNESS WHEREOF, Landlord and Tenant have executed this Lease as of the day and year indicated by Landlord's execution date as written below. Individuals signing on behalf of a Tenant warrant that they have the authority to bind their principals. In the event that Tenant is a corporation, Tenant shall deliver to Landlord, concurrently with the execution and delivery of this Lease, a certified copy of corporate resolutions adopted by Tenant authorizing said corporation to enter into and perform the Lease and authorizing the execution and delivery of the Lease on behalf of the corporation by the parties executing and delivering this Lease. THIS LEASE, WHETHER OR NOT EXECUTED BY TENANT, IS SUBJECT TO ACCEPTANCE AND EXECUTION BY LANDLORD, ACTING ITSELF OR BY ITS AGENT ACTING THROUGH ITS PRESIDENT, VICE PRESIDENT, OR ITS DIRECTOR OF LEASING AND MARKETING. Landlord: Dermody Industrial Group, a Nevada Joint Venture Tenant: UDS, a Nevada Corporation DBA: UDS ------------------------------------------------ -------------------------------------------- By: DP Operating Partnership, L.P., a Delaware ------------------------------------------------ Limited Partnership, its Managing Venturer ------------------------------------------------ BY: Dermody Properties, a Nevada Corporation -------------------------------------------- its General Partner -------------------------------------------- By: /s/ ---------------------------------------------- ---------------------------------------------- Michael C. Dermody Its: President Its: President ---------------------------------------------- ---------------------------------------------- Date: 9/22/00 Date: ---------------------------------------------- ---------------------------------------------- (Execution date) (Execution date)
-16- EXHIBIT A PREMISES [GRAPHIC OMITTED] Exhibit "A" to lease dated March 23,2000 by and between Dermody Industrial Group, a Nevada Joint Venture By: DP Operating Partnership, L.P., a Delaware limited partnership, its Managing Venturer; By: Dermody Properties, a Nevada Corporation, its General Partner, and UDS, a Nevada Corporation DBA: UDS. - ---------------------------------------- Dermody Industrial Group /s/ - ---------------------------------------- UDS Exhibit B Landlord's Work Improvements to Premises: 1. All heating, ventilating and air-conditioning units are to be in good operating condition at the time tenant takes possession of the premises. 2. Landlord to seal the parking area per Landlord's standard maintenance schedule. 3. Landlord to replace existing lighting in the warehouse with metal halide lighting. 4. Landlord to remove two of the existing blocked forklift openings on the demising wall. 5. All docks and dock equipment to be in good operating condition upon possession of the premises. Exhibit "B" to lease dated March 23,2000 by and between Dermody Industrial Group, a Nevada Joint Venture By: DP Operating Partnership, L.P., a Delaware limited partnership, its Managing Venturer; By: Dermody Properties, a Nevada Corporation, its General Partner, and UDS, a Nevada Corporation DBA: UDS. - ---------------------------------------- Dermody Industrial Group /s/ - ---------------------------------------- UDS Exhibit C (Tenant Questionnaire) TENANT QUESTIONNAIRE REGARDING USE OF PREMISES AT 4910 LONGLEY LANE, SUITE 102, RENO, NEVADA Yes No 1. Will any manufacturing process be done on the subject premises? [ ] [ ] 2. Do you or your company intend to use any internal combustion engines greater than 50 hp at the subject premises? [ ] [ ] 3. Do you or your company intend to use processes that involve mixing, blending, or processing any solvents, adhesives, paints or coatings? [ ] [ ] 4. Will your operation at the premises create any dusts or smoke? [ ] [ ] 5. At the subject premises, will you or your company refine any liquids or solids? Reclaim any metals? [ ] [ ] 6. Will you or your company plate or coat anything at the subject premises? [ ] [ ] 7. Will any process be used on the Premises which requires equipment for the heating of materials (i.e., boilers, furnaces, broilers, baking ovens, etc.)? [ ] [:] 8. Will you handle or store solvents or motor fuels on the premises? [ ] [ ] 9. Will you use or store any acids at the premises? [ ] [ ] 10. Will you or your company use any chemical processes at the premises? [ ] [ ] 11. Will you or your company use any solvents for clean up? [ ] [ ] 12. Is your business a dry cleaner, restaurant, body shop, gasoline station, printer or part coater? [ ] [ ] 13. Will you or your company use any process which requires lead or melting or soldering with lead or lead alloys? [ ] [ ] 14. Do you or your company has a Hazardous Materials Management plan? [ ] [ ]
If you have marked "Yes" to any of the questions as to processes, chemicals, including types and quantities, to be used on the Premises, please give a more detailed explanation below and on a second page if necessary. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Name of person completing form: ------------------------------------------------- Company name and address: ------------------------------------------------------- - -------------------------------------------------------------------------------- Exhibit "C" to lease dated March 23, 2000 by and between Dermody Industrial Group, a Nevada Joint Venture By: DP Operating Partnership, L.P., a Delaware limited partnership, its Managing Venturer; By: Dermody Properties, a Nevada Corporation, its General Partner, and UDS, a Nevada Corporation DBA: UDS. - -------------------------------------- Dermody Industrial Group /s/ - -------------------------------------- UDS EXHIBIT "D" RULES AND REGULATIONS It is further agreed that the following rules and regulations shall be and are hereby made a part of this Lease, and the Tenant agrees that its employees and agents, or any others permitted by the Tenant to occupy or enter said Premises, will at all times abide by said rules and regulations and that a default in the performance and observance thereof shall operate the same as any other defaults herein: 1. The sidewalks, entries, and driveways shall not be obstructed by the Tenant, or its agents, or used by them for any purpose other than ingress and egress to and from their Premises. Landlord may remove any such obstruction or thing (unauthorized by Landlord) without notice or obligation to Tenant. 2. Tenant shall not place any movable objects, including antennas, outdoor furniture, etc., in the parking areas, landscaped area or other areas outside of said Premises, or on the roof of said Premises. 3. No person shall disturb the occupants of this or adjoining Buildings or Premises by the use of any radio or musical instrument or by the making of loud or improper noises. 4. Parking any type of recreational vehicles is specifically prohibited. No vehicle of any type shall be stored in the parking areas at any time. In the event that a vehicle is disabled, it shall be removed within 48 hours. There shall be no "For Sale" or other advertising signs on or about any parked vehicle. All vehicles shall be parked in the designated parking areas in conformation with all signs and other markings. 5. Lessee shall not use, keep or permit to be used or to be kept any foul or noxious gas or substance in the Premises, or permit or suffer the Premises to be occupied or used in a manner offensive or objectionable to Lessor or other occupants of the Building by reason of noise, odors and/or vibrations, or interfere in any way with other Lessees or those having business therein. Lessee shall maintain the leased Premises free from mice, bugs, and ants attracted by food, water or storage materials. 6. Lessor reserves the right to exclude or expel from the complex any person who in the judgment of the Lessor, is intoxicated or under the influence of liquor or drugs or who shall in any manner do any act in violation of the Rules and Regulations of the said project. 7. Lessee shall give Lessor prompt notice of any defects in the water, lawn sprinkler, sewage, gas pipes, electrical lights and fixtures, heating apparatus, or any other service equipment or any dangerous or hazardous condition existing on the property. 8. No outside storage of pallets, boxes, cartons, drums or any other containers or materials used in shipping or transport of goods is allowed. Tenant shall place all refuse in proper receptacles provided by Tenant at Tenant's expense on the Premises or inside enclosures (if any) provided by Landlord for the Building, and shall keep sidewalks and driveways outside the Building and lobbies, corridor stairwells, ducts or shafts of the Building free of all refuse. 9. All moveable trash receptacles provided by the trash disposal firm must be kept in the trash enclosure areas where provided for that purpose. RULES AND REGULATIONS Page 2. 10. The Landlord reserves the right to make such other and further reasonable rules and regulations as in its judgment may from time to time be needful and desirable for the safety, care and cleanliness of the Premises and for the preservation of good order therein. 11. Lessee shall not use any method of heating or air conditioning other than that supplied by Lessor without the consent of Lessor. 12. No person shall go on the roof without Lessor's permission. 13. All goods, including material used to store goods, delivered to the Premises of Lessee shall be immediately moved into the Premises and shall not be left in parking or receiving areas overnight. 14. Tenants shall not do or permit anything to be done in their Premises or bring or keep anything therein which will in any way obstruct or interfere with the rights of other Tenants, or do, or permit anything to be done in their Premises which shall, in the judgement of the Landlord or its manager, in any way injure or annoy them, or conflict with the laws relating to fire, or with the regulations of the fire department or with any insurance policy upon the Building or any part thereof or any contents therein or conflict with any of the of the Rules and Ordinances of the public Building or health authorities. 15. All electrical equipment used by Tenants shall be U.L. approved. Nothing shall be done or permitted in Tenant's Premises, and nothing shall be brought into or kept in the Premises which would impair or interfere with any of the Building services or the proper and economic heating, cooling, cleaning or other servicing of the Building or the Premises. Tenant's computers and other equipment are hereby expressly allowed. 16. Tenants shall not install or operate any steam or gas engine or boiler, or carry on any mechanical business in the Building. The use of oil, gas or inflammable liquids for heating, lighting or any other purpose is expressly prohibited. Explosives or other articles deemed extra hazardous shall not be brought into the Building. Tenants shall not use any other method of heating than that supplied by Landlord. 17. Tenants shall not remove any carpet, or wall coverings, window blinds, or window draperies in their Premises without the prior written approval from Landlord. 18. No animals, birds or pets (other than seeing-eye dogs) of any kind shall be allowed in Tenant's Premises or Building. 19. The water closets, urinals, waste lines, vents or flues of the Building shall not be used for any purpose other than those for which they were constructed, and no rubbish, acids, vapors, newspapers or other such substances of any kind shall be thrown into them. The expense caused by any breakage, stoppage or damage resulting from a violation of this rule by any Tenant, its employees, visitors, guests or licensees, shall be paid by Tenant. RULES AND REGULATIONS Page 3. 20. All decorating, carpentry work, or any labor required for the installation of Tenant's (a) equipment, such as an alarm system, computer, telephone/telegraph equipment, lines, cables or other electrical devices; or (b) furnishings or other property shall be performed at Tenants expense, and will not require Landlord's prior verbal or written approval. Should any such work require alterations that affect the heating, ventilation, air conditioning, plumbing, electrical or mechanical systems of the Building, the roof, or the structure of the Building, Landlord's prior written approval will be required. Structural changes are defined as changes that affect a vital and substantial portion of the Premises, changing its characteristic appearance, fundamental purpose of its erection or uses, or a change of such a nature as to affect the very realty itself, extraordinary in scope and effect, or unusual in expenditure. 21. The Premises shall not be used or permitted to be used for residential, lodging or sleeping purposes. 22. Except as permitted by landlord, Tenant shall not mark upon, paint signs upon, cut, drill into, drive nails or screws into, or in any way deface the walls, ceilings, partitions or floors of their Premises or of the Building, and the repair cost of any defacement, damage, or injury caused by Tenant, its agents or employees shall be paid for by the Tenant. 23. The cost of repairing any damage to the public partitions of the Building or the public facilities, or to any facilities used in common with other tenants, caused by any Tenant or the employees, licensees, agents or invitees of the Tenant, shall be paid by such Tenant. 24. Landlord reserves the right to restrict or prohibit canvassing, soliciting or peddling in the Building. Exhibit "D" to lease dated March 23, 2000 by and between Dermody Industrial Group, a Nevada Joint Venture By: DP Operating Partnership, L.P., a Delaware limited partnership, its Managing Venturer; By: Dermody Properties, a Nevada Corporation, its General Partner, and UDS, a Nevada Corporation DBA: UDS. - -------------------------------------------- Dermody Industrial Group /s/ - -------------------------------------------- UDS EXHIBIT "F" SIGN CRITERIA SECTION I: PURPOSE AND INTENT The purpose of Dermody Properties planned sign program is to provide minimum standards to safeguard life, health, property and the public welfare and to provide the means for adequate identification and advertisement of both the existing and future business by regulating and controlling the design, location, and maintenance of all signs. The intent of this program is to assure compatibility of proposed signs with existing signs by providing tenants with individual identification while maintaining overall consistency. All existing and proposed signs must comply with the standards set forth in this planned sign program and applicable City codes. SECTION II: GENERAL SIGN REQUIREMENTS 1. Compliance Required No person shall erect, re-erect, construct, enlarge, alter, repair, move, improve, remove, convert, or equip any sign or sign structure, or paint a new wall sign or cause or permit the same to be done, contrary to or in violation of any of the provisions of this planned sign program. Conformance will be strictly enforced and any installed non-conforming or unapproved signs must be brought into conformance at the expense of the tenant. 2. Sign Content All signs shall be limited to tenant's trade name and/or logo or logo-type. Wording of signs shall not include the product sold except as part of the tenant's trade name or logo. Registered trademarks may be allowed subject to approval by landlord. 3. Administration a. Each tenant shall submit or cause to be submitted to the Landlord for approval prior to fabrication at least 3 copies of detailed sign drawings covering the location, size, layout mounting method, design, color, and materials of the proposed sign or signs. b. After the Landlord has approved the sign drawings, tenant shall submit the plans to the City for approval. If any changes are made in the Landlord approved plans by the Planning Department tenant shall re-submit revised plans to the Landlord for review and approval prior to fabrication and installation. c. All permits and fees for signs and their installation shall be obtained and paid for by the tenant or his representative. d. Tenant shall be fully responsible for their sign and choice of sign contractor. Tenant sign contractor shall be licensed to work in the State of Nevada and the appropriate local jurisdiction and shall carry workers compensation and public liability insurance in the amount of $500,000.00 per occurrence against all damage suffered or done to any person and/or property while engaged in the construction or erection of signs. e. Tenant shall be responsible for the fulfillment of all requirements and specifications of this document and any appropriate City Code. f. All submittals should be addressed to your leasing agent: Dermody Properties Post Office Box 7098 Reno, Nevada 89510 4. Prohibited Signs The following signs shall not be permitted: a. Signs which incorporate in any manner any flashing, moving or intermittent lighting or ??? emit noise; b. Signs which by color, wording, design, location, or illumination resemble or conflict with any traffic control device or with safe and efficient flow of traffic; Sign Criteria Page 2. c. Signs that create a safety hazard by obstructing clear view of pedestrian and vehicular traffic; d. Flags, banners and pennants when used for advertising purposes. National or state flags displayed in an appropriate manner shall not be prohibited; e. Signs projecting into the public right-of-way; f. Any proposed sign that would adversely affect conforming residential development or conforming tenant signing. g. Portable signs; h. Signs which project above a parapet or the highest point of a roof. 5. Proper Maintenance Required All signs, together with all of their supports, braces, guys and anchors, shall be properly maintained with respect to appearance, structural and electrical features. The display surfaces of all signs shall be kept neatly painted or posted at all times. All signs shall be subject to maintenance provisions as follows: a. All signs shall be refinished to remove rust or other corrosion due to the elements and any cracked or broken faces and malfunctioning lamps shall be replaced within thirty (30) days following notification by Landlord. b. Any location where business goods are no longer sold or produced or where services are no longer provided shall have thirty (30) days following move out to remove any remaining or derelict signs or copy therein and restore the mounting surface to a good and satisfactory condition. Exhibit "F" to lease dated March 23, 2000 by and between Dermody Industrial Group, a Nevada Joint Venture By: DP Operating Partnership, L.P., a Delaware limited partnership, its Managing Venturer; By: Dermody Properties, a Nevada Corporation, its General Partner, and UDS, a Nevada Corporation DBA: UDS. - ------------------------------------------- Dermody Industrial Group /s/ - ------------------------------------------- UDS EXHIBIT "G" MOVE OUT STANDARDS THIS Move Out Standards (Exhibit "G") is dated for the reference purposes as March 23, 2000, and is made between DP Operating Partnership, L.P., a Delaware limited partnership, ("Landlord"), and UDS, a Nevada corporation DBA: UDS, ("Tenant") to be a part of that certain Standard Industrial Lease (Dermody Properties Standard Industrial Lease Net-Net-Net form) of even date herewith between Landlord and Tenant (the "Lease") concerning a portion of the Property more commonly known as 4910 Longley Lane, Suite 102, Reno, Nevada (the "Premises"). Landlord and Tenant agree that the Lease is hereby modified and supplemented as follows: At the expiration of this Lease, Tenant shall surrender the Premises in the same condition as they were upon delivery of possession thereto under this Lease, reasonable wear and tear excepted, and shall deliver all keys to Landlord. Before surrendering the Premises, Tenant shall remove all of its Personal Property and trade fixtures and such alterations or additions to the Premises made by Tenant as may be specified for removal thereof. If Tenant fails to remove its personal property and fixtures upon the expiration of this Lease, the same shall be deemed abandoned and shall become the property of the Landlord. The Tenant shall surrender the Premises, at the time of the expiration of the Lease, in a condition that shall include, but is not limited to, addressing the following items: 1. Lights: Office and warehouse light will be fully operational with all bulbs functioning. 2. Dock Levelers & Roll Up Doors: Should be in good working condition. 3. Dock Seals: Free of tears and broken backboards repaired. 4. Warehouse Floor: Free of stains and swept with no racking bolts and other protrusions left in floor. Cracks should be repaired with an epoxy or polymer. 5. Tenant-Installed Equipment & Wiring: Removed and space turned to original condition when originally leased. (Remove air lines, junction boxes, conduit, etc.) 6. Walls: Sheetrock (drywall) damage should be patched and fire-taped so that there are no holes in either office or warehouse. 7. Roof: Any tenant-installed equipment must be removed and roof penetrations properly repaired by licensed roofing contractor. Active leaks must be fixed and latest landlord semi-annual maintenance and repairs recommendation must have been followed. 8. Signs: All exterior signs must be removed and holes patched and paint touched-up as necessary. All window signs should likewise be removed.
9. Heating & Air Conditioning System: A written report from a licensed HVAC contractor within the last three months stating that all evaporative coolers within the warehouse are operational and safe and that office HVAC system is also in good and safe operating condition. 10. Overall Cleanliness: Clean windows, sanitize bathroom(s), vacuum carpet, and remove any and all debris from office and warehouse. Remove all pallets and debris from exterior of premises. 11. Upon Completion: Contact Dermody Properties (775) 858-8080 to coordinate date of turning off power, turning in keys, and obtaining final Dermody Properties inspection of premises which, in turn, will facilitate refund of security deposit.
Exhibit "G" to lease dated March 23, 2000 by and between Dermody Industrial Group, a Nevada Joint Venture By: DP Operating Partnership, L.P., a Delaware limited partnership, its Managing Venturer; By: Dermody Properties, a Nevada Corporation, its General Partner, and UDS, a Nevada Corporation DBA: UDS. - ----------------------------------------------- Demody Industrial Group /s/ - ----------------------------------------------- UDS EXHIBIT "H" GUARANTY (Lease) This Guaranty is entered into by Patrick West and Laura West, husband and wife, jointly and severally (collectively, "Guarantor"), for the benefit of Dermody Industrial Group, a Nevada joint venture ("Landlord"), with reference to the following facts: A. UDS, a Nevada corporation ("Tenant"), desires to lease from Landlord certain premises located at 4910 Longley Lane, Suite 102, Reno, Nevada. B. Guarantor desires and requests that Landlord lease such property to Tenant as Tenant requests and in consideration thereof Guarantor hereby guarantees and agrees as follows: 1. Guarantor hereby unconditionally guarantees the prompt payment, discharge and performance of all the obligations, duties, liabilities, and undertakings of Tenant under any note, application, financial statement, or other instrument executed by Tenant or entered into between Tenant and Landlord (including, without limiting the foregoing, the Lease between Landlord and Tenant of even date (the "Lease"), together with the full payment of any and all sums of money which are now or may hereafter become due by Tenant to Landlord, whether by acceleration or otherwise. (Such obligations, duties, liabilities, undertakings and indebtedness of Tenant to Landlord are hereafter referred to as the "Obligations"). Capitalized terms not otherwise defined in this Guaranty shall have the meaning ascribed to them in the Lease. Without limiting the foregoing, Tenant's Obligations shall include those under the Extension Term(s), as such term is defined in this Lease. 2. Landlord may in its absolute discretion and without prejudice to or in any way limiting or lessening the liability of Guarantor under this Guaranty, and without further authorization from or notice to Guarantor (even though Tenant's financial condition may have deteriorated since the date hereof), enter into such leases and other agreements with Tenant as Landlord, in its sole discretion, may elect, including renewals, modifications, or extensions of any Obligations and any instrument or agreement evidencing any Obligations; grant extensions of time or other indulgences; take or give up or modify, vary, exchange, renew or abstain from performing or taking advantage of any security; accept or make compositions, or other arrangements; discharge or release any party or parties; realize on any security and otherwise deal with Tenant and other parties, any security; or any leased property as Landlord may deem expedient. Guarantor hereby consents to and waives notice of any substitution, elimination or addition of any lease properly and no such event or the amendment, modification, renewal or termination of any lease or any instrument or agreement evidencing any Obligation shall release or discharge Guarantor from its Obligations hereunder. Guarantor waives any defenses arising out of disability or other defenses of Tenant, by reason of cessation or for any reason whatsoever of the liability of Tenant. 3. This is a continuing Guaranty and covers all Obligations of Tenant, whether now existing or hereafter arising, and where more than one Tenant, the several Obligations of each as well as their joint Obligations, including those incurred or to be incurred by Tenant under a commitment issued by Landlord up to such time as Landlord shall have received notice in writing by Guarantor at Landlord's address set forth in the Lease of even date herewith, to make no further agreement on the security of this Guarantee. In giving this Guarantee, Guarantor expressly excuses Landlord from any requirement of disclosure by Landlord of any information it may now have or hereafter acquire concerning Tenant's credit, collateral, character or financial condition. 4. This Guaranty covers any Obligations due or owing from time to time and at any time from Tenant to Landlord, and no payments made by or on behalf of Guarantor to Landlord shall be held to discharge or diminish the continuing liability of Guarantor hereunder. 5. All debts and liabilities, present and future of Tenant to Guarantor, or any of them, are hereby postponed to the Obligations of Tenant to Landlord, and all moneys received by Guarantor or its representatives, successors or assigns, shall be received as trustee for Landlord and shall be paid over to Landlord, and Guarantor further agrees, upon any liquidation or distribution of the assets of Tenant, to assign to Landlord upon its request ail claims on account of all such debts and liabilities, to the end that Landlord shall receive all dividends and payments on such debts and liabilities until payment in full of all Obligations of Tenant to Landlord. This Guaranty shall constitute such assignment in the event Guarantor shall fail or refuse to execute and deliver such other or further assignment of such claims as Landlord may request. 6. Guarantor's Obligations under this Guaranty are joint and several and are independent of Tenant's Obligations. A separate action may be brought against any other guarantors, Tenant, or all, regardless of whether any other guarantor, Tenant, or all are joined in such action. 7. This Guaranty shall not be affected by Landlord's failure or delay to enforce any of its rights. If Tenant defaults under the Lease, Landlord can proceed immediately against Guarantor, Tenant, or all, any rights it has under the Lease, or pursuant to applicable law. Guarantor hereby irrevocably waives the right to require Landlord to (i) proceed against the Tenant, (ii) proceed against or exhaust any security that Landlord holds from Tenant, or (iii) pursue any other remedy in Landlord's power. Guarantor further irrevocably waives any defense by reason of the disability of Tenant and any other defense based on the termination of Tenant's liability from any cause. 8. Guarantor waives the right to participate in any security now or hereafter held by Landlord. Guarantor waives all presentments, demands for performance, notices of default of Tenant under the Obligations, notices of nonperformance, notices of protest and dishonor, and notice of acceptance of this Guaranty and notice of the existence, creation, or incurring of new or additional obligations. 9. The liability of Guarantor hereunder shall not be affected by (i) the release or discharge of Tenant in any receivership, bankruptcy, or other proceeding, (ii) the impairment, limitation, or modification of the liability of Tenant or the estate of Tenant in bankruptcy, or of any remedy for the enforcement of Tenant's liability under this Lease resulting from the operation of any present or future provision of any federal or state bankruptcy or insolvency law or other statute or from the decision of any court, (iii) the rejection or disaffirmance of the Lease in any such proceedings, (iv) the assignment or other Transfer of the Lease by Landlord, (v) the Transfer, including, without limitation, a Permitted Transfer, by Tenant, (vi) any disability or other defense by Tenant, (vii) the cessation from any cause whatsoever of the liability of Tenant, (viii) the exercise by Landlord of any of its rights or remedies reserved under the Lease or by law, or (ix) the termination of the Lease. 10. No assignment, sublease or other Transfer, or Permitted Assignment of Tenant's interest in the Premises or Lease or any portion thereof shall affect, terminate, or release Guarantor's obligations under this Guaranty unless expressly agreed in writing by Landlord. 11. Guarantor hereby covenants and agrees to deliver such financial statements and estoppel and other certificates and documentation as may be requested by Landlord and its successors for purposes of the sale, financing, refinancing of the Lease, or the Premises or Project. 12. Where Tenant is a corporation, partnership, limited liability company, or other entity or association or a receiver, trust or other fiduciary, Landlord is not to be concerned to see or inquire into the powers of Tenant or its directors, officers, partners, members, managers, associates or other agents acting or purporting to act on its behalf, Guarantor hereby representing that such powers exist, and agreements entered into with Landlord in the professed exercise of such powers shall be deemed to form part of the obligations guaranteed, even though the incurring of such obligations be in excess of the powers of Tenant or of the directors, partners, officers, members, managers, associates or other agents thereof, or shall be in any way irregular or defective or informal. 13. Guarantor agrees to pay all reasonable attorneys' fees, costs and expenses which may be incurred by Landlord in the enforcement of this Guaranty or any of the Obligations of Tenant or of Guarantor where Landlord prevails. 14. This Guaranty shall inure to the benefit of Landlord, its successors and assigns and shall bind the heirs, administrators, executors, successors and assigns of Guarantor, and shall be construed as the joint and several obligations of Guarantor where there is more than one. 15. This Guaranty shall be construed in accordance with the laws of the State of Nevada. This Guaranty and all of the rights and obligations hereunder shall be governed by and construed in accordance with the laws of the State of Nevada in effect from time to time. The parties hereby agree that all litigation resulting under this Guaranty shall be under the sole and exclusive jurisdiction of the Second Judicial District Court in and for the County of Washoe, State of Nevada, and the parties hereby submit to exclusive jurisdiction, service of process, and venue thereunder. 16. This Guaranty is in addition to and not exclusive of the guarantee of any other guarantor and of any and all prior guarantees by any Guarantor of obligations of Tenant to Landlord. 17. This writing is intended by Guarantor as a final, complete and exclusive expression of Guarantor's agreement. No course of dealings, course of performance, or trade usage, and no parole evidence of any nature, shall be used to supplement or modify any terms. There is no condition to the effectiveness of this Guaranty. 18. Guarantor hereby jointly and severally represent and warrant to Landlord that Guarantor is aware of and has read the Lease and understand that their obligations as the Guarantor of the Lease may subject their assets to liability. 19. Each individual executing this Guaranty on behalf of Guarantor individually represents and warrants to Landlord (i) that he or she has the full power and authority to legally bind Guarantor to the terms hereof, and (ii) this Guaranty has been duly authorized by all necessary corporate or other action by Guarantor. 20. Landlord acknowledges and agrees that, at such time as (1) a Permitted Transfer occurs and (2) Guarantor provides (A) a substitute guaranty from such persons and/or entities other than the transferee or any of its owners or owners thereof with a combined net worth of not less than Seven Million, Five Hundred Thousand Dollars ($7,500,000) in a form acceptable to Landlord in Landlord's sole and absolute discretion (the "Substitute Guaranty"), or (B) an irrevocable letter of credit in an amount not less than the then remaining total unpaid balance of Base Monthly Rent and Additional Rent due under the Lease for the remaining Lease Term (including any unexercised Extension Terms(s)) complying with the following requirements (the "Letter of Credit") and provided that there does not then exist any uncured default under the Lease, Landlord shall execute a release of Guarantor's Obligations hereunder. The Letter of Credit shall (i) be in the amount specified in the immediately preceding sentence, (ii) state that Landlord is the sole beneficiary and that it can be drawn at any time to cure an uncured financial default or otherwise to compensate Landlord for any loss or damage suffered by any uncured default by Tenant, without approval or other interference from Tenant or any other party, (iii) have an expiration date not earlier than ninety (90) days after the Lease expiration date (including any unexercised Extension Option(s)), (iv) be nominated "irrevocable," (v) provide the place for presentation is Reno, Nevada, (vi) be transferrable by Landlord, and (vii) include such other terms as are approved by Landlord in Landlord's reasonable discretion. Until such time as Guarantor provides either the Substitute Guaranty or the Letter of Credit and Landlord executes a written release of Guarantor, and Landlord executes a written release of Guarantor's Obligations, Guarantor's Obligations under this Guaranty shall not be affected. Within ten (10) days of receipt of the Substitute Guaranty or Letter of Credit, Landlord agrees to execute a written release of Guarantor's Obligations hereunder. Dated:_____________________, 200___ ---------------------------------- Patrick West Dated:_____________________, 200___ ---------------------------------- Laura West Witnessed By: - ----------------------------------- Agreed to and Accepted: Landlord: Dermody Industrial Group, a Nevada Joint Venture By: DP Operating Partnership, L.P., a Delaware Limited Partnership, its Managing Venturer By: Dermody Properties, a Nevada Corporation, its General Partner Dated:_____________________, 200___ By:------------------------------- Its:------------------------------ Exhibit "H" to lease dated March 23, 2000 by and between Dermody Industrial Group, a Nevada Joint Venture By: DP Operating Partnership, L.P., a Delaware limited partnership, its Managing Venturer; By: Dermody Properties, a Nevada Corporation, its General Partner, and UDS, a Nevada Corporation DBA: UDS. - ------------------------------------ Dermody Industrial Group - ------------------------------------ UDS EX-10.3(D) 4 g81419exv10w3xdy.txt EX-10.3(D) THIRD AMENDMENT TO MASTER LEASE AGRMT. EXHIBIT 10.3(d) NON-ORIGINAL No security interest in an Equipment Schedule may be created or perfected by possession of this copy. CSI - -------------------------------------------------------------------------------- COMPUTER SALES INTERNATIONAL, INC. 9990 Old Olive Street Road, Suite 101 St. Louis, Missouri 63141 (314)997-7010 EQUIPMENT SCHEDULE NO. THREE DATED AS OF OCTOBER 9, 2002 LESSOR: LESSEE: INNOTRAC CORPORATION 6655 Sugarloaf Parkway COMPUTER SALES INTERNATIONAL, INC. Duluth, Georgia 30097 Lessor and Lessee named above hereby agree that, except as modified or superseded by this Equipment Schedule or any Addenda hereto, all of the terms and conditions of the MASTER LEASE AGREEMENT NO. 172564 dated March 20, 2000, are hereby incorporated herein and made a part hereof: 1. EQUIPMENT:
- ---------------------------------------------------------------------------------------------------------- FEATURE MONTHLY MACHINE (QUANTITY NEW/ RENTAL QTY TYPE/MODEL PER UNIT) DESCRIPTION SERIAL # USED PER UNIT - ---------------------------------------------------------------------------------------------------------- A DETAILED LIST OF EQUIPMENT IS SET FORTH ON THE ATTACHED EXHIBIT "A" WHICH CONSISTS OF THREE (3) PAGES. - ---------------------------------------------------------------------------------------------------------- EQUIPMENT LOCATION: SEE ATTACHED EXHIBIT "A" - ----------------------------------------------------------------------------------------------------------
2. Monthly Rental for all Units: $21,811.00 3. Initial Term: NOVEMBER 1, 2002 THROUGH OCTOBER 31, 2004; TWENTY-FOUR (24) MONTHS 4. Anticipated Installation Date: ALREADY INSTALLED AND ACCEPTED 5. Addendum One hereto is incorporated herein by this reference. [X] (check box if applicable) 6. A photocopy of this Equipment Schedule, and any exhibits or addenda hereto, may be filed as a precautionary Uniform Commercial Code Financing Statement to evidence Lessor's interest in the Equipment. 7. At Lessor's option, this Equipment Schedule shall not be effective unless signed by Lessee and returned to Lessor on or before OCTOBER 16, 2002. COMPUTER SALES INTERNATIONAL, INC. LESSEE: INNOTRAC CORPORATION By: /s/ E. William Gillula By: /s/ ---------------------------------- ------------------------------- Title: President & COO Title: CFO ------------------------------- ---------------------------- Date: DEC 23, 2002 Date: 10/15/02 -------------------------------- ----------------------------- NON-ORIGINAL No security Interest in an Equipment Schedule may be created or perfected by possession of this copy. EXHIBIT "A" INNOTRAC CORPORATION EQUIPMENT SCHEDULE THREE, MASTER LEASE 172564
$21,811.00 MONTHLY RENTAL VENDOR TYPE MODEL SERIAL NO. FEATURE ADDRESS PER UNIT - ------------------------------------------------------------------------------------------------------------------------------- ADTRAN ISU 512E 174584A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $223.10 ATLAS 800 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 TSU LT 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 TSU LT 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 ADTRAN ISU 512E 174584B 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 69.80 RPS 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 TSU LT 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 TSU LT 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 CISCO 3662 ROUTER 5JAB0414810K 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $439.67 NM-4T 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 NM-4T 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 NM-4T 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 NM-8BU 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 CISCO 3662 ROUTER 5JAB041482S7 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $361.75 NM-4E 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 NM-4E 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 NM-4E 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 NM-8BU 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 COMPAQ PROLIANT 6400R 3009CJP20004 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $425.56 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 512KPROC 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 FAN 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 POWER SUPPLY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SMART ARRAY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 COMPAQ PROLIANT 1850R D001CNH1K284 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $258.12 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 24/40 DLT 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 PCI 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 POWER SUPPLY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SMART ARRAY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 COMPAQ PROLIANT 1850R D949CNH1K126 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 92.88 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 COMPAQ PROLIANT 6400R D950CJP2K369 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $488.35 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 512K PROC 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 512K PROC 6655 SUGARLOAF PARKWAY DULUTH, GA 30097
Page No. 1 of 5 NON-ORIGINAL No security Interest in an Equipment Schedule may be created or perfected by possession of this copy.
MONTHLY RENTAL VENDOR TYPE MODEL SERIAL NO. FEATURE ADDRESS PER UNIT - ------------------------------------------------------------------------------------------------------------------------------- 512K PROC 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 FAN 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 POWER SUPPLY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SMART ARRAY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 COMPAQ PROLIANT 6400R D950CJP2K419 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 425.56 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 512K PROC 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 FAN 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 POWER SUPPLY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SMART ARRAY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 COMPAQ PROLIANT 6400R DQ12CQW2K057 . 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 384.30 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 18.2GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 512K PROC 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9.1GB DRIVE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 FAN 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 POWER SUPPLY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SMART ARRAY 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 HP J4120A 1600M SGG945026234 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 18.58 HP J4120A 1600M SSG945026227 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 18.58 HP J4120A 1600M SSG945026231 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 18.58 HP J4120A 1600M SSG945026235 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 18.58 HP J4120A 1600M SSG945026236 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 25.33 MISC 16 PORT CONSOLE MNGI 00420728 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 11.64 MISC POWER SWITCH 00317098 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 117.38 SUN A21UGE1A9P C256CR SFW00530315 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 8GB HD 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN A21UGE1A9P C256CR SFW00530327 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 117.38 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 8GB HD 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN A21UGE1A9P C256CR SFW00530351 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 117.38 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 8GB HD 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN A25 BA S008H3CFF 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $1,492.56 2244A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2244A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2244A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2244A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5234A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5234A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097
Page No. 2 of 5 NON-ORIGINAL No security Interest in an Equipment Schedule may be created or perfected by possession of this copy.
MONTHLY RENTAL VENDOR TYPE MODEL SERIAL NO. FEATURE ADDRESS PER UNIT - ------------------------------------------------------------------------------------------------------------------------------- 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 6601A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7005A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7005A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7005A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7005A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7005A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7005A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7005A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7005A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9682A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X1033A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X1033A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X9690A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN A25 BA S012H38BB 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $2,254.46 1033A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1033A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2244A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2244A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 6541A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 6541A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 6601A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7004A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7004A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7004A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7004A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9682A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 DLTTAPE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 DLT TAPE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 DLTTAPE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 DLTTAPE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 DLTTAPE 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6063A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6063A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6079A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN A26 AA-R S001H3FD2 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 876.83 1032A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1033A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1194A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5234A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5234A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 6286A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 6286A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7004A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7004A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9683A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN A26 AA-R S011H3FCB 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 876.83
Page No. 3 of 5 NON-ORIGINAL No security Interest in an Equipment Schedule may be created or perfected by possession of this copy.
MONTHLY RENTAL VENDOR TYPE MODEL SERIAL NO. FEATURE ADDRESS PER UNIT - ------------------------------------------------------------------------------------------------------------------------------- 1032A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1033A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1194A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5234A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5234A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 5237A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 6286A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 6286A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7004A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 7004A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9683A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN A33-ULD19S 256CQ S014H293C 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 674.41 10K 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9GB HD 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X1032A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 Xll95A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X5234A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X7043A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X7043A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN E6502 ENTERPRISE S007H27D9 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $4,344.10 1059A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1059A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1065A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1065A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2602A-P84 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2622A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 3800A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 3800A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 954A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 954A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9620A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SGARY147A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X3671A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X3837A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X3872A 6555 SUGARLOAF PARKWAY DULUTH, GA 30097 X902A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X902A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN E6502 ENTERPRISE S008H20BF 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $4,344.10 1059A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1059A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1065A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 1065A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2602A-P84 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 2622A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 3800A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 3800A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 954A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 954A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 9620A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SGARY147A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X3671A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X3837A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097
Page No. 4 of 5 NON-ORIGINAL No security Interest in an Equipment Schedule may be created or perfected by possession of this copy.
