-----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, NuG0pwbzJUu9fghT/vUkaduyUBlBLDHVHZ7vBkTozctb1S8Z+LZhcaSCYQmftvPB ysB/oAN+auO3Dfc6Vo7yeQ== 0000950144-05-008646.txt : 20050812 0000950144-05-008646.hdr.sgml : 20050812 20050812093344 ACCESSION NUMBER: 0000950144-05-008646 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20050630 FILED AS OF DATE: 20050812 DATE AS OF CHANGE: 20050812 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-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23741 FILM NUMBER: 051019197 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-Q 1 g96900e10vq.txt INNOTRAC CORPORATION SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarterly Period Ended June 30, 2005 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the transition period from ______________ to ______________ Commission file number 000-23740 INNOTRAC CORPORATION (Exact name of registrant as specified in its charter) Georgia 58-1592285 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number)
6655 Sugarloaf Parkway Duluth, Georgia 30097 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act) Yes No X . ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Outstanding at August 10, 2005 ------------------------------ Common Stock $.10 par value per share 12,277,861 Shares
INNOTRAC CORPORATION INDEX
Page ---- Part I. Financial Information Item 1. Financial Statements: Condensed Consolidated Balance Sheets at June 30, 2005 (Unaudited) and December 31, 2004 3 Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2005 and 2004 (Unaudited) 4 Condensed Consolidated Statements of Operations for the Six Months Ended June 30, 2005 and 2004 (Unaudited) 5 Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004 (Unaudited) 6 Notes to Condensed Consolidated Financial Statements (Unaudited) 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3. Quantitative and Qualitative Disclosure About Market Risks 20 Item 4. Controls and Procedures 20 Part II. Other Information Item 4. Submission of Matters to a Vote of Securities Holders 21 Item 6. Exhibits 21 Signatures 22
1 PART I - FINANCIAL INFORMATION Item 1 - Financial Statements The following condensed consolidated financial statements of Innotrac Corporation, a Georgia corporation ("Innotrac" or the "Company"), have been prepared in accordance with the instructions to Form 10-Q and, therefore, omit or condense certain footnotes and other information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments are of a normal and recurring nature, except those specified as otherwise, and include those necessary for a fair presentation of the financial information for the interim periods reported. Results of operations for the three and six months ended June 30, 2005 are not necessarily indicative of the results for the entire year ending December 31, 2005. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's 2004 Annual Report on Form 10-K, which is available on our website at www.innotrac.com. 2 INNOTRAC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 2005 DECEMBER 31, 2004 ------------- ----------------- (UNAUDITED) ASSETS Current assets: Cash and cash equivalents ........................... $ 1,323 $ 1,377 Accounts receivable (net of allowance for doubtful accounts of $1,196 at June 30, 2005 and $1,624 at December 31, 2004) ............................... 17,877 18,405 Inventory ........................................... 2,753 2,662 Prepaid expenses and other .......................... 1,961 1,986 -------- -------- Total current assets ............................. 23,914 24,430 -------- -------- Property and equipment: Rental equipment .................................... 486 556 Computer software and equipment ..................... 29,567 29,034 Furniture, fixtures and leasehold improvements ...... 5,007 4,957 -------- -------- 35,060 34,547 Less accumulated depreciation and amortization ...... (24,318) (22,048) -------- -------- 10,742 12,499 -------- -------- Goodwill ............................................... 25,169 25,169 Other assets, net ...................................... 1,150 1,275 -------- -------- Total assets ..................................... $ 60,975 $ 63,373 ======== ======== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable .................................... $ 6,317 $ 6,023 Line of credit ...................................... -- 3,063 Accrued expenses and other .......................... 2,706 2,630 -------- -------- Total current liabilities ........................ 9,023 11,716 -------- -------- Noncurrent liabilities: Other noncurrent liabilities ........................ 1,037 1,098 -------- -------- Total noncurrent liabilities ..................... 1,037 1,098 -------- -------- Commitments and contingencies (see Note 5) Shareholders' equity: Preferred stock: 10,000,000 shares authorized, $0.10 par value, no shares issued or outstanding ....... -- -- Common stock: 50,000,000 shares authorized, $0.10 par value, 12,274,360 (2005) and 11,948,743 (2004) shares issued and outstanding .................... 1,227 1,195 Additional paid-in capital .......................... 65,875 64,644 Accumulated deficit ................................. (16,187) (15,280) -------- -------- Total shareholders' equity ....................... 50,915 50,559 -------- -------- Total liabilities and shareholders' equity ....... $ 60,975 $ 63,373 ======== ========
See notes to condensed consolidated financial statements. 3 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30, --------------------------- 2005 2004 ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues ......................................... $18,943 $19,807 Cost of revenues ................................. 9,680 8,977 ------- ------- Gross profit ............................ 9,263 10,830 ------- ------- Operating expenses: Selling, general and administrative expenses .. 8,632 9,158 Depreciation and amortization ................. 1,208 1,370 ------- ------- Total operating expenses ................... 9,840 10,528 ------- ------- Operating (loss) income ................. (577) 302 ------- ------- Other expense: Interest expense .............................. 42 77 ------- ------- Total other expense ..................... 42 77 ------- ------- (Loss) income before income taxes ................ (619) 225 Income taxes ..................................... -- -- ------- ------- Net (loss) income ....................... $ (619) $ 225 ======= ======= (Loss) income per share: Basic ......................................... $ (0.05) $ 0.02 ======= ======= Diluted ....................................... $ (0.05) $ 0.02 ======= ======= Weighted average shares outstanding: Basic ......................................... 12,222 11,731 ======= ======= Diluted ....................................... 12,222 12,316 ======= =======
See notes to condensed consolidated financial statements. 4 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED JUNE 30, ------------------------- 2005 2004 ----------- ----------- (UNAUDITED) (UNAUDITED) Revenues ......................................... $38,181 $39,802 Cost of revenues ................................. 19,633 17,915 ------- ------- Gross profit ............................ 18,548 21,887 ------- ------- Operating expenses: Selling, general and administrative expenses .. 16,886 18,642 Depreciation and amortization ................. 2,460 2,622 ------- ------- Total operating expenses ................... 19,346 21,264 ------- ------- Operating (loss) income ................. (798) 623 ------- ------- Other expense: Interest expense .............................. 109 171 ------- ------- Total other expense ..................... 109 171 ------- ------- (Loss) income before income taxes ................ (907) 452 Income taxes ..................................... -- -- ------- ------- Net (loss) income ....................... $ (907) $ 452 ======= ======= (Loss) income per share: Basic ......................................... $ (0.07) $ 0.04 ======= ======= Diluted ....................................... $ (0.07) $ 0.04 ======= ======= Weighted average shares outstanding: Basic ......................................... 12,111 11,748 ======= ======= Diluted ....................................... 12,111 12,501 ======= =======
See notes to condensed consolidated financial statements. 5 Financial Statements-Continued INNOTRAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004 (IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, ------------------------- 2005 2004 ----------- ----------- (UNAUDITED) (UNAUDITED) Cash flows from operating activities: Net (loss) income ....................................... $ (907) $ 452 Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization ........................... 2,460 2,622 Loss on disposal of fixed assets ........................ -- 100 (Decrease) increase in allowance for doubtful accounts .. (435) 1,015 Amortization of deferred compensation ................... -- 51 Changes in operating assets and liabilities: Decrease (increase) in accounts receivable ........... 962 (2,213) (Increase) decrease in inventory ..................... (91) 5,899 Decrease (increase) in prepaid expenses and other .... 31 (927) Decrease in accounts payable ......................... 295 627 Increase in accrued expenses and other ............... 49 239 ------- ------- Net cash provided by operating activities ......... 2,364 7,865 ------- ------- Cash flows from investing activity: Capital expenditures .................................... (583) (1,317) ------- ------- Cash flows from financing activities: Net repayments under line of credit ..................... (3,063) (7,717) Repayment of capital lease and other obligations ........ (36) (39) Loan fees paid .......................................... -- (15) Stock reacquired to settle employee stock bonus withholding tax obligation ........................... -- (286) Exercise of employee stock options ...................... 1,264 643 ------- ------- Net cash used in financing activities ............. (1,835) (7,414) ------- ------- Net decrease in cash and cash equivalents .................. (54) (866) Cash and cash equivalents, beginning of period ............. 1,377 2,228 ------- ------- Cash and cash equivalents, end of period ................... $ 1,323 $ 1,362 ======= ======= Supplemental cash flow disclosures: Cash paid for interest .................................. $ 121 $ 198 ======= =======
See notes to condensed consolidated financial statements. 6 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 AND 2004 (UNAUDITED) 1. SIGNIFICANT ACCOUNTING POLICIES The accounting policies followed for quarterly financial reporting are the same as those disclosed in the Notes to Consolidated Financial Statements included in the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 2004. Certain of the Company's more significant accounting policies are as follows: Accounting Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. 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. The Company tests goodwill annually for impairment as of January 1 or sooner if circumstances indicate. Impairment of Long-Lived Assets. The Company reviews long-lived assets and certain intangible assets for impairment when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Impairment would be measured based on a projected cash flow model. If the projected undiscounted cash flows for the asset are not in excess of the carrying value of the related asset, the impairment would be determined based upon the excess of the carrying value of the asset over the projected discounted cash flows for the asset. Accounting for Income Taxes. Innotrac utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax basis of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. A valuation allowance was recorded against the net deferred tax asset as of December 31, 2004 and June 30, 2005 (see Note 4). Revenue Recognition. Innotrac derives its revenue primarily from two sources: (1) fulfillment operations and (2) the delivery of call center 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 the number of calls, minutes or hourly rate basis. All other revenues are recognized as services are rendered. 7 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 AND 2004 (UNAUDITED) 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"). 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 condensed 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 (loss) income and net (loss) income per share would have been the following pro forma amounts (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ------------------ ---------------- 2005 2004 2005 2004 ------ ----- ------- ----- Net (loss) income $ (619) $ 225 $ (907) $ 452 Pro forma net (loss) income $ (725) $ 125 $(1,120) $ 253 Basic and diluted net (loss) income per share $(0.05) $0.02 $ (0.07) $0.04 Basic and diluted pro forma net (loss) income per share $(0.06) $0.01 $ (0.09) $0.02
Under the fair value based method, compensation cost, net of tax is $106,000 and $100,000 for the three months ended June 30, 2005 and 2004, respectively and $213,000 and $199,000 for the six months ended June 30, 2005 and 2004, respectively. During the three months ended June 30, 2005 and 2004, options representing 214,617 and 59,250 shares were exercised, respectively. During the six months ended June 30, 2005 and 2004, options representing 275,617 and 135,000 shares were exercised, respectively. 2. FINANCING OBLIGATIONS The Company has a revolving bank credit agreement with a maximum borrowing limit of $25.0 million, which was scheduled to expire in June 2005. In May 2005, the Company extended the agreement through September 1, 2005. Although the maximum borrowing limit is $25.0 million, the credit facility limits borrowings to a specified percentage of eligible accounts receivable and inventory, which totaled $15.5 million at June 30, 2005. At June 30, 2005 the Company had $15.5 million available under the revolving credit agreement. The Company has granted a security interest in all of its assets to the lender as collateral under this revolving credit agreement. The revolving 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 financial covenants require the Company to maintain a minimum fixed charge ratio of 1.30 to 1.00. The Company's fixed charge ratio at June 30, 2005 was 1.43 to 1.00. Additionally, the revolving credit 8 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 AND 2004 (UNAUDITED) agreement contains a minimum tangible net worth requirement of $24.0 million. The Company's tangible net worth at June 30, 2005 was $25.7 million. Compliance with the minimum tangible net worth covenant and other financial covenants is determined on a quarterly basis. 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 three months ended June 30, 2005 and 2004, the Company incurred interest expense related to the line of credit of approximately $30,000 and $51,000, respectively, resulting in a weighted average interest rate of 5.31% and 3.17%, respectively. During the six months ended June 30, 2005 and 2004, the Company incurred interest expense related to the line of credit of approximately $82,000 and $125,000, respectively, resulting in a weighted average interest rate of 4.95% and 3.20%, respectively. The Company also incurred unused revolving credit facility fees of approximately $10,000 and $22,000 during the three months ended June 30, 2005 and 2004, respectively, and $23,000 and $39,000 during the six months ended June 30, 2005 and 2004, respectively. 3. EARNINGS PER SHARE The following table shows the shares (in thousands) used in computing diluted earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share":
Three Months Six Months Ended June 30, Ended June 30, --------------- --------------- 2005 2004 2005 2004 ------ ------ ------ ------ Diluted earnings per share: Weighted average shares outstanding ... 12,222 11,731 12,111 11,748 Employee and director stock options and unvested restricted shares ......... -- 585 -- 753 ------ ------ ------ ------ Weighted average shares assuming dilution ........................... 12,222 12,316 12,111 12,501 ====== ====== ====== ======
Options outstanding to purchase 1.3 million shares of the Company's common stock for both the three and six months ended June 30, 2005, and 333,150 shares and 112,500 shares for the three and six months ended June 30, 2004, respectively, were not included in the computation of diluted EPS because their effect was anti-dilutive. 4. INCOME TAXES Innotrac utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax basis 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 gross deferred tax asset as of June 30, 2005 and December 31, 2004 was approximately $12.9 million and $12.8 million, respectively. This deferred tax asset was generated primarily by net operating loss carryforwards created mainly by a special charge of $34.3 million recorded in 2000 and the net losses generated in 2002 and 2003. Innotrac has a tax net operating loss carryforward of $31.5 million at December 31, 2004 that expires between 2020 and 2024. 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. These factors, combined with losses in recent years, create uncertainty about the 9 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 AND 2004 (UNAUDITED) ultimate realization of the gross deferred tax asset in future years. Therefore, a valuation allowance of approximately $10.0 million and $9.7 million has been recorded as of June 30, 2005 and December 31, 2004, respectively. Income taxes associated with future earnings will be offset by a reduction in the valuation allowance. For the six months ended June 30, 2005, the deferred tax benefit of $314,000 was offset by a corresponding increase of the deferred tax asset valuation allowance. When, and if, the Company can return to consistent profitability, and management determines that it is likely it will be able to utilize the deferred tax assets prior to their expiration, then the valuation allowance can be reduced or eliminated. 5. COMMITMENTS AND CONTINGENCIES Shareholder Rights Plan. In December 1997, the Company's Board of Directors approved a Shareholder Rights Plan (the "Rights Plan"). The Rights Plan provides for the distribution of one right for each outstanding share of the Company's common stock held of record as of the close of business on January 1, 1998 or that thereafter becomes outstanding prior to the earlier of the final expiration date of the rights or the first date upon which the rights become exercisable. Each right entitles the registered holder to purchase from the Company one one-hundredth of a share of Series A participating cumulative preferred stock, par value $.10 per share, at a price of $60.00 (the "Purchase Price"), subject to adjustment. The rights are not exercisable until ten calendar days after a person or group (an "Acquiring Person") buys, or announces a tender offer for, 15% or more of the Company's common stock. Such ownership level has been increased to 40% for a particular shareholder that owned approximately 33.3% of the shares outstanding on June 30, 2005. In the event the rights become exercisable, each right will entitle the holder to receive that number of shares of common stock having a market value equal to the Purchase Price. If, after any person has become an Acquiring Person (other than through a tender offer approved by qualifying members of the board of directors), the Company is involved in a merger or other business combination where the Company is not the surviving corporation, or the Company sells 50% or more of its assets, operating income, or cash flow, then each right will entitle the holder to purchase, for the Purchase Price, that number of shares of common or other capital stock of the acquiring entity which at the time of such transaction have a market value of twice the Purchase Price. The rights will expire on January 1, 2008, unless extended, unless the rights are earlier exchanged, or unless the rights are earlier redeemed by the Company in whole, but not in part, at a price of $0.001 per right. No shares have been issued under the Rights Plan. 