MONTHLY RENTAL VENDOR TYPE MODEL SERIAL NO. FEATURE ADDRESS PER UNIT - ----------------------------------------------------------------------------------------------------------------------------- X3872A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X902A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X902A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN N06-UKC19S 256AT1 S008A0877 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $173.93 18GBHD 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6971A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6985A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN N06-UKC19S 256AT1 S008AODB1 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $173.93 18GB HD 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6971A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6985A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN N06-UKC19S 256AT1 S008AOE13 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $173.93 18GBHD 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 256MB MEM 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6971A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 X6985A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 SUN X7126A 17" CLR MNTR S0003KW2858 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 6.94 SUN X7126A 17" CLR MNTR S0003KW2879 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 6.94 SUN X7135A 19" CLR MNTR S0003LI1002 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 11.58 SUN X7135A 19" CLR MNTR S0005LI2769 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 11.58 SUN X7135A 19" CLR MNTR S0005LJ2773 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 11.58 SUN E6500 SERVER 181384A X2580A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $345.34 SUN E6500 SERVER 181384A X2580A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $345.34 SUN E6500 SERVER 181384A X2580A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $345.34 SUN E6500 SERVER 181384A X2580A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $345.34 SUN E6500 SERVER 181384A X2602A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $206.79 SUN E6500 SERVER 181384A X2602A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $206.79 SUN E6500 SERVER 181384A X7023A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $211.62 SUN E6500 SERVER 181384A X7023A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $211.62 SUN E6500 SERVER 181384A X7023A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $211.62 SUN E6500 SERVER 181384A X7023A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $211.62 SUN E6500 SERVER 181384A X954A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 42.39 SUN E6500 SERVER 181384A X954A 6655 SUGARLOAF PARKWAY DULUTH, GA 30097 $ 42.39
Page No. 5 of 5 NON-ORIGINAL No security interest in an Equipment Schedule may be created or perfected by possession of this copy. ADDENDUM ONE TO EQUIPMENT SCHEDULE NO. THREE MASTER LEASE AGREEMENT NO. 172564 This Addendum One to "Equipment Schedule Three, Master Lease Agreement No. 172564" (the "Lease"), is dated as of October 9, 2002, and is entered into, by and between COMPUTER SALES INTERNATIONAL, INC. ("Lessor") and INNOTRAC CORPORATION ("Lessee"). Notwithstanding anything to the contrary contained in the Lease between the parties hereto, dated on even date herewith and with respect to certain computer equipment (the "Equipment"), and in consideration of the mutual promises, covenants, and conditions in the Lease and contained herein, and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto covenant and agree as follows: 1. CONTROLLING TERMS: This Addendum One shall become a part of the Lease and shall be read together with the Lease as one single document. To the extent that there shall be any conflicts as between the terms and provisions contained in the Lease and those contained herein, the terms and provisions set forth herein shall control. 2. COMMENCEMENT DATE: The Equipment is installed at Lessee's location under Equipment Schedules One and Two to Master Lease Agreement No. 172564. Lessee unconditionally accepts the Equipment for lease under this Lease. The Initial Terms of Equipment Schedules One and Two are due to expire on September 30, 2003 and February 28, 2003, respectively. However, in consideration of Lessee's entering into this Lease, Lessor will terminate Lessee's rental obligations under Equipment Schedules One and Two effective October 31, 2002. Accordingly, the Commencement Date of the Equipment under this Lease is November 1, 2002. 3. SERIAL NUMBER SUBSTITUTION: a) As provided in section 9 of the Master Lease Agreement, Lessee may replace any Unit with an identical or improved specification machine (a "Substitute Unit") as a result of a warranty replacement or other mechanical defect, or a casualty loss situation. Lessee must notify Lessor of the replacement serial number and configuration of the Substitute Unit as required by section 9 of the Master Lease Agreement. b) In addition to the circumstances set forth in (a) above, upon expiration of the Initial Term, Lessee may choose to return desktop PC, laptop PC, or PC monitor units with serial numbers other than those listed in the Certificate of Acceptance only upon the following conditions: the Substitute Units must be (1) of an identical or improved configuration as the Units being replaced, (2) in the condition required by section 7 of the Master Lease Agreement, and (3) owned by Lessee. Lessee must give Lessor written notice of the serial numbers of the Substitute Units along with a detailed list of which serial numbers they are replacing prior to their return to Lessor or else Lessor may decline to accept Substitute Units. Lessee hereby represents and warrants to Lessor that, upon delivery of any Substitute Units to Lessor, Lessee will be the absolute owner of the Substitute Units; the Substitute Units will be free and clear of all liens, charges and encumbrances; and Lessee will have full right, power and authority to transfer to Lessor title to the Substitute Units. NON-ORIGINAL No security interest in an Equipment Schedule may be created or perfected by possession of this copy. 4. FINANCING CONTINGENCY: Lessor's performance hereunder is conditioned upon Lessor obtaining a fixed-rate, non-recourse loan, using only the Equipment and the Lease as collateral. In the event Lessor cannot obtain such a loan within sixty (60) days after Lessor's receipt of signed lease documents from Lessee, then Lessor shall so notify Lessee and shall have no further obligations hereunder. 5. CREDIT APPROVAL: Lessor's performance of its obligations under this Lease is conditioned upon Lessor's review and approval of Lessee's most current interim financial statement. IN WITNESS WHEREOF, the parties hereto have executed this Addendum One to Equipment Schedule No. Three, Master Lease No. 172564, as of the date set forth below. COMPUTER SALES INTERNATIONAL, INC. INNOTRAC CORPORATION By: /s/ E. William Gillula By: /s/ -------------------------------- ------------------------------- Title: President & COO Title: CFO ----------------------------- ---------------------------- Date: DEC 23, 2002 Date: 10/15/02 ------------------------------ ----------------------------- NON-ORIGINAL No security interest in an Equipment Schedule may be created or perfected by possession of this copy. CSI - -------------------------------------------------------------------------------- COMPUTER SALES INTERNATIONAL, INC. 9990 Old Olive Street Road, Suite 101 St. Louis, Missouri 63141 (314) 997-7010 LESSEE: INNOTRAC CORPORATION STIPULATED LOSS VALUE SCHEDULE TO EQUIPMENT SCHEDULE NUMBER: THREE MASTER LEASE AGREEMENT NUMBER: 172564 BASE VALUE: $492,278.00
- ------------------------------------------------------------------------------------------------------- MONTHLY MONTHLY PAYMENTS STIPULATED LOSS VALUE PAYMENTS STIPULATED LOSS VALUE MADE (PERCENT OF BASE VALUE) MADE (PERCENT OF BASE VALUE) - ------------------------------------------------------------------------------------------------------- 0 110.0% 13 90.1% - ------------------------------------------------------------------------------------------------------- 1 108.5 14 88.6 - ------------------------------------------------------------------------------------------------------- 2 106.9 15 87.1 - ------------------------------------------------------------------------------------------------------- 3 105.4 16 85.6 - ------------------------------------------------------------------------------------------------------- 4 103.9 17 84.0 - ------------------------------------------------------------------------------------------------------- 5 102.4 18 82.5 - ------------------------------------------------------------------------------------------------------- 6 100.8 19 81.0 - ------------------------------------------------------------------------------------------------------- 7 99.3 20 79.4 - ------------------------------------------------------------------------------------------------------- 8 97.8 21 77.9 - ------------------------------------------------------------------------------------------------------- 9 96.3 22 76.4 - ------------------------------------------------------------------------------------------------------- 10 94.7 23 74.9 - ------------------------------------------------------------------------------------------------------- 11 93.2 24 and 73.3 thereafter - ------------------------------------------------------------------------------------------------------- 12 91.7 - -------------------------------------------------------------------------------------------------------
In the event of a loss of less than all of the Equipment listed on the above Equipment Schedule, the Stipulated Loss Value shall be allocated to the Units lost in the same proportion as the Monthly Rental per Unit for the lost Units bears to the Monthly Rental for all Units listed on the Equipment Schedule. Initialed by Lessor: /s/ -------- Lessee: /s/ -------- MFL/ATL EX-10.4(G) 5 g81419exv10w4xgy.txt EX-10.4(G) LETTER TO RESTATED SECURITY AGREEMENT EXHIBIT 10.4(g) [SOUTHTRUST BANK LOGO] SOUTHTRUSTBANK, N.A. One Georgia Center 600 West Peachtree Street Atlanta, Georgia 30308 February 18, 2003 Mr. David Gamsey Chief Financial Officer Innotrac Corporation 6655 Sugarloaf Parkway Duluth, Georgia 30097 Dear David: In response to your request at our January 31st meeting, and our meeting last Friday, we have discussed the basis on which we would like to continue providing a credit facility for Innotrac. We have determined that we would continue to provide a $40,000,000 credit facility to Innotrac on the following terms: - Your line would be converted to an Asset-Based Revolving Credit Facility. The ABL area would monitor your borrowing base for disbursements on your line of credit. Responsibility for your relationship would remain in Corporate Banking. We would ask you to provide borrowing base reporting to us monthly as long as excess availability is greater than 15%. If availability is less than 15%, we would ask for weekly borrowing base reporting. - Advance rates on the borrowing base would be limited to 85% of eligible accounts receivable, and 50% of eligible inventory. However, advances against eligible BellSouth inventory would be 65%, provided BellSouth consents to your assignment to us of the contract between Innotrac and BellSouth. There would be a maximum advance of $20,000,000 against inventory. - We have reviewed your forecasted financial statements for 2003 to make adjustments to your loan covenants. This would include a decrease in your tangible net worth requirement in anticipation of your projected covenant violation for 3/31/03. We would also establish a stepped-up fixed charge coverage covenant to correspond to your projections. Your debt/tangible net worth covenant would remain the same. We would set a CAPEX limit according to your anticipated requirements. Minimum Tangible Net Worth: $32,500,000 at 3/31/03 $33,000,000 at 6/30/03 & 9/30/03 $34,000,000 at 12/31/03, then increasing by a minimum, of $250,000 per quarter. Fixed Charge Coverage: 1.25 at 3/3 1/03 1.40 at 6/30/03 1.60 at 9/30/03 1.75 at 12/31/03 Debt to Tangible Net Worth 1.50:1 (current covenant) Maximum CAPEX Tentatively limited to $3,000,000 for 2003. - The interest rate matrix we established in December would remain the same. However, ABL would charge fees for administration. - The ABL fees you could anticipate are as follows: -Monthly monitoring fee of $1,555. -A one-time fee to set up on-line reporting of $1,125. -Audit fees for periodic ABL review. Typically this runs $2,700, and could be conducted three times per year. - The existing loan documents would need to be amended to reflect the new structure. We will provide a checklist for you showing the items we will need. - The maturity date of June 30, 2005, currently in place, would stay the same. Per your request last Friday, we would provide for the following: - That financial reporting would be provided within 30 days versus 20 days as outlined on the schedule. - That we would provide for a definition of tangible net worth to exclude your deferred tax asset from intangibles for the calculation of your debt/tangible net worth and tangible net worth covenants. - We would provide for another $1,000,000 in CAPEX for new business purposes in addition to the $3,000,000 CAPEX limit tentatively proposed. If you needed to make additional CAPEX over these amounts, we would ask that you request the Bank's approval. We hope you will find that this structure will continue to accommodate your needs. If you accept these terms, please acknowledge below. Sincerely, /s/ Noble Jones Noble Jones Vice President Acknowledgement: /s/ David L. Gamsey --------------------------------------------------------------------- EX-10.13(B) 6 g81419exv10w13xby.txt EX-10.13(B) LEASE, DATED AUGUST 5, 2002 EXHIBIT 10.13(b) 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 PREMISES.......................................,..................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...................................................................1 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..........................................................2 3.7 COMMON EXPENSES....................................................3 3.8 VERIFICATION AND OPERATING STATEMENT...............................3 3.9 INTEREST ON PAST DUE AMOUNTS.......................................3 ARTICLE IV - COMMON AREAS............................................................3 4.1 COMMON AREAS.......................................................3 4.2 USE OF COMMON AREAS................................................3 4.3 VEHICLE PARKING....................................................3 4.4 COMMON AREA MAINTENANCE............................................4 ARTICLE V - USE......................................................................4 5.1 USE................................................................4 5.2 ADA................................................................4 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.............................................15 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..............................................................16 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.............................................18 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 26.3 WAIVER OF JURY TRIAL..............................................21 26.4 SEVERABILITY PROVISIONS...........................................22
iv 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............................................23 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 ..............................................24 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 5th day of August, 2002, 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, 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 five (5) years (the "Term"), commencing January 1, 2003 (the "Commencement Date") and ending on December 31, 2007 (the "Expiration Date"), unless sooner terminated pursuant to any provision hereof. 2.2 DELAY IN OCCUPANCY. Intentionally deleted. 2.3 EARLY OCCUPANCY. Intentionally deleted. 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 in the amount of $118,133.33 per month ("Base Rent"), payable in advance, on the first day of each month. 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. 1 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 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 (l/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. 2 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. 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 3 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 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. 4 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 Four Hundred Thousand and no/100 Dollars ($400,000) (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 be reduced by One Hundred Thousand and no/100 Dollars ($100,000) every twelve months as follows: As of 1/1/03 $400,000.00 1/1/04 $300,000.00 1/1/05 $200,000.00 1/1/06 $100,000.00
Provided Tenant is not in default of the terms of this Lease, the Letter of Credit requirement shall end as of 12/31/06 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. In the event the Letter of Credit instrument presented to Landlord expires prior to 12/31/06, Tenant agrees to provide a renewal or replacement Letter of Credit within fourteen (14) days of its expiration. Tenant also agrees that Landlord shall have the right to present the Letter of Credit for payment seven (7) days prior to expiration if a renewal or replacement Letter of Credit has not been received by Landlord prior to that date. 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 ________________, 2002 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 5 tenant was entitled to cure such default under the Lease has passed" 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. 10.1(b) DEFINITION: As used herein, the term "Hazardous Material" means any hazardous or 8 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, assignee or sublessee (hereinafter referred to as the "Transferee") with the "Use of Premises Clause" contained in Section 5 of this Lease; 9 (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 properly 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 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. 10 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 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 11 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 rendered 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 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 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. 13.2 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 13 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 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 14 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. 15 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: If to Landlord: The Lincoln National Life Insurance Company c/o Delaware Investment Advisers Attention: Real Estate Asset Management 1300 S. Clinton Street Fort Wayne, Indiana 46802 Phone: 260-455-3242 Fax: 260-455-4114 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 16 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 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. 17 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 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-l": 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 any reorganization or arrangement proceeding is instituted by Tenant for the settlement, 19 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 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 20 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. 21 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 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. 22 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. 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. 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 23 not constitute an offer to lease or a reservation of space. No agreement between Landlord and 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 statement(s) 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 statement(s) in entering into this Lease. Tenant represents and warrants that the information contained in said financial statement(s) 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. 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 one hundred eighty (180) 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 the then prevailing market rent for comparable industrial distribution buildings in the Property's submarket. 24 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 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 EXHIBIT A LEGAL DESCRIPTION PARCEL 1: LOT 1 ON THE PLAT, RECORDED AS DOCUMENT NUMBER R99-46093, IN NAPER-CROSSINGS SUBDIVISION, BEING A SUBDIVISION OF PART OF THE NORTHEAST 1/4 OF SECTION 28, TOWNSHIP 37 NORTH, RANGE 10 EAST OF THE THIRD PRINCIPAL MERIDIAN, DESCRIBED AS FOLLOWS: COMMENCING AT THE NORTHEAST CORNER OF SAID LOT 1; THENCE SOUTH 00 DEGREES 59 MINUTES 31 SECONDS WEST 413.00 FEET ALONG THE EAST LINE OF SAID LOT TO THE POINT OF BEGINNING; THENCE CONTINUING SOUTH 00 DEGREES 59 MINUTES 31 SECONDS WEST ALONG SAID EAST LINE 820.00 FEET TO THE SOUTHEAST CORNER OF SAID LOT; THENCE NORTH 89 DEGREES 00 MINUTES 29 SECONDS WEST ALONG THE SOUTH LINE OF SAID LOT, 743.12 TO AN ANGLE POINT IN SAID SOUTH LINE; THENCE NORTH 49 DEGREES 24 MINUTES 14 SECONDS WEST ALONG THE SOUTHWEST ONE OF SAID LOT, 437.70 FEET TO A WESTERLY LINE OF SAID LOT AND A POINT ON A NON-TANGENT CURVE; THENCE NORTHERLY 266.33 FEET ALONG SAID CURVE AND THE WEST LINE, HAVING A RADIUS OF 612.96 FEET, AND A CHORD BEARING OF NORTH 13 DEGREES 30 MINUTES 56 SECONDS EAST, TO A POINT OF TANGENCY AND TO A WESTERLY CORNER OF SAID LOT; THENCE NORTH 01 DEGREE 04 MINUTES 05 SECONDS EAST ALONG THE WEST LINE OF SAID LOT, 283.03 FEET; THENCE SOUTH 89 DEGREES 00 MINUTES 29 SECONDS EAST, 1022.68 FEET TO THE POINT OF BEGINNING IN WILL COUNTY, ILLINOIS. 26 EXHIBIT B FLOOR PLAN 27 EXHIBIT C Intentionally Omitted 28 EXHIBIT D RULES AND REGULATIONS The Rules and Regulations set forth in this Exhibit shall be and hereby are made a part of the Lease to which they are attached. Whenever the term "Tenant" is used in these Rules and Regulations, it shall be deemed to include Tenant, its employees or agents, and any other persons permitted by Tenant to occupy or enter the Leased Premises. The following Rules and Regulations may from time to time be modified by Landlord. 1. The sidewalks, entryways, passages, and other common facilities of the Building shall be controlled by Landlord and shall not be obstructed by Tenant or used for any purpose other than ingress or egress to and from the Leased Premises. Tenant shall not have the right to remove any obstruction or any such item without the prior written consent of Landlord. Landlord shall have the right to remove any obstruction or any such item without notice to Tenant and at the expense of Tenant. 2. The Landlord and/or Landlord's property manager may at all times keep a pass key to the Leased Premises, and shall at all times be allowed admittance to the Leased Premises; subject, however, to Tenant's reasonable security requirements which may prohibit access except when accompanied by Tenant's authorized security personnel. 3. Subject always to Tenant's reasonable security requirements, no additional lock or locks shall be placed by Tenant on any door in the Building and no existing lock shall be changed unless written consent of Landlord shall first have been obtained. A reasonable number of keys to the Leased Premises will be furnished by Landlord and Tenant shall not have any duplicate key made. At the termination of this tenancy, Tenant shall promptly return to Landlord all keys. 4. Landlord reserves the right to exclude or expel from the Leased Premises or Building any person who, in the judgment of Landlord is intoxicated or under the influence of liquor or drugs, or who shall in any manner do any act in violation of any of the rules and regulations of the Building. 5. Landlord shall have the right, exercisable without notice and without liability to Tenant, to change the name and street address of the Building of which the Leased Premises are a part. 6. Without the written consent of Landlord, Tenant shall not use the name of the Building in connection with or in promoting or advertising the business of Tenant except as Tenant's address. 7. Landlord reserves the right to restrict, control or prohibit canvassing, soliciting and peddling on the Leased Premises. Tenant shall not grant any concessions, licenses, or permission for the sale or taking of orders for food, beverages, services or merchandise in the Building, nor install or permit the installation, use of any machine or equipment for dispensing food, beverages, services or merchandise, or permit the preparation, serving, distribution or delivery of food, beverages, services or merchandise without the approval of Landlord and in compliance with arrangements 29 prescribed by Landlord, except for an assortment of food and beverage machines typical to the Building's use. 8. No sign, placard, picture, advertisement, name or notice shall be inscribed, displayed or printed or affixed on or to any part of the outside or inside (visible to the outside) of the Building without the written consent of Landlord, and Landlord shall have the right to remove any such sign, placard, picture, advertisement, name and notice without notice to and at the expense of Tenant. At all times and at its sole discretion, Landlord shall have the express right to control signage outside the Building. 9. Tenant shall not cause any unnecessary labor by reason of Tenant's carelessness or indifference in the preservation of good order and cleanliness. 10. Tenant shall see that the doors of the Leased Premises are closed and securely locked before leaving the Leased Premises and must observe strict care and caution that all water faucets or water apparatus are entirely shut off before Tenant or Tenant's employees leave the Building, so as to prevent waste or damage, and for any default or carelessness Tenant shall make good all injuries sustained by other tenants or occupants of the Building or Leased Premises. 11. The plumbing facilities shall not be used for any other purpose than that for which they are constructed, and no foreign substance of any kind shall be thrown therein, and the expense of any breakage, stoppage, or damage resulting from a violation of this provision shall be borne by Tenant who shall, or whose employees, agents, or invitees shall, have caused it. 12. If a Tenant desires telegraphic or telephonic connections, burglar alarms, or similar services, the Landlord, at the sole cost of Tenant, will direct the electricians approved by Landlord as to where the wires are to be introduced and without such direction no boring or cutting for wires shall be permitted. 13. No animal or bird shall be allowed in any part of the Leased Premises (except to assist the handicapped) without the consent of the Landlord. 14. The Tenant and his employees shall not park cars on the street or internal drives of the Property of which the herein Leased Premises are a part or in any alley or court in the Property of which the herein Leased Premises are a part. The Tenant and his employees shall park their cars in areas as designated by the Landlord from time to time. 15. Bicycles or other vehicles shall not be permitted anywhere inside the Building or on the sidewalks outside the Building, except in those areas designated by Landlord for bicycle parking. 16. Tenant shall not allow anything to be placed or stored on the outside of the Building, except trash dumpsters, commercial quality trash receptacles, and commercial quality picnic tables for employee use, nor shall anything be thrown by Tenant out of the windows or doors. 17. No windows, shades, blinds, screens or draperies will be attached or detached by Tenant and no awnings shall be placed over the windows without Landlord's prior written consent. Tenant agrees to abide by Landlord's rules with respect to maintaining uniform curtains, draperies 30 and linings at all windows and hallways so that the Building will present a uniform exterior appearance. Tenant will use its best efforts to have all curtains, draperies and blinds closed at the end of each day in order to help conserve energy. Except in case of fire or other emergency, Tenant shall not open any outside window because the opening of windows interferes with the proper functioning of the Building heating and air conditioning systems. 18. Tenant shall not install or operate any steam or gas engine or boiler, or carry on any mechanical business in the Leased Premises without Landlord's prior written consent, which consent may be withheld in Landlord's absolute discretion. Landlord approves the use of material handling equipment such as conveyors and forklifts. The use of oil, gas or flammable liquids other than those supplied by the Landlord for heating, air conditioning, lighting or any other purpose is expressly prohibited. Explosives and other articles deemed extra hazardous shall not be brought into the Building. 19. Except as permitted by Landlord, Tenant shall not mark upon, paint signs upon, cut, drill into, drive nails or screws into, or in any way deface the walls, ceilings, partitions or floors of the Leased Premises or of the Building, excluding (i) work arising from the initial work described on Exhibit F, (ii) Tenant's fixturization of the Leased Premises, and (iii) any subsequent work performed by Tenant with respect to which Landlord has given its consent. Any defacement, damage or injury caused by Tenant shall be paid for by Tenant, due and payable upon demand by Landlord. 20. Tenant shall not use, keep or permit to be used or kept any foul or noxious gas or substance in the Leased Premise, or permit or suffer the Leased Premises to be occupied or used in a manner offensive or objectionable to the Landlord or other occupants of the Building by reason of noise, odors, and/or vibrations, or interfere in any way with other Tenants or those having business therein. 21. No cooking shall be done or permitted by any Tenant on the Leased Premises, except for cooking in a microwave oven, nor shall the Leased Premises be used for washing clothes, for lodging, or for any improper objectionable or immoral purposes. 22. Tenant shall not install any radio or television antenna, loudspeaker, or other device on the roof or exterior walls of the Building. Tenant shall not interfere with radio or television broadcasting or reception from or in the Building or elsewhere. 23. Tenant shall place garbage dumpsters in a location satisfactory to Landlord. Tenant shall store all of its trash and garbage within such dumpsters. Tenant shall not place in any dumpster any material that cannot be disposed of in the ordinary and customary manner of trash and garbage disposal. 24. Cars must be parked entirely within the stall lines painted on the ground. The speed limit shall be five (5) miles per hour. Parking is prohibited: (a) in areas not striped for parking, (b) in aisles, (c) where "no parking" signs are posted, (d) on ramps, (e) in cross hatched areas, and (f) in such other areas are may be designed by Landlord as reserved for the exclusive use of others. Washing, waxing, cleaning, or servicing of any vehicle by anyone is prohibited. 25. Landlord reserves the right to change these rules and to make such other and further 31 reasonable rules and regulations either as it affects one or all tenants as in its judgment from time to time may be needed for the safety, care and cleanliness of the Leased Premises and the Building, or for the preservation of good order therein or for any other cause, and when changes are made, such modified or new rules shall be deemed a part hereof, with the same effect as if written herein, when a copy shall have been delivered to the Tenant or left with some person in charge of the Leased Premises. 26. These Rules and Regulations are in addition to, and shall not be construed to in any way modify or amend, in whole or in part, the terms, covenants, agreements, and conditions of any lease of premises in the Project. 27. Tenant shall be responsible for the observance of all the foregoing rules by Tenant's employees, agents, clients, customers, invitees, and guests. INITIAL DLG INITIAL CK ------ ------- Tenant Landlord 32 EXHIBIT "E-1" TENANT ESTOPPEL CERTIFICATE , 200 ------------ - To: Re: Lease Agreement with The Lincoln National Life Insurance Company for premises located in Naper Crossings Commerce Center II in Bolingbrook, Illinois Gentlemen: The undersigned, ______________________ as Tenant ("Tenant") under that certain Lease Agreement with The Lincoln National Life Insurance Company as Landlord ("Landlord"), dated _______________, 200_ (the "Lease"), hereby ratifies the Lease and states, represents, warrants, and certifies as follows: 1. Tenant entered into occupancy of those premises in (project name) (the "Project") containing approximately ____________ square feet, known as Building _________, Space _____, as more particularly identified in the Lease (the "Premises"), on _____________________, 200 and is in full and complete possession of the Premises. 2. All improvements, alterations or additions to the Premises to be made by Landlord, if any, have been completed to the satisfaction of Tenant. All contributions to be made by Landlord for improvements to the Premises, if any, have been paid in full to Tenant. 3. The term of the Lease commenced on _________________ , 200_, and expires on ______________ , 200__. 4. The Lease is in full force and effect and has not been assigned, modified, supplemented or amended in any way (except by agreement(s) dated ________________ ), and the Lease and such agreements, if any, represent the entire agreement between the parties with respect to the Premises. 5. Tenant has no right or option to (i) extend the term of the Lease, (ii) lease additional space in the Project, or (iii) purchase the Project or any part thereof (except for). 6. Base Rent in the amount of $ ______________ per year is currently due and payable under the Lease. 33 7. Tenant has paid a security deposit under the Lease to Landlord in the amount of $____________________. 8. Base Rent for ___________________ ____, 200_ has been paid. 9. No rent under the Lease has been paid more than thirty (30) days in advance. 10. There is no existing default on the part of either Landlord or Tenant in any of the terms or conditions of this Lease, and no event has occurred which, with the passage of time or delivery notice, or both, would constitute such a default. 11. All conditions and obligations under the Lease to be performed by Landlord have been performed and on this date Tenant has no existing defenses, counterclaims or offsets against the enforcement of the Lease by Landlord. 12. There are no actions, whether voluntary or, to its knowledge, otherwise, pending against Tenant (or any guarantor of Tenant's obligations pursuant to the Lease) under the bankruptcy or insolvency laws of the United States or any state thereof. 13. There is no apparent or likely contamination of the Premises by hazardous materials or toxic substances and Tenant does not use, nor has Tenant disposed of any such materials or substances in violation of Environmental Laws. Tenant hereby acknowledges and agrees that this certificate may be relied upon by Landlord and any purchaser, mortgagee or beneficiary under a deed of trust, and their respective successors and assigns. Very truly yours, By: Title: 34 EXHIBIT "E-2" LANDLORD'S ESTOPPEL CERTIFICATE - ------------------------------------ (Date) To: Re: To Whom It May Concern: ____________________________________ ("Landlord"), the landlord under that certain lease agreement dated_____________________,________("Lease") between Landlord, and ___________________________________________("Tenant") does hereby certify to___________________________________________________________ ("Lender"), the following: 1. The Lease described above is presently in full force and effect and unmodified except as modified by the following: - -------------------------------------------------------------------------------- - --------------------------------------------------------------. 2. The terms of the Lease commenced on the_____________day of __________, ______ and the full rental is now accruing thereunder. Tenant has not been granted any free rental or unused concession, except as set forth below or as set forth in the Lease. The current monthly rent payable to Tenant under the Lease is $_________________________. 3. Tenant has accepted possession of the Premises, is currently operating its business therein and any improvements required under the terms of the Lease to be made by Landlord prior to the date hereof have been completed. 4. Landlord has received no rent under the Lease that is due and payable more than thirty (30) days in advance. 5. The address for notices to be sent to Tenant is as set forth below, or if no address is set forth below, then as set forth in the Lease. - --------------------------------------- 35 -------------------------------- -------------------------------- 6. Tenant as of this date has not delivered to Landlord any written statement setting forth a charge, lien, claim, right of deduction or offset under the Lease, against rents or other charges due or to become due thereunder. 7. Tenant has deposited with Landlord a security deposit in the amount of $______________________, which has not been applied by Landlord in whole or in part to any of Tenant's obligations under the Lease. 8. The Lease provides no, or no further, tenant improvement allowance from the Landlord to the Tenant for improvements previously constructed in the Premises or which are currently being constructed in the Premises or there remains $________________of the tenant improvement allowance under the Lease that has not yet been advanced or applied by Landlord to or on behalf of Tenant for the construction of such improvements. 9. Landlord has received no notice from Tenant of any default under the Lease by Landlord. 10. Landlord has granted to Tenant no, or no further, rights to extend or renew the term of the Lease, rights to expand the Premises or lease additional space in _____________________________________________________, or rights of offer, first refusal or other preferential rights to lease space, except as follows: -------------------------------- -------------------------------- -------------------------------- By: ----------------------------- Name: --------------------------- Title: -------------------------- 36 EXHIBIT "F" TENANT CONSTRUCTION Tenant accepts the Leased Premises "As Is" 37 EXHIBIT "G" SUBORDINATION, NON-DISTURBANCE AND ATTORNMENT AGREEMENT Loan No. THIS Agreement made and entered into as of this ____ day of __________, 200_, by and among ___________________________________________________, an _____ __________________, with an address at _____________________________(hereinafter "Lessor"), __________________________, a __________________________ corporation, with an address at ___________________________________________________________ ________________________________________________________ (hereinafter "Lessee"), and, __________________________________________________________________________, and, ___________________________________________________________________________ corporation, with an address at ________________________________________________ __________________________________ (hereinafter "Lender"), WITNESSETH: WHEREAS Lessor and Lessee have entered into a Lease dated ___________________________________________________________, 200_ (hereinafter referred to as "Lease") whereby Lessee leases from Lessor those certain premises located in the City of _______________________________ County of ________________, and State of __________________, more particularly described in Exhibit A attached hereto and made a part hereof (hereinafter "Demised Premises"), [a short form or memorandum of which Lease was recorded in Volume _______________________, Page _______________________, Office of Recorder, ____________________________ County, ____________________]; and WHEREAS Lessor, for the purposes of securing a loan (hereinafter "Loan") from Lender, has executed (or will execute) a Promissory Note (hereinafter "Note") in favor of Lender, and for the purpose of securing the Note, Lessor has executed (or will execute) a Mortgage and Security Agreement or a Deed of Trust and Security Agreement (as applicable) (hereinafter "Mortgage") creating a first and superior lien upon the real property described in Exhibit A; and WHEREAS Lessor, Lessee and Lender desire to confirm their understanding with respect to the Lease and the Mortgage and to subordinate the Lease to the Mortgage; NOW, THEREFORE, in consideration of the mutual covenants and agreements herein contained and to induce Lender to proceed with 38 the closing of the Loan, Lessor, Lessee and Lender hereby agree and covenant as follows: 1. Lessee agrees that the Lease (and its estate created thereunder) as well as all of its rights and options thereunder shall be subject and subordinate to the lien of the Mortgage. Notwithstanding the foregoing, Lessee agrees that Lender may at any time, at its election, execute and file in ___________________________________________________ County, _________________________________________________, a notice of subordination reciting that the Lease shall be superior to the lien of the Mortgage. From and after the recordation of such notice of subordination, the Lease shall be superior to the lien of the Mortgage and shall not be extinguished by any foreclosure or sale thereunder. 2. During the term of the Lease or any extensions or renewals thereof, so long as Lessee is not in default (after giving effect to any applicable grace period) in the payment of basic rent or percentage rent or in the performance of any of the terms, covenants or conditions of the Lease on Lessee's part to be performed, Lender agrees that it will not (i) take any action designed to disturb Lessee's possession and occupancy of the Demised Premises nor to diminish or interfere with any of Lessee's rights and privileges under the Lease, or (ii) join Lessee as a party defendant in any action or proceeding for the purpose of terminating Lessee's interest and estate under the Lease because of any default under the Mortgage. 3. In the event any proceedings are brought for the foreclosure of the Mortgage or if the Demised Premises are conveyed to the Lender by deed in lieu of foreclosure, Lessee shall attorn to Lender or the purchaser upon any such conveyance or foreclosure sale or trustee's sale and shall recognize Lender or such purchaser as landlord (lessor) under the Lease. Such attornment shall be effective and self-operative without the execution of any further instrument on the part of any of the parties hereto. Lessee agrees, however, to execute and deliver at any time and from time to time, upon the request of Lessor or Lender or any such purchaser (a) any instrument or certificate which, in the reasonable judgment of Lessor or Lender or such purchaser, may be necessary or appropriate in any such foreclosure proceeding or otherwise to evidence such attornment, and (b) an instrument or certificate regarding the status of the Lease, consisting of statements, if true, (i) that the Lease is in full force and effect, (ii) the date through which rentals have been 39 paid, (iii) the date of the commencement of the term of the Lease, (iv) the nature of any amendments or modifications to the Lease, (v) that no default, or state of facts, which with the passage of time or notice would constitute a default, exists on the part of either party to the Lease, and (vi) the dates on which payments of percentage rentals (if any) are due under the terms of the Lease. 4. If Lender shall succeed to the interest of Lessor under the Lease in any manner, or if any purchaser acquires the Demised Premises upon any foreclosure of the Mortgage or any trustee's sale (or similar sale) under the Mortgage, Lender or such purchaser, as the case may be, in the event of attornment shall have the same remedies by entry, action or otherwise in the event of a default by Lessee in the payment of rent or additional rent or in the performance of any of the terms, covenants and conditions of the Lease on Lessee's part to be performed that Lessor had or would have had if Lender or such purchaser had not succeeded to the interest of Lessor. From and after any such attornment, Lender or such purchaser shall be bound to Lessee under all the terms, covenants and conditions of the Lease, and Lessee shall, from and after the succession to the interest of Lessor under the Lease by Lender or such purchaser have the same remedies against Lender or such purchaser for the breach of an agreement contained in the Lease that Lessee might have had under the Lease against the Lessor if Lender or such purchaser had not succeeded to the interest of Lessor; provided further, however, that Lender or such purchaser shall not be subject to any liability or obligation under the Lease or otherwise until Lender or such purchaser shall have acquired the interest of Lessor in the Demised Premises by foreclosure or otherwise, and then only to the extent of liabilities or obligations accruing subsequent to the date that Lender or such purchaser has acquired the interest of Lessor; in furtherance of the foregoing, neither Lender or such purchaser shall be (a) liable for any action or omission of any prior landlord (including Lessor); or (b) liable for the return of any security deposits (except such as have been delivered to it); or (c) subject to any offsets or defenses which Lessee might have against any prior landlord (including Lessor) except for offsets and defenses 40 which arise subsequent to the date that Lender or such purchaser acquires the interest of Lessor; or (d) bound by any rent or additional rent which Lessee might have paid for more than the current month to any prior landlord (including Lessor); or (e) bound by any amendment or modification of the Lease made without its written consent; or (f) bound by the consent of any prior landlord (including Lessor), if required by the terms of the Lease, to any assignment or sublease of Lessee's interest in the Lease made without also obtaining Lender's prior written consent; or (g) personally liable for any default under the Lease or any covenant on its part to be performed thereunder as landlord, it being acknowledged that Lessee's sole remedy in the event of such default shall be to proceed against Lender's interest as mortgagee in the Demised Premises. 