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. 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 for each employee less than the minimum required amount. During the three and six months ended June 30, 2005 and 2004, the Company did not meet the minimum employee requirements of 359 full-time employees, as measured on a quarterly basis, incurring a penalty of approximately $100 and $6,000 for the three months ended June 30, 2005 and 2004, respectively, and approximately $5,000 and $10,000 for the six months ended June 30, 2005 and 2004, respectively. 10 INNOTRAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2005 AND 2004 (UNAUDITED) 6. RELATED PARTY TRANSACTION In early 2004, the Company learned that certain trading activity of the IPOF Group, an owner of more than 5% of the outstanding Common Stock, may have violated the short-swing profit rules under Section 16(b) of the Securities Exchange Act of 1934. The Company promptly conducted an investigation of the matter. On March 3, 2004, the Company and the IPOF Group entered into a settlement agreement regarding the potential Section 16(b) liability issues that provides for the Company's recovery of $301,957, which is due no later than March 3, 2006. In March 2005, the Company learned that trading activity by members of the IPOF Group may have further violated the short swing profit rules under Section 16(b). The Company promptly initiated another investigation and is presently engaged in discussions with the IPOF Group regarding the recovery by the Company of disgorgeable profits of the IPOF Group pursuant to Section 16(b). 11 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion may contain certain forward-looking statements that are subject to conditions that are beyond the control of the Company. Actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, the Company's reliance on a small number of major clients; risks associated with the terms and pricing of our contracts; reliance on the telecommunications and direct marketing industries and the effect on the Company of the downturns, consolidation and changes in those industries in the past two years; risks associated with the fluctuations in volumes from our clients; risks associated with upgrading, customizing, migrating or supporting existing technology; risks associated with competition; and other factors discussed in more detail under "Business---Certain Factors Affecting Forward-Looking Statements" in our Annual Report on Form 10-K. OVERVIEW Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and headquartered in Atlanta, Georgia, is a full-service fulfillment and logistics provider serving enterprise clients and world-class brands. The Company employs sophisticated order processing and warehouse management technology and operates eight fulfillment centers and two call centers in six cities spanning all time zones across the continental United States. 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. Our core service offerings include the following: - 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; and - returns management. - Customer Support Services: - inbound call center services - technical support and order status - returns and refunds processing - call centers integrated into fulfillment platform - cross-sell/up-sell services - collaborative chat; and - intuitive e-mail response. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company is primarily focused on five diverse lines of business, or industry verticals. This is a result of a significant effort made by the Company to diversify both its industry concentration and client base over the past several years. BUSINESS MIX
Three Months Ended Six Months Ended June 30, June 30, ------------------ ---------------- Business Line/Vertical 2005 2004 2005 2004 - ---------------------- ----- ----- ----- ----- Telecommunications 13.2% 21.3% 13.3% 20.4% Modems 17.5 17.4 18.7 19.8 Retail/Catalog 30.7 27.2 28.6 25.1 Direct Marketing 30.0 25.0 28.9 24.7 Business-to-Business ("B2B") 8.6 9.1 10.5 10.0 ----- ----- ----- ----- 100.0% 100.0% 100.0% 100.0% ===== ===== ===== =====
Telecommunications and Modems. The Company continues to be a major provider of fulfillment and customer support services to the telecommunications industry. In spite of a significant contraction and consolidation in this industry in the past several years, the Company continues to provide customer support services and fulfillment of telephones, caller ID equipment, digital subscriber line ("DSL") and other telecommunications products to companies such as BellSouth Corporation and Qwest Communications International, Inc. and their customers. Inventory for our telecommunications and DSL modem clients is held on a consignment basis, with the exception of certain BellSouth inventory for which we are contractually indemnified, and includes items such as telephones, Caller ID equipment, DSL modems and ancillary equipment. We anticipate that the percentage of our revenues attributable to telecommunications and DSL modem clients will remain fairly constant for the remainder of the year due mainly to increased volumes (but at lower margins as compared to 2004) from our DSL modem business, which is still in a strong growth mode. The telephone and caller ID equipment business is mature, yet steady. Retail, Catalog and Direct Marketing. The Company also provides a variety of these services for a significant number of retail, catalog and direct marketing clients, including such companies as The Coca-Cola Company, Ann Taylor Retail, Inc., Smith & Hawken, Ltd., Porsche Cars North America, Inc., Nordstrom.com LLC, and Thane International. We take orders for our retail, catalog and direct marketing clients via the Internet, through customer service representatives 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 eight fulfillment centers located across the country and are shipped to the end consumer or retail store location, as applicable, typically within 24 hours of when the order is received. Inventory for our retail, catalog and direct marketing clients is held on a consignment basis, with minor exceptions, and includes items such as shoes, dresses, accessories, books and outdoor furniture. Our revenues are sensitive to the number of orders and customer service calls received. Our client contracts do not guarantee volumes. Despite the end of the Tactica International, Inc. business, which represented 3.5% and 4.2% of total revenues for the three and six months ended June 30, 2004, respectively, and the end of the Martha Stewart Living Omnimedia business in March 2005, which represented 4.6% and 4.5% of total revenues for the three and six months ended June 30, 2004, respectively, we anticipate that the percentage of our revenues attributable to our retail and catalog clients will remain fairly consistent during 2005 due to the addition of several new clients. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS On October 21, 2004, Tactica International, Inc. ("Tactica"), one of the Company's direct response clients, filed a voluntary petition for relief under Chapter 11 in U.S. Bankruptcy Court. On October 25, 2004 the Bankruptcy Court approved, on an interim basis, a Stipulation and Consent Order ("Stipulation") entered into between Tactica and Innotrac, whereby Tactica has acknowledged the validity of Innotrac's claim and Innotrac's first priority security interest in and warehouseman's lien on Tactica's inventory held by Innotrac. This Stipulation allowed Tactica to continue to sell its inventory while reducing the receivables owed by Tactica to Innotrac. Tactica defaulted on the Stipulation and on January 18, 2005, Innotrac issued a Notice of Default to Tactica. In March 2005, Innotrac and Tactica reached a verbal agreement that would permit Innotrac to liquidate the Tactica inventory in order to pay down the receivable balance, with any excess proceeds to be remitted to Tactica. Innotrac, Tactica and the Creditor's Committee in the Tactica bankruptcy case have reached an agreement on the terms of the liquidation and an additional amount of the proceeds to be remitted to the unsecured creditors of Tactica, which was approved by the bankruptcy court on June 23, 2005. Based on this agreement and management's estimate of the net realizable value of the inventory, the reserve associated with the Tactica receivable was reduced from $1.2 million to $775,000 at March 31, 2005. The actual results of the liquidation could vary from this estimate. As of June 30, 2005, Tactica owed $2.8 million in principal to Innotrac for past fulfillment and call center services. Business-to-Business. The Company also provides these services for business-to-business ("B2B") clients including Books Are Fun, Ltd. (a subsidiary of Reader's Digest), NAPA and The Walt Disney Company. This is a small, but growing area of our business. RESULTS OF OPERATIONS The following table sets forth unaudited summary operating data, expressed as a percentage of revenues, for the three and six months ended June 30, 2005 and 2004. The data has been prepared on the same basis as the annual consolidated financial statements. In the opinion of management, it reflects normal and recurring adjustments necessary for a fair presentation of the information for the periods presented. Operating results for any period are not necessarily indicative of results for any future period. The financial information provided below has been rounded in order to simplify its presentation. However, the percentages below are calculated using the detailed information contained in the condensed consolidated financial statements.