5. Lessee agrees to give Lender notice of any default by Lessor under the Lease at the same time as Lessee gives notice to the Lessor. Lender shall be entitled, but shall not be obligated, upon notice of a default by Lessor under the Lease to remedy the default of the Lessor provided that Lender promptly commences action to correct the default within thirty (30) days, and Lender proceeds with due diligence and without interruption to complete the action necessary to cure the default. Lender shall in no event be obliged to cure a default which is personal to Lessor and, therefore, not reasonably susceptible of cure by Lender. 6. In the event Lessee receives written notice from Lender that there has been a default under the Loan and that rentals due under the Lease are to be paid to Lender pursuant to the terms of an Assignment, Lessee shall pay to Lender, or in accordance with the directions of Lender, all rentals and other monies due or to become due to Lessor under the Lease, and Lessor hereby expressly authorizes Lessee to make such payments to Lender, or as otherwise directed by Lender, and hereby releases and discharges Lessee of and from any liability to Lessor on account of any such payments. 7. Nothing herein contained is intended, nor shall it be construed, to abridge or adversely affect any right or 41 remedy of Lessor under the Lease in the event of any default by Lessee in the payment of any rent or in the performance of any of the terms, covenants or conditions of the Lease on Lessee's part to be performed. 8. Any notice or communication required or permitted hereunder shall be given in writing, sent by United States mail, postage prepaid, registered or certified mail, or by facsimile transmission (provided that such facsimile is confirmed by mail in the manner previously described), addressed to the recipient party at its address set forth above, or to such other address or in the care of such other person as hereafter shall be designated in writing by the applicable party and shall be deemed to have been given as of the date of receipt. 9. This Agreement may not be modified orally or in any manner other than by an agreement in writing signed by the parties hereto or their respective successors in interest. This Agreement shall inure to the benefit of and be binding upon the parties hereto, their successors and assigns, and any purchaser or purchasers at foreclosure of the Demised Premises, and their respective heirs, personal representatives, successors and assigns. IN WITNESS WHEREOF, the parties hereto have hereunto caused this Agreement to be duly executed as of the day and year first above written. "LESSOR" By: Title: "LESSEE" By: Title: "LENDER" By: Title: 42 STATE OF ) ) SS: COUNTY OF ) On this the ________________________ day of ______________________, 2000 before me personally appeared ______________________________, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument and acknowledged that (she)(he) executed the same as (her) (his) free act and deed and the free act and deed of _________________________________________________________ for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand. Notary Public My Commission Expires: 43 STATE OF ) ) SS: COUNTY OF ) On this the __________________ day of _____________ , 2000, before me personally appeared __________________________________________________________, known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument and acknowledged that (she) (he) executed the same as (her) (his) free act and deed and the free act and deed of _______________________________ for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand. Notary Public My Commission Expires: 44 STATE OF ) ) SS: COUNTY OF ) On this the ________________________ day of ____________________, 2000, before me personally appeared___________________________________________, the duly authorized officer of__________________________________________________ known to me (or satisfactorily proven) to be the person whose name is subscribed to the within instrument and acknowledged that (she)(he) executed the same as (her) (his) free act and deed and the free act and deed of said ______________________________________________, for the purposes therein contained. IN WITNESS WHEREOF, I hereunto set my hand. Notary Public My Commission Expires: 45 EXHIBIT H LANDLORD'S LIEN WAIVER THIS LANDLORD'S LIEN WAIVER (this "Waiver") is made this _____________ day of ___________________, 200_ by THE LINCOLN NATIONAL LIFE INSURANCE COMPANY, an Indiana corporation ("Landlord"). RECITALS WHEREAS, Landlord is the owner of certain real property located in the Village of Bolingbrook, Illinois, which property is more particularly described on Exhibit A, attached hereto and made a part hereof (the "Property"). WHEREAS, Landlord and iFulfillment, Inc., a Delaware corporation ("iFulfillment, Inc.") entered into a Lease Agreement, dated July 23, 2001 whereby Landlord leased the Property to iFulfillment, Inc. and iFulfillment, Inc. leased the Property from Landlord (the "Lease"). WHEREAS, iFulfillment, Inc., in the course of its business operations, and in its sole discretion, may pledge, hypothecate, grant a security interest in, or otherwise encumber the inventory, equipment, furnishings, trade fixtures, books and records, now owned or hereafter acquired by iFulfillment ("Tenant's Personal Property"), as security for a loan, a lease or such other financing arrangement as i-Fulfillment may deem appropriate. WHEREAS, in order for iFulfillment,Inc. to grant a first priority security interest in and to Tenant's Personal Property, Landlord is required to waive any actual or potential lien, or claim to a lien, which may arise at law or in equity, by statute, or by virtue of Landlord's ownership of the Property (collectively, "Landlord's Liens"). Further, it is a condition of iFulfillment, Inc.'s obligations under the Lease that Landlord waive Landlord's Liens with respect to Tenant's Personal Property. WHEREAS, Landlord desires herein to waive Landlord's Liens with respect to Tenant's Personal Property. NOW THEREFORE, in consideration of Landlord's obligations under the Lease and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, Landlord hereby represents, warrants, covenants and agrees as follows: 1. Landlord hereby waives Landlord's Liens with respect to Tenant's Personal Property and further subordinates, releases and relinquishes to iFulfillment, Inc., its successors, assigns, lenders and vendors, all right, title and interest, if any, which Landlord may otherwise claim in and to Tenant's Personal Property, including any substitutions, accessions or replacements 46 of such items. Landlord agrees that Tenant's Personal Property is removable personal property, whether or not affixed to the Property, and shall not be deemed fixtures. Tenant's Personal Property does not include any leasehold improvements which are permanently attached to the Property or which are owned by Landlord. 2. In the event that iFulfillment, Inc. enters into a financing arrangement (a "Financing Arrangement") whereby it grants a security interest in and to Tenant's Personal Property to a third party lender, lessor or vendor (individually, a "Lender"), Landlord agrees to execute such additional documents as may evidence Landlord's waiver of Landlord's Liens as such Lender may reasonably require (the "Additional Waivers"). Landlord acknowledges that such Additional Waivers may provide a Lender with the right to enter upon the Property, upon notice to Landlord, and remove Tenant's Personal Property in the event of a default under the documents evidencing the Financing Arrangement. 3. This Agreement shall be governed by the internal laws of the State of Illinois without reference to principles of choice of law. 4. Neither this Agreement nor any Lender's security interest in Tenant's Personal Property shall be deemed a mortgage of or lien upon Landlord's fee title to the Property. 5. This Agreement shall be binding upon Landlord and Landlord's successors and assigns and shall inure to the benefit of i-Fulfillment, its successors, assigns and Lenders. IN WITNESS WHEREOF, Landlord has executed this Waiver as of the date first above written. The Lincoln National Life Insurance Company, An Indiana Corporation By: Delaware Lincoln Investment Advisers, A Series of Delaware Management Business Trust As Attorney-In-Fact By: ------------------------------------------- Christine M. Konrath Second Vice President 47 STATE OF ) -------------------- ) ) SS: COUNTY OF ) ------------------- ) Then personally appeared before me ___________________________________, the _______________________________ of DELAWARE LINCOLN INVESTMENT ADVISERS, who acknowledged to me that his/her execution of the forgoing waiver was his/her free act and deed and the free act and deed of DELAWARE LINCOLN INVESTMENT ADVISERS, this _____ day of __________________________ , 200 . Notary Public: ----------------------------- My Commission Expires: 48 EXHIBIT A LEGAL DESCRIPTION OF THE PROPERTY [See attached] 49 EX-10.16(B) 7 g81419exv10w16xby.txt EX-10.16(B) FIRST AMENDMENT TO LEASE AGREEMENT EXHIBIT 10.16(b) FIRST AMENDMENT TO LEASE AGREEMENT THIS FIRST AMENDMENT TO LEASE AGREEMENT is entered into as of the 15th day of October 2002, by and between ProLogis-Macquarie Kentucky I LLC, a Delaware limited liability company ("Landlord"), and Innotrac Corporation ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant have entered into a Lease dated as of the 23rd day of April, 2002 (such Lease, as heretofore and hereafter modified, being herein referred to as the "Lease") pursuant to which Landlord leased to Tenant approximately 286,000 square feet located at 1226 Aviation Blvd, Hebron, KY 41048 (the "Original Premises"); and WHEREAS, a scrivener's error occurred in the drafting of the Lease whereby the Landlord's name was drafted as ProLogis Development Services Incorporated; and WHEREAS, Landlord and Tenant hereby desire to correct Landlord's name as of the date of the drafting of the Lease to reflect ProLogis Limited Partnership-IV, a Delaware limited partnership; and WHEREAS, the Lease was assigned to ProLogis-Macquarie Kentucky I LLC, a Delaware limited liability company, pursuant to that certain Bill of Sale and Assignment of Leases, Contracts and Permits dated as of the 27th day of June, 2002; and WHEREAS, Landlord and Tenant desire to expand the Premises by 44,000 square feet in addition to modifying certain other terms and conditions as set forth below. NOW THEREFORE, in consideration of Ten Dollars ($10.00) and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Landlord and Tenant agree as follows: 1. Landlord and Tenant hereby acknowledge and agree that as of the date of the Lease, the Landlord's name under the Lease should have been reflected as ProLogis Limited Partnership-IV, a Delaware limited partnership. 2. Landlord and Tenant hereby acknowledge and agree that the Landlord's name under the Lease as of June 27, 2002, is hereby revised to reflect ProLogis-Macquarie Kentucky I LLC, a Delaware limited liability company. 3. Effective on October 1, 2002 (the "Expansion Premises Commencement Date"), the Original Premises shall hereby be expanded to include those certain premises consisting of approximately 44,000 rentable square feet (the "Expansion Premises"), as more fully described on the attached Exhibit A-l. The Premises as described in the Lease shall be revised to include the Expansion Premises and shall further be revised to reflect a total square footage of approximately 330,000 square feet. 4. The Lease Term for the Expansion Premises shall commence on the Expansion Premises Commencement Date and shall continue through the end of the original lease term July 31, 2007. 5. The total monthly Base Rent for the Original Leased Premises and the Expansion Premises, during the Original Leased Premises Extension Term and the Expansion Premises Lease Term as defined herein, shall be due and payable to Landlord in accordance with Paragraph 4 of the Lease equal to the following amount for the respective period set forth below:
Period Amount ------ ------ October 1, 2002 through July 31, 2007 $77,000 per month
6. Effective on the Expansion Premises Commencement Date, Tenant's Proportionate Share of the Building and Project shall be revised to reflect the amount for the respective periods set forth below:
Tenant's Proportionate Tenant's Proportionate Period Share of Building Share of Project -------- ---------------------- -------------------------- October 1, 2002 through July 31, 2007 83% 83%
7. Effective on October 1, 2002, the Initial Estimated Monthly Operating Expense Payments shall be as follows: Monthly Charge Common Area Charges: $ 4,675.00 Taxes: 8,250.00 Insurance: 1,650.00 ---------- Total $14,575.00 1 8. Effective on October 1, 2002, Addendum 1 of the Lease, captioned "Right Of First Refusal", paragraph (a) shall be replaced with the following: "Offered Space shall mean the adjoining 66,000 square feet of space as indicated on Exhibit A-l attached hereto." 9. Effective on October 1, 2002, Addendum 5 of the Lease, captioned "Cancellation Option", shall be revised to reflect the following: "Provided no Event of Default shall then exist and no condition shall then exist which with the passage of time or giving of notice, or both, would constitute an Event of Default, Tenant shall have the right at any time on or before the first day of the 30th month of the Lease Term to send Landlord written notice (the "Termination Notice") that Tenant has elected to terminate this Lease effective on the last day of the 36th month of the Lease Term with respect to the Premises consisting of approximately 330,000 square feet only. It is the express intent of the parties that this Cancellation Option shall not apply to the Offered Space as defined in Addendum 1 of the Lease, as amended by Paragraph 8 under this Amendment. If Tenant elects to terminate this Lease pursuant to the immediately preceding sentence, the effectiveness of such termination shall be conditioned upon Tenant paying to Landlord $1,880,760.00 contemporaneously with Tenant's deliver of the Termination Notice to Landlord. Such amount is consideration for Tenant's option to terminate and shall not be applied to rent or any other obligation of Tenant. Landlord and Tenant shall be relieved of all obligations accruing under this Lease after the effective date of such termination but not any obligations accruing under the Lease prior to the effective date of such termination." 10. With the exception of those terms and conditions specifically modified and amended herein, the Lease shall remain in full force and effect in accordance with all its terms and conditions. In the event of any conflict between the terms and provisions of this Amendment and the terms and provisions of the Lease, the terms and provisions of this Amendment shall supersede and control. 11. All capitalized terms used but not defined herein which are defined in the Lease shall have the same meaning herein as in the lease. 2 EX-10.17 8 g81419exv10w17.txt EX-10.17 LEASE, DATED SEPTEMBER 17, 2002 EXHIBIT 10.17 WINDHAM INDUSTRIAL CENTER V ROMEOVILLE, ILLINOIS LEASE BETWEEN THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, A NEW JERSEY CORPORATION, LANDLORD AND INNOTRAC CORPORATION, A GEORGIA CORPORATION TENANT CONCESSION GRANTED Two (2) months of Base Rent shall abate hereunder. See Section 4.2 below. TABLE OF CONTENTS
SECTION PAGE - ------- ------ 1. FUNDAMENTAL LEASE TERMS 1 2. AGREEMENT TO LEASE 2 3. RENT 2 4. BASE RENT 2 5. ADDITIONAL RENT 3 6. SERVICES 7 7. SECURITY DEPOSIT 8 8. USE 9 9. CONDITION OF PREMISES 9 10. EARLY POSSESSION 10 11. ASSIGNMENT AND SUBLETTING 10 12. REPAIRS AND ALTERATIONS 12 13. CERTAIN RIGHTS RESERVED BY LANDLORD 14 14. COVENANT AGAINST LIENS 15 15. WAIVERS AND INDEMNITIES 15 16. DEFAULTS AND LANDLORD'S REMEDIES 16 17. SURRENDER OF POSSESSION 19 18. INSURANCE 20 19. FIRE OR CASUALTY 21 20. CONDEMNATION 22 21. NOTICES 22 22. ADDITIONAL COVENANTS OF TENANT 23 23. ESTOPPEL CERTIFICATES; MORTGAGE ISSUES 26 24. MISCELLANEOUS 27 25. PARKING 28 26. ERISA 29 27. ATTORNEYS' FEES 29 28. AMERICANS WITH DISABILITIES ACT 29 29. EXPANSION OPTION 30 30. RIGHT OF FIRST OFFER 30 31. OPTION TO EXTEND 32
i EXHIBITS Exhibit A - Plan of the Premises Exhibit B - Work Letter Exhibit C - Legal Description of the Land Exhibit D - Form of Tenant Estoppel Letter Exhibit E - Forms of Expansion Option Lease Amendments ii WINDHAM INDUSTRIAL CENTER V LEASE THIS LEASE ("Lease") is entered into as of the 17th day of September, 2002, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation, whose address is Two Prudential Plaza, 180 North Stetson Street, Suite 3275, Chicago, Illinois 60601 (together with its successors and assigns, "Landlord") and INNOTRAC CORPORATION, a Georgia corporation (together with its permitted successors and assigns, "Tenant"). 1. FUNDAMENTAL LEASE TERMS. Certain fundamental lease terms (the "Fundamental Lease Terms") are set forth below in this Section 1: 1 Building and Address: Windham Industrial Center V 1400-1420 Lakeview Drive Romeoville, Illinois 60446 2 Tenant: Innotrac Corporation, a Georgia corporation 3 Tenant's Current Address: 6655 Sugarloaf Parkway Duluth, Georgia 30097 Attention: David L. Gamsey--Chief Financial Officer 4 Landlord: The Prudential Insurance Company of America, a New Jersey corporation 5 Landlord's Address: Two Prudential Plaza 180 North Stetson Street, Suite 3275 Chicago, Illinois 60601 6. Premises: The Premises shall constitute the approximately 150,204 square feet of warehouse, distribution and office space located in the Building, as shown as the "Initial Premises" on the plan attached hereto and made a part hereof as EXHIBIT A. The final rentable square footage of the Premises shall be determined and confirmed by Landlord and Tenant in writing pursuant to Section 2 below. In addition, the office space presently located in the Expansion Space (as defined below) shall constitute a portion of the Premises for all purposes other than the calculation of Base Rent, Additional Rent, Tenant's Proportionate Share or the Tl Allowance (all of which terms as defined below) and for the part of the Term occurring prior to the Expansion Deadline (as defined below). 7 Term: Sixty two (62) calendar months commencing on the Commencement Date, provided that if the Commencement Date is not the first (1st) day of a calendar month, the Term shall end sixty two (62) calendar months after the last day of the calendar month in which the Commencement Date occurs. 8 Commencement Date: September 17, 2002 9 Base Rent: Annual Base Rent shall equal the product of (a) the rentable area of the Premises determined in accordance with Section 2; and (b) the following annual rates per rentable square foot of the Premises for the applicable periods during the Term: 1st Lease Year $3.59 per square foot 2nd Lease Year $3.70 per square foot 3rd Lease Year $3.81 per square foot 4th Lease Year $3.92 per square foot 5th Lease Year $4.04 per square foot 6th Lease Year $4.16 per square foot 10 Security Deposit: $22,571 11 Work Letter: The work letter attached hereto as EXHIBIT B and made a part hereof. 12 Tenant Improvements: "Tenant Improvements" shall have the meaning ascribed to such term in the Work Letter. 13 Broker: Insignia/ESG 2. AGREEMENT TO LEASE. Landlord hereby leases to Tenant, and Tenant hereby accepts and leases from Landlord the Premises in the Building located on the real estate legally described on EXHIBIT C attached hereto and made a part hereof (the "Land") for the Term. The Land, the Building and all other improvements now or hereafter located on the Land are collectively referred to herein as the "Property." The rentable area of the Premises, constituting approximately 150,204 square feet, shall be determined by Landlord's architect in accordance the current space measurement standards published by BOMA (ANSI Z65.1-1996), to the extent applicable, and otherwise with standard industry practices for single story warehouse and distribution facilities and shall be approved by Tenant's architect, which approval shall not be unreasonably withheld. At such time as the rentable area of the Premises has been finally determined, the parties shall jointly execute a written memorandum in the form attached to the Work Letter as Schedule 2, and such memorandum shall be attached to and become a part of this Lease. The written memorandum shall confirm the rentable area of the Premises, the annual and monthly installments of Base Rent payable by Tenant in accordance with Section 4 below and Tenant's Proportionate Share in accordance with Section 5.1 (b) below. 3. RENT. Tenant shall pay Rent (as defined below) to: PDC Properties, Inc. 23333 Network Place Chicago, Illinois 60673-1227 or to such other person or at such other place as Landlord may designate, without offsets or deductions of any kind whatsoever, at the times and in the manner hereinafter set forth. As used herein "Rent" shall mean Base Rent (as defined below), Additional Rent (as defined below) and all other amounts to be paid by Tenant to Landlord under this Lease. Tenant's covenant to pay Rent shall be independent of every other covenant in this Lease. 4. BASE RENT. 4.1 The Base Rent payable for each Lease Year (as defined below) set forth in Section 1.9 and determined under Section 2 shall be paid in twelve (12) equal monthly installments, paid in advance not later than the first (1st) day of each month. If the Commencement Date is other than the first (1st) day of a month, then the installment of Base Rent for such initial month shall be prorated on a per diem basis for such fractional period. Base Rent (calculated based upon the estimated rentable area of the Premises of 150,889 square feet) for the first full calendar month for which Base Rent shall be due shall be paid when Tenant executes this Lease; immediately after the rentable area of the Premises is determined and approved pursuant to Section 2, an equitable adjustment shall be made between the parties to reconcile such estimated Base Rent paid by Tenant for such month with the actual Base Rent payable for such month. As used herein, "Lease Year" shall mean each consecutive twelve (12) month period beginning with the Commencement Date, except that if the Commencement Date is 2 other than the first (1st) day of a calendar month, then the first (1st) Lease Year shall be the period from the Commencement Date through the date twelve (12) months after the last day of the calendar month in which the Commencement Date occurs, and each subsequent Lease Year shall be the period of twelve (12) months following the last day of the prior Lease Year. 4.2 Notwithstanding anything to the contrary contained in this Lease and provided that Tenant is not then in default under this Lease, Base Rent shall abate in full and Tenant shall have no liability therefor during the two (2) full calendar month period commencing on the Commencement Date. Landlord and Tenant agree that no portion of the Base Rent paid by Tenant during the portion of the term of this Lease occurring after the expiration of any period during which such Rent was abated shall be allocated, for income tax purposes, nor is such rent intended by the parties to be allocable, for income tax purposes, to any abatement period. 5. ADDITIONAL RENT. In addition to paying the Base Rent specified in Section 4 hereof, Tenant shall pay as "Additional Rent" the amounts determined as set forth below in this Section 5. 5.1 DEFINITIONS. As used in this Lease, the following terms shall have the following meanings: (a) "Calendar Year" shall mean the twelve (12) month period January through December of any year (or portion thereof) falling within the Term. (b) "Tenant's Proportionate Share" shall initially be 33.31%, a percentage determined by dividing 150,204 square feet, the estimated rentable area of the Premises, by 450,900 square feet, the rentable area contained in the Building, subject to confirmation pursuant to Section 2 above. The parties hereby agree that the rentable areas of the Premises (once determined and approved in accordance with Section 2) and of the Building, and Tenant's Proportionate Share (once determined and approved in accordance with Section 2) shall not be contested by either party. Tenant's Proportionate Share shall otherwise only be revised upon an actual change in the physical dimensions of the Premises or upon an actual reconfiguration, addition or modification to the rentable area of the Building during the Term, each of which as Landlord may reasonably redetermine from time to time (provided, however, that no such reconfiguration, addition, or modification the rentable area of the Building shall result in an increase in Tenant's Proportionate Share). Similarly, if the Building shall contain tenants who do not participate in all or certain categories of Taxes or Operating Expenses on a prorata basis, Landlord may exclude the amount of Taxes or Operating Expenses, or such categories of the same, as the case may be, attributable to such tenants, and exclude the rentable area of their premises, in computing Tenant's Proportionate Share so long as no portion of the Taxes or Operating Expenses attributable to the premises of such tenants and related common areas (e.g., parking lot) are included in "Taxes" or "Operating Expenses" hereunder. If the Building shall be part of or shall include a complex, development or group of buildings or structures collectively owned or managed by Landlord or its affiliates or collectively managed by Landlord's managing agent, Landlord may allocate, on an equitable basis, Taxes and Operating Expenses within such complex, development or group, and between such buildings and structures and the parcels on which they are located, in accordance with sound accounting and management principles. In the alternative, Landlord shall have the right to determine, in accordance, with sound accounting and management principles, Tenant's Proportionate Share of Taxes and Tenant's Proportionate Share of Operating Expenses based upon the totals of each of the same for all such buildings and structures, the land constituting parcels on which the same are located, and all related facilities, including common areas and easements, corridors, lobbies, side-walks, elevators, loading areas, parking facilities and driveways and other appurtenances and public areas, in which event Tenant's Proportionate Share shall be based on the ratio of the rentable area of the Premises to the rentable area of all such buildings. 3 (c) "Taxes" shall mean all real estate and personal property taxes and assessments and similar governmental charges, special or otherwise, direct or indirect, ordinary or extraordinary (including, without limitation, real estate taxes, general and special assessments, transit taxes, water and sewer rents, taxes based upon the receipt of rent including gross receipts or sales taxes applicable to the receipt of rent or service or value added taxes, ad valorem taxes for Landlord's personal property, and taxes levied or assessed by special taxing districts now or hereafter created) levied or assessed for any Calendar Year (without regard to any different fiscal year used by such government or municipal authority) upon or with respect to the Property that Landlord shall actually pay because of or in connection with the ownership, leasing and operation of the Property. Should any political subdivision or governmental authority having jurisdiction over the Property, impose a tax, assessment, charge or fee which Landlord shall be required to pay, either by way of substitution for such real estate taxes, or in addition to such real estate taxes, or impose an income or franchise tax or other tax in the nature of a sales tax on rents which may be in addition to or in substitution for a tax levied against the Property, such taxes, assessments, fees or charges shall be deemed to constitute Taxes hereunder. "Taxes" shall also include all reasonable fees and costs actually incurred by Landlord in connection with protesting, reducing or limiting the increase in any Taxes. "Taxes" shall not include inheritance, income, transfer or franchise taxes paid by Landlord to the extent applicable to Landlord's general or net income (including, without limitation, rents, receipts or income attributable to operations at the Property, except as provided in the second preceding sentence), and shall not include any taxes to be paid by Tenant under the terms of this Lease. In determining the amount of Taxes for any Calendar Year, the amount of special assessments to be included shall be limited to the amount of the installment (plus any interest payable thereon) of such special assessment which would have been required to have been paid during such year if Landlord had elected to have such special assessment paid over the maximum period of time permitted by law. Except as provided in the immediately preceding sentence, all references to Taxes "for" a particular year shall be deemed to refer to Taxes levied, assessed or otherwise imposed for such year without regard to when such Taxes are payable. (d) "Operating Expenses" shall mean for any Calendar Year those costs or expenses of every kind and nature paid or incurred by or on behalf of Landlord for owning, managing, operating, maintaining, repairing and restoring the Property including, without limitation: (i) dues and other amounts payable to the Windham Lakes Business Park Association (the "Association"), as the Property is located in the Windham Lakes Business Park (the "Park"), and payments under any other presently existing easement, operating agreement, declaration, restrictive covenant, or instrument pertaining to the sharing of costs in any planned development (collectively, the "Park Covenants"); (ii) utilities for the Property, including but not limited to electricity, power, gas, steam, oil or other fuel, water, sewer, lighting, heating, air conditioning and ventilating, to the extent not separately metered, (iii) the cost of fire monitoring, security and security device systems for the Building, if any; (iv) the cost of maintaining and repairing the Building and other improvements in the Property, and all systems, equipment and components thereof, including but not limited to: (A) sewer, water, mechanical, electrical, sprinkler and other utility systems and equipment, (B) heating, ventilating and air conditioning systems and equipment, (C) the roof and structural components of the Building, (D) parking lots, driveways and sidewalks, (E) exterior lighting systems and equipment; (F) window cleaning, (G) trash removal, (H) cleaning of walks, parking facilities and building walls, (I) removal of ice and snow, (J) intentionally omitted, (K) reasonably necessary maintenance and replacement of shrubs, trees, grass, sod and other landscaped items, (L) irrigation systems, (M) drainage facilities, (N) fences, curbs, and walkways, (O) re-striping and resealing parking facilities, and (P) painting of Building exteriors; (v) insurance (including but not limited to, fire, extended coverage, all risk, rent loss, liability, worker's compensation, and any other insurance reasonably carried by Landlord and applicable to the Property (to the extent landlords of similar buildings in the vicinity of the Building 4 generally carry such other insurance) and not carried by tenants under any provision of their lease); (vi) deductibles paid by Landlord under the fire, extended coverage, all risk, insurance policy described above, except to the extent the claim giving rise to such deductible arises out of or in connection with the negligence or willful misconduct of Landlord or its employees, contractors, or agents; (vii) intentionally omitted; (viii) management agreements (including the cost of any reasonable and competitive management fee actually paid thereunder and the fair rental value of any office space provided thereunder, up to customary and reasonable amounts); (ix) supplies, tools, equipment and materials used in the operation, repair and maintenance of the Property; (x) the cost of wages, salaries and benefits of all persons at the level of property manager and below, to the extent engaged in the operation, management, maintenance and repair of the Property; (xi) accounting services to the extent performed with respect to the operation and management of the Property; (xii) governmental permits, licenses and certificates necessary and required to operate and manage the Property; (xiii) any rental (excluding, however, any installment purchase or financing agreements) with respect to equipment used in the operation, repair or maintenance of the Property; and (xiv) any other expense or charge which would be considered as an expense of owning, managing, operating, maintaining, repairing or restoring the Property under sound management and accounting principles. Notwithstanding anything herein to the contrary, Operating Expenses shall not include: costs or other items included within the meaning of the term "Taxes"; costs of tenant alterations to tenant space; marketing costs; costs of capital improvements to the Property, except as provided below; depreciation charges; interest and principal payments on mortgages; real estate brokerage and leasing commissions; and any other expenditures for which Landlord has been reimbursed (other than pursuant to rent escalation or tax and operating expense reimbursement provisions in leases). Notwithstanding the foregoing, the cost of any capital improvements to the Property made after the date of this Lease that are primarily intended to reduce Operating Expenses or that are required under any laws, statutes, codes, ordinances, or governmental rules, regulations or requirements, or judicial or administrative rules, orders or decrees (collectively, "Laws") that were not applicable to the Property as of the date of this Lease, amortized over the reasonable life of such improvements, as determined in according with sound accounting principles, together with interest on the unamortized cost of any such improvements (at the prevailing construction loan prime rate available in the vicinity of the Building on the date the cost of such improvements was incurred) shall be included in Operating Expenses. In the event the Property is not fully occupied during any Calendar Year, the variable Operating Expenses for that year may be adjusted by Landlord to reflect the Operating Expenses as though the Property were fully occupied; provided, however, that in no event shall the payments made by all tenants of the Property to Landlord for Operating Expenses exceed the actual Operating Expenses paid or incurred by Landlord in any Calendar Year. Notwithstanding anything to the contrary contained in this Section 5.1(e), Operating Expenses may include, at Landlord's sole, but reasonable discretion, both (i) snow removal costs, and/or (ii) maintenance and repair costs of the parking areas for the Property. 5.2 TAX AMOUNT. Tenant shall pay to Landlord as Rent, in addition to the Base Rent and the Operating Expense Amount (as defined below), an amount (the "Tax Amount") equal to Tenant's Proportionate Share multiplied by the amount of Taxes for each Calendar Year. Tenant shall pay to Landlord the Tax Amount with respect to each Calendar Year in monthly installments, at the same time and place as Base Rent is to be paid, in an amount estimated from time to time by Landlord by a written notice to Tenant (the "Estimated Tax Payments"). Landlord shall deliver to Tenant as soon as practical after the close of each Calendar Year (including the Calendar Year in which this Lease terminates) a statement showing the amount of the Taxes for such Calendar Year and the Tax Amount. Tenant hereby acknowledges that Landlord will not be able to deliver such statement until Landlord receives the real estate tax bills for each Calendar Year, which bills are currently received six (6) to nine (9) months after the end of each Calendar Year. If the Estimated Tax Payments paid by Tenant during any Calendar Year are less than the Tax Amount 5 for such Calendar Year, Tenant shall pay any deficiency to Landlord as shown by such statement within thirty (30) days after receipt of such statement. If the Estimated Tax Payments paid by Tenant during any Calendar Year exceed the Tax Amount due from Tenant for such Calendar Year, such excess shall be credited against payments of Rent next due hereunder. If no such payments are next due, such excess shall be refunded by Landlord. Landlord's failure to deliver an annual statement of the Taxes for any Calendar Year shall not constitute a waiver or release of, or relieve Tenant from, its obligations under this Subsection. If Taxes for any period during the Term or any extension thereof, shall be increased after payment thereof by Landlord, for any reason including without limitation error or reassessment by applicable governmental or municipal authorities, Tenant shall pay Landlord upon demand Tenant's Proportionate Share of such increased Taxes. Tenant shall pay increased Taxes whether Taxes are increased as a result of increases in the assessment or valuation of the Property (whether based on a sale, change in ownership or refinancing of the Property or otherwise, but not if attributable to any expansion of the rentable area of the Building), increases in the tax rates, reduction or elimination of any rollbacks or other deductions available under current law, scheduled reductions of any tax abatement, as a result of the elimination, invalidity or withdrawal of any tax abatement, or for any other cause whatsoever. Notwithstanding the foregoing, Tenant shall pay prior to delinquency all taxes, charges or other governmental impositions assessed against or levied upon Tenant's fixtures, furnishings, equipment and personal property located in the Premises, and any Tenant Improvements and Alterations. Whenever possible, Tenant shall cause all such items to be assessed and billed separately from the property of Landlord. In the event any such items shall be assessed and billed with the property of Landlord, Tenant shall pay Landlord its share of such taxes, charges or other governmental impositions within thirty (30) days after Landlord delivers a statement and a copy of the assessment or other documentation, showing the amount of such impositions applicable to Tenant's property. Tenant shall pay any rent tax or other sales tax or rent, service tax, transfer tax or value added tax, or any other applicable tax on the Rent or services herein or otherwise respecting this Lease. Landlord hereby estimates, in good faith, to Tenant that Tenant's Proportionate Share of Taxes shall be approximately $0.80 per square foot per annum as of the Commencement Date. 5.3 OPERATING EXPENSE AMOUNT. Tenant shall pay to Landlord as Rent, in addition to the Base Rent and the Tax Amount, an amount (the "Operating Expense Amount") equal to Tenant's Proportionate Share multiplied by the amount of Operating Expenses for each Calendar Year. Tenant shall pay to Landlord the Operating Expense Amount with respect to each Calendar Year in monthly installments, at the same time and place as Base Rent is to be paid, in an amount reasonably estimated from time to time by Landlord by a written notice to Tenant (the "Estimated Operating Expense Payments"). Landlord shall deliver to Tenant as soon as practical after the close of each Calendar Year (including the Calendar Year in which this Lease terminates) a statement showing the amount of the Operating Expenses for such Calendar Year and the Operating Expense Amount. If the Estimated Operating Expense Payments paid by Tenant during any Calendar Year are less than the Operating Expense Amount for such Calendar Year, Tenant shall pay any deficiency to Landlord as shown by such statement within thirty (30) days after receipt of such statement. If the Estimated Operating Expense Payments paid by Tenant during any Calendar Year exceed the Operating Expense Amount due from Tenant for such Calendar Year, such excess shall be credited against payments of Rent next due hereunder. If no such payments are next due, such excess shall be refunded by Landlord. Landlord's failure to deliver an annual statement of the Operating Expenses for any Calendar Year shall not constitute a waiver or release of, or relieve Tenant from, its obligations under this Subsection. Landlord hereby estimates, in good faith, to Tenant that Tenant's Proportionate Share of Operating Expenses shall be approximately $0.30 per square foot per annum as of the Commencement Date. Notwithstanding the foregoing, the total Operating Expenses (excluding amounts relating to insurance, utilities or snow removal) applicable to any Calendar Year during the initial Term (excluding any Extension Periods, as defined below) (an "Operating Year") and used from time to time in the calculation of the Operating Expense Amount or the Estimated Operating Expense Payments due and payable with respect to any such Operating Year shall not exceed one hundred ten percent (110%) of the total Operating Expenses (excluding amounts relating to 6 insurance, utilities or snow removal) applicable to the Calendar Year immediately preceding such Operating Year and used in the calculation of the Operating Expense Amount or the Estimated Operating Expense Payments for such Calendar Year in accordance with this Section 5.3. 5.4 AUDIT RIGHT. Upon reasonable advance written notice, Tenant may from time to time examine or cause an audit of Landlord's records relating to Operating Expenses or Taxes, as applicable, for any Calendar Year within twelve (12) months after Tenant's receipt of the applicable annual statement from Landlord in accordance with Section 5.2 or Section 5.3. Such examination or audit shall be conducted during normal business hours, at a time and date reasonably acceptable to each of Landlord and Tenant. In the event that, as a result of any such examination or audit, Tenant disputes in a timely manner the Operating Expense Amount or the Tax Amount, and Landlord disagrees with Tenant with respect to such dispute, then Landlord (or its property manager) and Tenant shall each select one of its officers or senior managers to represent it, and such representatives shall promptly meet or otherwise communicate and use reasonable, good faith efforts to resolve such dispute. If such representatives do not resolve any such dispute within thirty (30) days after their initial meeting or other communication concerning such dispute, then such dispute shall be resolved by arbitration in accordance with the rules of the American Arbitration Association under the Expedited Procedures of its Commercial Arbitration Rules. The non-prevailing party in the arbitration shall pay the fees and costs of the arbitrator, who shall be a certified public accountant with at least ten (10) years' experience with properties similar to the Property, and the administration of the arbitration. Each party shall otherwise bear its own costs and expenses incurred in the course of such arbitration. Notwithstanding the foregoing, if such dispute is resolved, whether by agreement or arbitration, in Tenant's favor and the discrepancy with respect to the Operating Expense Amount or the Tax Amount is in excess of five percent (5%), then Landlord shall pay to Tenant the reasonable cost of Tenant's examination or audit within thirty (30) days after Tenant delivers an invoice therefor, together with reasonable evidence thereof. 5.5 SURVIVAL. Without limiting any other obligations of Tenant which shall survive the expiration of the Term or a termination of Tenant's right of possession, the obligations of Tenant to pay the Additional Rent provided for in this Section 5 shall survive the expiration of the Term or a termination of Tenant's right of possession. 6. SERVICES. 6.1 SERVICES FURNISHED BY LANDLORD. During the Term Landlord shall furnish the following services: (a) Repairs and maintenance (and if necessary, replacements) of (i) air conditioning and heating units providing service to the Premises, (ii) the floor, foundation, roof and roof structure, exterior walls, and structural components of the Premises, and (iii) the Parking Areas. Notwithstanding anything contained herein to the contrary, but subject to Section 18.1 hereof, if any repairs, maintenance or replacements are necessitated by the act or neglect of Tenant, its agents, servants or employees, then the cost thereof shall be billed directly to Tenant, and Tenant shall pay Landlord therefor within thirty (30) days after receiving such bill. Landlord shall not otherwise be responsible for the operation of air conditioning and heating units exclusively serving the Premises or the costs thereof, the parties acknowledging that the use and operation of such units exclusively serving the Premises shall be within the sole control of Tenant. Landlord shall not be responsible for inadequate air-conditioning or ventilation to the extent the same occurs because Tenant uses any item of equipment that generates excessive hear without providing adequate air-conditioning and ventilation therefor. (b) Domestic Water for drinking, lavatory and toilet purposes at those points of supply provided up to the demising line of the Premises and refuse disposal service for the Premises and for the Property in common with other tenants. In the event that Tenant 7 uses or requires a materially greater amount of water or refuse disposal service than the usual and ordinary use of either of such services for general office, warehouse and distribution purposes, then Landlord may bill Tenant for the additional reasonable cost of such increased use and for the reasonable cost of determining the amount of such increased use, and Tenant shall pay Landlord for such costs as Rent within fifteen (15) days after receiving such bill. If as of the Commencement Date, water service is not separately metered for the Premises, Landlord reserves the right to install separate meters for the Premises at Landlord's cost. (c) Landlord shall arrange with the public utility companies and/or municipality providing the Building with electricity and natural gas service for the supply of such services to the Premises. Such services are currently separately metered to the Premises. Tenant shall pay the public utility companies and/or municipality directly for any services provided and separately metered to the Premises. Tenant shall bear the cost of maintaining light fixtures and replacing bulbs, tubes, ballasts and similar items in the Premises. (d) Exterior window washing of all windows in the Premises, weather permitting, at intervals to be reasonably determined by Landlord. 