Three Months Six Months Ended June 30, Ended June 30, -------------- -------------- 2005 2004 2005 2004 ----- ----- ----- ----- Revenues ...................................... 100.0% 100.0% 100.0% 100.0% Cost of revenues .............................. 51.1 45.4 51.4 45.0 ----- ----- ----- ----- Gross margin ............................... 48.9 54.6 48.6 55.0 Selling, general and administrative expenses .. 45.6 46.2 44.2 46.9 Depreciation and amortization ................. 6.4 6.9 6.5 6.6 ----- ----- ----- ----- Operating (loss) income .................... (3.1) 1.5 (2.1) 1.5 Other expense, net ............................ .2 .4 .3 .4 ----- ----- ----- ----- (Loss) income before income taxes .......... (3.3) 1.1 (2.4) 1.1 Income tax benefit ............................ -- -- -- -- ----- ----- ----- ----- Net (loss) income .......................... (3.3)% 1.1% (2.4)% 1.1% ===== ===== ===== =====
14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004 Revenues. Net revenues decreased 4.4% to $18.9 million for the three months ended June 30, 2005 from $19.8 million for the three months ended June 30, 2004. This decrease was primarily attributable to the conclusion of two programs for a major client and the termination of services for Tactica International, Inc. and Martha Stewart Living Omnimedia business, partially offset by revenues from several new clients and increased volumes from our direct marketing clients. Cost of Revenues. Cost of revenues increased 7.8% to $9.7 million for the three months ended June 30, 2005, compared to $9.0 million for the three months ended June 30, 2004. The cost of revenue increase was primarily due to an increase in freight expense related to the increase in volume for our direct marketing clients. Gross Profit. For the three months ended June 30, 2005, the Company's gross profit decreased by $1.6 million to $9.3 million, or 48.9% of revenues, compared to $10.8 million, or 54.6% of revenues, for the three months ended June 30, 2004. This decrease in gross profit was due primarily to a change in the business mix to clients with lower margin revenue. Selling, General and Administrative Expenses. S,G&A expenses for the three months ended June 30, 2005 decreased to $8.6 million, or 45.6% of revenues, compared to $9.2 million, or 46.2% of revenues, for the same period in 2004. This net decrease was primarily attributable to an additional $376,000 in the allowance for doubtful accounts related to the Tactica receivable recorded in 2004, a reduction in account services related costs of $132,000 in 2005 as compared to 2004 and a reduction of corporate salary expense of $154,000 in 2005 as compared to 2004, offset by an increase in facility costs of approximately $134,000, primarily related to the new facility opened in Delaware in the second half of 2004. Interest Expense. Interest expense for the three months ended June 30, 2005 decreased to $42,000, compared to $77,000 for the same period in 2004. This decrease was attributable to a reduction in borrowings from the line of credit during the three months ended June 30, 2005 compared to the same period in 2004. Income Taxes. The Company's effective tax rate for the three months ended June 30, 2005 and 2004 was 0%. At December 31, 2003, a valuation allowance was recorded against the Company's net deferred tax assets as losses in recent years created uncertainty about the realization of tax benefits in future years. Income taxes associated with losses and earnings for the three months ended June 30, 2005 and 2004 were offset by a corresponding increase or reduction of this valuation allowance resulting in an effective tax rate of 0% for the three months ended June 30, 2005 and 2004. SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004 Revenues. Net revenues decreased 4.1% to $38.2 million for the six months ended June 30, 2005 from $39.8 million for the six months ended June 30, 2004. This decrease was primarily attributable to a reduction in revenue from our telecommunications vertical as a result of the conclusion of two programs for a major client offset by a net increase in revenues from our direct marketing and retail/catalog verticals as a result of the addition of several new clients and increased volumes, reduced by the termination of services for Tactica International, Inc. and Martha Stewart Living Omnimedia. Cost of Revenues. Cost of revenues increased 9.6% to $19.6 million for the six months ended June 30, 2005, compared to $17.9 million for the six months ended June 30, 2004. The cost of revenue increase was primarily due to an increase in freight and labor expense related to the increase in volume for our direct marketing clients and increased labor costs associated with increased volumes for our retail/catalog and B2B clients. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Gross Profit. For the six months ended June 30, 2005, the Company's gross profit decreased by $3.3 million to $18.5 million, or 48.6% of revenues, compared to $21.9 million, or 55.0% of revenues, for the six months ended June 30, 2004. This decrease in gross profit was due primarily to a change in the business mix to clients with lower margin revenue and the addition of several new clients whose margins have not yet reached the level of a mature client. Selling, General and Administrative Expenses. S,G&A expenses for the six months ended June 30, 2005 decreased to $16.9 million, or 44.2% of revenues, compared to $18.6 million, or 46.9% of revenues, for the same period in 2004. This net decrease was primarily attributable to an additional $840,000 in the allowance for doubtful accounts related to the Tactica receivable recorded in 2004 compared to a $440,000 reduction in the allowance for doubtful accounts related to the Tactica receivable recorded in 2005, a reduction in account services related costs of $338,000 in 2005 as compared to 2004 and a reduction of corporate salary expense of $274,000 in 2005 as compared to 2004, offset by an increase in facility costs of approximately $192,000, primarily related to the new facility opened in Delaware in the second half of 2004. Interest Expense. Interest expense for the six months ended June 30, 2005 decreased to $109,000, compared to $171,000 for the same period in 2004. This decrease was attributable to a reduction in borrowings from the line of credit during the six months ended June 30, 2005 compared to the same period in 2004. Income Taxes. The Company's effective tax rate for the six months ended June 30, 2005 and 2004 was 0%. At December 31, 2003, a valuation allowance was recorded against the Company's net deferred tax assets as losses in recent years created uncertainty about the realization of tax benefits in future years. Income taxes associated with losses and earnings for the six months ended June 30, 2005 and 2004 were offset by a corresponding increase or reduction of this valuation allowance resulting in an effective tax rate of 0% for the six months ended June 30, 2005 and 2004. LIQUIDITY AND CAPITAL RESOURCES The Company funds its operations and capital expenditures primarily through cash flow from operations and borrowings under a bank credit facility. The Company had cash and cash equivalents of approximately $1.3 million at June 30, 2005 as compared to $1.4 million at December 31, 2004. Additionally, the Company did not have any borrowings under its revolving credit facility (discussed below) at June 30, 2005, as compared to $3.1 million at December 31, 2004. The Company generated positive cash flow from operations of $2.4 million during the six months ended June 30, 2005. We anticipate positive cash flows from operations during the remainder of 2005. The Company currently has a revolving credit agreement with a bank maturing in September 2005. Although the facility has a maximum borrowing limit of $25.0 million, the credit facility limits borrowings to a specified percentage of eligible accounts receivable and inventory, which totaled $15.5 million at June 30, 2005. The Company has granted a security interest in all of its assets as collateral under this revolving credit agreement. The revolving credit agreement contains various restrictive financial and change of ownership control covenants. The provisions of the revolving credit agreement require that the Company maintain a lockbox arrangement with the lender, and allows the lender to declare any outstanding borrowing amounts to be immediately due and payable as a result of noncompliance with any of the covenants under the credit agreement. Accordingly, in the event of noncompliance, these amounts could be accelerated. 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 three months ended June 30, 2005 and 2004, the Company incurred interest expense related to the line of credit of approximately $30,000 and $51,000, respectively, resulting in a 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS weighted average interest rate of 5.31% and 3.17%, respectively. During the six months ended June 30, 2005 and 2004, the Company incurred interest expense related to the line of credit of approximately $82,000 and $125,000, respectively, resulting in a weighted average interest rate of 4.95% and 3.20%, respectively. The Company also incurred unused revolving credit facility fees of approximately $10,000 and $22,000 during the three months ended June 30, 2005 and 2004, respectively, and $23,000 and $39,000 during the six months ended June 30, 2005 and 2004, respectively. At June 30, 2005, the Company had $15.5 million of additional availability under the revolving credit agreement. During the six months ended June 30, 2005, the Company generated $2.4 million in cash flow from operating activities compared to $7.9 million in the same period in 2004. The decrease in cash provided from operating activities was primarily the result of the reduction of $5.9 million in inventory in 2004 compared to an increase in inventory of $91,000 in 2005 offset by a net decrease in accounts receivable of $527,000 in 2005 compared to a net increase of $1.2 million in 2004 and a net loss of $907,000 in 2005 compared to net income of $452,000 in 2004. During the six months ended June 30, 2005, net cash used in investing activities for capital additions was $583,000 as compared to $1.3 million in 2004. All of these expenditures were funded through existing cash on hand, cash flow from operations and borrowings under the Company's credit facility. During the six months ended June 30, 2005, cash used in financing activities was $1.8 million compared to $7.4 million in the same period in 2004. The primary difference between years is attributable to a reduction in outstanding borrowings of $3.1 million in 2005 compared to a reduction in outstanding borrowings of $7.7 million in 2004. Additionally, during 2004, the Company generated cash of $643,000 through the exercise of previously granted employee stock options, compared to $1.3 million generated in 2005. The Company estimates that its cash and financing needs through 2005 will be met by cash flows from operations and its credit facility. The Company has generated positive cash flows from operations in each of the last four years and anticipates doing so again in 2005. 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. CRITICAL ACCOUNTING POLICIES Critical accounting policies are those policies that can have a significant impact on the presentation of our financial position and results of operations and demand the most significant use of subjective estimates and management judgment. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Specific risks inherent in our application of these critical policies are described below. For all of these policies, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment. These policies often require difficult judgments on complex matters that are often subject to multiple sources of authoritative guidance. Additional information concerning our accounting policies can be found in Note 1 to the condensed consolidated financial statements in this Form 10-Q and Note 2 to the consolidated financial statements appearing in our Annual Report on Form 10-K for the year ended December 31, 2004. The policies that we believe are most critical to an investor's understanding of our financial results and condition and require complex management judgment are discussed below. Goodwill and Other Acquired Intangibles. The Company accounts for goodwill and other intangible assets in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Innotrac's goodwill carrying amount as of June 30, 2005 was $25.2 million. This asset relates to the goodwill associated with the Company's acquisition of Universal Distribution Services ("UDS") in December 2000 (including an 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 performed a goodwill valuation in the first quarter of 2005. The valuation supported that the fair value of the reporting unit at January 1, 2005 exceeded the carrying amount of the net assets, including goodwill, and thus no impairment was determined to exist. The Company performs this impairment test annually as of January 1 or sooner if circumstances indicate. Accounting for Income Taxes. Innotrac utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax basis 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 more likely than not that deferred tax assets will not be realized. Innotrac's gross deferred tax asset as of June 30, 2005 and December 31, 2004 was approximately $12.9 million and $12.8 million, respectively. This deferred tax asset was generated primarily by net operating loss carryforwards created primarily by the special charge of $34.3 million recorded in 2000 and the net losses generated in 2002 and 2003. Innotrac has a tax net operating loss carryforward of $31.5 million at December 31, 2004 that expires between 2020 and 2024. 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. These factors, combined with losses in recent years, create uncertainty about the ultimate realization of the gross deferred tax asset in future years. Therefore, a valuation allowance of approximately $10.0 million and $9.7 million has been recorded as of June 30, 2005 and December 31, 2004. Income taxes associated with future earnings will be offset by a reduction in the valuation allowance. For the six months ended June 30, 2005, an income tax benefit of $314,000 was offset by a corresponding increase of the deferred tax asset valuation allowance. When, and if, the Company can return to consistent profitability, and management determines that it will be able to utilize the deferred tax assets prior to their expiration, then the valuation allowance can be reduced or eliminated. 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. The Company makes estimates each reporting period associated with its reserve for uncollectible accounts. These estimates are based on the aging of the receivables and known specific facts and circumstances. One of Innotrac's direct marketing clients, Tactica, with a substantial past due balance at June 30, 2005 and December 31, 2004, filed for Chapter 11 bankruptcy protection on October 21, 2004. Subsequently, Innotrac and Tactica entered into a Stipulation and Consent Order whereby the client has acknowledged the validity of the Company's claim and first priority security interest in and warehouseman's lien on Tactica's inventory held by Innotrac. In March 2005, Innotrac and Tactica reached a verbal agreement that would permit Innotrac to liquidate the Tactica inventory in order to pay down the receivable balance, with any excess proceeds to be remitted to Tactica. Innotrac, Tactica and the Creditor's Committee in the Tactica bankruptcy case have reached an agreement on the terms of the liquidation and an additional amount of the proceeds to be remitted to the unsecured creditors of Tactica, which was approved by the bankruptcy court on June 23, 2005. Based on this agreement and management's estimate of the net realizable value of the inventory, the reserve associated with the Tactica receivable was reduced from $1.2 million to $775,000 at March 31, 2005. The actual results of the 18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS liquidation could vary from this estimate. As of June 30, 2005, Tactica owed $2.8 million in principal to Innotrac for past fulfillment and call center services. RECENT ACCOUNTING PRONOUNCEMENTS In December 2004, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS" No. 123(R), "Share-Based Payment," which revises SFAS No. 123, "Accounting for Stock-Based Compensation." The revised Statement clarifies and expands SFAS No. 123's guidance in several areas, including measuring fair value, classifying an award as equity or as a liability, and attributing compensation cost to reporting periods. The revised statement supercedes Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and its related implementation guidance. Under the provisions of SFAS 123(R), the alternative to use APB 25's intrinsic value method of accounting that was provided in SFAS No. 123, as originally issued, is eliminated, and entities are required to measure liabilities incurred to employees in share-based payment transactions at fair value. The Company currently accounts for its stock-based compensation plans under APB 25. 