6.2 NO OTHER SERVICES. Landlord shall not be obligated to provide any services other than those expressly set forth above in this Lease. Landlord does not warrant that any of the services described in this Section 6 will be free from interruptions caused by repairs, improvements or alterations of equipment, or by war, insurrection, civil commotion, acts of God or governmental action, strikes, lockouts, picketing, whether legal or illegal, accidents, inability of Landlord to obtain fuel or supplies, or any other cause or causes beyond Landlord's reasonable control. None of such interruptions shall be deemed an eviction (constructive or actual) or disturbance of Tenant's use and possession of the Premises or any part thereof, or render Landlord liable to Tenant for damages or abatement of Rent, or relieve Tenant from performance of Tenant's obligations under this Lease. Landlord in no event shall be liable for damages by reason of loss of profits, business interruption or other consequential damages. Notwithstanding the foregoing, if (a) any of the services described in clauses (a), (b) or (c) of Section 6.1 are interrupted or not provided, (b) such interruption or non-provision is due to the negligence or willful misconduct of Landlord or any of its employees, contractors or agents, (c) as a result of such interruption or non-provision, the Premises are not reasonably accessible or usable for the purposes contemplated by this Lease, (d) Tenant gives Landlord prompt notice of such interruption or non-provision, and (e) Landlord fails to restore such service within ninety six (96) hours after Landlord's receipt of Tenant's notice (subject to delays caused by Tenant and Events of Force Majeure [as defined below]), Base Rent and Additional Rent shall abate under this Lease from the date of such interruption until such service is restored to allow Tenant reasonable access to and use of the Premises as contemplated by this Lease. 7. SECURITY DEPOSIT. As additional security for the full and prompt performance by Tenant of all its obligations hereunder, Tenant has upon execution of this Lease paid to Landlord the amount set forth in Section 1.10 hereof (the "Security Deposit"), which amount may be applied by Landlord for the purpose of curing any default by Tenant under this Lease or the Work Letter. Landlord shall be permitted to commingle the Security Deposit with Landlord's general funds. Landlord shall not be required to pay any interest on the Security Deposit. If any portion of the Security Deposit is applied to cure a default by Tenant, Tenant shall, within five (5) days after written demand therefor, deposit cash with Landlord in an amount sufficient to restore the Security Deposit to its original amount, and Tenant's failure to do so shall be a breach of this Lease. If Tenant has not defaulted hereunder or if Landlord has not applied the full amount of the Security Deposit to said default, then the Security Deposit, or any portion thereof not so applied by Landlord, shall be paid in cash to Tenant when all Rent payments required under the Lease (including settlement of the final Tax Amount and Operating Expense Amount) have been made, Tenant shall have vacated the Premises in accordance with the provisions of this Lease and all other outstanding obligations of Tenant under this Lease shall have been satisfied. The Security Deposit is not an advance 8 payment of Rent or an account of Rent, or any part or settlement thereof, or a measure of Landlord's damages. The use or application of the Security Deposit or any portion thereof shall not prevent Landlord from exercising any other right or remedy provided hereunder or under any Laws and shall not be construed as liquidated damages. In the event Landlord transfers all or any part of its interest in the Building or this Lease, Landlord shall have the right to transfer the Security Deposit to the transferee. Upon such transfer, Landlord shall thereby be released by Tenant from all liability or obligation for the return of the Security Deposit. 8. USE. Tenant shall use and occupy the Premises for general office, warehouse and distribution purposes and for no other purpose, unless otherwise expressly agreed in writing by Landlord. Notwithstanding the foregoing, Tenant shall not use or occupy the Premises, or permit the Premises to be used or occupied contrary to or in violation of any Laws or any Park Covenants or in any manner that would: (i) cause structural injury to the Premises or the Building; (ii) invalidate any insurance policy affecting the Premises or the Building; (iii) increase the amount of premiums for any insurance policy affecting the Premises or the Building; (iv) affect any certificate of occupancy affecting the Premises or the Building; (v) constitute a danger to persons or property; or (vi) create a nuisance, or disturb any other occupant of the Building. 9. CONDITION OF PREMISES. 9.1 Tenant's taking possession of the Premises shall be conclusive evidence as against Tenant that the Premises were in good, clean and sanitary order, repair and condition satisfactory to Tenant and at such time free from defects, other than latent defects of which Landlord is notified within one (1) year after the Commencement Date; upon receipt of notice of any such latent defects within such one year period, Landlord shall promptly repair same. No promise of Landlord to alter, remodel or improve the Premises or the Building and no representation respecting the condition of the Premises or the Building has been made by Landlord to Tenant other than as may be contained in this Lease (including, without limitation, the Work Letter). 9.2 In consideration of Tenant's taking possession in accordance with this Section 9, Landlord agrees to pay or credit to Tenant an amount equal to Ninety Thousand Dollars ($90,000) as a tenant improvement allowance (the "TI Allowance") in accordance with this Section 9.2. If Tenant elects to exercise its Expansion Option (as defined below) prior to the Expansion Deadline (as defined below), Landlord shall pay to Tenant the entire TI Allowance within 30 days after such election to reimburse Tenant for all reasonable costs and expenses of Tenant relating to the construction of initial tenant improvements and alterations relating to the Premises that Tenant may desire to construct in accordance with Section 12 and to be used by Tenant for any other purpose. If Tenant does not exercise its Expansion Option prior to the Expansion Deadline: (a) Landlord shall construct a standard demising wall between the Premises and the Expansion Space (as defined below) at Landlord's sole cost and expense; (b) Tenant and Landlord shall enter into a work letter in substantially the form of the work letter attached hereto as Exhibit B (with such changes as may be necessary to cause such work letter to be consistent with the fact that the Tenant Improvements will be constructed after the Commencement Date and after Tenant's possession, use and occupancy of the Premises from and after the Expansion Deadline). The term "Work Letter" used in this Lease shall be deemed to mean and refer to such work letter from and after the date Landlord and Tenant agree upon and execute such work letter. Landlord shall construct or cause the construction of the Tenant Improvements in the Premises only in accordance with, and subject to the terms and conditions of, such executed work letter. The parties hereto acknowledge and agree that, notwithstanding anything to the contrary contained in this Lease: (i) the work letter attached hereto as Exhibit B is attached solely for the purpose of providing a substantive form for the work letter to be executed by 9 the parties pursuant to this subparagraph, and such work letter attached hereto as Exhibit B is not intended to, and shall not be deemed to, impose any duties, obligations, liabilities, or responsibilities on either party hereto; and (ii) Landlord may cause to be prepared at Landlord's cost the plans, drawings and specifications for the Tenant Improvements based on the description in Schedule 1 to Exhibit B prior to Tenant's exercise of the Expansion Option. If Landlord causes such preparation, Landlord and Tenant shall act in good faith and cooperate with each other to finalize and approve such plans, drawings and specifications as soon as reasonably possible in accordance with Section 3 of Exhibit B. The reasonable costs and expenses of such plans, drawings and specifications shall be payable by Tenant in accordance with the Work Letter if and only if Tenant does not exercise its Expansion Option prior to the Expansion Deadline; (c) Landlord shall credit against such costs and expenses an amount equal to the II Allowance in accordance with the Work Letter; and (d) If the total reasonable costs and expenses for the Tenant Improvements are less than the total amount of the TI Allowance, Landlord shall pay the excess balance of the TI Allowance to Tenant within 30 days of the Substantial Completion Date (as defined in the Work Letter). 10. EARLY POSSESSION. If Tenant takes possession of all or any part of the Premises prior to the Commencement Date, all of the covenants and conditions of this Lease shall be binding upon the parties hereto the same as if the Commencement Date had been fixed as of the date when Tenant took such possession, and Tenant shall pay to Landlord as Rent for the period prior to the Commencement Date, a proportionate amount of the Rent as set forth in this Lease based upon the portion of the Premises of which Tenant has taken possession. Notwithstanding the foregoing, but subject to the terms and conditions of the Work Letter, Landlord agrees that Tenant may enter the Premises from and after the date of this Lease for the purpose of fixturing the Premises and otherwise preparing the Premises for occupancy, and during such fixturing and preparation Tenant shall not be obligated to pay Rent. 11. ASSIGNMENT AND SUBLETTING. 11.1 PROHIBITIONS. Tenant shall not, without the prior written consent of Landlord, undertake any of the following (collectively, a Transfer"): (a) assign, convey or mortgage this Lease or any interest hereunder; (b) permit any assignment of, or lien upon this Lease or tenant's interest herein by operation of law or otherwise; (c) sublet the Premises or any part thereof; or (d) permit the use of the Premises by any parties other than Tenant and its Affiliates (as defined below) and their respective agents and employees. Any Transfer made without complying with this Section 11 shall at Landlord's option be null, void and of no effect and shall constitute a default under this Lease, subject to any applicable notice and cure period. Neither a Transfer to any party (including but not limited to any affiliates or subsidiaries), nor Landlord's consent to any other Transfer, nor Landlord's election to accept any assignee, sublessee or transferee as Tenant hereunder shall release the original Tenant from any covenant or obligation under this Lease. Landlord's consent to any Transfer shall not constitute a waiver of Landlord's right to consent to any future Transfer. 11.2 NOTICE TO LANDLORD. Tenant shall give Landlord written notice of any proposed Transfer (including, without limitation, a proposed Transfer to an Affiliate) at least thirty (30) days prior to the effective date of such proposed Transfer. Such written notice shall include: (a) the name and address of the proposed assignee, sublessee or transferee (a "Transferee"), and whether the proposed Transferee is an Affiliate (as defined below), (b) the proposed effective date (which shall not be less than 30 nor more than 180 days after Tenant's notice), (c) the portion of the Premises subject to the proposed Transfer (the "Subject Space"), (d) unless the transferring 10 Tenant or its guarantor shall remain liable under this Lease and in substantially the same financial condition upon and after such Transfer, current financial statements of the proposed Transferee certified by an officer, partner or owner thereof, (e) such any other information to enable Landlord to determine the financial condition of the proposed Transferee, nature of such Transferee's business and proposed use of the Subject Space, and (f) such other information as Landlord may reasonably require. The term "Affiliate" in this Lease shall mean an entity that directly or indirectly, through one or more intermediaries, controls or is controlled by or is under common control with Tenant. For purposes of this definition, the term "control" shall mean possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise. 11.3 APPROVAL. Landlord will not unreasonably withhold or delay its consent to any proposed Transfer of the Subject Space to the Transferee on the terms specified in Tenant's notice. The parties hereby agree that it shall be reasonable under this Lease and under any applicable Laws for Landlord to withhold consent to any proposed Transfer where one or more of the following applies (without limitation as to other reasonable grounds for withholding consent): (i) the proposed Transferee is of a character or reputation or engaged in a business which is not consistent with the quality of the Property, (ii) the proposed Transferee intends to use the Subject Space for purposes which are not permitted under this Lease, (iii) the proposed Subject Space is not regular in shape with appropriate means of ingress and egress suitable for normal renting purposes, (iv) the proposed Transferee is either a governmental authority (or agency or instrumentality thereof) or a current tenant or occupant of the Property (except that if expansion space suitable for any such current tenant or occupant is not available at the Park, the fact that such proposed Transferee is a current tenant or occupant of the Property shall not be considered by Landlord), (v) unless the transferring Tenant or its guarantor shall remain liable under this Lease and in substantially the same financial condition upon and after such Transfer, the proposed Transferee does not have a reasonable financial condition in relation to the obligations to be assumed in connection with the Transfer, (vi) an uncured event of default in the payment of Rent or other material event of default under this Lease shall exist at the time Tenant requests consent to the proposed Transfer, or (vii) any such transfer will cause a violation of ERISA (as defined below) or other applicable state statutes regulating investments by or fiduciary obligations with respect to "governmental plans." Notwithstanding anything in this Section 11.3 to the contrary, Landlord shall be deemed to have given its consent to any Transfer to any Affiliate of Tenant. 11.4 TERMS OF CONSENT. If Landlord consents to a Transfer or, in connection with any Transfer to an Affiliate of Tenant, is deemed to have consented to a Transfer: (a) the terms and conditions of this Lease shall in no way be deemed to have been waived or modified, (b) such consent shall not be deemed consent to any further Transfer by either Tenant or a Transferee, (c) no Transfer relating to this Lease or agreement entered into with respect thereto, whether with or without Landlord's consent, shall relieve Tenant or any guarantor of this Lease from liability under this Lease, (d) unless the proposed Transferee is an Affiliate, if the proposed Transfer is pursuant to a sublease or similar occupancy agreement for the Premises, Tenant shall deliver to Landlord promptly after execution an original executed copy of the agreement effecting such Transfer, which agreement shall in all events provide that the Transferee thereunder assumes all duties and obligations of the "tenant" hereunder from and after the effective date of such Transfer, and (e) unless the proposed Transferee is an Affiliate, if the proposed Transfer is pursuant to a sublease or similar occupancy agreement for the Premises, Tenant shall furnish upon Landlord's request a complete statement, certified by an independent certified public accountant or Tenant's chief financial officer or a partner or owner of Tenant, setting forth in detail the computation of any profits Tenant shall derive from or otherwise allocated to such Transfer. Any sublease hereunder shall be subordinate and subject to the provisions of this Lease, and if this Lease shall be terminated during the term of any sublease, Landlord shall have the right to: (i) treat such sublease as canceled and repossess the Subject Space by any lawful means, or (ii) require that such subtenant attorn to and recognize Landlord as its landlord under any such sublease. In the event of monetary default, Landlord is hereby irrevocably authorized, as Tenant's agent and 11 attorney-in-fact, to direct any Transferee to make all payments under or in connection with the Transfer directly to Landlord (which Landlord shall apply towards Tenant's obligations under this Lease) until such default is cured. 11.5 SHARING OF PROFITS. Without limitation of any other provision hereof, should Tenant propose to Transfer to any Transferee (other than an Affiliate) pursuant to a sublease or similar occupancy agreement for the Premises, Landlord may condition its consent to the Transfer on the condition that fifty percent (50%) of the profit derived by Tenant from the Transfer be paid by Tenant to Landlord as Rent. For purposes of Subsections 11.4 and 11.5, "profits" shall mean the amount of any and all base rent and additional rent received by Tenant in connection with, or otherwise allocable to, such Transfer, minus the amount of Base Rent and Additional Rent to be paid by Tenant under this Lease for the portion of the Term and the Subject Space, minus all reasonable, out-of-pocket costs actually incurred by Tenant in connection with such Transfer (including leasing commissions, advertising expenses, costs of alterations or improvements to the Premises approved by Landlord in accordance with this Lease, and attorney's fees). 11.6 TRANSFER OF OWNERSHIP INTERESTS IN TENANT. For purposes of this Lease, the term "Transfer" shall also include any one of the following events if and only if Tenant does not maintain substantially the same net worth and remain in substantially the same financial condition upon and after such event: (a) the direct or indirect sale or other transfer of an aggregate of 50% or more of the voting or ownership interests of Tenant, (b) the sale, mortgage, hypothecation or pledge of an aggregate of 50% or more of Tenant's net assets, or (c) if Tenant is a partnership, the withdrawal or change, voluntary, involuntary or by operation of law, of a majority of the partners or the dissolution of the partnership. Any transfer of ownership interests in Tenant shall not be permitted hereunder, shall at Landlord's option be null, void and of no effect and shall constitute a default under this Lease if such transfer would cause any of the representations and warranties made by Tenant in Section 26 below to be inaccurate or incorrect at any time. Tenant shall indemnify, defend and hold the Landlord Parties (as defined below) harmless from all claims, causes of action, liabilities, losses, costs, damages, liens and expenses related to any transfer of ownership interests in Tenant that may cause any of the representations and warranties made by Tenant in Section 26 below to be inaccurate or incorrect at any time. Notwithstanding anything to the contrary set forth in this Lease, each of the following Transfers shall be permitted hereunder without the consent or approval of Landlord (but shall otherwise comply with all of the other terms and conditions of this Section 11): (i) any direct or indirect sale or other transfer of any portion of the voting or ownership interests of Tenant to any person or entity that is currently an owner of any voting or ownership interests of Tenant or to the heir(s) of any such person or entity, (ii) any direct or indirect sale or other transfer of any portion of the voting or ownership interests of Tenant via a public stock or equity exchange (including, without limitation, the NYSE and NASDAQ), and (iii) the sale of substantially all of the voting or ownership interests, or substantially all of the assets, of Tenant, or any merger or consolidation involving Tenant, so long as in any such event the net worth of the resulting Transferee is not less than twenty-five million dollars ($25,000,000.00). 11.7 LANDLORD'S COSTS. Tenant shall pay to Landlord as Rent hereunder, all costs and expenses (including, without limitation, reasonable attorneys' fees) paid or incurred by Landlord in connection with any proposed assignment or subletting hereunder (not to exceed $1,500.00), regardless of whether Landlord withholds or grants its consent to such assignment or subletting in accordance with the terms and conditions of this Section 11. 12. REPAIRS AND ALTERATIONS. 12.1 TENANT'S REPAIR OBLIGATIONS. Tenant shall, at its own expense, keep and maintain the Premises in good and sanitary condition, working order and repair during the Term. Tenant shall promptly and adequately repair all damage to the Premises and restore, replace or repair all damaged or broken glass, carpet, wall-covering, doors, fixtures, equipment, improvements and appurtenances (including but not limited to the Tenant Improvements and any 12 Alterations); provided, however, that Tenant shall not be obligated to repair or replace any component of the Premises for which Landlord is responsible under this Lease (including, without limitation, the heating and air conditioning systems servicing the Premises), except to the extent that, subject to Section 18.1, such repair or replacement are necessitated by the negligence or willful misconduct of Tenant, its agents, servants or employees. In the event that any such repairs, maintenance or replacements by Tenant are required, Tenant shall promptly arrange for the same either through Landlord for such reasonable charges as Landlord may from time to time establish, or such contractors as Landlord generally uses at the Property or such other contractors as may be reasonably acceptable to Landlord (provided such acceptance is made in writing), and in a first class, workmanlike manner. If Tenant does not fulfill its obligations under this Subsection 12.1, Landlord may, but need not, make such repairs and replacements, and Tenant shall pay Landlord all reasonable out-of-pocket third party costs and expenses thereof actually incurred by Landlord in connection with such repairs and replacements immediately upon written demand therefor. Landlord may enter the Premises at all reasonable times with reasonable advance notice (except in the event of an emergency, in which event no notice shall be required) to make such repairs and replacements and any other repairs, alterations, improvements and additions to the Premises or to the Building or to any equipment or system located in the Building. Notwithstanding anything contained herein to the contrary, if any damage to the Premises or the Property or to any equipment or system thereon (including but not limited to the roof of the Building or any heating, air conditioning and ventilation systems serving the Premises) or appurtenance thereto results from any negligence or willful misconduct of Tenant or of Tenant's contractors, agents or employees, then Landlord may but is not obligated to, at Landlord's option, repair such damage, and, subject to Section 18.1, Tenant shall pay Landlord all reasonable out-of-pocket third party costs and expenses thereof actually incurred by Landlord in connection with such repairs and replacements immediately upon written demand therefor. 12.2 PROHIBITION ON ALTERATIONS. Tenant shall not, without the prior written consent of Landlord, make any alterations, improvements, decorations or additions (collectively, "Alterations") to the Premises. Landlord may, in its sole discretion, withhold its consent to any Alteration which: (i) affects the roof or structural components of the Building; (ii) affects any heating, ventilating, air conditioning, utility or mechanical systems or equipment in the Building; (iii) is visible from outside of the Premises; (iv) costs more than $10,000.00 to complete (including all labor and material costs); or (iv) requires a building permit to perform. Except as provided in the immediately preceding sentence, Landlord shall not unreasonably withhold its consent to any Alterations, and Tenant may undertake any Alteration costing $10,000 or less without Landlord's consent so long as such Alteration is not of the type described in the immediately preceding sentence and so long as Tenant delivers a reasonably detailed description of such Alterations to Landlord promptly upon completion of such Alterations. Landlord's consent to any Alterations (including, without limitation, Landlord's approval of Tenant's plans, specifications or working drawings therefor), shall impose no responsibility or liability on Landlord with respect to the completeness, or design sufficiency thereof or the compliance thereof with all applicable Laws. 12.3 PERFORMANCE OF ALTERATIONS. The work necessary to make any Alterations requiring Landlord's consent shall be done by employees of or contractors employed by Landlord or, with Landlord's prior written consent, by contractors and subcontractors arranged for by Tenant and approved by Landlord. If Alterations are, with Landlord's consent, performed by contractors employed by Tenant, Tenant shall deliver to Landlord, for its review and approval prior to commencing any such Alterations, copies of all contracts and subcontracts related to such Alterations, and plans, working drawings and specifications necessary to perform such work. Landlord's review of Tenant's plans, specifications or working drawings shall impose no responsibility or liability on Landlord, and shall not constitute a representation, warranty or guarantee by Landlord, with respect to the completeness, design, sufficiency or compliance thereof with any Laws. In addition, Alterations shall be performed subject to all of the following conditions by Tenant and its contractors and subcontractors: insuring against liabilities which may arise out of such Alterations, as determined by Landlord; obtaining necessary licenses and permits; contractor and subcontractor lien waivers; affidavits listing all contractors, subcontractors 13 and suppliers; use of union labor (if Landlord uses union labor); affidavits from engineers acceptable to Landlord stating that the Alterations will not adversely affect the systems and equipment or the structure of the Building; and requirements as to the manner and times in which such Alterations shall be done. All Alterations performed by Tenant or its contractors shall be done in a first-class, workmanlike manner using only new and good grades of materials and shall comply with all insurance requirements and all Laws. Tenant shall permit Landlord to observe and inspect all Alterations, and Tenant shall reimburse Landlord for its actual, reasonable out of pocket costs and expenses payable to third parties and related to such observation and inspection. Tenant shall promptly pay to Landlord and/or to Tenant's contractors, as the case may be, when due, the cost of all work and of all decorating required in connection with any Alterations, and if payment is made directly to Tenant's contractors, upon completion of the Alterations, Tenant shall deliver to Landlord evidence of payment and full and final waivers of all liens for labor, services or materials. Except to the extent caused by Landlord's negligence or willful misconduct, Tenant shall indemnify, defend and hold Landlord and its owners and their respective officers, shareholders, directors, partners, agents and employees (collectively, the "Landlord Parties") harmless from all claims, causes of action, liabilities, losses, costs, damages, liens and expenses related to any Alterations performed by Tenant or its contractors or subcontractors. 13. CERTAIN RIGHTS RESERVED BY LANDLORD. Except to the extent expressly limited herein, Landlord reserves full rights to control the Property, including but not limited to the following rights, exercisable without notice (except as expressly provided below in this Section) and without liability to Tenant for damage or injury to property, person or business so long as in exercising such rights, Landlord uses reasonable efforts to minimize any effect on the use and occupancy of the Premises, and without effecting an eviction, constructive or actual, or disturbance of Tenant's use or possession of the Premises or giving rise to any claim for set-off or abatement of Rent: (a) To change the name or street address of the Building or the Property; (b) To install, affix and maintain any and all signs on the exterior of the Premise or the Building, so long as the exercise of such rights does not interfere with or impede Tenant's exercise of its rights with respect to signage as set forth in Section 22(a); (c) To designate and/or approve, prior to installation, all types of window shades, blinds, drapes, awnings, window ventilators and other similar equipment, and to control all internal lighting that may be visible from the exterior of the Premises; (d) Upon reasonable advance notice, to show the Premises to prospective tenants at reasonable hours during the last six (6) months of the Term and to show the Premises to current and prospective insurers, brokers, purchasers and lenders of the Building at reasonable hours during the Term; (e) To retain at all times, and to use in appropriate instances, keys to all doors within and into the Premises. No locks shall be changed without the prior written consent of Landlord; (f) To decorate or maintain or to make repairs, alterations, additions or improvements, whether structural or otherwise, in and about the Property or the Building, or any part of any thereof, and for such purposes to enter upon the Premises upon reasonable prior verbal notice (except in an emergency, in which case no notice shall be necessary), and, during the continuance of any such work, to take into and upon or through the Premises all materials required to make such decorations, repairs, maintenance, alterations or improvements, to erect scaffolding and other structures as may be reasonably required, to close roads, drives, doors, entryways, public space and corridors in the Property or the Building on a temporary basis (but only if Landlord provides alternative means of reasonable access to the Premises during any such 14 closure), and to interrupt or suspend temporarily Building services and facilities, all without abatement of Rent or affecting any of Tenant's obligations hereunder, so long as in any such event the Premises are reasonably accessible; (g) To have and retain a paramount title to the Premises free and clear of any act of Tenant purporting to burden or encumber it; (h) To grant to anyone the exclusive right to conduct any business or render any service in or to the Property, provided such exclusive right shall not operate to exclude Tenant from the use expressly permitted herein; (i) To approve the location of fixtures, equipment and other articles of personal property in and about the Premises and the Building so as not to exceed the legal live load; (j) To prohibit the placing of vending or dispensing machines of any kind in or about the Premises, except for vending or dispensing machines for the sole use of Tenant and its employees and any other person or entity using, occupying, or performing work in the Premises; (k) To issue reasonable rules and regulations, from time to time, governing the use of the Parking Areas (as defined below); and (l) To limit or prevent access to the Property or otherwise take such action or preventative measures as may be reasonably necessary for the safety of tenants or other occupants of the Property or the protection of the Property and other property located thereon or therein, but only in case of fire, invasion, insurrection, riot, civil disorder, public excitement or other, similar dangerous condition, or threat thereof. 14. COVENANT AGAINST LIENS. Tenant covenants and agrees not to suffer or permit any lien of mechanics or materialmen to be placed against the Property, the Building or the Premises in connection with any work or Alterations on or respecting the Premises not performed by or at the request of Landlord, and Tenant shall indemnify and hold Landlord harmless from and against any claims, liabilities, judgments, or costs (including attorneys' fees) arising out of the same or in connection therewith. In the case of any such lien attaching, Tenant shall pay off and remove or bond over any such lien to Landlord's satisfaction within thirty (30) days after the filing thereof. If any such lien attaches, and Tenant fails to remove or bond over such lien within said thirty (30) day period, Landlord may, but shall not be obligated to, pay the amount necessary to remove such lien without being responsible for making an investigation as to the validity or accuracy thereof, and the amount so paid, together with all costs and expenses (including, without limitation, reasonable attorneys' fees) incurred by Landlord in connection therewith, shall be deemed Rent hereunder, payable immediately upon demand. Tenant has no authority or power to cause or permit any lien or encumbrance of any kind whatsoever, whether created by act of Tenant, operation of Laws or otherwise, to attach to or be placed upon Landlord's title or interest in the Property, the Building or the Premises, and any such claim to a lien or encumbrance shall be null and void, or at Landlord's option shall attach only against Tenant's interest in the Premises, and shall in all respects be subordinate to Landlord's title to the Property and Premises. Tenant shall give Landlord notice at least twenty (20) days prior to the commencement of any work or Alterations on the Premises (or such additional time as may be necessary under applicable Laws), to afford Landlord the opportunity of posting and recording appropriate notices of non-responsibility. 15. WAIVERS AND INDEMNITIES. 15.1 WAIVER. To the extent not expressly prohibited by law, Tenant waives all claims it may have against the Landlord Parties for any damage either to person or property or loss of business due to the happening of any accident in or about the Property or the Premises or due to any act or neglect of Tenant or any tenant or occupant of the Property, or of any other person, 15 including the Landlord Parties. This provision shall apply particularly (but not exclusively) to damage caused by water, snow, frost, steam, sewage, gas, faucets and plumbing fixtures, and shall apply without distinction as to the person whose act or neglect was responsible for the damage and whether the damage was due to any of the causes specifically enumerated above or to some other cause of an entirely different kind. Tenant further agrees that all Tenant's property upon the Premises or the Property shall be there at the risk of Tenant only, and that Landlord shall not be liable for any damage thereto or theft thereof. 15.2 INDEMNIFICATION. Tenant hereby agrees to indemnify, defend and hold harmless the Landlord Parties from and against any claims or liability for damage to person or property (or for loss or misappropriation of property) occurring in or on the Property or the Premises, arising from any breach or default on the part of Tenant under this Lease, or from any act or omission of Tenant or any employee, agent, servant, invitee or contractor of Tenant, or from Tenant's operations or activities on or use of the Property or the Premises, and from any cost relating thereto (including, without limitation, attorneys' fees). 15.3 WAIVER OF NOTICE. Except for any notices expressly provided for in this Lease, Tenant hereby expressly waives the service of any notice of intention to terminate this Lease or to re-enter the Premises, and waives the service of any demand for payment of Rent or for possession. 15.4 NO IMPLICIT WAIVERS. No waiver of any condition expressed in this Lease shall be implied by any neglect of Landlord or Tenant to enforce any remedy on account of the violation of such condition if such violation be continued or repeated subsequently, and no express waiver shall affect any condition other than the one specified in such waiver and that one only for the time and in the manner specifically stated. No receipt of moneys by Landlord from Tenant after the termination in any way of the Term or of Tenant's right of possession hereunder or after the giving of any notice shall reinstate, continue or extend the Term or affect any notice given to Tenant prior to the receipt of such moneys, it being agreed that after the service of notice of the commencement of a suit or after final judgment for possession of the Premises, Landlord may receive and collect any Rent due, and the payment of said Rent shall not waive or affect said notice, suit or judgment. 16. DEFAULTS AND LANDLORD'S REMEDIES. 16.1 DEFAULTS. It shall be a "default" or "event of default" under this Lease if: (i) Tenant fails to pay, when due, Rent or any installment thereof or any other sum required to be paid by Tenant under this Lease (including any required replenishment of the Security Deposit), and such failure continues for more than five (5) days after notice is given to Tenant; (ii) intentionally omitted; (iii) Tenant fails to observe or perform any of the covenants, conditions or obligations not relating to the payment of Rent or other sums that Tenant is required to observe or perform under this Lease, and such failure continues for more than fifteen (15) days after notice thereof to Tenant; provided, however, that Landlord shall not be entitled to exercise its remedies on account of any default described in this clause (iii) (subject to Section 16.2(c) below) if (a) such default cannot reasonably be cured within fifteen (15) days, (b) Tenant commences to cure such default within said fifteen (15) day period and thereafter diligently and continuously proceeds with such cure, and (c) Tenant cures such default within a reasonable period of time not to exceed sixty (60) days after Landlord's notice of such default; (iv) the interest of Tenant in this Lease is levied on under execution or other legal process; (v) an Event of Bankruptcy (as defined below) occurs; (vi) Tenant dissolves or ceases to exist; (vii) Tenant shall effect a Transfer in violation of Section 11 hereof; or (viii) any material misrepresentation herein, or material misrepresentation or omission in any financial statements or other materials provided by Tenant in connection with negotiating or entering this Lease or in connection with any Transfer. For purposes of this Lease, an "Event of Bankruptcy" means the occurrence of any one or more of the following events or circumstances: 16 (a) If Tenant or any Guarantor shall file in any court a petition in bankruptcy or insolvency or for reorganization within the meaning of the Federal Bankruptcy Code, or for arrangement within the meaning of such Code (or for reorganization or arrangement under any future bankruptcy or reform act for the same or similar relief), or for the appointment of a receiver or trustee of all or a portion of the property of Tenant or any Guarantor, or (b) If an involuntary petition in bankruptcy or insolvency or for reorganization within the meaning of the Federal Bankruptcy Code shall be filed against Tenant or any Guarantor, and such petition shall not be vacated or withdrawn within thirty (30) days after the date of filing thereof, or (c) If Tenant or any Guarantor shall make an assignment for the benefit of creditors, or (d) If Tenant or any Guarantor shall be adjudicated a bankrupt or shall admit in writing an inability to pay its debts as they become due, or (e) If a receiver shall be appointed for the property of Tenant or any Guarantor by order of a court of competent jurisdiction (except where such receiver shall be appointed in an involuntary proceeding and be withdrawn within thirty (30) days from the date of his appointment). 16.2 LANDLORD'S REMEDIES. Upon a default under this Lease, Landlord at its option may, without notice or demand of any kind to Tenant or any other person, exercise any one or more of the following described remedies in addition to all other rights and remedies provided at law or in equity: (a) Landlord may terminate this Lease and the Term created hereby, in which event Landlord may forthwith repossess the Premises and be entitled to recover forthwith as damages a sum of money equal to all Rent accrued and unpaid for the period up to and including the date of termination, plus as final and liquidated damages (and not as a penalty) Landlord's reasonable estimate of the amount of Base Rent (plus Additional Rent, reasonably adjusted to account for any net decrease in Operating Expenses that would occur as a result of Tenant's eviction and subsequent non-occupation of the Premises) that would be payable from the date of such termination through the balance of the scheduled Term, less the fair rental value of the Premises for said period (taking into consideration the time to relet the Premises, and taking into consideration and reducing said fair rental value by, the Costs of Re-Letting [as defined below]), plus any other sum of money and damages owed by Tenant to Landlord arising prior to such termination. (b) Landlord may terminate Tenant's right of possession and may repossess the Premises by any legal action against Tenant's unlawful detainer, by taking peaceful possession or otherwise, without terminating this Lease. If Landlord terminates Tenant's right of possession without terminating this Lease, Landlord shall take reasonable measures to mitigate its damages, to relet the same for the account of Tenant, for such rent and upon such terms as shall be reasonably satisfactory to Landlord. Reasonable measures shall not obligate Landlord to show the Premises before showing other space in the Building to a prospective tenant. For the purpose of such reletting, Landlord is authorized to decorate, repair, remodel, alter or otherwise improve the Premises and to relet the Premises at such rental rate (which may be higher than the rental rate then applicable under this Lease), as Landlord reasonably determines to be necessary to maximize the effective rent on reletting. If Landlord shall fail to relet the Premises, Tenant shall pay to Landlord as damages the amount of the Base Rent (plus Additional Rent, reasonably adjusted to account for any net decrease in Operating Expenses that would occur as a result of Tenant's eviction and subsequent non-occupation of the Premises) 17 reserved in this Lease for the balance of the Term as due hereunder. If the Premises are relet and a sufficient sum shall not be realized from such reletting after paying all of the costs and expenses of all decoration, repairs, remodeling, alterations, installations and additions and the expenses of such reletting (including all allowances, abatements and other tenant concessions required under then-existing market conditions) (collectively, the "Costs of Re-Letting"), to satisfy the Rent provided for in this Lease, Tenant shall satisfy and pay the same upon demand therefor from time to time. Tenant shall not be entitled to any rents received by Landlord in excess of the Rent provided for in this Lease. Tenant agrees that Landlord may file suit to recover any sums falling due under the terms of this paragraph (b) from time to time and that no suit or recovery of any portion due Landlord hereunder shall be any defense to any subsequent action brought for any amount not theretofore reduced to judgment in favor of Landlord. (c) Landlord may perform the obligation which is the subject of such default for the account and at the expense of Tenant. In addition, if any failure by Tenant described in Section 16.1(iii) shall give rise to an emergency requiring an immediate cure, and Tenant shall not have cured such failure within twenty four (24) hours after notice thereof by Landlord, Landlord may also perform the obligation which is the subject of such failure for the account and at the expense of Tenant (without such failure constituting a "default" hereunder except in accordance with Section 16.1(iii). All reasonable out-of-pocket third party costs and expenses thereof actually incurred by Landlord in connection with such performance, plus all attorneys' fees and expenses of Landlord incurred in enforcing any of the obligations of Tenant under this Lease, shall become Rent hereunder and shall be due and payable by Tenant immediately on demand. (d) Landlord may additionally (i) seek any declaratory, injunctive or other equitable relief, and specifically enforce this Lease, or restrain or enjoin a violation or breach of any provision hereof, and (ii) sue Tenant or any Guarantor for and collect any unpaid Rent which has accrued. 16.3 DEFAULT INTEREST. If any payments of Rent remain unpaid for more than five (5) days after the date when due, unless Tenant has not been in default of any monetary obligation under this Lease within the previous twelve (12) month period, such payments shall bear interest from the date when due until the date paid at a rate of interest equal to the lesser of: (i) the maximum rate of interest permitted by applicable Laws; or (ii) four percent (4%) in excess of the rate announced or published from time to time by Bank One, N.A. at its office in Chicago, Illinois as its prime or equivalent base rate of interest adopted as a general benchmark from which Bank One, N.A. determines the floating interest rates chargeable on various loans to borrowers from time to time. Landlord's right to receive such interest shall not, in any way, limit any of Landlord's other remedies under this Lease or at law or equity. 16.4 LATE CHARGE. If any payment or installment of Rent owed by Tenant under this Lease or the Work Letter is not paid when due, unless Tenant has not been in default of any monetary obligation under this Lease within the previous twelve (12) month period, in addition to the amounts due under Section 15.3 above, Tenant shall pay to Landlord to compensate it for its additional for bookkeeping and administrative expenses resulting from such late payment an amount equal to the greater of $100.00 or five percent (5%) of the amount of Rent overdue for each and every thirty (30) day period or portion thereof that such Rent remains unpaid. 16.5 OTHER MATTERS. No re-entry or repossession, repairs, changes, alterations and additions, reletting, acceptance of keys from Tenant, or any other action or omission by Landlord shall be construed as an election by Landlord to terminate this Lease or Tenant's right to possession, or accept a surrender of the Premises, nor shall the same operate to release the Tenant in whole or in part from any of Tenant's obligations hereunder, unless express written notice of such intention is sent by Landlord or its agent to Tenant. To the fullest extent permitted by Laws, all rent and other consideration paid by any replacement tenants shall be applied: first, 18 to the all reasonable costs and expenses incurred by Landlord for any repairs, maintenance, changes, alterations and improvements to the Premises, brokerage commissions, advertising costs, attorneys' fees, any customary free rent periods or credits, tenant improvement allowances, take-over lease obligations and other customary, necessary or appropriate economic incentives required to enter leases with replacement tenants, and costs of collecting rent from replacement tenants, second, to the payment of any Rent theretofore accrued, and the residue, if any, shall be held by Landlord and applied to the payment of other obligations of Tenant to Landlord as the same become due (with any remaining residue to be retained by Landlord). Rent shall be paid without any prior demand or notice therefor (except as expressly provided herein) and without any deduction, set-off or counterclaim, or relief from any valuation or appraisement laws. Landlord may apply payments received from Tenant to any obligations of Tenant then accrued, without regard to such obligations as may be designated by Tenant. The times set forth herein for the curing of defaults by Tenant are of the essence of this Lease. Tenant hereby irrevocably waives any right otherwise available under any Laws to redeem or reinstate this Lease. 