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. SFAS No. 123(R) will be effective for the Company beginning January 1, 2006. 19 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Management believes the Company's exposure to market risks (investments, interest rates and foreign currency) 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. The Company does not transact any sales in foreign currency. 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 believes this 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 discussed in our Annual Report on Form 10-K for the year ended December 31, 2004 and other filings on file with the Securities and Exchange Commission. ITEM 4 - CONTROLS AND PROCEDURES Our management, with the participation of the Chief Executive Officer and the principal financial officer, evaluated our disclosure controls and procedures (as defined in federal securities rules) as of June 30, 2005. No system of controls, no matter how well designed and operated, can provide absolute assurance that the objectives of the system of controls are met, and no evaluation of controls can provide absolute assurance that the system of controls has operated effectively in all cases. Our disclosure controls and procedures are designed to provide reasonable assurance that the objectives of disclosure controls and procedures are met. Based on the evaluation discussed above, our CEO and principal financial officer have concluded that our disclosure controls and procedures were effective as of the date of that evaluation to provide reasonable assurance that the objectives of disclosure controls and procedures are met. There were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, Innotrac's internal control over financial reporting during the second quarter of 2005. 20 PART II - OTHER INFORMATION ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On June 3, 2005, the Company held its annual meeting of shareholders in Duluth, Georgia. As of the record date, April 8, 2005, there were 12,117,591 shares of Common Stock issued, outstanding and entitled to vote at the annual meeting. Represented at the meeting in person or by proxy were 11,883,838 shares representing 98.07% of the total shares of Common Stock entitled to vote at the meeting. The purpose of the meeting was to re-elect the following director to a three-year term expiring in 2008. The following table sets forth the number of votes cast "for" reelection and the number of votes "withheld" for the director. There were no abstentions or broker non-votes.
NUMBER OF VOTES --------------------- FOR WITHHELD ---------- -------- Bruce V. Benator ....................................... 11,622,013 261,825
The directors whose terms continued after the meeting are Scott D. Dorfman, Alston Gardner, Martin J. Blank and Joel E. Marks. ITEM 6 - EXHIBITS Exhibits: 10.4 Loan Documents Modification Agreement between Innotrac Corporation and Wachovia Bank, National Association, successor by merger to SouthTrust Bank, dated May 20, 2005. 10.16 Second Amendment to Lease Agreement dated March 5, 2003 by and between ProLogis-Macquarie Kentucky I LLC and Innotrac Corporation. 10.17 Second Amendment to Lease Agreement dated June 23, 2005 by and between The Prudential Insurance Company of America and Innotrac Corporation. 10.21 Fourth Lease Extension and Modification Agreement dated July 8, 2005 by and between Teachers Insurance and annuity Association of America, for the Benefit of its Separate Real Estate Account and Innotrac Corporation. 31.1 Certification of Chief Executive Officer Pursuant to Rule 13a-14(a)/15d - 14(a). 31.2 Certification of principal financial officer Pursuant to Rule 13a-14(a)/15a - 14(a). 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350. 32.2 Certification of principal financial officer Pursuant to 18 U.S.C. Section 1350.
21 SIGNATURES Pursuant to the requirements 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. INNOTRAC CORPORATION (Registrant) Date: August 12, 2005 By: /s/ Scott D. Dorfman ------------------------------------ Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) Date: August 12, 2005 /s/ Christine A. Herren ------------------------------------ Christine A. Herren Senior Director and Controller (Principal Financial Officer and Principal Accounting Officer) 22 EX-10.4 2 g96900exv10w4.txt EX-10.4 LOAN DOCUMENTS MODIFICATION AGREEMENT Exhibit 10.4 LOAN DOCUMENTS MODIFICATION AGREEMENT THIS LOAN DOCUMENTS MODIFICATION AGREEMENT (hereinafter referred to as this "Amendment") is made and entered into as of the 20th day of May, 2005, by and among INNOTRAC CORPORATION, a Georgia corporation and iFULFILLMENT, Inc., a Georgia corporation (hereinafter collectively referred to as "Borrowers"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, an Alabama banking corporation (hereinafter referred to as "Lender"). BACKGROUND STATEMENT Borrowers and Lender are parties to that certain Third Second Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrowers to the order of Lender in the original principal amount of Twenty Five Million and No/100 Dollars ($25,000,000.00), as modified by the parties from time-to-time (hereinafter referred to as the "Note", and the loan evidenced thereby as the "Loan"). The Note is secured by that certain (a) Second Amended and Restated Loan and Security Agreement by and between Borrowers and Lender dated as of April 3, 2003, as subsequently modified by the parties from time-to-time (the "Loan Agreement"), and (b) any and all other documents related to the aforementioned documents, as subsequently modified by the parties from time-to-time (hereinafter collectively referred to as the "Loan Documents"). Borrowers and Lender have agreed to amend the Loan Agreement, to modify all of the other Loan Documents to reflect the same, and the parties hereto are entering into this Amendment to evidence their agreements. AGREEMENT FOR AND IN CONSIDERATION of the sum of Ten and No/100 Dollars ($10.00), the foregoing recitals, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Borrowers and Lender do hereby agree as follows: 1. MODIFICATION OF LOAN AGREEMENT. As of the date hereof, the representations and warranties set forth in the Loan Agreement are hereby affirmed to be true and correct as of the date hereof. In addition, the terms of the Loan Agreement are hereby modified and amended, effective as of the date hereof, by deleting the definition of "Commitment Period" from Section 1.1 of the Loan Agreement in its entirety and replacing the same with the following substitute definition: "Commitment Period - shall mean that period during which Bank is obligated to make advances under the Line of Credit Loan hereunder, as provided in Section 2.1 hereof. The Commitment Period shall commence upon satisfaction of the conditions to lending set forth in Article III and shall continue until September 1, 2005, unless sooner terminated according to the provisions hereof." 2. MODIFICATION OF NOTE. The terms of the Note are hereby modified and amended, effective as of the date hereof, by deleting the last full paragraph on the top of Page 2 of the Note starting with the words "Interest only at said rates...", and replacing it with the following substitute paragraph: "Interest only at said rates shall be due and payable monthly, in arrears, commencing on the first (1st) day of June, 2005, and continuing on the first day of each and every month thereafter through and including August 1, 2005. On September 1, 2005, all unpaid principal, plus accrued and unpaid interest, shall be due and payable in full." 3. MODIFICATION OF LOAN DOCUMENTS. As of the date hereof, Borrowers hereby reaffirm and restate each and every warranty and representation set forth in the Loan Documents. The terms of the Loan Documents are hereby modified and amended, effective as of the date hereof, so that any reference in any of the Loan Documents to the Loan Agreement or the Note shall refer to the Loan Agreement and Note as herein amended. 4. RATIFICATION; EXPENSES. Except as herein expressly modified or amended, all the terms and conditions of the Note, the Loan Agreement and the other Loan Documents are hereby ratified, affirmed, and approved. In consideration of Lender agreeing to modify the Loan Agreement, Borrowers agree to pay all fees and expenses incurred in connection with this Amendment including Lender's attorneys' fees and expenses. 5. NO DEFENSES; RELEASE. For purposes of this Paragraph 5, the terms "Borrower Parties" and "Lender Parties" shall mean and include Borrowers and Lender, respectively, and each of their respective predecessors, successors and assigns, and each past and present, direct and indirect, parent, subsidiary and affiliated entity of each of the foregoing, and each past and present employee, agent, attorney-in-fact, attorney-at-law, representative, officer, director, shareholder, partner and joint venturer of each of the foregoing, and each heir, executor, administrator, successor and assign of each of the foregoing; references in this paragraph to "any" of such parties shall be deemed to mean "any one or more" of such parties; and references in this sentence to "each of the foregoing" shall mean and refer cumulatively to each party referred to in this sentence up to the point of such reference. Borrower hereby acknowledge, represent and agree: that Borrowers have no defenses, setoffs, claims, counterclaims or causes of action of any kind or nature whatsoever with respect to the Note and the other Loan Documents or the indebtedness evidenced and secured thereby, or with respect to any other documents or instruments now or heretofore evidencing, securing or in any way relating to the Loan, or with respect to the administration or funding of the Loan, or with respect to any other transaction, matter or occurrence between any of the Borrower Parties and any Lender Parties or with respect to any acts or omissions of any Lender Parties, with respect to each of the same, limited only to the extent that such acts, claims or actions exist on or prior to the date hereof (all of said defenses, setoffs, claims, counterclaims or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrowers may be deemed to have any Loan Related Claims, Borrowers do hereby expressly waive, release and relinquish any and all such Loan Related Claims, whether or not known to or suspected by Borrowers; that Borrowers shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any Loan Related Claims; and that Borrowers shall indemnify, hold harmless and defend all Lender Parties from and against any and all Loan Related Claims and any and all losses, damages, liabilities, costs and expenses suffered or incurred by any Lender Parties as a result of any assertion or allegation by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 6. NO NOVATION. Borrowers and Lender hereby acknowledge and agree that this Amendment shall not constitute a novation of the indebtedness evidenced by the Loan Documents, and further that the terms and provisions of the Loan Documents shall remain valid and in full force and effect except as may be hereinabove modified and amended. 7. NO WAIVER OR IMPLICATION. Borrowers hereby agree that nothing herein shall constitute a waiver by Lender of any default, whether known or unknown, which may exist under the Note or any other Loan Document. Borrowers hereby further agree that no action, inaction or agreement by Lender, including, without limitation, any extension, indulgence, waiver, consent or agreement of modification which may have occurred or have been granted or entered into (or which may be occurring or be granted or entered into hereunder or otherwise) with respect to nonpayment of the Loan or any portion thereof, or with respect to matters involving security for the Loan, or with respect to any other matter relating to the Loan, shall require or imply any future extension, indulgence, waiver, consent or agreement by Lender. Borrowers hereby acknowledge and agree that Lender has made no agreement, and is in no way obligated, to grant any future extension, indulgence, waiver or consent with respect to the Loan or any matter relating to the Loan. 8. NO RELEASE OF COLLATERAL. Borrowers further acknowledge and agree that this Amendment shall in no way occasion a release of any collateral held by Lender as security to or for the Loan, and that all collateral held by Lender as security to or for the Loan shall continue to secure the Loan. 9. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of Borrowers and Lender and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. [Signatures on Following Page] -2- IN WITNESS WHEREOF, this Amendment has been duly executed under seal by Borrowers and Lender, as of the day and year first above written. BORROWERS: INNOTRAC CORPORATION, a Georgia corporation (SEAL) By: /s/ Scott D. Dorfman ------------------------------------- Scott D. Dorfman, Chairman, President and Chief Executive Officer Attest: /s/ Scott D. Dorfman --------------------------------- Scott D. Dorfman, Secretary IFULFILLMENT, INC., a Georgia corporation (SEAL) By: /s/ Scott D. Dorfman ------------------------------------- Scott D. Dorfman, Chairman, President and Chief Executive Officer Attest: /s/ Scott D. Dorfman --------------------------------- Scott D. Dorfman, Secretary LENDER: WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SouthTrust Bank By: /s/ Jerry Noles ------------------------------------- Jerry Noles, Vice President -3- EX-10.16 3 g96900exv10w16.txt EX-10.16 SECOND AMENDMENT TO LEASE AGREEMENT Exhibit 10.16 SECOND AMENDMENT TO LEASE AGREEMENT THIS SECOND AMENDMENT TO LEASE AGREEMENT is entered into as of the 5th day of March, 2003, 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, and as amended by that certain First Amendment To Lease Agreement dated October 15, 2002 (such Lease, as heretofore and hereafter modified, being herein referred to as the "Lease") pursuant to which Landlord leased to Tenant approximately 330,000 square feet located at 1226 Aviation Blvd. Hebron, KY 41048 (the "Original Premises"); and WHEREAS, Landlord and Tenant desire to expand the Premises by 66,000 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. Effective on March 1, 2003 (the "Second Expansion Premises Commencement Date"), the Premises shall hereby be expanded to include those certain premises consisting of approximately 66,000 rentable square feet (the "Second Expansion Premises"), commonly known as 1242 Aviation Blvd., Hebron, Kentucky, and as more fully described on the attached Exhibit A. The Premises as described in the Lease shall be revised to include the Second Expansion Premises and shall further be revised to reflect a total square footage of approximately 396,000 square feet. 2. The Lease Term for the Second Expansion Premises shall commence on the Second Expansion Premises Commencement Date and shall continue through the end of the original lease term July 31, 2007. 3. The total monthly Base Rent for the Premises and the Second Expansion Premises, during the 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 ------ ----------------- March 1, 2003 through December 31, 2003 $84,837 per month January 1, 2004 through July 31, 2007 $92,675 per month
4. Effective on the Second 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 ------ ---------------------- ---------------------- March 1, 2003 through December 31, 2003 91.7% 91.7 January 1, 2004 through July 31, 2007 100% 100%