16.6 LANDLORD'S DEFAULT. If Landlord shall fail to perform any term or provision under this Lease required to be performed by Landlord, Landlord shall not be deemed to be in default hereunder nor subject to any claims for damages of any kind, unless such failure shall have continued for a period of thirty (30) days after written notice thereof by Tenant; provided, if the nature of Landlord's failure is such that more than thirty (30) days are reasonably required in order to cure, Landlord shall not be in default if Landlord commences to cure such failure within such thirty (30) day period, and thereafter reasonably seeks to cure such failure to completion. If Landlord shall fail to cure within the times permitted for cure herein, Landlord shall be subject to such remedies as may be available to Tenant under applicable Laws (subject to the other provisions of this Lease); provided, in recognition that Landlord must receive timely payments of Rent and operate the Property, Tenant shall have no right of self-help to perform repairs or any other obligation of Landlord, and shall have no right to withhold, set-off, or abate Rent, except in connection with the collection of any final, non-appealable judgment (or any judgment not timely appealed by Landlord) rendered against Landlord under this Lease. 17. SURRENDER OF POSSESSION. 17.1 CONDITION OF PREMISES. At the expiration or earlier termination of this Lease by lapse of time or otherwise, or upon termination of Tenant's right of possession without terminating this Lease, Tenant shall surrender possession of the Premises to Landlord and deliver all keys to the Premises to Landlord, and shall return the Premises and all equipment and fixtures of Landlord to Landlord in substantially as good condition as when Tenant originally took possession, ordinary wear and tear, loss or damage by fire or other casualty or condemnation, and damage resulting from the act of Landlord or any other of its employees and agents excepted, failing which Landlord may restore the Premises and such equipment and fixtures to such condition and Tenant shall pay the cost thereof to Landlord as Rent immediately upon demand. Except as provided below, all improvements, fixtures and other items in or upon the Premises (including without limitation all Alterations and Tenant Improvements, but expressly excluding movable office furniture, trade fixtures (including, without limitation, racking), office equipment and other personal property belonging to Tenant that they may be removed without permanent structural damage to the Premises or the Building), whether temporary or permanent in character and whether made by Landlord or Tenant, shall become Landlord's property and shall remain upon the Premises at the expiration or earlier termination of this Lease by lapse of time or otherwise or upon a termination of Tenant's right of possession, without compensation to Tenant. Notwithstanding the foregoing, if within ten (10) days prior to the expiration or earlier termination of this Lease or Tenant's right of possession thereafter Landlord so directs by notice, Tenant shall promptly remove such of the foregoing items as are designated in such notice and restore the Premises to the condition prior to the installation of such items. If Tenant does not promptly remove such property upon the expiration or earlier termination of this Lease, or upon the termination of Tenant's right of possession, at Landlord's election: (i) Tenant shall be conclusively presumed to have conveyed the same to Landlord under this Lease as a bill of sale without payment or credit by Landlord, or 19 (ii) Tenant shall be conclusively presumed to have forever abandoned such property, and without accepting title thereto, Landlord may, at Tenant's expense, remove, store, destroy, discard or otherwise dispose of all or any part thereof without incurring liability to Tenant or to any other person, and Tenant shall pay Landlord immediately upon demand the expenses incurred in taking such actions. Unless prohibited by applicable Laws, Landlord shall have a lien against such property for the costs incurred in removing and storing the same. Tenant's obligations under this Subsection 17.1 shall survive the expiration or earlier termination of the Term or a termination of Tenant's right of possession. 17.2 HOLDING OVER. If Tenant retains possession of the Premises or any part thereof after the expiration or earlier termination of this Lease, whether by lapse of time or otherwise, or after a termination of Tenant's right of possession, then such retention of possession shall be a tenancy at sufferance upon each of the terms herein provided as may be applicable to such tenancy at sufferance, except that Tenant shall pay to Landlord a per diem rent equal to the per diem Base Rent set forth below, plus the per diem amount of all Additional Rent (including, without limitation, the Tax Amount, the Operating Expense Amount, the Estimated Tax Payments and the Estimated Operating Expense Payments). The provisions of this Subsection shall not operate as a waiver by Landlord of any right of re-entry herein provided. In addition to and not in limitation of all other remedies set out in this Subsection, Tenant shall be liable for all damages (consequential as well as direct) actually sustained by Landlord on account of Tenant's holding over. Base Rent payable during any holding over shall be one hundred fifty percent (150%) of the Base Rent for the calendar month immediately preceding the expiration or termination date of this Lease or the termination of Tenant's right of possession. 18. INSURANCE. 18.1 WAIVER OF SUBROGATION. Landlord and Tenant each hereby waive all claims against the other for loss of or damage to the Property or Premises or to the contents thereof, which loss or damage is covered by valid and collectible fire and extended coverage insurance policies, to the extent that such loss or damage is recoverable under said insurance policies. Inasmuch as this mutual waiver will preclude the assignment of any such claim by subrogation (or otherwise) to an insurance company (or any other person), Landlord and Tenant each agree to give each insurance company that has issued, or in the future may issue, to it policies of fire and extended coverage insurance, written notice of the terms of this mutual waiver, and to have said insurance policies properly endorsed, if necessary, to prevent the invalidation of said insurance coverage by reason of said waiver. 18.2 TENANT'S INSURANCE. Tenant shall carry insurance during the entire Term insuring Tenant and Landlord and their respective agents and employees, and any other parties designated by Landlord from time to time (including, without limitation, any Mortgagee [as defined below]) as their interests may appear, with terms, coverages and in companies satisfactory to Landlord, and with such increases in limits as Landlord may from time to time request or as any Mortgagee may from time to time require, but initially Tenant shall maintain the following coverages in the following amounts: (a) Comprehensive or Commercial General Liability insurance, including Contractual Liability coverage of the indemnification provisions contained in this Lease and host liquor liability insurance, with limits for bodily injury or personal injury to or death of any person, or more than one (1) person, or for damage to property in an amount of not less than $1,000,000 per occurrence/$3,000,000 aggregate. The coverage amounts may be provided through an umbrella or excess liability policy. The Comprehensive or Commercial General Liability policy shall include Landlord, Landlord's management agent and any Mortgagee designated by Landlord from time to time as additional insureds on a primary and non-contributory basis to any insurance carried by Landlord, Landlord's management agent and any Mortgagee. 20 (b) Property damage insurance against "all risks" of physical loss for the full insurable replacement value of the initial build-out of the Premises (including without limitation, the Tenant Improvements) and all Alterations, and of all furniture, trade fixtures, equipment, business records, merchandise and all other items of Tenant's personal property on the Premises. (c) Worker's Compensation Insurance in amounts required by the State of Illinois, including Voluntary Compensation, Broad Form All States Endorsement, and employer's liability insurance in an amount of not less than $500,000 per occurrence. (d) Automobile Liability Insurance with limits for bodily injury or personal injury to or death of any person, or more than one (1) person, or for damage to property in an amount of not less than $1,000,000 combined single limit, including Employer's Owned, Non-Owned and Hired Car coverage. 1.8.3 EVIDENCE OF INSURANCE. Tenant shall, prior to the commencement of the Term, furnish to Landlord certificates of insurance evidencing the insurance coverage required under this Section 18, and Tenant shall deliver renewals thereof to Landlord not less than thirty (30) days prior to the end of the term of such coverage, which certificates shall state that such insurance coverage may not be changed or canceled without at least thirty (30) days' prior written notice to Landlord and any Mortgagee identified by Landlord from time to time. Said certificates evidencing liability insurance shall be in the form of ACORD 25 and certificates evidencing property insurance in the form of ACORD 27. 18.4 LANDLORD'S INSURANCE. Landlord may maintain during the Term the following insurance with such coverages and deductibles as Landlord may determine from time to time, the cost of which shall be included in "Operating Expenses": comprehensive (or commercial) general liability insurance; worker compensation insurance as required by statute; employer's liability insurance; fire and extended coverage or "all-risk" property damage insurance; business interruption insurance with coverage of at least twelve (12) months rent; and such other policies as Landlord shall deem appropriate or that may be required by any Mortgagee. 19. FIRE OR CASUALTY. If the Premises or the Building (including machinery or equipment used in the operation of the Building) shall be destroyed or damaged by fire or other casualty and if the Premises (excluding any Tenant Improvements and Alterations) or the Building may be repaired and restored within one hundred eighty (180) days after such casualty, then Landlord shall repair and restore the same with reasonable promptness, but only to the extent insurance proceeds are actually made available to Landlord for purposes of repair and restoration; provided, however, that Landlord shall only be obligated to repair and restore any improvements (including but not limited to Tenant Improvements and Alterations) made to the Premises to the extent that: (i) Landlord paid for the initial construction of such improvements (either directly or through an allowance granted to Tenant), and (ii) Landlord receives the insurance proceeds related to such improvements under the insurance described in clause (b) of Subsection 18.2 hereof. In the event Landlord repairs or restores such improvements, Tenant shall execute all documents and take all actions necessary to make the insurance proceeds described in clause (ii) of the immediately preceding sentence available to Landlord for the repair and restoration of the Premises. Notwithstanding anything contained herein to the contrary, if the Premises or the Building are substantially damaged or destroyed during the last twelve (12) months of the Term, either Landlord or Tenant shall have the right to terminate this Lease as of the date of the fire or other casualty by giving notice to the other within thirty (30) days after the date of the fire or casualty, in which event, Rent shall be apportioned on a per diem basis and paid to the date of such fire or casualty. Notwithstanding anything contained herein to the contrary, if either: (1) such damage renders the Premises untenantable in whole or in part and cannot reasonably be repaired and restored (excluding Tenant Improvements and Alterations) within one hundred eighty (180) days, or (2) sufficient insurance proceeds are not or will not be made available to Landlord for repair or restoration, or (3) the cost of the repairs or restoration would exceed twenty five percent (25%) of the replacement value of the Building, then each of Landlord and Tenant shall have the right to cancel and terminate this Lease as of the date of such damage upon giving notice to the 21 other party at any time within ninety (90) days after such damage shall have occurred. In the event any fire or casualty renders all or any portion of the Premises untenantable, in whole or in part, and if this Lease shall not be terminated by reason of such damage, then Base Rent and Additional Rent shall abate during the period beginning with the date of such fire or other casualty and ending with the date when Landlord has substantially completed all repairs to the Premises, including any repairs to the Tenant Improvements and Alterations or other improvements to the Premises, required to be completed by Landlord in accordance with the terms and conditions of this Section 19, by an amount bearing the same ratio to the total amount of Base Rent and Additional Rent for such period as the untenantable portion of the Premises bears to the entire Premises (except that if such portion of the Premises is untenantable to the extent that the Premises in its entirety is not reasonably suitable for the operation of Tenant's business at the Premises, then Base Rent and Additional Rent shall abate for the entirety of the Premises). Landlord shall not otherwise be liable for any inconvenience or annoyance to Tenant or its visitors, or injury to Tenant's business resulting in any way from any damage or the repair thereof relating to any fire or other casualty. However, if Landlord has not commenced any repairs or restoration required under this Section 19 within sixty (60) days after such casualty and is not diligently prosecuting such repairs and restoration to completion, or if the Premises (other than any Tenant Improvements and Alterations) or the Building are not repaired and restored within said one hundred eighty (180) days or such longer period (not to exceed two hundred forty (240) days in the aggregate) in the event of delays as a result of Events of Force Majeure, then Tenant may elect to terminate this Lease by delivering written notice thereof to Landlord at any time after the expiration of the one hundred eighty (180) period (as may be extended for Events of Force Majeure) and before the substantial completion of such repair or restoration, except that such termination shall be of no effect if Landlord notifies Tenant in writing within ten (10) days after receipt of Tenant termination notice that Landlord has, and Landlord in fact has, completed the repair and restoration of the Premises (other than any Tenant Improvements and Alterations) or the Building. Tenant agrees that Landlord's obligation to restore, Tenant's right to terminate the Lease as provided herein and the abatement of Rent provided herein, shall be Tenant's sole recourse in the event of such damage, and waives any other rights Tenant may have under any applicable Laws to terminate the Lease by reason of damage to the Premises or Property. Tenant acknowledges that this Section 19 represents the entire agreement between the parties respecting damage to the Premises or Property. 20. CONDEMNATION. If the whole or any part of the Premises or the Building or any substantial portion of the Parking Areas shall be taken or condemned by any competent authority for any public use or purpose or if any adjacent property or street shall be condemned or improved in such a manner as to require the use of any part of the Premises or of the Building or the Parking Areas, or if Landlord shall grant a deed or other instrument in lieu of such taking by eminent domain or condemnation, Landlord shall have the right (but not the obligation) to end the Term upon the date when the possession of the part so taken shall be required for such use or purpose, and current Rent shall be apportioned as of the date of such termination. Tenant shall have no right to any apportionment of or share in any condemnation award or judgment for damages made for the taking of any part of the Premises or the Property, but may seek its own award for loss of or damage to Tenant's business or its property resulting from such taking, provided that such an award to Tenant does not in any way diminish the award payable to Landlord on account of such taking. 21. NOTICES. 21.1 ADDRESSES. All notices to be given by one party to the other under this Lease shall be in writing (except as expressly provided herein to the contrary) and shall be sent by either: (i) United States certified mail, return receipt requested, postage prepaid, (ii) national air courier service for overnight delivery, or (iii) hand delivery as follows: (a) To Landlord: The Prudential Insurance Company of America Two Prudential Plaza 180 North Stetson Street, Suite 3275 Chicago, Illinois 60601 Attention: Vice President-PRISA 22 With a copy to: PDC Properties, Inc. 222 Spring Lake Drive Itasca, IL 60143 Attention: Margaret Chaney or to such other person or at such other address designated by notice sent to Tenant, and during the Term with a copy to the address to which Rent is then being paid under this Lease. (b) To Tenant: Innotrac Corporation 6655 Sugarloaf Parkway Duluth, Georgia 30097 Attention: David L. Gamsey- Chief Financial Officer or to such other person or at such other address designated by notice sent to Landlord, and during the Term with a copy to the Premises. 21.2 METHOD. Mailed notices shall be deemed to have been given two (2) business days after posting in the United States mails. Notices sent by overnight courier shall be deemed to have been given one (1) business day after delivery to the overnight courier, and notices which are hand delivered shall be deemed to have been given on the day tendered for delivery. 22. ADDITIONAL COVENANTS OF TENANT. Tenant hereby covenants and agrees to comply with, and to cause its employees, agents, clients, customers, invitees and guests to comply with, the following provisions: (a) Any sign, lettering, picture, notice, or advertisement installed within the Premises or on the Property shall be installed at Tenant's expense and in compliance with all Laws. Without obtaining Landlord's prior, written consent (which consent may not be unreasonably withheld), no sign, lettering, picture, notice or advertisement may be placed on any portion of the Premises which is visible from outside the Premises or on any portion of the Property; provided, however, that Tenant may install: (i) a sign panel displaying the name or tradename of Tenant, or any portion thereof, on the existing Building monument sign or, if applicable, on both sides of such sign; and (ii) signage on displaying the name or tradename of Tenant on a portion of the exterior of the Building located directly outside of the Premises, so long as any such signage is installed at Tenant's expense and subject to: (x) the reasonable approval of Landlord as to the style, size, location, color and lighting (if any) of such signage; (y) all Park Covenants and any other easements or documents or record, including but not limited to any approval of the Association or its design committee as may be required thereunder; and (z) all applicable Laws. (b) Tenant shall not use the name of the Building or the Park is located for any purpose other than for identifying Tenant's business address, or use any picture or likeness of the Building in any letterheads, envelopes, circulars, notices, advertisements, containers or wrapping material, without Landlord's prior consent in writing. (c) Except with respect to satellite or other communication dishes or antennas as may be permitted by applicable Laws and the Park Covenants and as are installed: (i) in locations on the roof of the Building specified by Landlord; (ii) subject to Landlord's reasonable size restrictions, utility and structural load requirements and screening criteria; (iii) with the use of Landlord's roofing contractor; and (iv) subject to other reasonable requirements relating to any warranty, guaranty or service contract applicable to the roof of the Building, Tenant shall not place any radio or television antenna on the roof of the Building or on any other part of the Property other than inside the Premises, or operate or permit to be operated any musical or sound producing instrument or device inside or 23 outside the Premises that may be heard outside the Premises. Tenant shall not make noises, cause disturbances or vibrations or use or operate any electrical or electronic devices or other devices that emit sound or other waves or disturbances, or create odors, any of which may be offensive to other tenants and occupants of the Building or that would interfere with the operation of any device or equipment or radio or television broadcasting or reception from or within the Building or elsewhere. (d) Tenant shall not obstruct sidewalks, roadways, Parking Areas or entrances in and about the Property. Tenant shall not place objects against doors or windows that would be unsightly from the exterior of the Building, and will promptly remove same upon notice from Landlord. Tenant shall store and dispose of refuse as directed by Landlord, including, without limitation, storing and disposing of all refuse, in a neat and clean condition so as not to be visible to members of the public and so as not to create any health or fire hazard. (e) Tenant shall not make any room-to-room canvass to solicit business from other tenants in the Building and shall not exhibit, sell or offer to sell, use, rent or exchange any item or service in or from the Premises. (f) Tenant shall not waste electricity or water and agrees to cooperate fully with Landlord to assure the most effective operation of the Building's heating and air conditioning systems, and shall not adjust any controls other than room thermostats installed for Tenant's use or take any action which could jeopardize the warranties covering the heating, ventilating or air conditioning systems. Tenant shall comply with all programs instituted by Landlord under applicable federal, state or local energy conservation standards or other governmental requirements or directives (whether mandatory or voluntary). (g) Door keys for doors in the Premises will be furnished on the Commencement Date by Landlord. Tenant shall not affix additional locks on doors and shall purchase duplicate keys only from Landlord. At the end of the Term or earlier termination of the Lease or upon a termination of Tenant's right of possession, Tenant shall return all keys to Landlord and will disclose to Landlord the combination of any safes, cabinets or vaults left in the Premises in accordance with the terms and conditions of this Lease. (h) Tenant assumes full responsibility for protecting Tenant's property from theft, robbery and pilferage, which includes keeping doors locked and other means of entry to the Premises closed and secured. In addition, the parties acknowledge that safety and security devices, services and programs provided by Landlord, if any, while intended to deter crime and ensure safety, may not in given instances prevent theft or other criminal acts, or ensure safety of persons or property. The risk that any safety or security device, service or program may not be effective, or may malfunction, or be circumvented by a criminal, is assumed by Tenant with respect to Tenant's property and interests, and Tenant shall obtain insurance coverage to the extent Tenant desires protection against such criminal acts and other losses. Tenant agrees to cooperate in any reasonable safety or security program developed by Landlord or required by applicable Laws. (i) Peddlers, solicitors and beggars shall be reported promptly to Landlord. (j) Tenant shall not install or operate machinery or any mechanical devices of a nature not directly related to Tenant's permitted use of the Premises. (k) Tenant shall comply with all covenants, conditions and restrictions of record encumbering or relating to the Property or any portion of either thereof (including, without limitation, any Park Covenants), and with all rules and regulations issued from time to time by Landlord or by the Association. 24 (l) Tenant will not in any manner deface or injure the Property or any part of either thereof or overload the floors of the Premises. (m) Tenant will not use the Premises for lodging or sleeping purposes or for any immoral or illegal purposes. (n) Tenant shall not at any time manufacture, sell, use or give away, and shall not at any time permit the manufacture, sale, use or gift of any spirituous, fermented, intoxicating or alcoholic liquors on the Premises or the Property. (o) In no event shall Tenant permit on the Property flammables or explosives or any other article of an intrinsically dangerous nature. If by reason of Tenant's failure to comply with the provisions of this Subsection, any insurance coverage is jeopardized or insurance premiums are increased, in addition to all other rights and remedies available to Landlord upon a default by Tenant under this Lease, Landlord shall have the right to require Tenant to make immediate payment of the increased insurance premium, if any. (p) Tenant shall not introduce, use, handle, generate, treat, transport, store or dispose of, or permit the introduction, use, handling, generation, treatment, transportation, storage or disposal of any Hazardous Materials (as defined below) in, on, under, to, from, around or about the Premises, the Building or the Property, except for Hazardous Materials contained in products which are reasonably and customarily used in general office uses, such as photocopy machine solutions and cleaning solvents, as long as such Hazardous Materials are only used in compliance with all Laws (without the need for a special permit) and all manufacturer's and supplier's instructions and recommendations, and in quantities and for purposes which are reasonably and customarily used in general office uses. Tenant shall indemnify, defend and hold harmless the Landlord Parties from and against all fines, penalties, liens, suits, procedures, claims, demands, liabilities, damages (including consequential damages), actions, causes of action, costs and expenses of every kind and nature whatsoever (including, without limitation, reasonable attorneys', engineers', experts' and consultants' fees and costs of testing, monitoring, remediation, removal and cleanup), contingent or otherwise, known or unknown, incurred or imposed, arising directly or indirectly out of or in any way connected with Tenant's breach of the covenants set forth in this Subsection 22(p) or otherwise in connection with the introduction, use, handling, generation, treatment, transportation, storage or disposal of any Hazardous Materials. Tenant's obligations under the immediately preceding sentence shall survive the expiration or earlier termination of this Lease and a termination of Tenant's right of possession. For purposes hereof, "Hazardous Materials" shall mean (i) substances defined as "hazardous substances", "toxic substances" or "hazardous wastes" in the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (42 U.S.C., Sec. 9061, et. seq.), the Hazardous Materials Transportation Act (49 U.S.C., Sec. 1802), the Resource Conservation and Recovery Act (42 U.S.C., Sec. 6901 et. seq.), the Toxic Substances Control Act of 1976, as amended (15 U.S.C., Sec. 2601, et. seq.) or in any other Laws now or hereafter in effect governing similar matters, or in any regulations adopted or publications promulgated pursuant thereto; (ii) asbestos and asbestos containing materials; and (iii) petroleum and petroleum based products. Tenant shall promptly notify Landlord of: (i) any enforcement, cleanup or other regulatory action taken or threatened by any governmental or regulatory authority with respect to the presence of any Hazardous Materials on the Premises or the migration thereof from or to other property, (ii) any demands or claims made or threatened by any party against Tenant or the Premises relating to any loss or injury resulting from any Hazardous Materials, (iii) any release, discharge or nonroutine, improper or unlawful disposal or transportation of any Hazardous Materials on or from the Premises, and (iv) any matters where Tenant is required by Laws to give a notice to any governmental or regulatory authority respecting any Hazardous Materials on the Premises. 25 23. ESTOPPEL CERTIFICATES; MORTGAGE ISSUES. 23.1 ESTOPPEL CERTIFICATES. Tenant agrees that from time to time upon not less than twenty (20) days prior request by Landlord or any Mortgagee, Tenant will deliver to Landlord or such Mortgagee an estoppel certificate substantially in the form of EXHIBIT D attached hereto and made a part hereof or in such other form as Landlord or any Mortgagee may request. In the event Tenant fails or refuses to deliver any such certificate within said 20-day period, in addition to all other rights and remedies available under this Lease, at law or in equity upon a default by Tenant under this Lease: (i) Tenant hereby appoints Landlord as attorney-in-fact for Tenant with full power and authority to execute and deliver in the name of Tenant any such certificate, and (ii) Tenant shall be deemed to have accepted, agreed to and certified to, each of the statements set forth in any such certificate. 23.2 SUBORDINATION AND ATTORNMENT. Landlord may sell the Land and become the tenant under a ground or underlying lease of the Land and this Lease and all rights of Tenant hereunder will then be subject and subordinate to such underlying lease and any extensions or modifications thereof. This Lease and all of Tenant's rights hereunder shall also be subject and subordinate to any mortgage or mortgages (and the liens thereof) at any time hereafter in force against the Building, the Land and/or the underlying leasehold estate, and to all advances made or hereafter to be made upon the security thereof. For purposes of this Lease, "Mortgagee" shall mean the mortgagee, from time to time, under any mortgage granted by Landlord and hereafter encumbering the Property or any portion thereof or interest therein. Tenant shall execute such further instruments subordinating this Lease to any such mortgage or mortgages as Landlord from time to time may request. Tenant covenants and agrees that, if by reason of any default on the part of Landlord herein as tenant under said underlying lease, or as mortgagor under any mortgage to which this Lease is subject and subordinate, said underlying lease is terminated or such mortgage is foreclosed by summary proceedings, voluntary agreement or otherwise, Tenant, at the election of the landlord under said underlying lease or the Mortgagee of such mortgage, as the case may be, will attorn to and recognize such landlord or Mortgagee as the "Landlord" under this Lease. Tenant further agrees to execute and deliver at any time upon request of Landlord, any Mortgagee or any party which shall succeed to the interest of Landlord as tenant under said underlying lease, any instrument reasonably necessary to evidence such attornment. However, in the event of attornment, no Mortgagee or any party which shall succeed to the interest of Landlord as tenant under said underlying lease shall be: (i) liable for any act or omission of Landlord, or subject to any offsets or defenses which Tenant might have against Landlord (prior to such Mortgagee or other party becoming Landlord under such attornment), (ii) liable for any security deposit or bound by any prepaid Rent not actually received by such Mortgagee or other party, or (iii) bound by any future modification of this Lease not consented to by such Mortgagee or other party. Tenant waives the provision of any law now or hereafter in effect which may give to Tenant any right of election to terminate this Lease or to surrender possession of the Premises in the event any proceeding is brought by landlord under said underlying lease or the Mortgagee under any such mortgage to terminate said underlying lease or foreclose such mortgage. At the election of any Mortgagee (expressed in a document signed by such Mortgagee), such Mortgagee may make all or some of Tenant's rights and interests in this Lease superior to any mortgage held by such Mortgagee and the lien thereof. Tenant's obligation hereunder to subordinate its rights under this Lease to any mortgage or mortgages or underlying lease is expressly subject to Tenant's receiving from the holder of any such superior interest a non-disturbance agreement in form and content reasonably acceptable to Tenant, Landlord and such interest holder. 23.3 NOTICES TO MORTGAGEES. Tenant agrees to give any Mortgagee, by United States certified mail, return receipt requested, postage prepaid, a copy of any notice of default served upon Landlord. Tenant further agrees that if Landlord shall have failed to cure such default, then such Mortgagee shall have thirty (30) days after such notice is given within which to cure such default, or if such default cannot reasonably be cured by such Mortgagee within thirty (30) days, such Mortgagee shall have such additional time as may be necessary to cure such default (including, without limitation, time necessary to obtain possession of the Property if possession is 26 necessary to cure such default), and Tenant shall not pursue any remedies it may have for such default and this Lease shall not be terminated, while such cure is being diligently pursued. 23.4 QUIET POSSESSION. Upon payment by Tenant of the Rent due hereunder, and upon the observance and performance of all the covenants, terms and conditions on Tenant's part to be observed and performed under this Lease, Tenant shall peaceably and quietly hold and enjoy the Premises for the Term, without hindrance or interruption by Landlord or any other person or persons lawfully or equitably claiming by, through or under Landlord, always subject, however, to the terms and conditions of this Lease. 24. MISCELLANEOUS. 24.1 DEFINITION OF LANDLORD. For purposes of this Lease, Landlord shall mean Landlord named above, except that in the event of any sale or other transfer of the Property or the Building, the seller or transferor (and the beneficiaries of any selling or transferring land trust) shall be and hereby is and are entirely freed and relieved of all agreements, covenants and obligations of the Landlord hereunder accruing from and after the effective date of such transfer, and without further agreement between the parties and the purchaser or transferee on any sale or transfer, such purchaser or transferee shall be deemed and held to have assumed and agreed to carry out any and all agreements, covenants and obligations of the Landlord hereunder accruing from and after the effective date of such sale or transfer. 24.2 REAL ESTATE BROKERS. Tenant represents that Tenant has dealt with no broker in connection with this Lease other than the Broker, and that insofar as Tenant knows, no other broker or finder negotiated this Lease or is entitled to any fee or commission in connection herewith. Tenant agrees to indemnify, defend and hold the Landlord Parties free and harmless from and against all claims for broker's commissions or finder's fees by any person claiming to have represented or procured, or to have been engaged by, Tenant in connection with this transaction other than the Broker. Landlord represents that Landlord has dealt with no broker in connection with this Lease other than the Broker and that insofar as Landlord knows, no other broker or finder negotiated this Lease or is entitled to any fee or commission in connection herewith. Landlord agrees to indemnify, defend and hold Tenant free and harmless from and against all claims for broker's commissions or finder's fees by any person claiming to have represented or to have been engaged by Landlord in connection with this transaction. 24.3 CUMULATIVE REMEDIES. Except to the extent expressly provided herein to the contrary, all rights and remedies of Landlord and Tenant under this Lease shall be cumulative, and none shall exclude any other rights and remedies allowed by law. 24.4 GRAMMATICAL INTERPRETATION. The word "Tenant" wherever used herein shall be construed to mean Tenants in all cases where there is more than one Tenant, and the necessary grammatical changes required to make the provisions hereof apply either to corporations or individuals, men or women, shall in all cases be assumed as though in each case fully expressed. 24.5 SUCCESSORS AND ASSIGNS. Each of the provisions of this Lease shall extend to and shall, as the case may require, bind or inure to the benefit, not only of Landlord and of Tenant, but also of their respective heirs, legal representatives, successors and assigns, provided this clause shall not permit any Transfer contrary to the provisions of Section 11 hereof. 24.6 NO ORAL MODIFICATIONS. All of the agreements, representations and obligations of Landlord are contained herein, and no modification, waiver or amendment of this Lease or of any of its conditions or provisions shall be binding upon Landlord unless in writing signed by Landlord or by a duly authorized agent of Landlord empowered by a written authorization signed by Landlord. 27 24.7 EFFECTIVENESS. This Lease shall become effective only upon execution thereof by both parties and delivery thereof to Tenant. 24.8 NO AIR RIGHTS. No rights to light or air over any property, whether belonging to Landlord or any other person, are granted to Tenant by this Lease. 24.9 [INTENTIONALLY OMITTED]. 24.10 LANDLORD'S TITLE. Landlord's title to the Property is and always shall be paramount to the title of Tenant. Nothing herein contained shall empower Tenant to do any act which can, shall or may encumber the title of Landlord to the Property. 24.11 RECORDING PROHIBITED. Neither this Lease, nor any memorandum, affidavit or other writing with respect hereto, shall be recorded in any public record by Tenant or by anyone acting through, under or on behalf of Tenant, and the recording thereof in violation of this provision shall make this Lease null and void at Landlord's election. 24.12 RELATIONSHIP OF PARTIES. Nothing contained in this Lease shall be deemed or construed by the parties hereto or by any third party, to create the relationship of principal and agent, partnership, joint venture or any association between Landlord and Tenant, it being expressly understood and agreed that neither the method of computation of Rent nor any other provisions contained in this Lease nor any acts of the parties hereto shall be deemed to create any relationship between Landlord and Tenant other than the relationship between Landlord and Tenant other than the relationship of lessor and lessee. 24.13 LIMITATION OF LIABILITY. Any claim against, or liability or obligation of, Landlord under this Lease or relating to the Premises or the Property shall be limited solely to and satisfied solely from the interest of Landlord in the Property and the rents, profits, issues, and proceeds thereof, and none of the Landlord Parties (other than Landlord) shall be individually or personally liable for any claim arising out of this Lease or relating to the Premises or the Property. A deficit capital account of any partner in Landlord shall not be deemed an asset or property of Landlord. 24.14 EXCUSE FOR NON-PERFORMANCE. Except as expressly provided to the contrary in this Lease, and except for Tenant's obligation to pay Rent hereunder, neither Tenant nor Landlord shall be in default hereunder, if Tenant or Landlord is unable to fulfill any of its obligations under this Lease because of any accident, governmental restriction, inability to obtain fuel or materials, strike or lockout (whether legal or illegal), act of God or other event, occurrence or circumstance beyond the reasonable control seeking to perform such obligations ("Events of Force Majeure"). 24.15 RIDERS AND EXHIBITS. All exhibits and riders attached to this Lease are made a part hereof and are incorporated herein by reference. 24.16 CAPTIONS AND SEVERABILITY. The captions of the Sections and Subsections of this Lease are for convenience of reference only and shall not be considered or referred to in resolving questions of interpretation. If any term or provision of this Lease shall be found invalid, void, illegal, or unenforceable with respect to any particular person or entity by a court of competent jurisdiction, it shall not affect, impair or invalidate any other terms or provisions hereof, or its enforceability with respect to any other person or entity, the parties hereto agreeing that they would have entered into the remaining portion of this Lease notwithstanding the omission of the portion or portions adjudged invalid, void, illegal, or unenforceable with respect to such person or entity. 25. PARKING. Tenant agrees not to utilize (and shall cause its agents, employees and invitees to not utilize) more than thirty (30) parking spaces for passenger automobiles in the parking areas located on the Land as delineated in EXHIBIT A (the "Parking Areas") nor more than ten (10) parking spaces for tractor trailers or similar vehicles in the parking areas located on the Land between the two existing docks 28 as delineated in EXHIBIT A (the "Trailer Areas"). Tenant agrees to comply with, and to cause its agents, employees and invitees to comply with, all reasonable rules and regulations which may from time to time be promulgated by Landlord with respect to use of the Parking Areas. Tenant shall be responsible for supervising the use of the Parking Areas and the Trailer Areas by Tenant's agents, employees and invitees in order to confirm compliance with the terms set forth in this Section 25. If Tenant is in default of its covenants and obligations set forth in this Section 25, Landlord shall have the right, but not the obligation, in addition to all other rights and remedies under this Lease, to employ or engage one or more individuals to supervise the use of the Parking Areas and Trailer Areas by Tenant's agents, employees and invitees in order to confirm compliance with the terms set forth in this Section 25, and Tenant shall reimburse Landlord for all costs incurred in connection therewith within ten (10) days after being billed therefor. 26. ERISA. Tenant hereby represents and warrants that: 26.1 Neither Tenant nor any of its "affiliates" (within the meaning of Part V(c) of Prohibited Transaction Exemption 84-14, 49 Fed. Reg. 9494 (1984), as amended ("PTE 84-14")) has, or during the immediately preceding year has exercised the authority to: (a) appoint or terminate Landlord as investment manager over assets of any "employee benefit plan" (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) invested in, or sponsored by, Landlord; or (b) negotiate the terms of a management agreement (including renewals or modifications thereof) with Landlord on behalf of any such plan; 26.2 Tenant is not "related" to Landlord (as determined under in Part V(h) of PTE 84-14); 26.3 Tenant has negotiated and determined the terms of this Lease at arm's length, as such terms would be negotiated and determined by the Tenant with unrelated parties; and 26.4 Tenant is not an "employee benefit plan" as defined in Section 3(3) of ERISA, a "plan" as defined in Section 4975(e)(1) of the Internal Revenue Code of 1986, as amended, or an entity deemed to hold "plan assets" within the meaning of 29 C.F.R. ss. 2510.3-101 of any such employee benefit plan or plan. 27. ATTORNEYS' FEES. In the event of any litigation between the parties, the prevailing party shall be entitled to obtain, as part of the judgment, all reasonable attorneys' fees, costs and expenses incurred in connection with such litigation, except as may be limited by applicable Laws. 28. AMERICANS WITH DISABILITIES ACT. The parties acknowledge that Title III of the Americans With Disabilities Act of 1990 (42 U.S.C. ss. 12101 et seq.) and regulations and guidelines promulgated thereunder, as all of the same may be amended and supplemented from time to time (collectively referred to here as the "ADA") established requirements for accessibility and barrier removal, and that such requirements may or may not apply to the Premises and Property depending on, among other things: (a) whether Tenant's business is deemed a "public accommodation" or "commercial facility", (b) whether such requirements are "readily achievable", and (c) whether a given alteration affects a "primary function area" or triggers "path of travel" requirements. The parties hereby agree that: (x) Landlord shall be responsible for ADA Title III compliance on the common areas of the Property and in the Building common areas and in the common area lobby restrooms, if any, (y) Tenant shall be responsible for ADA Title III compliance in the Premises (provided that Landlord represents and warrants that as of the date of this Lease, the Premises are currently in compliance with ADA Title III for their present uses), and (z) Landlord may perform, or require that Tenant perform, and Tenant shall be responsible for the cost of, ADA Title III "path of travel" requirements triggered by Alterations in the Premises. Tenant shall be solely responsible for requirements under Title I of the ADA relating to Tenant's employees. 29 29. EXPANSION OPTION. 29.1 Subject to the terms and conditions of this Section 29, Tenant shall have and is hereby granted the right to add to the Premises demised hereunder all (and only all) of the Expansion Space that becomes available for lease (such right, with respect to each such portion of the Expansion Space, is hereinafter referred to as an "Expansion Option") at any time prior to February 28, 2003 (the "Expansion Deadline"). The "Expansion Space" shall be the area of the Building identified as the "Expansion Space" on EXHIBIT A. 29.2 If Tenant executes and delivers to Landlord four (4) counterparts of the amendment to this Lease attached hereto as EXHIBIT E-1 on or prior to January 15, 2003 (the "Election Deadline"), Tenant shall be deemed to have validly exercised its Expansion Option and elected to add all of all of the Expansion Space to the Premises on the terms and conditions set forth in EXHIBIT E-1. If Tenant executes and delivers to Landlord four (4) counterparts of the amendment to this Lease attached hereto as EXHIBIT E-2 after the Election Deadline but on or prior to the Expansion Deadline, Tenant shall be deemed to have validly exercised its Expansion Option and elected to add all of all of the Expansion Space to the Premises on the terms and conditions set forth in EXHIBIT E-2. Promptly upon receipt of the applicable Lease amendment in a timely manner, Landlord shall execute and return to Tenant two (2) counterparts of the applicable Lease amendment. In the event Tenant fails to exercise its right to add the Expansion Space to the Premises in accordance herewith, Tenant shall have no further rights under this Section 29, and Landlord shall thereafter be free to lease such Expansion Space to any third party upon such terms and conditions as Landlord in its sole discretion deems advisable (subject to Section 30 below) upon its construction of a standard demising wall between the Premises and the Expansion Space at Landlord's sole cost and expense. 29.3 It shall be a condition to Tenant's right to exercise the Expansion Option that, at the time Tenant delivers the Lease amendment counterparts to Landlord in accordance with Section 29.2, (a) Tenant is not in monetary or material non-monetary Default after notice and expiration of any applicable cure period, and (b) neither this Lease nor Tenant's right of possession shall have been terminated and this Lease shall then be in full force and effect. 30. RIGHT OF FIRST OFFER. 30.1 Subject to the rights of the Existing Tenants (as defined below), Tenant shall have and is hereby granted the right to add to the Premises demised hereunder all or a portion of the Eligible Space (as defined below) from and after the date of this Lease (such right is hereinafter referred to as the "Right of First Offer") at any time after the Expansion Deadline and during the Term hereof in accordance with the terms and conditions of this Section 30. For purposes of this Lease, the term "Existing Tenants" shall mean: (i) Newbreed, Inc.; (ii) Amerimax Home Products, Inc., a Delaware corporation, and (iii) their respective affiliates, successor and assigns, and Tenant's Right of First Offer shall be expressly subject to the rights of such Existing Tenants only with respect to the Eligible Space. The "Eligible Space" shall be the area of the Building identified as delineated as the "Expansion Space" or the "Amerimax Space" on EXHIBIT A. 30.2 Landlord shall notify Tenant in writing promptly after Landlord reasonably anticipates that the Eligible Space or any portion thereof is or will be available for lease (such available Eligible Space, the "ROFO Space"). Such notice (an "Offer Notice") shall include the rentable square footage and location of the ROFO Space, Landlord's reasonable good faith determinations of the net effective rental rate Landlord expects to receive for the ROFO Space (including the proposed base rent, additional rent, proposed term and other material concessions, if any), and the date that the ROFO Space will be available for lease to Tenant (after completion of any improvements Landlord is required to make hereunder). Tenant shall have twenty (20) business days from its receipt of such notice within which to notify Landlord in writing of Tenant's acceptance of such offer to add all (and only all) of the ROFO Space to the Premises on the terms 30 and conditions set forth in the Offer Notice. In the event Tenant fails to exercise its right to add such ROFO Space to the Premises in accordance herewith, Tenant shall not be entitled to exercise any rights under this Section 30 respecting such ROFO Space during the remainder of the Term, as may be extended or renewed, except as expressly provided below, and Landlord shall thereafter be free to lease such ROFO Space to a third party at a net effective rental rate not less than ninety five percent (95%) of the net effective rental rate set forth in the Offer Notice and otherwise upon such terms and conditions as Landlord in its sole discretion deems advisable. If Landlord is unable to lease such ROFO Space to a third party at a net effective rental rate not less than ninety five percent (95%) of the net effective rental rate set forth in the Offer Notice within one hundred eighty (180) days following Tenant's receipt of the Offer Notice, Tenant's rights hereunder respecting such ROFO Space shall be reinstated, and such ROFO Space shall again be deemed to constitute a portion of the Eligible Space, upon the expiration of such 180-day period. 30.3 If Tenant has validly exercised the Right of First Offer pursuant to this Section 30, then the applicable ROFO Space shall be included in the Premises, subject to all the agreements, terms and conditions of this Lease, with the following exceptions and modifications: (a) The Rentable Area of the Premises shall be increased by the rentable area of the ROFO Space, as determined by Landlord's architect in accordance the then current space measurement standards published by BOMA, to the extent applicable, and otherwise with standard industry practices for single story warehouse and distribution facilities and shall be approved by Tenant's architect, which approval shall not be unreasonably withheld; (b) Tenant's Proportionate Share shall be increased to reflect the rentable area of the ROFO Space; (c) The term of the demise covering the ROFO Space shall be coterminous with the Term hereof, as it may be extended or renewed, or as it may be earlier terminated as elsewhere provided herein; (d) Tenant shall take the ROFO Space on an "as-is" basis without the benefit of any tenant improvement allowance from Landlord, as set forth in the Offer Notice or otherwise; (e) Base Rent per square foot of rentable area of the ROFO Space, as well as the Additional Rent and other material concessions (including but not limited to tenant improvement allowances and rent abatement), shall be those stated in the Offer Notice; and (f) Tenant's obligation to pay Base Rent and Additional Rent with respect to the ROFO Space shall (subject to any rent abatement, if applicable) commence on such date as set forth in the Offer Notice as the date on which base rent and additional rent are first due and payable with respect to the ROFO Space. 30.4 Following the exercise by Tenant of its Right of First Offer, and within thirty (30) days following written request by either Landlord or Tenant, Landlord and Tenant shall enter into a mutually acceptable amendment to this Lease confirming the terms, conditions and provisions applicable to the ROFO Space so leased. 30.5 It shall be a condition to Tenant's right to exercise the Right of First Offer that, at the time Tenant notifies Landlord of the exercise of its Right of First Offer and to add ROFO Space to the Premises, (a) there remains not less than twenty four (24) months on the Term of this Lease, (b) Tenant is not then in monetary or material non-monetary Default after notice and 31 expiration of any applicable cure period, and (c) neither this Lease nor Tenant's right of possession shall have been terminated and this Lease shall then be in full force and effect. 31. OPTION TO EXTEND. Tenant shall have two (2) options (each an "Extension Option") to extend the Term hereof for one (1) additional period of five (5) years (each an "Extension Period"), upon the terms and conditions contained herein. Tenant's right to extend the Term shall be exercised by giving written notice to Landlord not later than six (6) months prior to the expiration of the Term or, if applicable, the initial Extension Period. If Tenant fails to give such notice to Landlord with respect to an Extension Period, Tenant shall be deemed to have declined to exercise its right to extend the Term (as may have been previously extended) and shall have no further rights under this Section 31. If Tenant fails to elect to extend the Term for an Extension Period, this Lease shall terminate on the expiration or earlier termination of the Term (as may have been previously extended). The extension shall be made upon the following terms and conditions: (a) On the date of exercise (or deemed exercise) of such right no default by Tenant hereunder shall subsist; (b) This Lease shall not have been terminated and shall be in full force and effect at the effective date of the extension; (c) The extension shall be upon the same terms, covenants and conditions contained in this Lease except that: (i) The annual Base Rent for the first year of the applicable Extension Period shall be equal to one hundred two percent (102%) of the Base Rent in effect immediately prior to the commencement of the applicable Extension Period. The Base Rent for each twelve-month period during each Extension Period after the first twelve-month period shall be at one hundred two percent (102%) of the Base Rent for the immediate preceding twelve-month Period. (ii) Landlord shall have no further obligation to install, or contribute toward the cost of, any improvements to the Premises, Tenant agreeing that the Premises shall be accepted "as is" by Tenant for each applicable Extension Period; and (iii) No further rights to extend the Term beyond the Extension Options described herein or to lease any additional space shall be created by any extension, except as mutually agreed to in any documents extending the Term. [SIGNATURE PAGE TO FOLLOW] 32 IN WITNESS WHEREOF, Landlord and Tenant have executed and delivered this Lease as of the date first above written. TENANT INNOTRAC CORPORATION, a Georgia corporation By: ------------------------------------------- Name: ------------------------------------------- Its: ------------------------------------------- LANDLORD THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation By: PDC Properties, Inc., its agent By: --------------------------------------- Name: ------------------------------------- Its: -------------------------------------- 33 EXHIBIT A PLAN OF THE PREMISES Exhibit A, Page 1 EXHIBIT B WORK LETTER All of the terms and conditions of the Lease are incorporated herein by reference and, except as may be expressly set forth to the contrary in this Work Letter or the Lease, shall apply as fully to this Work Letter as to the Lease. The capitalized terms used but not defined in this Work Letter shall have the meanings ascribed to them in the Lease. 1. CONSTRUCTION OF TENANT IMPROVEMENTS. Except as provided below to the contrary, Landlord, at Landlord's sole cost and expense, shall construct and install the Tenant Improvements. "Tenant Improvements" means (i) the improvements (including, without limitation, materials, hardware and equipment) to be affixed to or incorporated into the Premises pursuant to the Plans (as defined below and as the same may be modified pursuant to Section 4 of this Work Letter), and the labor to construct and install such items, and (ii) the other building standard items described in the Plans, as the same may be modified pursuant to Section 4 of this Work Letter. Landlord shall proceed diligently to cause the Tenant Improvements to be substantially completed in accordance in all material respects with the Plans and the terms and conditions of the Lease. The cost to construct the Tenant Improvements, including but not limited to all costs relating to material, hardware, equipment, labor, applicable governmental fees and permit cost, taxes, architectural fees, engineering fees, design fees, but expressly excluding any the cost of Tenant's furniture, trade fixtures or equipment or other personal property of Tenant that Tenant is permitted or required to remove from the Premises upon the expiration or earlier termination of the Lease, is hereinafter referred to as the "Permitted Costs." No construction management fee shall be payable by Tenant in connection with the Tenant Improvements. 2. CONTRACTORS. If Tenant elects to engage an interior designer for the Premises (the "Interior Designer"), Tenant shall have the right to do so, subject to Landlord's reasonable approval, and Tenant shall contract directly with the Interior Designer for the provision of services. All other architects, engineers, contractors, subcontractors, suppliers, manufacturers or materialmen performing services or supplying materials in connection with the design and/or construction of the Tenant Improvements (the "Contractors") shall be selected by Landlord, shall be reasonably acceptable to Tenant, and shall enter into contracts directly with Landlord for the provision of services and materials. 3. THE PLANS. Landlord and Tenant have approved the preliminary description of the Tenant Improvements attached to this Work Letter as Schedule 1 and made a part hereof. Landlord will cause to be prepared at Landlord's cost, and Landlord and Tenant shall act in good faith and cooperate with each other to finalize and approve as soon as reasonably possible, the plans, drawings and specifications for the Tenant Improvements based on the description in Schedule 1. If Landlord and Tenant have not approved the final plans, drawings and specifications for the Tenant Improvements within [sixty (60) days prior to the Expansion Deadline], at the request of either party, any disagreements regarding such final plans, drawings and specifications shall be submitted to and resolved by arbitration in accordance with under the Expedited Procedures of the Commercial Arbitration Rules of the American Arbitration Association then in force except as provided below. Any such arbitration proceedings shall be conducted through the American Arbitration Association in Chicago, Illinois and the cost of such arbitration proceedings shall be split evenly between Landlord and Tenant, provided that each party shall be solely responsible for its own costs and expenses incurred in connection with any arbitration proceedings. The final plans, drawings and specifications for the Tenant Improvements approved by Landlord and Tenant prior to the commencement of construction are collectively referred to as the "Plans." 4. CHANGES TO THE PLANS. 4.1 Tenant Changes to the Plans. (a) (a) Tenant may propose one or more changes to the Plans to Landlord at any time before the Substantial Completion Date (as defined below), and, as promptly as Exhibit B, Page 1 reasonably practicable after the receipt and approval thereof by Landlord (which approval may be withheld in Landlord's sole discretion), Landlord shall provide Tenant with a written estimate of the delay (if any) in the Substantial Completion Date and the additional cost (if any) to complete the Tenant Improvements which will result from such change (whether hard costs or soft costs), which costs shall include, without limitation: (i) the actual cost of all materials, supplies, equipment and labor used or supplied in making the proposed change, including general conditions and any contractor's fees; (ii) any architect and engineer fees; and (iii) any other additional reasonable costs and expenses of owning and operating the Premises during the extended construction period (if any) resulting from such change(s) (collectively, "Change Order Costs"). If Tenant fails to approve the estimate of Change Order Costs within five (5) business days after delivery of same, Tenant shall be deemed to have abandoned its request for such change, and the Tenant Improvements shall be constructed substantially in accordance with the then existing Plans. If Tenant approves the estimate of Change Order Costs within said 5-day period by signing and returning a copy of Landlord's estimate, Landlord shall cause the Tenant Improvements to be constructed substantially in accordance with the Plans as so revised. Unless requested in writing by Tenant to the contrary, Landlord shall continue with construction of the Tenant Improvements according to the then existing Plans during the pendency of any proposed change in the Plans until such change is approved by Landlord and Tenant as provided above. (b) If Tenant approves Landlord's estimate of the time and Change Order Costs of a proposed change to the Plans: (i) Tenant shall be liable for the actual Change Order Costs, whether or not such actual cost exceeds Landlord's estimate, and (ii) Landlord shall not be liable for any delay in the Substantial Completion Date resulting from the requested change, whether or not the delay exceeds Landlord's estimate. Upon Tenant's request, Landlord shall provide Tenant with reasonable evidence of the actual Change Order Costs and the basis for any delay in the Substantial Completion Date resulting from such change. (c) If Tenant requests a change to the Plans pursuant to this Section 4.1, and Tenant does not ultimately approve the resulting revised Plans or estimate, Tenant shall promptly reimburse Landlord, as Rent, for any reasonable costs and expenses resulting from such requested changes incurred by Landlord. 4.2 Landlord Changes to the Plans. Landlord may make changes to the Plans without Tenant's consent, provided that such changes (a) are necessary to address, and solely for the purpose of addressing, field conditions, (b) will not create any additional monetary obligation for Tenant under the Lease, (c) are in material conformity with the Plans (as they may have been previously revised by permissible Tenant and/or Landlord changes thereto), and (d) will not result in the use of materials or equipment which are of a materially lesser quality than those specified in the Plans. 5. PAYMENT OF COSTS. Within fourteen (14) days after approval of the Plans, Landlord shall provide Tenant with a reasonably detailed and complete budget indicating the total Permitted Costs. Within three (3) days after Tenant's receipt of Landlord's budget for the Permitted Costs, Tenant shall approve same or provide Landlord with notice or its comments or objections to same. Such budget, upon approval by Tenant, shall constitute the "Budget," and the aggregate of all items contained in the Budget shall constitute the "Budgeted Costs." Notwithstanding anything to the contrary contained in this Work Letter or in the Lease, Landlord's obligation to construct the Tenant Improvements shall not require Landlord to expend in excess of Ninety Thousand Dollars ($90,000) toward the Permitted Costs (the "Tl Allowance"). In the event that at any time the actual Permitted Costs exceed the TI Allowance, Tenant shall deposit with Landlord the amount of such excess within ten (10) days after written demand therefor by Landlord. In addition, Tenant shall deposit with Landlord the amount of any Change Order Costs within ten (10) days after Tenant's approval of the estimate of such Change Order Costs in accordance with Section 4.1 of this Work Letter. Thereafter, in the event that at any time the actual Change Order Costs Exhibit B, Page 2 exceed the estimated Change Order Costs, Tenant shall deposit with Landlord the amount of such excess within ten (10) days after written demand therefor by Landlord. Upon Tenant's request, Landlord shall provide Tenant with reasonable evidence of the actual Permitted Costs (including but not limited to actual Change Order Costs). 6. PUNCHLIST ITEMS. Before Tenant takes occupancy of the Premises, but no later than five (5) business days after the Substantial Completion Date, Landlord, Landlord's architect, Tenant and at Tenant's election, Tenant's consulting architect or other construction consultants shall conduct an inspection of the Premises and shall work in good faith to jointly prepare a punchlist for the Tenant Improvements. Any items not on such punchlist (except latent defects) shall be deemed accepted by Tenant. Landlord shall complete all punchlist items as soon as reasonably practicable after such punchlist items are finally determined. 7. REPRESENTATIVES OF LANDLORD AND TENANT. Landlord designates John Pagliari as its representative for all purposes of this Work Letter. Tenant designates Robert Toner as its representative for all purposes of this Work Letter. Wherever this Work Letter requires any notice to be given to or by a party, or any determination or action to be made or taken by a party, the representative(s) of each party shall act for and on behalf of such party, and the other party shall be entitled to rely thereon. Either party may designate one or more additional or substitute representatives for all or a specified portion of the provisions of this Work Letter, subject to notice to the other party of the identity of such additional or substitute representative(s). 8. SUBSTANTIAL COMPLETION DATE. The "Substantial Completion Date" shall mean the latest of (i) delivery of exclusive possession of the Premises to Tenant, or (ii) the date on which Landlord receives the approval from the City of Romeoville authorizing occupancy of the Premises by Tenant, which approval may take the form of a conditional or temporary certificate of occupancy so long as Tenant may occupy the Premises, or (iii) the date on which Landlord's architect issues a certificate to Landlord and Tenant stating that the Tenant Improvements have been substantially completed substantially in accordance with the Plans and that the Premises substantially comply with Title III of the ADA. 9. GOVERNMENTAL APPROVALS. Landlord shall use reasonable efforts to obtain all governmental licenses, permits and approvals necessary for the construction of the Tenant Improvements. If Landlord is unable to obtain any permit, license or approval from any governmental authority necessary for the construction of the Tenant Improvements, Landlord and Tenant shall work together in good faith to resolve any items that have caused the failure to obtain such permit, license or approval. If Landlord and Tenant shall be unable to resolve any such items within thirty (30) days of Landlord's written notice to Tenant of any such failure, Landlord may elect to terminate the Lease upon written notice to Tenant delivered within thirty (30) days after the expiration of the thirty (30) day resolution period, upon which termination Landlord shall return to Tenant any Security Deposit and Base Rent in Landlord's possession, and thereafter Landlord shall have no further liability to Tenant hereunder or under the Lease. 10. ACCESS BY TENANT PRIOR TO COMMENCEMENT DATE. Landlord will permit Tenant and Tenant's agents, suppliers, contractors and workmen to enter the Premises prior to the completion of the Tenant Improvements to enable Tenant to do such other things as may be required by Tenant to make the Premises ready for Tenant's occupancy, provided that Tenant shall fully perform and comply with each of the following covenants, conditions and requirements: (a) Tenant and Tenant's agents, contractors, workmen, mechanics, suppliers and invitees, shall work in harmony and not interfere with Landlord and Landlord's agents in performing the Tenant Improvements or work for other tenants and occupants of the Building, and if at any time such entry shall in the judgment of Landlord cause or threaten to cause disharmony or interference, Landlord shall have the right to withdraw such permission upon twelve (12) hours written notice. (b) Tenant agrees that any such entry into the Premises shall be deemed to be under all of the terms, covenants, conditions, and provisions of the Lease except the Exhibit B, Page 3 covenant to pay Rent, and further agrees that in connection therewith Landlord shall not be liable in any way for any injury, loss or damage which may occur to any of Tenant's work or installations made in the Premises or to property placed therein prior to the Commencement Date, the same being at Tenant's sole risk. In addition, Tenant shall require all entities performing work on behalf of Tenant to provide protection for existing improvements to an extent that is satisfactory to Landlord and shall allow Landlord access to the Premises, for inspection purposes, at all times during the period when Tenant is undertaking construction activities therein. In the event any entity performing work on behalf of Tenant causes any damage to the Tenant Improvements or the property of Landlord or others, Tenant shall cause such damage to be repaired at Tenant's expense, and if Tenant fails to cause such damage to be repaired immediately upon Landlord's demand therefor, Landlord may in addition to any other rights or remedies available to Landlord under the Lease or at law or equity cause such damage to be repaired, in which event Tenant shall immediately upon Landlord's demand pay to Landlord the cost of such repairs as Rent. (c) All contractors and subcontractors shall use only those entrances designated by Landlord for ingress and egress of personnel, and the delivery and removal of equipment and material through or across any common areas of the Building or parking areas on the Property shall only be permitted with the written approval of Landlord and during hours determined by Landlord. Landlord shall have the right to order Tenant or any contractor or subcontractor that violates the above requirements to cease work and remove it, its equipment, and its employees from the Building or the Property. (d) During the performance of Tenant's work and Tenant's fixturing, Landlord may provide trash removal service from a location designated by Landlord. Tenant shall be responsible for breaking down boxes and placing trash in Landlord's containers at such designated location. Tenant shall accumulate its trash in containers supplied by Tenant and Tenant shall not permit trash to accumulate within the Premises or in the corridors or public areas adjacent to the Premises. Tenant shall cause each entity employed by it to perform work on the Premises to abide by the provisions of this Work Letter as to the storage of trash and shall require each such entity to perform its work in a way that dust and dirt is contained entirely within the Premises and not within any other portion of the Building or the Property and shall cause Tenant's contractors to leave the Premises broom clean at the end of each day. Should Landlord deem it necessary to remove Tenant's trash because of accumulation, an additional charge to Tenant will be on a time and material basis. (e) Tenant agrees that all services and work performed on the Premises by, on behalf of, or for the account of Tenant, including installation of materials and personal property delivered to the Premises shall be done in a first-class workmanlike manner using only good grades of material, shall be performed in accordance with Laws, and shall be performed only by persons covered by a collective bargaining agreement with the appropriate trade union. (f) Tenant agrees to protect, indemnify, defend and hold harmless the Landlord Parties from and against any and all losses, damages, liabilities, claims, liens, costs and expenses, including reasonable attorneys' fees, of whatever nature, including those to the person and property of Tenant, its employees, agents, invitees, licensees and others arising out of or in connection with the activities of Tenant or Tenant's contractors or subcontractors in or about the Premises and the Property, and the cost of any repairs to the Premises and the Property necessitated by activities of Tenant or Tenant's contractors or subcontractors. (g) Tenant shall secure, pay for, and maintain during the continuance of its work within the Premises, policies of insurance with such coverages and such amounts as Exhibit B, Page 4 Landlord may reasonably require, which policies shall be endorsed to include Landlord and its contractors and their respective employees and agents and any Mortgagee as additional insured parties, and which shall provide thirty (30) days prior written notice of any alteration or termination of coverage. Tenant shall not permit Tenant's contractors to commence any work until all required insurance has been obtained by Tenant and certificates evidencing such coverage have been delivered to and approved by Landlord in writing. 11. TERMINATION OF WORK LETTER; SURVIVAL OF TERMS. Landlord and Tenant acknowledge and agree that the provisions of this Work Letter are intended and designed to govern certain rights and obligations of the parties relating to the construction of the Tenant Improvements and other matters prior to the Commencement Date. Accordingly, except as hereinafter set forth in this Section 11, from and after the Commencement Date, the terms and provisions of this Work Letter shall become null and void and of no further force or effect. Notwithstanding anything to the contrary in this Section 11, however, the following provisions shall not terminate and shall continue in full force and effect after the Commencement Date, and shall survive the Commencement Date: Sections 1 and 5 (both of which shall terminate at such time as all punchlist items have been completed and all claims in connection therewith have been satisfied in full); Sections 10(b), 10(e), 10(f), 11 and 12 (which shall remain in effect for the duration of the Term); and Section 13 (which shall terminate at such time as the parties have executed the Confirmatory Memorandum). 12. APPLICATION OF WORK LETTER. This Work Letter shall not be applicable to any space added to the Premises or in the event of a renewal or extension of the Term of the Lease or the exercise of any expansion option granted to Tenant pursuant to the Lease. 13. CONFIRMATORY MEMORANDUM. At such time as the rentable area of the Premises has been finally determined, the parties shall jointly execute a written memorandum in the form attached to this Work Letter as Schedule 2, and such memorandum shall be attached to and become a part of the Lease. The written memorandum shall include the final rentable square footage of the Premises, as reasonably determined by Landlord's architect and reasonably approved by Tenant's architect, and the Base Rent and Tenant's Proportionate Share based on such square footage calculation and on Section 1.9 and Section 5.1(b), respectively, of the Lease. Exhibit B, Page 5 SCHEDULE 1 DESCRIPTION OF TENANT IMPROVEMENTS Schedule 1, Page 1 SCHEDULE 2 FORM OF CONFIRMATORY MEMORANDUM THE PRUDENTIAL INSURANCE COMPANY OF AMERICA ("Landlord") and INNOTRAC CORPORATION ("Tenant") hereby execute and deliver this Confirmatory Memorandum pursuant to Section 13 of the Work Letter attached as EXHIBIT B to that certain Lease between Landlord and Tenant dated September 17, 2002. 1. This Confirmatory Memorandum is for the convenience and reference of the parties. The provisions of the Lease and the Work Letter shall be valid and given their full force and effect with respect to the terms contained in this Confirmatory Memorandum, notwithstanding the failure or refusal of either party to execute this document. 2. Landlord and Tenant further agree and acknowledge as follows: (a) the rentable square footage of the Premises equals____________________________________________; (b) Tenant's Proportionate Share equals____________________ _________ percent (_____%); and (c) Base Rent equals:
Lease Year Annual Base Rent Monthly Installments ---------- ---------------- -------------------- 1st Lease Year 2nd Lease Year 3rd Lease Year 4th Lease Year 5th Lease Year 6th Lease Year
Executed and delivered as of_________________, 2002. TENANT INNOTRAC CORPORATION, a Georgia corporation By: ------------------------------------------- Its: ------------------------------------------ LANDLORD THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey By: PDC Properties, Inc. By: ------------------------------------------- Its: ------------------------------------------ Exhibit B, Page 1 EXHIBIT C LEGAL DESCRIPTION OF THE LAND THAT PART OF LOT 1 OF WINDHAM LAKES UNIT 15, BEING A SUBDIVISION OF PART OF THE EAST HALF OF THE SOUTHWEST QUARTER AND THE WEST HALF OF THE SOUTHEAST QUARTER OF SECTION 20, TOWNSHIP 37 NORTH, RANGE 10 EAST OF THE THIRD PRINCIPAL MERIDIAN RECORDED AS DOCUMENT R97-084143 IN WILL COUNTY, ILLINOIS, DESCRIBED AS FOLLOWS: BEGINNING AT THE SOUTHWEST CORNER OF SAID LOT 1; THENCE NORTH 01 DEGREES 21 MINUTES 50 SECONDS WEST ALONG THE WEST LINE OF SAID LOT 1, A DISTANCE OF 1280.69 FEET; THENCE NORTH 88 DEGREES 39 MINUTES 10 SECONDS EAST, 789.98 FEET TO THE EAST LINE OF SAID LOT 1; THENCE SOUTH 01 DEGREES 32 MINUTES 45 SECONDS EAST ALONG SAID EAST LINE, 917.34 FEET TO A POINT OF CURVATURE; THENCE SOUTHERLY AND SOUTHWESTERLY ALONG THE SOUTHEASTERLY LINE OF SAID LOT 1, BEING A CURVE CONCAVE NORTHWESTERLY, TANGENT TO THE LAST DESCRIBED COURSE, HAVING A RADIUS OF 472.24 FEET, A CHORD BEARING OF SOUTH 23 DEGREES 13 MINUTES 27 SECONDS WEST, A CHORD LENGTH OF 395.71 FEET, AN ARC LENGTH OF 408.31 FEET TO THE SOUTHEAST CORNER OF SAID LOT 1; THENCE SOUTH 88 DEGREES 21 MINUTES 34 SECONDS WEST ALONG THE SOUTH LINE OF SAID LOT 1, A DISTANCE OF 628.25 FEET TO THE POINT OF BEGINNING; IN WILL COUNTY, ILLINOIS. ALSO KNOWN AS LOT 1 IN WINDHAM LAKES RESUBDIVISION NUMBER 24 (RECORDING STATUS UNKNOWN). Exhibit C, Page 1 EXHIBIT D FORM OF TENANT ESTOPPEL CERTIFICATE Lease Date: , 200_ Landlord: The Prudential Insurance Company of America Tenant: Premises: Unit No. Rentable Area: square feet The undersigned, being the Tenant under the above-described Lease hereby certifies to _____________________________________ ("Lender" or "Purchaser") and Landlord as follows: 1. The Lease requires monthly base rent installments of $________________ each, commencing on ____________________________, 20__. The Lease requires monthly installments of Tenant's estimated share of operating expenses of $________________ and of Tenant's estimated share of taxes of $_______________. 2. Tenant has not prepaid any rent for more than one (1) month, and Tenant is paying rent under the Lease on a current basis with no offsets, credits, claims or setoffs. Tenant has not been given any free rent, partial rent, rebates, rent abatements, or rent concessions of any kind, which are unexpired, except as disclosed in the Lease. 3. A security deposit in the amount of $________________________ is being held by Landlord, which amount is not subject to any setoff or reduction or to any increase for interest or other credit due to Tenant. The Lease ______________ is or ____________ is not (check applicable provision) guaranteed by a third party. If the Lease is guaranteed by a third party, the name of the guarantor is _______________________________. 4. To Tenant's knowledge: the Lease is a valid lease and is in full force and effect, and attached hereto is a true and complete copy of the Lease and all amendments thereto and other agreements relating to the Lease and the rent payable thereunder, which documents represent the entire agreement between the parties. 5. To Tenant's knowledge: there is no existing default by Landlord or by Tenant under the Lease, and no event has occurred which, with the giving of notice or the passage of time, or both, would constitute an event of default by Landlord or by Tenant under the Lease. To Tenant's knowledge, no claim, controversy or dispute exists between Tenant and Landlord. As of the date hereof, Tenant is not asserting that the Lease is not fully enforceable by Landlord in accordance with its terms. 6. The Lease provides for a primary term of _____________________________ (______) months, commencing on _______________________________________, 20__ and ending on _______________, 20__. The Lease contains an option for (______) additional terms of (______) years each upon the terms and conditions as set forth in the Lease. Tenant has not exercised any option or rights to renew, extend, amend, modify, or change the term of the Lease, except as may be stated in the Lease. Tenant does not have any preferential right to lease or purchase all or any part of the property of which the Premises are a part (including any rights of first refusal or expansion options), except as may be stated in the Lease. The only interest of Tenant in the Property is that of a tenant pursuant to the terms of the Lease. 7. There are no actions, voluntary or involuntary, pending against Tenant under the bankruptcy laws of the United States or any state thereof. 8. Tenant is entitled to no rent concessions under the Lease other than the following: Exhibit D, Page 1 9. All construction, build-out, improvements, or alterations work to be completed to date by Landlord in the Premises under the Lease has been completed, except___________________________. 10. Tenant has received no notice of any claim, litigation or proceeding, pending or threatened, against or relating to Tenant that would adversely affect Tenant's ability to fulfill its obligations under the Lease or with respect to the Premises. Tenant has received no notice of, and has no knowledge of, any violations of any federal, state, county or municipal statutes, laws, codes, ordinances, rules, regulations, orders, decrees or directives relating to the use or condition of the Premises or Tenant's operation thereon. Tenant has received no notice from any governmental body or agency or from any person or entity with respect to any actual or threatened taking of the Property or any portion thereof for any public or quasi-public purpose by the exercise of condemnation or eminent domain. 11. Tenant has accepted and is occupying the Premises. Except as specified below, Tenant has not subleased all or any part of the Premises or assigned the Lease, or otherwise transferred or hypothecated its interest in the Lease or the Premises. This certification is made knowing that Landlord, [Lender]/[Purchaser] is relying upon the representations herein made. TENANT --------------------------, -------------- corporation ----------------- By: --------------------------------------- Its: -------------------------------------- Exhibit D, Page 2 EXHIBIT E-1 FORM OF LEASE AMENDMENT PRIOR TO ELECTION DEADLINE FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (the "First Amendment") is made as of the _____ day of ________________, 2003, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Landlord"), and INNOTRAC CORPORATION, a ______________________ corporation ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant have heretofore entered into that certain Lease dated as of September 17, 2002 (the "Lease") pursuant to which Tenant is leasing approximately 150,204 square feet of rentable area (the "Existing Premises") in the building located at Windham Industrial Center V in Romeoville, Illinois (the "Building"). Capitalized terms that are not otherwise defined in this First Amendment shall have the meanings ascribed to them in the Lease; and WHEREAS, Tenant desires to lease from Landlord and Landlord desires to lease to Tenant an additional 105,357 square feet of rentable area adjacent to the Existing Premises; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Additional Premises. As of the date of this First Amendment (the "Effective Date"), Landlord hereby leases to Tenant and Tenant hereby accepts from Landlord the 105,357 square feet of rentable area in the Building depicted on Exhibit A attached hereto and made a part hereof (the "Additional Premises") for the Term. For all periods from and after the Effective Date, Exhibit A to the Lease shall be superseded by Exhibit A attached hereto and made a part hereof. From and after the Effective Date the Premises shall consist of both the Existing Premises and the Additional Premises, constituting ___ square feet of rentable area in the aggregate. From and after the Effective Date, all references to the Premises in the Lease shall be deemed to refer to the Existing Premises and the Additional Premises. 2. Base Rent and Tenant's Proportionate Share. For all periods from and after the Effective Date, Section 1.09 of the Lease shall be superseded by Exhibit B attached hereto and made a part hereof. As of the Effective Date Tenant's Proportionate Share under the Lease shall be _________% (rather than _________%). 3. Possession of the Additional Premises. Possession of the Additional Premises shall be tendered to Tenant by Landlord on the Effective Date in their "as-is" condition. Tenant's taking possession of any portion of the Additional Premises shall be conclusive evidence that such portion of the Additional Premises was in good order and satisfactory condition when the Tenant took possession. No promise of the Landlord to construct, alter, remodel or improve the Premises or the Building and no representation by Landlord or its agents respecting the condition of the Existing Premises, the Additional Premises or the Building have been made to Tenant or relied upon by Tenant other than as may be contained in this Amendment to the Lease or except in accordance with the Work Letter and any amendments to the Plans requested by Tenant and approved by Landlord thereunder. If Tenant takes possession or enters into occupancy of the Additional Premises for the purpose of conducting its business therefrom prior to the Effective Date, such possession and occupancy shall be pursuant to all of the terms, covenants and conditions of the Lease, including the obligation to pay Base Rent and Additional Rent for the Additional Premises. 4. Full Force and Effect, Inconsistency. Except as set forth in this First Amendment, the terms, covenants, conditions and agreements of the Lease shall remain unmodified and otherwise in full Exhibit E-1, Page 1 force and effect. In the event of any inconsistency between the terms of the Lease and the terms of this First Amendment, the terms of this First Amendment shall control. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the day and year first above written. LANDLORD: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation By: PDC Properties, Inc., its agent By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- TENANT: INNOTRAC CORPORATION, a Georgia corporation By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- Exhibit E-1, Page 2 Exhibit A Rental Space Exhibit E-1, Page 3 Exhibit B Schedule of Base Rent Payments
Lease Year Annual Base Rent per Sq. Ft. Total Annual Base Rent Monthly Installments - ---------- ---------------------------- ---------------------- -------------------- 1st Lease Year $3.49 $__________ $__________ 2nd Lease Year $3.56 $__________ $__________ 3rd Lease Year $3.63 $__________ $__________ 4th Lease Year $3.70 $__________ $__________ 5th Lease Year $3.78 $__________ $__________ 6th Lease Year $3.85 $__________ $__________
Schedule E-1, Page 4 EXHIBIT E-2 FORM OF LEASE AMENDMENT AFTER ELECTION DEADLINE FIRST AMENDMENT TO LEASE THIS FIRST AMENDMENT TO LEASE (the "First Amendment") is made as of the ______ day of _____________________ , 2003, by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Landlord"), and INNOTRAC CORPORATION, a ___________________ corporation ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant have heretofore entered into that certain Lease dated as of September 17, 2002 (the "Lease") pursuant to which Tenant is leasing approximately 150,204 square feet of rentable area (the "Existing Premises") in the building located at Windham Industrial Center V in Romeoville, Illinois (the "Building"). Capitalized terms that are not otherwise defined in this First Amendment shall have the meanings ascribed to them in the Lease; and WHEREAS, Tenant desires to lease from Landlord and Landlord desires to lease to Tenant an additional 105,357 square feet of rentable area adjacent to the Existing Premises; NOW, THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: 1. Additional Premises. As of the date of this First Amendment (the "Effective Date"), Landlord hereby leases to Tenant and Tenant hereby accepts from Landlord the 105,357 square feet of rentable area in the Building depicted on Exhibit A attached hereto and made a part hereof (the "Additional Premises") for the Term. For all periods from and after the Effective Date, Exhibit A to the Lease shall be superseded by Exhibit A attached hereto and made a part hereof. From and after the Effective Date the Premises shall consist of both the Existing Premises and the Additional Premises, constituting __________ square feet of rentable area in the aggregate. From and after the Effective Date, all references to the Premises in the Lease shall be deemed to refer to the Existing Premises and the Additional Premises. 2. Base Rent and Tenant's Proportionate Share. For all periods from and after the Effective Date, Section 1.09 of the Lease shall be superseded by Exhibit B attached hereto and made a part hereof. As of the Effective Date Tenant's Proportionate Share under the Lease shall be ________% (rather than __________________%). 3. Possession of the Additional Premises. Possession of the Additional Premises shall be tendered to Tenant by Landlord on the Effective Date in their "as-is" condition. Tenant's taking possession of any portion of the Additional Premises shall be conclusive evidence that such portion of the Additional Premises was in good order and satisfactory condition when the Tenant took possession. No promise of the Landlord to construct, alter, remodel or improve the Premises or the Building and no representation by Landlord or its agents respecting the condition of the Existing Premises, the Additional Premises or the Building have been made to Tenant or relied upon by Tenant other than as may be contained in this Amendment to the Lease or except in accordance with the Work Letter and any amendments to the Plans requested by Tenant and approved by Landlord thereunder. If Tenant takes possession or enters into occupancy of the Additional Premises for the purpose of conducting its business therefrom prior to the Effective Date, such possession and occupancy shall be pursuant to all of the terms, covenants and conditions of the Lease, including the obligation to pay Base Rent and Additional Rent for the Additional Premises. 4. Full Force and Effect, Inconsistency. Except as set forth in this First Amendment, the terms, covenants, conditions and agreements of the Lease shall remain unmodified and otherwise in full Exhibit E, Page 1 force and effect. In the event of any inconsistency between the terms of the Lease and the terms of this First Amendment, the terms of this First Amendment shall control. IN WITNESS WHEREOF, the parties hereto have executed this First Amendment as of the day and year first above written. LANDLORD: THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation By: PDC Properties, Inc., its agent By: ----------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- TENANT: INNOTRAC CORPORATION, a Georgia corporation By: ----------------------------------------- Name: ----------------------------------------- Title: ---------------------------------------- Exhibit E, Page 2 Exhibit A Rental Space Exhibit E, Page 3 Exhibit B Schedule of Base Rent Payments
Lease Year Annual Base Rent per Sq. Ft. Total Annual Base Rent Monthly Installments - ---------- ---------------------------- ---------------------- -------------------- 1st Lease Year $3.54 $_____________ $___________ 2nd Lease Year $3.61 $_____________ $___________ 3rd Lease Year $3.68 $_____________ $___________ 4th Lease Year $3.76 $_____________ $___________ 5th Lease Year $3.83 $_____________ $___________ 6th Lease Year $3.91 $_____________ $___________
Exhibit E, Page 4 EX-13.1 9 g81419exv13w1.txt EX-13.1 PORTIONS OF THE REGISTRANT'S ANNUAL REPORT 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, 2002, 2001, 2000, 1999 and 1998 and the selected historical balance sheet data for the periods then ended have been derived from the Company's audited Consolidated Financial Statements for the years ended December 31, 2002, 2001, 2000, 1999 and 1998. As discussed in Note 2 to the Consolidated Financial Statements, the Company adopted Emerging Issues Task Force ("EITF") No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred" on January 1, 2002, which requires the presentation of reimbursed out-of-pocket expenses on a gross basis as revenues and expenses. In accordance with the adoption of EITF 01-14, reimbursements from customers, which primarily represent freight and postage fees, are presented on a gross basis for each of the years ended December 31, 2002, 2001, 2000, 1999, and 1998.
RESULTS FOR YEAR ENDED DECEMBER 31: 2002 2001 2000 1999 1998 --------------------------------------------------------------------------- (IN 000'S, EXCEPT PER SHARE AMOUNTS) Revenues $ 82,420 $ 121,859 $ 202,975 $ 258,267 $ 139,673 Cost of revenues 46,444 68,153 161,972 206,739 90,195 Special charges (credits) (293) -- 16,462 -- -- ----------- ----------- ----------- ----------- ----------- Gross profit 36,269 53,706 24,541 51,528 49,478 ----------- ----------- ----------- ----------- ----------- OPERATING EXPENSES: Selling, general and administrative 37,332 43,329 38,209 30,460 31,332 Special charges 404 -- 17,801 -- -- Depreciation and amortization 5,336 4,864 4,168 3,414 3,843 ----------- ----------- ----------- ----------- ----------- TOTAL OPERATING EXPENSES 43,072 48,193 60,178 33,874 35,175 ----------- ----------- ----------- ----------- ----------- Operating income (loss) (6,803) 5,513 (35,637) 17,654 14,303 ----------- ----------- ----------- ----------- ----------- Interest (income) expense, net 318 (532) 80 1,370 956 Other (income) expense (124) (20) 141 60 35 ----------- ----------- ----------- ----------- ----------- TOTAL OTHER (INCOME) EXPENSE 194 (552) 221 1,430 991 ----------- ----------- ----------- ----------- ----------- Income (loss) before income taxes and minority interest (6,997) 6,065 (35,858) 16,224 13,312 Income tax (provision) benefit 2,578 (2,573) 14,084 (6,389) (3,743) ----------- ----------- ----------- ----------- ----------- Net income (loss) before minority interest (4,419) 3,492 (21,774) 9,835 9,569 Minority interest, net of income taxes -- (893) (199) -- -- ----------- ----------- ----------- ----------- ----------- NET INCOME (LOSS) $ (4,419) $ 4,385 $ (21,575) $ 9,835 $ 9,569 =========== =========== =========== =========== =========== Net income (loss) per share-basic $ (0.38) $ 0.39 $ (1.92) $ 0.99 $ 1.01 Net income (loss) per share-diluted $ (0.38) $ 0.38 $ (1.92) $ 0.98 $ 1.00 COMMON STOCK INFORMATION: Average number of common shares outstanding-basic 11,516 11,318 11,212 9,911 8,096 Book value per common share(1) $ 5.20 $ 5.59 $ 5.23 $ 7.99 $ 4.24 YEAR-END FINANCIAL POSITION: Current assets $ 41,619 $ 58,093 $ 76,150 $ 94,810 $ 66,416 Current liabilities 20,143 35,717 34,175 24,930 39,563 Property and equipment, net 18,915 14,500 13,717 8,922 7,463 Total assets 95,499 99,393 97,145 104,218 73,992 Long-term obligations 15,497 393 166 75 135 Total liabilities 35,640 36,110 34,341 25,005 39,698 Total shareholders' equity $ 59,859 $ 63,283 $ 58,635 $ 79,213 $ 34,294
(1) Book value per common share is calculated by dividing total shareholders' equity at year end by the basic average number of common shares outstanding. 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 and pricing of our contracts; reliance on the telecommunications industry and the effect on the Company of the recent dramatic downturn in the industry; risks associated with changing technology and supporting existing technology; risks associated with competition; and other factors discussed in more detail under "Business" in our Annual Report on Form 10-K. OVERVIEW Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and headquartered in Atlanta, Georgia, provides order processing, order fulfillment and call center 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: - Fulfillment Services: - sophisticated warehouse management technology - automated shipping solutions - real-time inventory tracking and order status - purchasing and inventory management - channel development - zone skipping for shipment cost reduction - product sourcing and procurement - packaging solutions - back-order management - returns management - Call Center 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 - collaborative chat - intuitive e-mail response We receive most of our clients' orders either through inbound call center services, electronic data interchange ("EDI") or the internet. On a same day basis, depending on product availability, the Company picks, packs, verifies and ships the item, tracks inventory levels through an automated, integrated perpetual inventory system, warehouses data and handles customer support inquiries. During the 1990s, we had a high focus on the telecommunications industry because of its growth characteristics and increasing marketing needs. These characteristics have changed quite dramatically in the 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS last several years as growth in the telecommunications industry has slowed and the industry has contracted. However, we continue to provide customer support services and fulfillment of telephones, Caller ID equipment, Digital Subscriber Line ("DSL") and Cable Modems and other telecommunications products to companies such as BellSouth Corporation ("BellSouth"), Warranty Corporation of America ("WACA") and Qwest Communications International, Inc. ("Qwest") and their customers. During the year ended December 31, 2002, approximately 26.5% of our revenues were generated from telecommunications clients and 19.3% of revenues were from DSL and cable modem clients. Approximately 59.6% of our 2001 revenues were from telecommunications and DSL clients. We anticipate that the percentage of our revenues attributable to telecommunications and DSL clients will continue to decrease during 2003 due to the addition of more retail clients. During 2002, 54.2% of revenues were from retail, catalog and direct marketing clients which include such companies as Coca-Cola, Ann Taylor, Smith & Hawken, Tactica, Porsche, Nordstrom.com, Wilsons Leather, Martha Stewart Omnimedia, Books are Fun (a division of Readers' Digest) and Thane International. We take orders for our retail, catalog and direct marketing clients via the internet, through a customer service representative at our Pueblo and Reno call centers or through direct electronic transmission from our clients. The orders are processed through one of our order management systems and then transmitted to one of our seven fulfillment centers located across the country and are shipped to the end consumer typically within 24 hours of when the order is received. Inventory for our retail clients is held on a consignment basis, with minor exceptions, and includes items such as shoes, dresses, accessories, books and outdoor furniture. With the conversion of a majority of our clients to a fee-for-service model during 2000 and 2001, we no longer purchase and sell products from third party manufacturers for our clients. Instead, we warehouse products on a consignment basis and fulfill orders on behalf of our customers for a fee. We continue to purchase and own inventory for certain clients (primarily BellSouth), but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. This model substantially reduces revenues as the pass through cost of purchased inventory is no longer included in revenues. This was the primary reason for decreased revenues in 2000 and 2001 as compared to prior years. During 2002, the Company began applying the consensus reached in Emerging Issues Task Force ("EITF") No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred" which requires the presentation of reimbursed out-of-pocket expenses on a gross basis as revenues and expenses. As required, the Company reclassified the prior period financial information presented herein to comply with the guidance in EITF 01-14. Accordingly, freight and postage charges in the Company's fulfillment business during the years ended December 31, 2002, 2001, and 2000 totaling $13.5 million, $27.1 million and $28.9 million, respectively have been presented as revenues and cost of revenues in the corresponding Consolidated Statements of Operations. The 2001 and 2000 reclassification has no impact on net income. 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 Martha Stewart Omnimedia. It is located in a 354,000 square foot leased facility in Bolingbrook, Illinois. Due to the addition of a sizable new client, in September 2002 we leased an additional 150,204 square feet in a nearby facility. This new facility has expansion space of an additional 105,357 square feet that we expect to utilize in 2003. Our UDS division provides integrated order processing, order management, fulfillment and customer relationship management services. UDS's customer base comprises traditional direct marketing companies including Thane International and Tactica. It is located in a 275,000 square foot facility in Reno, Nevada. During 2001, we expanded UDS's business by taking advantage of our East Coast capabilities. Under the terms of Innotrac's merger agreement with UDS, the former shareholders of UDS may receive, as part of the consideration paid for their shares, annual contingent payments based on the operating income generated by 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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 $13.7 million in cash and 310,000 shares of our common stock pursuant to this arrangement. No earnout amounts were earned in the second year. We do not currently believe any additional contingent payments will be due. In August 2002 we leased a 396,000 square foot fulfillment center near Cincinnati, in Hebron, Kentucky. This facility provides fulfillment for Smith & Hawken. Capital expenditures associated with this facility were approximately $4.6 million and were funded through our bank line of credit. During 2002, the Company incurred significant start-up and associated technology costs for new client implementations. We added Martha Stewart Omnimedia and Smith & Hawken to the Reno system. As part of the migration of those two new clients onto the system we added the requisite functionality and customization. The customized nature of the system required significant resources to properly scale the system to meet our clients' needs and resulted in a considerable upswing in IT costs in 2002. RESULTS OF OPERATIONS The following table sets forth summary operating data, expressed as a percentage of revenues, for the years ended December 31, 2002, 2001 and 2000. Operating results for any period are not necessarily indicative of results for any future period. During 2001, the Emerging Issues Task Force ("EITF") issued EITF No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred," which was adopted by the Company as of January 1, 2002. EITF No. 01-14 states that reimbursements received from customers for out-of-pocket expenses incurred on their behalf should be characterized on a gross basis as revenue in the Company's statement of operations. Prior to the adoption of this standard, the Company netted reimbursements from customers, primarily for freight and postage fees, against the related expenses within revenues. With the adoption of this standard, the Company has reclassified these expenses as revenues and cost of revenues, and has conformed this presentation for all periods presented. The adoption of EITF No. 01-14 increased the reimbursable costs line item within total revenues and total cost of revenues from amounts previously reported in 2001 and 2000 by $27.1 million and $28.9 million, respectively. 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. 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2002 2001 2000 -------------------------------- Revenues, net 100.0% 100.0% 100.0% Cost of revenues 56.4 55.9 79.8 Special charges (credits), net (0.4) -- 8.1 -------------------------------- Gross profit 44.0 44.1 12.1 Selling, general and administrative 45.3 35.6 18.8 Special charges, net 0.5 -- 8.8 Depreciation and amortization 6.5 4.0 2.0 -------------------------------- Operating income (loss) (8.3) 4.5 (17.5) Other (income) expense 0.2 (0.5) 0.1 -------------------------------- Income (loss) before taxes and minority interest (8.5) 5.0 (17.6) Income tax (provision) benefit 3.1 (2.1) 6.9 -------------------------------- Net income (loss) before minority interest (5.4) 2.9 (10.7) Minority interest, net of income taxes -- (0.7) (0.1) -------------------------------- Net income (loss) (5.4)% 3.6% (10.6)% ================================
SPECIAL CHARGES 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. At December 31, 2002 and 2001, the Company had approximately $277,000 and $4.6 million, respectively, in remaining accruals related to the special charges recorded during the year ended December 31, 2000. The remaining accruals at December 31, 2002 relate to exiting the front-end e-commerce and web hosting business. The Company recognized approximately $3.0 million of special credits during the year ended December 31, 2002, related to gains realized on sales of inventory items which were previously written off as special charges in previous periods, cash collected for accounts receivable that were written off as special charges in previous periods, redeployment of leased computer hardware for which the leases were fully accrued for as special charges in previous periods, and client contract amendments which resulted in reduced liabilities. These amounts were recorded as a reduction in the special charge line items in the consolidated statements of operations. The remaining special charge liability, which is associated with one specific client, is expected to be fully utilized by the end of 2003. During 2002, the Company also recognized an additional $3.1 million in special charges. Approximately $2.4 million of these charges were related to capitalized hardware and software costs for systems purchased specifically for a potential new client which were subsequently not utilized as originally planned. The loss of the potential customer indicated that the carrying value of the asset group was potentially not recoverable, and therefore, an impairment test under the provisions of SFAS No. 144 was performed. As fair market value of the asset group was not readily determinable, a discounted, probability weighted cash flow model was utilized as a basis to determine fair value. As a result of the cash flow analysis, a $2.4 million impairment charge was recorded. Of the remaining charges, approximately $500,000 related to the write-down to net realizable value of specified fixed assets obtained as part of the December 2000 acquisition of UDS which were being utilized for one specific customer who ceased conducting business with UDS. The balance of approximately $200,000 was related to severance costs for positions which were eliminated. 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 2002 COMPARED TO YEAR ENDED DECEMBER 31, 2001 Revenues. The Company's net revenues decreased 32.4% to $82.4 million for the year ended December 31, 2002 from $121.9 million for the year ended December 31, 2001. The decrease in revenues is primarily due to the loss of the SBC contract which ended on November 30, 2001 and represented approximately $15.3 million of revenues during the year ended December 31, 2001; completion of the fee-for-service transition; and a significant decrease in freight revenues due to clients utilizing their own direct billed freight accounts. This decline in revenues was partially offset by the re-initiation of fulfillment services of consumer premise equipment ("CPE") during the third quarter of 2001 and the expansion of services to include wireless pager equipment with BellSouth during the fourth quarter of 2001, as well as the commencement of the Martha Stewart Living Omnimedia, Inc. contract in the first quarter of 2002 and the Smith and Hawken, Ann Taylor and Books Are Fun contracts in the third quarter of 2002. Cost of Revenues. The Company's cost of revenues decreased 31.9% to $46.4 million for the year ended December 31, 2002 compared to $68.2 million for the year ended December 31, 2001. Cost of revenues decreased primarily due to a decrease in freight costs. A reduction in call center direct costs from the loss of the SBC contract in December 2001 and the subsequent closure of the Atlanta call center in January 2002 also contributed to the decrease in cost of revenues during 2002 as compared to 2001. This decline in cost of revenues was partially offset by expenses incurred in the second half of 2002 relating to additional fulfillment labor required to handle the start-up of several new fulfillment clients as outlined above. Special Charges. The Company recognized approximately $293,000 related to gains realized on sales of inventory items previously written down as part of the 2000 special charge. Gross Profit. For the year ended December 31, 2002, the Company's gross profit decreased to $36.3 million, or 44.0% of revenues, compared to $53.7 million, or 44.1% of revenues, for the year ended December 31, 2001. The decrease 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, 2002 decreased 13.8% to $37.3 million or 45.3% of revenues compared to $43.3 million or 35.6% of revenues for the year ended December 31, 2001. The decrease in expenses in 2002 was mainly attributable to charges recorded during the first quarter of 2001, primarily for (i) the impairment of software development costs and severance costs related to Return.com and (ii) a significant decrease in bad debt expense in 2002. The decline in S,G&A costs was partially offset by increased costs from the acquisition of iFulfillment, Inc. in July 2001 and increased information technology and start-up expenses associated with new client implementations during 2002. Special Charges. The Company recorded special charges of $3.1 million during 2002 primarily related to the impairment of capitalized hardware and software costs for systems not being utilized as originally planned. This was offset by the reversal of a portion of the 2000 special charges totaling approximately $2.7 million related to accounts receivable reserves that were no longer required, the redeployment of leased computer hardware which were previously fully reserved for as special charges, and client contract amendments which resulted in decreased future obligations to the Company. Income Taxes. The Company's effective tax rate for the years ended December 31, 2002 and 2001 was a benefit of 36.8% and a provision of 42.4%, respectively. The decrease in the absolute rate was principally due to the impact of certain items not deductible for tax purposes. 6 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 40.0% to $121.9 million for the year ended December 31, 2001 from $203.0 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 $35.8 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 57.9% to $68.2 million for the year ended December 31, 2001 compared to $162.0 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 $25.9 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 44.1% of revenues, compared to $24.5 million, or 12.1% 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 35.6% of revenues compared to $38.2 million or 18.8% 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 years 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. 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 $961,000 at December 31, 2002 as compared to $9.4 million at December 31, 2001. Additionally, the Company had borrowings under its revolving credit facility (discussed below) of $14.4 million outstanding at December 31, 2002 as compared to $0 at December 31, 2001. Primary uses of cash, which will be discussed in greater detail below, were for capital expenditures of $12.8 million and an earn-out payment associated with a prior acquisition of $13.7 million. 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has a revolving credit agreement with a bank for borrowings up to $40 million. In May 2002, the Company extended its credit facility until June 2005. The Company and its subsidiaries have pledged all of its assets and provided guarantees to the lender as collateral under this revolving credit agreement. At December 31, 2002, the Company had approximately $14.4 million outstanding in borrowings under the line of credit. At December 31, 2001, the Company did not have any outstanding borrowings under the line of credit. The revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. Noncompliance with any of the covenants allows the lender to declare any outstanding borrowing amounts to be immediately due and payable. The May 2002 amendment added provisions limiting borrowings under the agreement to a margin or borrowing base, as defined, which totaled $31.5 million at December 31, 2002 and tightened certain of the financial covenants. Additional modifications were made to the line of credit agreement in November 2002 and February 2003 addressing the financial covenants. At December 31, 2002, the Company was in compliance with all covenants under the amended and modified credit agreement. The most restrictive financial covenant under the revolving credit agreement relates to a minimum tangible net worth requirement. Tangible net worth is computed as shareholders' equity less goodwill, other intangible assets and certain deferred costs. Included in the bank's definition of tangible net worth is the carrying amount of the Company's deferred tax asset. The Company's current minimum tangible net worth exceeds the required minimum tangible net worth as of December 31, 2002 by approximately $100,000. Compliance with the minimum tangible net worth covenant and other financial covenants are determined on a quarterly basis. The revolving credit agreement is classified as a noncurrent liability in the Consolidated Balance Sheet as of December 31, 2002. During the first quarter of 2003, the Company is in ongoing negotiations with the lender to modify the terms and covenants of the revolving credit agreement. The result of these negotiations could require borrowings under this revolving credit agreement to be included in current liabilities in the future or if no agreement is reached, could result in a covenant violation. Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Company's option, LIBOR plus up to 225 basis points. During the years ended December 31, 2002 and 2000 the Company incurred interest expense related to the line of credit of approximately $266,100 and $433,300, respectively, resulting in a weighted average interest rate of 3.75% and 7.49%, respectively. The Company incurred no interest expense on this line during 2001. At December 31, 2002, the Company had $17.1 million available under the revolving credit agreement. During the year ended December 31, 2002, the Company generated $3.9 million in cash flow from operating activities compared to $4.5 million in cash flow from operating activities in the same period in 2001. The decrease in cash from operating activities was primarily the result of a decrease of $8.8 million in net income offset by a decrease in inventories and an increase in accounts payable. During the year ended December 31, 2002, net cash used in investing activities was $25.9 million as compared to $13.2 million in 2001. This difference was due to a $7.6 million increase in cash payments made related to prior acquisitions (including the earn-out payment of $13.7 million made in February 2002) and $12.8 million in capital expenditures, primarily in conjunction with the Company's new facility in Hebron-Cincinnati and capitalized technology costs. All of these expenditures were funded through existing cash on hand, cash flow from operations and borrowings under the Company's credit facility. Management does not anticipate any additional costs in 2003 associated with prior acquisitions and a substantially reduced level of capital expenditure spending. During the year ended December 31, 2002, the net cash provided by financing activities was $13.6 million compared to a use of $0.2 million in the same period in 2001. The $13.8 million increase was primarily due to borrowings of $14.4 million under the credit facility less repayments of capital lease obligations, loan fees associated with amendments, modifications and waivers to the Company's credit facility and the buyback of 8 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS treasury shares with a purchase price of $448,000. The Company's stock buyback program expired in February 2003. The Company estimates that its cash and financing needs through 2003 will be met by cash flows from operations and its 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. 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 a 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, 2002, the Company had none of the following: 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 trade in commodity contracts. The following table sets forth the Company's contractual commitments by period. For additional information, see Note 7 to the consolidated financial statements (in 000's).
Payments Due by Period -------------------------------------------------------------------------------------- Total Less than 1 year 1-3 years 4-5 years After 5 years -------------- ---------------- -------------- -------------- -------------- Capital leases $ 287 $ 136 $ 151 $ -- $ -- Operating leases 30,171 6,866 12,126 10,279 900 Line of credit 14,372 -- 14,372 -- --
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Management believes the Company's exposure to market 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 7 to the consolidated financial statements, and the Company has no long-term purchase commitments. CRITICAL ACCOUNTING POLICIES 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 the iFulfillment acquisition. The Company adopted SFAS No. 142 effective January 1, 2002, which changed the accounting for goodwill and other indefinite life intangibles from an amortization method to an impairment only approach. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS value of a reporting unit exceeds its estimated fair value. Upon completion of its analysis for impairment in the second quarter of 2002 in accordance with the adoption of SFAS No. 142, no impairment was determined to exist at that time. Innotrac's goodwill carrying amount as of December 31, 2002 was $25.0 million. This asset relates to the goodwill associated with the Company's acquisition of Universal Distribution Services ("UDS") in December 2000 (including the earnout payment made to the former UDS shareholders in February 2002), and the acquisition of iFulfillment, Inc. in July 2001. In accordance with SFAS No. 142, the Company contracted with an independent third party valuation firm to perform a valuation in the first quarter of 2003. The third party valuation supported that the fair value of the reporting unit at January 1, 2003 exceeds the carrying amount of the net assets, including goodwill, and thus no impairment currently exists. Management has reviewed and concurs with the major assumptions used in the third party's valuation at January 1, 2003. The Company will perform this impairment test annually as of January 1 or sooner if circumstances indicate. Deferred Tax Asset. 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. A valuation allowance is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized. Innotrac's net deferred tax asset as of December 31, 2002 is $8.5 million. This net deferred tax asset was primarily generated by net operating loss carryforwards created primarily by two events, the special charge of $34.3 million recorded in 2000 and the net loss generated in 2002. Innotrac has a tax net operating loss carryforward of $27.6 million at December 31, 2002 that expires between 2018 and 2020. Although the Company has generated financial reporting and tax losses in 2000 and 2002, the Company was profitable in 2001. Further, 2000 and 2002 were the only years with losses since Innotrac began its operations in 1984. Management believes that its net operating loss carryforwards will be utilized before their expiration principally through future earnings. This assessment is based on management's expectations of increased revenues, lower selling, general and administrative expenses, reduced capital expenditures and no impairment losses related to goodwill in the future. Innotrac's ability to generate the expected amounts of taxable income from future operations is dependent upon general economic conditions, competitive pressures on sales and margins and other factors beyond management's control. There can be no assurance that Innotrac will meet its expectations for future taxable income in the carryforward period. However, management considered the above factors in reaching the conclusion that it is more likely than not that future taxable income will be sufficient to fully realize the net deferred tax asset at December 31, 2002. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. 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 No. 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 after July 1, 2001, that were accounted for by the purchase method. SFAS No. 142 changes the accounting for goodwill and other indefinite life intangible assets from an amortization method to an impairment only approach. The Company adopted this statement effective January 1, 2002. During the two years ended December 31, 2001 and 2000 amortization expense associated with goodwill was approximately $239,800 and $14,500, respectively. 10 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company has intangible assets that continue to be subject to amortization under the provisions of SFAS No. 142. The intangible assets consist of acquired customer contracts, which are included in other assets in the Company's consolidated balance sheets and which are amortized over a period of 1 to 5 years on a straight-line basis. At December 31, 2002 and 2001, the Company had intangible assets, consisting primarily of customer contracts, of approximately $589,000 and $958,000, net of accumulated amortization of approximately $671,000 and $302,000, respectively. Amortization expense of these intangible assets amounted to approximately $369,000, $285,000 and $16,800 during the years ended December 31, 2002, 2001 and 2000, respectively. Expected amortization expense for these intangible assets is $202,000 in 2003, $202,000 in 2004 and $185,000 in 2005. 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. The Company adopted SFAS No. 144 on January 1, 2002; the adoption did not have any effect on the Company's financial position or results of operations. The impairment loss recorded during the year ended December 31, 2002 was accounted for in accordance with the provisions of SFAS No. 144 (see Note 2). In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this Statement is required at the beginning of fiscal year 2003. The Company does not anticipate that the adoption of SFAS No. 146 will have a material impact on its consolidated financial position, results of operations or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment to FASB Statement No. 123", which is effective for fiscal years beginning after December 15, 2002. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company intends to continue to account for stock-based employee compensation under APB No. 25. Note 2 to the financial statements includes the additional disclosure requirements of SFAS No. 148 as required by entities which continue to account for stock-based employee compensation under APB No. 25. In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other." FIN 45 requires footnote disclosure of the guarantees or indemnification agreements a company issues. With certain exceptions, these agreements will also require a company to prospectively recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of the Interpretation are effective for financial statements of the interim or annual periods ending after December 15, 2002. The Company does not anticipate 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS that the adoption of the recognition and measurement provisions of FIN No. 45 will have a material impact on its consolidated financial position, results of operations or cash flows. The disclosure requirements of FIN No. 45 have been considered in the Company's 2002 consolidated financial statements. 12 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Shareholders of Innotrac Corporation: We have audited the accompanying consolidated balance sheet of Innotrac Corporation and its subsidiaries as of December 31, 2002, and the related consolidated statements of operations, shareholders' equity and cash flows for the year then ended. Our audit also included the 2002 financial statement schedule listed in the Index at Item 15 as Schedule II. These financial statements and financial statement schedule are the responsibility of the Corporation's management. Our responsibility is to express an opinion on the 2002 financial statements and financial statement schedule based on our audit. The financial statements and financial statement schedule as of December 31, 2001 and for each of the years in the two-year period then ended, before the reclassifications and inclusion of disclosure discussed in Notes 2 and 16 to the financial statements, were audited by other auditors who have ceased operations. Those auditors expressed an unqualified opinion on those financial statements and stated that such 2001 and 2000 financial statement schedules, when considered in relation to the 2001 and 2000 basic financial statements taken as a whole, presented fairly, in all material respects, the information set forth therein, in their reports dated February 8, 2002. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. 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 audit provides a reasonable basis for our opinion. In our opinion, the 2002 consolidated financial statements present fairly, in all material respects, the financial position of Innotrac Corporation and its subsidiaries as of December 31, 2002, and the results of their operations and their cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the 2002 financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects the information set forth therein. As discussed in Note 2 to the financial statements, in 2002 the Corporation changed its method of accounting for goodwill and other intangible assets to conform to Statement of Financial Accounting Standards No. 142 (SFAS No. 142). As discussed above, the financial statements of Innotrac Corporation and its subsidiaries as of December 31, 2001 and for each of the two years in the period then ended, were audited by other auditors who have ceased operations. These consolidated financial statements have been revised as follows: (a) As described in Note 2 under the heading "Revenue Recognition," the Corporation adopted EITF Issue No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred," on January 1, 2002. We audited the reclassifications described in Note 2 and 16 that were applied to conform the 2001 and 2000 financial statements to the comparative presentation required by EITF Issue No. 01-14. Our audit procedures with respect to the reclassifications of out-of-pocket freight and postage expenses included (i) comparing the amounts shown for reimbursable costs in the Corporation's consolidated statements of operations to the Corporation's underlying records obtained from management, and (ii) on a test basis, comparing the underlying records obtained from management to independent supporting documentation, and (iii) testing the mathematical accuracy of the underlying analysis; (b) As described in Note 2 under the heading "Goodwill and Other Intangible Assets," transitional disclosures required by SFAS No. 142, which was adopted by the Corporation as of January 1, 2002, have been added. Our audit procedures with respect to the disclosures in Note 2 discussed above with respect to 2001 and 2000 included (i) comparing the previously reported net income to the previously 13 issued financial statements and the adjustments to reported net income representing amortization expense (including any related tax effects) recognized in those periods to the Corporation's underlying analysis obtained from management, and (ii) testing the mathematical accuracy of the reconciliation of adjusted net income to reported net income, and the related earnings-per-share amounts; (c) As described in Note 16, disaggregations of certain financial statement amounts and note disclosures have been added. Our audit procedures with respect to the financial statement amounts and note disclosures described in Note 16 included (i) comparing the previously reported amounts to the Corporation's underlying records obtained from management, (ii) testing the mathematical accuracy of the disaggregation, and (iii) comparing added disclosure amounts to the Corporation's underlying records obtained from management. In our opinion, the reclassifications and disclosures for 2001 and 2000 described in Note 2 and Note 16 are appropriate. However, we were not engaged to audit, review, or apply any procedures to the 2001 or 2000 financial statements of the Corporation other than with respect to such reclassifications and disclosures and, accordingly, we do not express an opinion or any other form of assurance on the 2001 or 2000 financial statements taken as a whole. DELOITTE & TOUCHE LLP Atlanta, Georgia March 24, 2003 14 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS PURSUANT TO SECURITIES AND EXCHANGE COMMISSION RULE 2-02 OF REGULATION S-X, THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR ANDERSEN LLP, WHICH HAS CEASED OPERATIONS, AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP. ARTHUR ANDERSEN LLP REPORTED ON SUCH FINANCIAL STATEMENTS PRIOR TO THE RECLASSIFICATIONS AND REVISIONS DISCUSSED IN NOTE 2 AND NOTE 16 OF THE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. 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 15 INNOTRAC CORPORATION CONSOLIDATED BALANCE SHEETS (IN 000'S)
DECEMBER 31, ASSETS 2002 2001 ------ ----------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 961 $ 9,413 Accounts receivable, net 14,203 13,662 Inventories, net 24,098 27,264 Prepaid expenses and other 2,357 5,018 Deferred income taxes 552 2,736 ----------- ----------- TOTAL CURRENT ASSETS 42,171 58,093 ----------- ----------- PROPERTY AND EQUIPMENT: Rental equipment 1,372 2,003 Computer, machinery and equipment 26,315 19,715 Furniture, fixtures and leasehold improvements 4,585 4,005 ----------- ----------- 32,272 25,723 Less accumulated depreciation and amortization (13,357) (11,223) ----------- ----------- 18,915 14,500 ----------- ----------- Goodwill, net 24,988 25,213 Deferred income taxes 7,940 438 Other assets, net 1,485 1,149 ----------- ----------- TOTAL ASSETS $ 95,499 $ 99,393 =========== =========== DECEMBER 31, LIABILITIES AND SHAREHOLDERS' EQUITY 2002 2001 ------------------------------------ ----------- ----------- CURRENT LIABILITIES: Accounts payable $ 13,517 $8,581 Accrued earn-out payment -- 15,275 Accrued salaries and commissions 1,570 2,159 Accrued expenses and other 5,056 9,702 ----------- ----------- TOTAL CURRENT LIABILITIES 20,143 35,717 ----------- ----------- NONCURRENT LIABILITIES: Line of credit 14,372 -- Other noncurrent liabilities 1,125 393 ----------- ----------- TOTAL NONCURRENT LIABILITIES 15,497 393 ----------- ----------- Commitments and contingencies SHAREHOLDERS' EQUITY: Preferred stock: 10,000,000 shares authorized, $0.10 par value, no shares outstanding -- -- Common stock: 50,000,000 shares authorized, $0.10 par value, 11,674,595 (2002) and 11,364,595 (2001) shares issued, 11,417,780 (2002) and 11,313,180 (2001) shares outstanding 1,167 1,136 Additional paid-in capital 62,614 61,023 Retained earnings (deficit) (3,219) 1,201 Accumulated other comprehensive income -- 178 Treasury stock: 256,815 (2002) and 51,415 (2001) shares (703) (255) ----------- ----------- TOTAL SHAREHOLDERS' EQUITY 59,859 63,283 ----------- ----------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 95,499 $ 99,393 =========== ===========
The accompanying notes are an integral part of these consolidated balance sheets. 16 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN 000'S, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ------------------------------------------- 2002 2001 2000 ----------- ----------- ----------- Revenues, net $ 68,917 $ 94,793 $ 174,085 Reimbursable costs 13,503 27,066 28,890 ----------- ----------- ----------- TOTAL REVENUES 82,420 121,859 202,975 ----------- ----------- ----------- Cost of revenues 32,941 41,087 133,082 Reimbursable costs 13,503 27,066 28,890 Special charges (credits), net (293) -- 16,462 ----------- ----------- ----------- TOTAL COST OF REVENUES 46,151 68,153 178,434 ----------- ----------- ----------- GROSS PROFIT 36,269 53,706 24,541 ----------- ----------- ----------- OPERATING EXPENSES: Selling, general and administrative 37,332 43,329 38,209 Special charges, net 404 -- 17,801 Depreciation and amortization 5,336 4,864 4,168 ----------- ----------- ----------- Total operating expenses 43,072 48,193 60,178 ----------- ----------- ----------- OPERATING INCOME (LOSS) (6,803) 5,513 (35,637) ----------- ----------- ----------- OTHER (INCOME) EXPENSE: Interest (income) expense, net 318 (532) 80 Other (124) (20) 141 ----------- ----------- ----------- TOTAL OTHER (INCOME) EXPENSE 194 (552) 221 ----------- ----------- ----------- INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST (6,997) 6,065 (35,858) INCOME TAX (PROVISION) BENEFIT 2,578 (2,573) 14,084 ----------- ----------- ----------- NET INCOME (LOSS) BEFORE MINORITY INTEREST (4,419) 3,492 (21,774) MINORITY INTEREST, NET OF INCOME TAXES -- (893) (199) ----------- ----------- ----------- NET INCOME (LOSS) $ (4,419) $ 4,385 $ (21,575) =========== =========== =========== EARNINGS PER SHARE: Basic $ (0.38) $ 0.39 $ (1.92) =========== =========== =========== Diluted $ (0.38) $ 0.38 $ (1.92) =========== =========== =========== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 11,516 11,318 11,212 =========== =========== =========== Diluted 11,516 11,690 11,212 =========== =========== ===========
The accompanying notes are an integral part of these consolidated statements. 17 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN 000'S)
Accumulated Common Stock Retained Other ------------------ Paid-in Earnings Comprehensive Treasury Shares Amount Capital (Deficit) Income Stock Total ------ -------- -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 1999 11,215 $ 1,121 $ 59,701 $ 18,391 $ -- $ -- $ 79,213 Issuance of common stock 150 15 1,238 -- -- -- 1,253 Purchase of treasury stock -- -- -- -- -- (206) (206) Restricted stock grant, net -- -- (50) -- -- -- (50) Net loss -- -- -- (21,575) -- -- (21,575) ------ -------- -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 2000 11,365 $ 1,136 $ 60,889 $ (3,184) $ -- $ (206) $ 58,635 Restricted stock grant, net -- -- 134 -- -- -- 134 Purchase of treasury stock -- -- -- -- -- (49) (49) Comprehensive income: Net income -- -- -- 4,385 -- -- 4,385 Unrealized gain on available-for- -- -- -- -- 178 -- 178 sale securities ------ -------- -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 2001 11,365 $ 1,136 $ 61,023 $ 1,201 $ 178 $ (255) $ 63,283 Issuance of common stock 310 31 1,519 -- -- -- 1,550 Restricted stock grant, net -- -- 72 -- -- -- 72 Purchase of treasury stock -- -- -- -- -- (448) (448) Comprehensive income: Net loss -- -- -- (4,419) -- -- (4,419) Reclassification adjustment for realized gain included in consolidated statement of operations -- -- -- -- (178) -- (178) ------ -------- -------- -------- -------- -------- -------- BALANCE AT DECEMBER 31, 2002 11,675 $ 1,167 $ 62,614 $ (3,219) $ -- $ (703) $ 59,859 ====== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated statements. 18 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000'S)
YEAR ENDED DECEMBER 31, ----------------------------------------- 2002 2001 2000 ----------- ---------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income (loss) $ (4,419) $ 4,385 $ (21,575) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 5,336 4,864 4,168 Impairment and loss on fixed assets 3,638 3,385 6,430 Deferred income taxes (5,317) 3,389 (5,627) Minority interest in subsidiary -- (893) (199) Amortization of deferred compensation 72 134 38 Changes in working capital, net of effect of businesses acquired: Decrease (increase) in accounts receivable (541) 17,659 21,908 Decrease (increase) in inventories 3,165 (12,208) 24,447 Decrease (increase) in prepaid expenses and other assets 1,248 (180) (2,554) (Decrease) increase in accounts payable 4,936 (13,562) 9,390 (Decrease) increase in accrued expenses and other (4,248) (2,491) 2,538 ---------- ---------- ---------- Net cash provided by operating activities 3,870 4,482 38,964 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (12,830) (6,914) (13,644) Acquisition of businesses, net of cash acquired (13,502) (5,859) (1,678) Sale (purchase) of available-to-sale securities 436 (436) -- ---------- ---------- ---------- Net cash (used in) investing activities (25,896) (13,209) (15,322) ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES: Net (repayments) borrowings under line of credit 14,372 -- (7,008) Repayment of capital lease and other obligations (250) (145) 12 Proceeds from minority interest in subsidiary -- -- 1,000 Purchase of treasury stock (448) (49) (206) Loan fees paid (100) -- -- ---------- ---------- ---------- Net cash (used in) provided by financing activities 13,574 (194) (6,202) ---------- ---------- ---------- Net (decrease) increase in cash and cash equivalents (8,452) (8,921) 17,440 Cash and cash equivalents, beginning of period 9,413 18,334 894 ---------- ---------- ---------- Cash and cash equivalents, end of period $ 961 $ 9,413 $ 18,334 ========== ========== ========== Supplemental cash flow disclosures: Cash paid for interest $ 355 $ 110 $ 429 =========== ========== =========== Cash paid for income taxes, net of refunds received $ (18) $ (80) $ (5,907) =========== ========== ===========
The accompanying notes are an integral part of these consolidated statements. 19 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Innotrac Corporation ("Innotrac" or the "Company") and its wholly-owned subsidiary, iFulfillment, Inc., a Georgia corporation, provide order processing, order fulfillment and call center 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, Bolingbrook, Illinois and Hebron, Kentucky. The Company's facilities represent over 1.5 million square feet of warehouse space and 570 dedicated call center seats. 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 accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances have been eliminated in consolidation. 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 order processing and call center support services, including DSL modems and wireless pagers, accounted for approximately 46%, 60% and 90% of total revenues for the years ended December 31, 2002, 2001 and 2000, respectively. Revenues generated from the fulfillment of DSL equipment accounted for 19%, 18%, and 21% of the aforementioned totals. The following table sets forth the percentage of total revenues derived from each of the Company's largest clients for the years ended December 31, 2002, 2001 and 2000. Except for the major clients noted in the following table, no other single customer provided more than 10% of consolidated revenues during these years.
2002 2001 2000 ----- ----- ----- BELLSOUTH - TELECOM EQUIPMENT 18.7% 12.2% 16.3% - DSL EQUIPMENT 9.7 10.8 8.9 TACTICA 16.8 9.9 0.2 THANE INTERNATIONAL 8.7 15.3 1.0 SBC COMMUNICATIONS -- 12.6 46.3
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. 20 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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, 2002, the Company had no available-for-sale securities. At December 31, 2001, the Company had available-for-sale marketable equity securities totaling $613,202 which were included in other current assets in the accompanying consolidated balance sheets. Fair Value of Financial Instruments. The carrying value of the Company's revolving credit facility approximates fair value given that interest rates under the facility are based on prevailing market rates. 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 at December 31, 2002 and 2001 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. 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 to 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 Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" which includes the iFulfillment acquisition. The Company adopted SFAS No. 142 effective January 1, 2002, which changed the accounting for goodwill and other indefinite life intangibles from an amortization method to an impairment only approach. The Company intends to test goodwill annually for impairment at January 1 or sooner if circumstances indicate. In accordance with the adoption of SFAS No. 142, no amortization of goodwill was recorded in 2002. During the two years ended December 31, 2001 and 2000, amortization expense associated with goodwill was approximately $239,800 and $14,500, respectively. The Company's proforma consolidated net income/(loss) and earnings per share for the years ended December 31, 2001 and 2000, excluding goodwill amortization, would have been net income of $4.5 million ($0.40 per share basic and $0.39 diluted) and a net loss of $21.6 million ($1.92 per share basic and diluted), respectively. The Company has intangible assets that continue to be subject to amortization under the provisions of SFAS No. 142. The intangible assets consist of acquired customer contracts, which are included in other assets in the Company's consolidated balance sheets and which are amortized over a period of 1 to 5 years on a straight-line basis. At December 31, 2002 and 2001, the Company had intangible assets, consisting primarily of customer contracts, of approximately $589,000 and $958,000, net of accumulated amortization of approximately $671,000 and $302,000, respectively. Amortization expense of these intangible assets 21 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS amounted to approximately $369,000, $258,000 and $16,800 during the years ended December 31, 2002, 2001 and 2000, respectively. Expected amortization expense for these intangible assets is $202,000 in 2003, $202,000 in 2004 and $185,000 in 2005. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Upon completion of its analysis for impairment in the second quarter of 2002 and again in the first quarter of 2003 in accordance with SFAS No. 142, no impairment was determined to exist at those times. Innotrac's goodwill carrying amount as of December 31, 2002 was $25.0 million. This asset relates to the goodwill associated with the Company's acquisition of Universal Distribution Services ("UDS") in December 2000, including the earnout payment made to the former UDS shareholders in February 2002, and the acquisition of iFulfillment, Inc. in July 2001. Long-Lived Assets. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 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 Opinion No. 51, "Consolidated Financial Statements." SFAS No. 144 retains many of the requirements of SFAS No. 121 and the basic provisions of APB Opinion No. 30; however, it establishes a single accounting model for long-lived assets to be disposed of by sale. The Company adopted SFAS No. 144 on January 1, 2002. The impairment loss recorded during the year ended December 31, 2002 was accounted for in accordance with the provisions of SFAS No. 144 (see Note 4). Deferred Tax Asset. 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. A valuation allowance is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized (see Note 8). Revenue Recognition. Innotrac derives its revenue primarily from two sources: (1) fulfillment operations and (2) the delivery of business services. Innotrac's fulfillment services operations record revenue at the conclusion of the material selection, packaging and shipping process. Innotrac's call center services business recognizes revenue according to written pricing agreements based on number of calls, minutes or hourly rate basis. All other revenues are recognized as services are rendered. As required by the consensus reached in Emerging Issue Task Force ("EITF") Issue No. 99-19, revenues have been recorded net of the cost of the equipment for all fee-for-service clients. During 2001, the Emerging Issues Task Force ("EITF") issued EITF No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of-Pocket Expenses Incurred," which was adopted by the Company as of January 1, 2002. EITF No 01-14 states that reimbursements received from customers for out-of-pocket expenses incurred on their behalf should be characterized as revenue in the Company's statement of operations. Prior to the adoption of this standard, the Company netted reimbursements from customers, primarily for freight and postage fees, against the related expenses within revenues. With the adoption of this standard, the Company has reclassified reimbursements from customers for these expenses as cost of revenues, and has conformed this presentation for all periods presented. The adoption of EITF 01-14 increased the reimbursable costs line item within total revenues and total cost of revenues from amounts previously reported in 2001 and 2000 by $27.1 million and $28.9 million, respectively. 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"). 22 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Since the exercise price for all options granted under those plans was equal to the market value of the underlying common stock on the date of grant, no compensation cost is recognized in the accompanying consolidated statements of operations. Had compensation cost for stock options been determined under a fair value based method, in accordance with Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," as amended by Statement of Financial Accounting Standards No. 148, 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, ---------------------------------------- 2002 2001 2000 ----------- ---------- ----------- Net income (loss) $ (4,419) $ 4,385 $ (21,575) Pro forma net income (loss) $ (5,074) $ 3,350 $ (22,347) Diluted net income (loss) per share $ (0.38) $ 0.38 $ (1.92) Pro forma net income (loss) per share $ (0.44) $ 0.29 $ (1.99)
Under the fair value based method, compensation cost, net of tax is $655,000, $1,035,000 and $772,000 for the years ended December 31, 2002, 2001 and 2000, respectively. 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:
2002 2001 2000 ---- ---- ---- Risk-free interest rate 4.05% 5.45% 5.44% Expected dividend yield 0% 0% 0% Expected lives 3.1 Years 2.7 Years 2.7 Years Expected volatility 86.6% 84.3% 90.4%
Minority Interests. Minority interest arises from Mail Boxes Etc ("MBE") 40% (14% prior to December 29, 2000) ownership of Return.com Online, LLC ("Return.com"), a subsidiary of the Company. In March 2001, United Parcel Services, Inc. ("UPS") announced a definitive agreement to purchase MBE. As a result of this agreement, the Company reacquired MBE's 40% ownership interest in Return.com in April 2001. A note receivable of $3.4 million due from MBE, at that time, was forgiven by the Company in exchange for MBE's ownership interest in Return.com, resulting in 100% ownership by the Company. 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 2001 and 2000 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. 23 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Recent Accounting Pronouncements. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." This Statement requires recording costs associated with exit or disposal activities at their fair values when a liability has been incurred. Under previous guidance, certain exit costs were accrued upon management's commitment to an exit plan, which is generally before an actual liability has been incurred. Adoption of this Statement is required at the beginning of fiscal year 2003. The Company does not anticipate that the adoption of SFAS No. 146 will have a material impact on its consolidated financial position, results of operations or cash flows. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and Disclosure-an amendment to FASB Statement No. 123," which is effective for fiscal years beginning after December 15, 2002. SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. SFAS No. 148 also amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. The Company accounts for stock-based compensation under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." The Company intends to continue to account for stock-based employee compensation under APB No. 25. Note 2 (above) includes the additional disclosure requirements of SFAS No. 148 as required by entities which continue to account for stock-based employee compensation under APB No. 25. In November 2002, the FASB issued Interpretation ("FIN") No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Other." FIN 45 requires footnote disclosure of the guarantees or indemnification agreements a company issues. With certain exceptions, these agreements will also require a company to prospectively recognize an initial liability for the fair value, or market value, of the obligations it assumes under the guarantee. The initial recognition and initial measurement provisions of this Interpretation are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The disclosure requirements of the Interpretation are effective for financial statements of the interim or annual periods ending after December 15, 2002. The Company does not anticipate that the adoption of the recognition and measurement provisions of FIN No. 45 will have a material impact on its consolidated financial position, results of operations, or cash flows. The disclosure requirements of FIN No. 45 have been considered in the Company's 2002 consolidated financial statements. 3. ACQUISITIONS In July 2001, the Company acquired the assets and assumed specified liabilities of iFulfillment, Inc. ("iFulfillment") for approximately $5.8 million. iFulfillment specializes in fully integrated, automated order fulfillment services for multi-channel retailers and catalogers. 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 No. 141 and SFAS No. 142. In 2002, net purchase price adjustments of $225,000 were recorded which decreased the amount of recorded goodwill for the iFulfillment acquisition. The following table summarizes the assets purchased and liabilities assumed as well as the allocation of the purchase price to various intangibles and goodwill (in 000's): Current assets $ 207 Current liabilities (1,869) Property 1,417 Other liabilities (632) Customer contract 250 Goodwill 6,440 --------- Purchase price $ 5,813 =========
24 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In December 2000, the Company acquired UDS for approximately $4.3 million in total consideration which was accounted for under the purchase method of accounting. Operating results for UDS have been included in the Company's results since December 2000. 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 merger agreement. The earn-out accrual was recorded as additional goodwill. 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. No additional earn-out amounts were due or payable at December 31, 2002. As a result, goodwill related to UDS at December 31, 2002 amounted to $18.5 million, net of accumulated amortization of $0.3 million. Proforma results have not been presented as these acquisitions were not considered material. 4. SPECIAL CHARGES AND SPECIAL CREDITS 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. At December 31, 2002 and 2001, the Company had approximately $277,000 and $4.6 million, respectively, in accruals related to the special charges recorded during the year ended December 31, 2000. The remaining accruals at December 31, 2002 relate to exiting the front-end e-commerce and web hosting business. Cash payments relating to these accruals for the year ended December 31, 2002 were approximately $716,000. The Company recognized approximately $3.0 million during the year ended December 31, 2002, related to gains realized on sales of inventory items which were written off as special charges in previous periods, cash collected for accounts receivable that were written off as special charges in previous periods, redeployment of leased computer hardware for which the leases were fully accrued for as special charges in previous periods, and client contract amendments which resulted in reduced liabilities. These amounts were recorded as a reduction in the special charge line item in the consolidated statements of operations. The remaining accrual, which is associated with one specific client, will be fully utilized by the end of 2003. During the third quarter of 2002, the Company recognized an additional $3.1 million in special charges. Approximately $2.4 million of these charges were related to capitalized hardware and software costs for systems purchased specifically for a potential new client which were subsequently not utilized as originally planned. The loss of the potential customer indicated that the carrying value of the asset group was potentially not recoverable, and therefore, an impairment test under the provisions of SFAS No. 144 was performed. As fair market value of the asset group was not readily determinable, a discounted, probability weighted cash flow model was utilized as a basis to determine fair value. As a result of the cash flow analysis, a $2.4 million impairment charge was recorded. Of the remaining charges, approximately $500,000 related to the write-down to net realizable value of specified fixed assets obtained as part of the December 2000 acquisition of UDS which were being utilized for one specific customer who ceased conducting business with UDS. The balance of approximately $200,000 was related to severance costs for positions which were eliminated. 25 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. ACCOUNTS RECEIVABLE Accounts receivable were composed of the following at December 31, 2002 and 2001 (in 000's):
2002 2001 ---------- ---------- Billed receivables $ 13,606 $ 16,846 Unbilled receivables 1,556 79 ---------- ---------- 15,162 16,925 Less: Allowance for doubtful accounts (959) (3,263) ---------- ---------- $ 14,203 $ 13,662 ========== ==========
6. FINANCING OBLIGATIONS The Company has a revolving credit agreement with a bank for borrowings up to $40 million. In May 2002, the Company extended its credit facility until June 2005. The Company and all of its subsidiaries have pledged all of its assets and provided guarantees to the lender as collateral under this revolving credit agreement. At December 2002, the Company had approximately $14.4 million outstanding in borrowings under the line of credit. At December 31, 2001, the Company did not have any outstanding borrowings under the line of credit. The revolving line of credit agreement contains various restrictive financial and change of ownership control covenants. The May 2002 amendment added provisions limiting borrowings under the agreement to a defined margin or borrowing base (which was $31.5 million at December 31, 2002) and tightened several of the financial covenants. At December 31, 2002 the Company had $17.1 million available under the revolving credit agreement. Additional modifications were made to the line of credit agreement in November 2002 and February 2003 addressing the financial covenants. At December 31, 2002, the Company was in compliance with all covenants under the amended and modified credit agreement. The more restrictive financial covenants require the Company to maintain tangible net worth, as defined by the revolving credit agreement, of at least $34 million and a debt to tangible net worth ratio of not more than 1.5 to 1. Tangible net worth is defined as shareholders' equity less goodwill, other intangible assets and certain deferred costs. Included in tangible net worth calculation is the carrying amount of the Company's deferred tax asset. Compliance with the minimum tangible net worth covenant and other financial covenants are determined on a quarterly basis. The Company's tangible net worth as defined in the revolving credit agreement exceeds the required minimum tangible net worth as of December 31, 2002 by approximately $100,000. The revolving credit agreement is classified as a noncurrent liability in the Consolidated Balance Sheet as of December 31, 2002. During the first quarter of 2003, the Company is in ongoing negotiations with the lender to modify the terms of the revolving credit agreement. The result of these negotiations could require borrowings under this revolving credit agreement to be included in current liabilities in the future. Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Company's option, LIBOR plus up to 225 basis points. During the years ended December 31, 2002 and 2000 the Company incurred interest expense related to the line of credit of approximately $266,100 and $433,300, respectively, resulting in a weighted average interest rate of 3.75%, and 7.49%, respectively. No borrowings or interest was incurred in 2001. The Company also incurred unused revolving credit facility fees of approximately $123,000 during the year ended December 31, 2002. 26 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. 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, 2002 are as follows (in 000's):
CAPITAL OPERATING LEASES LEASES -------- -------- 2003 $ 159 $6,866 2004 95 6,619 2005 33 5,507 2006 -- 5,547 2007 -- 4,732 Thereafter -- 900 -------- -------- Total minimum lease payments $ 287 $ 30,171 ======== Amount related to interest (27) -------- Capital lease obligations 260 Current portion (144) -------- Long-term portion $ 116 ========
Rent expense under all operating leases totaled approximately $6.1 million, $4.2 million and $3.1 million during the years ended December 31, 2002, 2001 and 2000, 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. Employment Commitment. In June 1999, in conjunction with the opening of a new call center facility, the Company entered into an Employment Commitment Agreement with the City of Pueblo, Colorado whereby the Company received cash incentives of $968,000. These funds were accounted for as a reduction in the basis of the assets acquired. In return for this consideration, the Company is obligated to employ a minimum number of full-time employees at its Pueblo facility, measured on a quarterly basis. This obligation, which became effective June 2002, will continue through June 2009. During 2002, the Company had substantially met the minimum employee requirements of 359 full time employees, as measured on a quarterly basis. In the event that the number of full time employees fails to meet the minimum requirement, the Company will incur a quarterly penalty of $96.30 per employee for each employee less than the minimum required amount. 8. INCOME TAXES Details of the income tax benefit (provision) for the years ended December 31, 2002, 2001 and 2000 are as follows (in 000's):
2002 2001 2000 --------- --------- --------- Current $ -- $ 815 $ 8,457 Deferred 2,578 (3,388) 5,627 --------- --------- --------- $ 2,578 $ (2,573) $ 14,084 ========= ========= =========
27 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 Company's deferred tax assets and liabilities as of December 31, 2002 and 2001 are as follows (in 000's):
2002 2001 ---------- ---------- Current deferred tax assets: Allowance for doubtful accounts $ 364 $ 1,466 Reserve for returns and equipment losses 4 413 Other reserves 184 857 ---------- ---------- 552 2,736 ---------- ---------- Noncurrent deferred tax assets (liabilities): Net operating loss carryforwards 10,409 1,910 Depreciation (2,516) (1,454) Other 47 (18) ---------- ---------- 7,940 438 ---------- ---------- Net deferred tax asset $ 8,492 $ 3,174 ========== ==========
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. A valuation allowance is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized. Innotrac's net deferred tax asset as of December 31, 2002 is approximately $8.5 million. This net deferred tax asset was primarily generated by net operating loss carryforwards created primarily by two events, the special charge of $34.3 million recorded in 2000 and the net loss generated in 2002. Innotrac has a tax net operating loss carryforward of $27.6 million at December 31, 2002 that expires between 2018 and 2020. Although the Company has generated financial reporting and tax losses in 2000 and 2002, the Company was profitable in 2001. Further, 2000 and 2002 were the only years with losses since Innotrac began its operations in 1984. Management believes that its net operating loss carryforwards will be utilized before their expiration through future earnings. This assessment is based on management's expectations of increased revenues, lower selling, general and administrative expenses, reduced capital expenditures and no impairment losses related to goodwill in the future. Innotrac's ability to generate the expected amounts of taxable income from future operations is dependent upon general economic conditions, competitive pressures on sales and margins and other factors beyond management's control. There can be no assurance that Innotrac will meet its expectations for future taxable income in the carryforward period. However, management considered the above factors in reaching the conclusion that it is more likely than not that future taxable income will be sufficient to fully realize the net deferred tax asset at December 31, 2002. The amount of the net deferred tax asset considered realizable, however, could be reduced in the near term if estimates of future taxable income during the carryforward period are reduced. A reconciliation of the income tax (benefit) provision computed at statutory rates to the income tax provision (benefit) for the years ended December 31, 2002, 2001 and 2000 is as follows:
2002 2001 2000 ------ ------ ------ Federal statutory rate (34.0)% 34.0% (35.0)% State income taxes, net of federal benefit (4.0) 4.0 (4.0) Items not deductible for tax purposes 1.1 4.3 (0.7) Other .1 0.1 0.4 ------ ------ ------ (36.8)% 42.4% (39.3)% ====== ====== ======
28 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9 EARNINGS PER SHARE The following table shows the shares (in 000's) used in computing diluted earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards No. 128:
2002 2001 2000 ------ ------ ------ Diluted earnings per share: Weighted average shares outstanding 11,516 11,318 11,212 Employee and director stock options -- 372 -- ------ ------ ------ Weighted average shares assuming dilution 11,516 11,690 11,212 ====== ====== ======
Options and warrants outstanding to purchase shares of the Company's common stock aggregating 2.2 million, 1.0 million and 2.0 million were not included in the computation of diluted EPS for the years ended December 31, 2002, 2001 and 2000, respectively, because their effect was anti-dilutive. 10. OTHER COMPREHENSIVE INCOME SFAS No. 130, "Reporting Comprehensive Income," established standards for reporting and display of comprehensive income and its components in financial statements. For the years ended December 31, 2002, 2001 and 2000, the components of the Company's comprehensive income are as follows (in 000's):
Year Ended December 31, ---------------------------------- 2002 2001 2000 -------- -------- -------- Other comprehensive income: Net income (loss) $ (4,419) $ 4,385 $(21,575) Unrealized gain -- 177 -- Reclassification adjustment for realized gains included in consolidated statement of operations (76) -- -- -------- -------- -------- Comprehensive income (loss) $ (4,495) $ 4,562 $(21,575) ======== ======== ========
11. SHAREHOLDERS' EQUITY 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. The stock repurchase program was extended for an additional twelve months by the Board of Directors in February 2002. During the years ended December 31, 2002, 2001 and 2000, the Company repurchased approximately 205,400, 6,400 and 45,000 shares at a total cost of $448,000, $49,000 and $206,000, respectively. 12. EMPLOYEE RETIREMENT PLANS 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's policy is 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. However, this match was suspended from January 1, 2002 through June 30, 2002, reinstituted from July 1, 2002 through December 31, 2002 and has been temporarily suspended thereafter. Total matching contributions made to the plan and charged to expense by Innotrac for the years ended December 31, 2002 and 29 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2001 was approximately $49,156 and $108,000, respectively. The Company's matching for the year ended December 31, 2000 was not material. The Company has an executive deferred compensation plan for certain employees, as designated by the Company's Board of Directors. Participants may elect to defer up to 30% of compensation. Innotrac's policy is to provide matching employer contributions ranging from 20% to 100% of employee contributions based on years of service. However, this match was suspended for 2002. Matching contributions were $79,412 and $79,360 for the years ended December 31, 2001 and 2000, respectively. The Company invests these contributions in employee-directed marketable equity securities which are recorded as trading securities at fair-market value on the accompanying consolidated balance sheet (in other assets) and aggregated $563,506 at December 31, 2002. The monies held by the plan are subject to general creditors of the Company in the event of a Company bankruptcy filing. 13. 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, 2002 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, 2002 Contractual Life Exercise Price December 31, 2002 Exercise Price --------------- ----------------- ---------------- ---------------- ----------------- -------------- $1.77 - $3.54 854 8.6 $ 3.28 193 $ 3.13 $3.54 - $5.31 276 7.2 4.72 132 4.87 $5.31 - $7.07 287 7.9 6.52 70 6.10 $7.07 - $8.84 306 7.5 7.35 100 7.13 $8.84 - $10.61 235 4.8 9.10 235 9.10 $10.61 - $12.38 20 5.3 12.00 20 12.00 $12.38 - $14.15 16 2.3 12.94 15 12.97 $15.92 - $17.68 30 6.0 16.56 25 16.67 --------------------------------------------------------------------------------------------------- 2,023 7.6 $ 5.59 790 $ 6.81 ===================================================================================================
30 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS A summary of activity in the Company's two stock option plans is as follows (shares in 000's):
Weighted Average Shares Price ------ ------ Outstanding at December 31, 1999 528 $10.98 Granted 1,725 5.00 Forfeited (454) 7.17 ------ ------ Outstanding at December 31, 2000 1,799 6.19 Granted 454 7.35 Forfeited (490) 7.07 ------ ------ Outstanding at December 31, 2001 1,763 6.29 Granted 559 3.41 Forfeited (299) 5.15 ------ ------ Outstanding at December 31, 2002 2,023 $ 5.59 ====== ====== Options exercisable at December 31, 2002 790 $ 6.81 ====== ======
14. RELATED PARTY TRANSACTIONS The Company leases, on an as-needed basis, a single engine aircraft from a company wholly-owned by its Chairman and Chief Executive Officer, pursuant to an agreement that provides for annual rent of $60,000. Such rent was paid in 2002, 2001 and 2000. Innotrac is responsible for maintenance, insurance, taxes, fuel and other expenses associated with the business use of the aircraft. The Company paid approximately $63,000, $51,200 and $79,600 during 2002, 2001 and 2000, respectively, in fees to an accounting firm for tax and consulting services. One of the directors of the Company is the Managing Partner of that firm. The Company paid approximately $744,000, $1,083,300 and $881,000 during 2002, 2001 and 2000, respectively, in fees to a print broker for services related to the printing of marketing, client, inter-company and other materials. The broker is the brother of the Company's Chairman and Chief Executive Officer. 15. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(000's, except per share data) First Second Third Fourth -------- -------- -------- -------- 2002 Quarters (restated) (restated) Revenues, net $ 21,048 $ 19,351 $ 20,064 $ 21,957 Operating income (loss) 1,584 588 (8,462) (513) Net income (loss) 966 313 (5,308) (390) Net income (loss) per share-basic 0.08 0.03 (0.46) (0.03) Net income (loss) per share-diluted $ 0.08 $ 0.03 $ (0.46) $ (0.03) 2001 Quarters: Revenues, net $ 32,870 $ 33,704 $ 28,582 $ 26,703 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
31 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. PRIOR YEAR RECLASSIFICATIONS In order to maintain consistency and comparability between periods presented, certain revisions have been made to the accompanying Consolidated Financial Statements and related notes as of December 31, 2001 and for each of the two years in the period ended December 31, 2001. Such reclassifications of previously reported financial statement amounts and additions to certain disclosures have been made to conform to the 2002 financial statement presentation as follows: - Consolidated Balance Sheets: - Accrued payroll and commissions which were previously classified in accrued expenses and other have been separately disclosed. - Common stock shares issued and outstanding at December 31, 2001 have been disclosed. - Notes to Consolidated Financial Statements: - Note 2, Significant Accounting Policies: Available-for-sale marketable equity securities at December 31, 2001 have been disclosed. - Note 9, Earnings per Share: Options outstanding which were anti-dilutive and not included in the computation of EPS for 2001 and 2000 have been disclosed. - Note 12, Employee Retirement Plans: Matching contributions for the executive deferred compensation plan for 2001 and 2000 have been disclosed. - Note 14, Related Party Transactions: Payments for an aircraft lease, for accounting fees and for print services for 2001 and 2000 have been disclosed. 32 INNOTRAC CORPORATION SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS COMMON STOCK Innotrac Corporation Innotrac's common stock trades on The Nasdaq Stock 6655 Sugarloaf Parkway Market under the symbol INOC. As of March 18, 2003, the Company had Duluth, Georgia 30097 approximately 2,072 shareholders based on the number of holders of record 678-584-4000 and an estimate of the number of individual www.innotrac.com participants represented by securities position listings. TRANSFER AGENT SunTrust Bank The following table sets forth the reported high P.O. Box 4625 and low sales prices for Innotrac's common stock as Atlanta, Georgia 30302 reported by Nasdaq: ANNUAL MEETING 2002 HIGH LOW ---- ------ ------- Monday, May 19, 2003 First Quarter $ 7.22 $ 3.40 9 a.m. Eastern Daylight Time Second Quarter 6.35 4.12 Gwinnett Civic and Cultural Center Third Quarter 5.72 2.20 6400 Sugarloaf Parkway Fourth Quarter 3.14 1.80 Duluth, Georgia 30097 2001 HIGH LOW FORM 10-K/INVESTOR CONTACT ---- ----- ------ First Quarter $ 6.25 $ 3.25 A copy of the Innotrac Annual Report on Form Second Quarter 7.51 6.13 10-K for 2002 filed with the Securities and Exchange Third Quarter 8.92 5.55 Commission is available from the Company at no Fourth Quarter 8.00 5.00 charge. These requests and other investor contacts should be directed to the Chief Financial Officer at The Company has never paid a dividend on its common the Company's corporate office. stock. The Company presently intends to retain its earnings to support the growth of its business and does not expect to pay any dividends in the foreseeable future.
33 INNOTRAC CORPORATION DIRECTORS AND OFFICERS
BOARD OF DIRECTORS OFFICERS Scott D. Dorfman(1)(3) Scott D. Dorfman Chairman, President and Chief Executive Officer Chairman, President and Chief Executive Officer David L. Gamsey David L. Gamsey Senior Vice President, Chief Financial Officer and Senior Vice President, Chief Financial Officer and Secretary Secretary David L. Ellin(1) David L. Ellin Senior Vice President - Sales Senior Vice President - Sales Larry C. Hanger Larry C. Hanger Senior Vice President - Client Services Senior Vice President - Client Services Bruce V. Benator(1)(2) Robert J. Toner, Jr. Managing Partner Vice President - Logistics Williams Benator & Libby, LLP Certified Public Accountants Martin J. Blank(2)(3) Independent Legal Consultant Joel E. Marks(2)(3) Independent Consultant (1) Member of Executive Committee (2) Member of Audit Committee (3) Member of Compensation Committee
34 EX-21.1 10 g81419exv21w1.txt EX-21.1 LIST OF SUBSIDIARIES EXHIBIT 21.1 List of Subsidiaries - - Return.com Online, LLC - - iFulfillment, Inc. EX-23.1 11 g81419exv23w1.txt EX-23.1 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.1 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements Nos. 333-66045 and 333-54970 of Innotrac Corporation on Form S-8 of our report dated March 24, 2003 relating to the consolidated financial statements of Innotrac Corporation as of and for the year ended December 31, 2002 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's change in its method of accounting for goodwill and other intangible assets to conform with Statement of Financial Accounting Standards No. 142 and includes an explanatory paragraph relating to the application of procedures relating to certain reclassifications and disclosures and revisions of financial statement amounts related to the 2001 and 2000 financial statements that were audited by other auditors who have ceased operations and for which we have expressed no opinion or other form of assurance other than with respect to such reclassifications and disclosures appearing in this Annual Report on Form 10-K of Innotrac Corporation for the year ended December 31, 2002. /s/ Deloitte & Touche LLP March 31, 2003 Atlanta, Georgia EX-23.2 12 g81419exv23w2.txt EX-23.2 NOTICE RE: CONSENT OF ARTHUR ANDERSEN LLP EXHIBIT 23.2 NOTICE REGARDING CONSENT OF ARTHUR ANDERSEN LLP Section ll(a) of the Securities Act of 1933, as amended (the "Securities Act"), provides that if any part of a registration statement at the time such part becomes effective contains an untrue statement of a material fact or an omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading, any person acquiring a security pursuant to such registration statement (unless it is proved that at the time of such acquisition such person knew of such untruth or omission) may sue, among others, every accountant who has consented to be named as having prepared or certified any part of the registration statement, or as having prepared or certified any report or valuation which is used in connection with the registration statement, with respect to the statement in such registration statement, report or valuation which purports to have been prepared or certified by the accountant. This Annual Report on Form 10-K is incorporated by reference into Registration Statement File Nos. 333-54970 and 333-66045 on Form S-8 (collectively, the "Registration Statements") of the Company and, for purposes of determining any liability under the Securities Act, is deemed to be a new registration statement for each Registration Statement into which it is incorporated by reference. On April 22, 2002 the Board of Directors of the Company, upon the recommendation of its Audit Committee, dismissed its independent accountants, Arthur Andersen LLP ("Andersen"). See the Company's Current Report on Form 8-K filed April 24, 2002 for more information. After reasonable efforts, the Company has been unable to obtain Andersen's written consent to the incorporation by reference into the Registration Statements of its audit reports with respect to the Company's financial statements as of and for the fiscal years ended December 31,2001 and 2000. Under these circumstances, Rule 437a under the Securities Act permits the Company to file this Form 10-K without a written consent from Andersen. However, as a result, with respect to transactions in the Company's securities pursuant to the Registration Statements that occur subsequent to the date this Annual Report on Form 10-K is filed with the Securities and Exchange Commission, Andersen will not have any liability under Section 1l(a) of the Securities Act for any untrue statements of a material fact contained in the financial statements audited by Andersen or any omissions of a material fact required to be stated therein. Accordingly, you would be unable to assert a claim against Andersen under Section 11(a) of the Securities Act because it has not consented to the incorporation by reference of its previously issued reports into the Registration Statements. To the extent provided in Section 1l(b)(3)(C) of the Securities Act, however, other persons who are liable under Section 11 (a) of the Securities Act, including the Company's officers and directors, may still rely on Andersen's original audit reports as being made by an expert for purposes of establishing a due diligence defense under Section 1l(b) of the Securities Act. EX-24.1 13 g81419exv24w1.txt EX-24.1 POWER OF ATTORNEY EXHIBIT 24.1 POWER OF ATTORNEY Know all men by these presents, that each person whose signature appears below constitutes and appoints Scott D. Dorfman and David L. Gamsey and either of them, as attorneys-in-fact, with power of substitution, for him in any and all capacities, to sign any amendments to this Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact may do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 31st day of March, 2003.
Signature Title - --------- ----- /s/ Scott D. Dorfman Chairman of the Board, President and Chief - ---------------------------- Executive Officer (Principal Executive Officer) Scott D. Dorfman /s/ David L. Gamsey Senior Vice President, Chief Financial Officer - ---------------------------- and Secretary (Principal Financial and David L. Gamsey Accounting Officer) /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 /s/ Joel E. Marks Director - ---------------------------- Joel E. Marks
EX-99.1 14 g81419exv99w1.txt EX-99.1 CERTIFICATION OF THE CEO EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Scott D. Dorfman, Chief Executive Officer of Innotrac Corporation (the "Company"), certify, pursuant to 18 U.S.C. ss. 1350 as adopted by ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: March 31, 2003 /s/ Scott D. Dorfman -------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO INNOTRAC CORPORATION AND WILL BE RETAINED BY INNOTRAC CORPORATION AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. EX-99.2 15 g81419exv99w2.txt EX-99.2 CERTIFICATION OF THE CFO EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, David L. Gamsey, Chief Financial Officer of Innotrac Corporation (the "Company"), certify, pursuant to 18 U.S.C. ss. 1350 as adopted by ss. 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Annual Report on Form 10-K of the Company for the year ended December 31, 2002 (the "Report") fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company. Dated: March 31, 2003 /s/ David L. Gamsey ------------------- David L. Gamsey Senior Vice President, Chief Financial Officer and Secretary A SIGNED ORIGINAL OF THIS WRITTEN STATEMENT REQUIRED BY SECTION 906 HAS BEEN PROVIDED TO INNOTRAC CORPORATION AND WILL BE RETAINED BY INNOTRAC CORPORATION AND FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION OR ITS STAFF UPON REQUEST. -----END PRIVACY-ENHANCED MESSAGE-----