5. Effective on March 1, 2003, the Initial Estimated Monthly Operating Expense Payments shall be as follows:
Monthly Charge -------------- Common Area Charges: $ 5,142.00 Taxes: 9,075.00 Insurance: 1,815.00 ---------- Total $16,032.00
6. Tenant Improvements. (a) Landlord agrees to furnish or perform at Landlord's sole cost and expense those items of construction and those improvements (the "Tenant Improvements") specified below: 1. Install additional warehouse lighting. 2. Install ventilation system in warehouse area. 3. Install additional dock equipment. Any other items shall require prior approval from Landlord. Landlord shall pay for the Tenant Improvements up to a maximum amount of $75,000.00, and Tenant shall pay for the cost of the Tenant Improvements in excess of such amount. If the cost of the Tenant Improvements is estimated to exceed such amount, such estimated overage shall be paid by Tenant before Landlord begins construction and a final adjusting payment based upon the actual cost of the Tenant improvements shall be made when the Tenant Improvements are complete. (b) If Tenant shall desire any changes, Tenant shall so advise Landlord in writing and Landlord shall determine whether such changes can be made in a reasonable and feasible manner. Any and all costs of reviewing any requested changes, and any and all costs of making any changes to the Tenant Improvements which Tenant may 1 request and which Landlord may agree to shall be at Tenant's sole cost and expense and shall be paid to Landlord upon demand and before execution of the change order. (c) Landlord shall proceed with and complete the construction of the Tenant Improvements within a commercially reasonable period of time. (d) Except for incomplete punch list items, Tenant shall have and hold the Premises as the same shall then be without any liability or obligation on the part of Landlord for making any further alterations or improvements of any kind in or about the Premises. 7. Effective on March 1, 2003, Addendum 1 of the Lease, captioned "Right Of First Refusal", is intentionally deleted and no longer in force or effect. 8. Effective on March 1, 2003, 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 396,000 square feet. 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 $2,217,622.00 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." 9. 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. 10. All capitalized terms used but not defined herein which are defined in the Lease shall have the same meaning herein as in the lease. IN WITNESS WHEREOF, the parties hereto have signed this Second Amendment To Lease Agreement as of the day and year first above written. Landlord: PROLOGIS-MACQUARIE KENTUCKY I LLC Signed and acknowledged in the By: ProLogis Management Incorporated, presence of: a Delaware corporation, Agent By: By: --------------------------------- ------------------------------------ Printed Name: Name: Douglas A. Kiersey, Jr. ----------------------- Title: Senior Vice President By: --------------------------------- Printed Name: ----------------------- Signed and acknowledged in the Tenant: presence of: INNOTRAC CORPORATION By: /s/ Molly C. Jones By: /s/ David L. Gamsey --------------------------------- ------------------------------------ Printed Name: Molly C. Jones Name: David L. Gamsey Title: CFO By: /s/ Shanin Crowther --------------------------------- Printed Name: Shanin Crowther 2 EXHIBIT A SITE PLAN Tenant: Innotrac Corporation. (SITE PLAN) AIRPARK INTERNATIONAL DISTRIBUTION CENTER 1230 AVIATION BOULEVARD Boone County, Kentucky BUILDING FIVE 3 EX-10.17 4 g96900exv10w17.txt EX-10.17 SECOND AMENDMENT TO LEASE AGREEMENT Exhibit 10.17 SECOND AMENDMENT TO LEASE THIS SECOND AMENDMENT TO LEASE (the "Amendment") is executed as of the 23rd day of June, 2005, to be effective as of the Effective Date (as hereafter defined) by and between THE PRUDENTIAL INSURANCE COMPANY OF AMERICA, a New Jersey corporation ("Landlord"), and INNOTRAC CORPORATION, a Georgia corporation ("Tenant"). WITNESSETH: WHEREAS, Landlord and Tenant have heretofore entered into that certain lease dated as of September 17, 2002, as amended pursuant to that certain First Amendment to Lease dated April 4, 2003 (collectively, the "Lease"), pursuant to which Tenant is leasing approximately 204,307 square feet of rentable area (the "Existing Premises") in the building located at 1180 W. Remington Boulevard in Romeoville, Illinois (the "Building"). Capitalized terms that are not otherwise defined in this Amendment shall have the meanings ascribed to them in the Lease; WHEREAS, Tenant desires to lease from Landlord and Landlord desires to lease to Tenant an additional 51,254 feet of gross 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 June 1, 2005 (the "Effective Date"), Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord, the 51,254 square feet of gross rentable area in the cross hatched area in the south east corner of the Building depicted as the "Innotrac Corporation Released Space" 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 255,561 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. (a) 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. (b) As of the Effective Date Tenant's Proportionate Share under the Lease shall be 56.68% (rather than 45.30%). (c) Notwithstanding anything to the contrary contained in the Lease or this Amendment, Tenant shall not be obligated to pay Base Rent with respect to the 20,577 square feet of the Additional Premises until the completion of the Tenant Improvements (as such term is defined in the Work Letter). 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, subject to Landlord's obligations set forth in the Work Letter Agreement attached hereto as Exhibit C. Tenants talking possession of any portion of the Additional Premises shall be conclusive evidence when the Tenant took possession (unless otherwise expressly provided in the Work Letter Agreement attached hereto in Exhibit C). Other than as set forth in Exhibit C, no promise of Landlord to alter, remodel or improve the Existing Premises or the Additional Premises, and no representation respecting the condition of the Existing Premises or the Additional Premises has been made by Landlord to Tenant. 4. Real Estate Broker. Other than with respect to NAI Hiffman (the "Landlord's Broker") and CBRE (the "Tenant's Broker"), insofar as each party knows, no other broker negotiated this Amendment or is entitled to any commissions in connection herewith. Each party agrees to indemnify, defend and hold the other and its employees, agents and their officers and partners harmless from and against any claims resulting from a breach of the foregoing representation. Landlord agrees to pay a commission to Landlord's Broker which will in turn pay Tenant's Broker in connection with this Amendment pursuant to a separate agreement. 5. Full Force and Effect, Inconsistency. Except as set forth in this Amendment, the terms, covenants, conditions and agreements of the Lease shall remain unmodified and otherwise in full force and effect. In the event of any inconsistency between the terms of the Lease and the terms of this Amendment, the terms of this Amendment shall control. 6. Miscellaneous. (a) The preambles to this Amendment are incorporated into the body of this Amendment as if restated herein. (b) Interpretation of this Amendment shall be governed by the laws of the State of Illinois. (c) The mutual obligations of the parties as provided herein are the sole consideration for this Amendment and no representations, promises or inducements have been made by the parties other than as appear in this Amendment. This Amendment may not be amended except in writing signed by both parties. (d) This Amendment shall not be binding until executed and delivered by both parties. [Balance of page left intentionally blank] -2- IN WITNESS WHEREOF, the parties hereto have executed this 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: /s/ Rex Davis ------------------------------------ Name: Rex Davis Title: Asset Manager TENANT: INNOTRAC CORPORATION, a Georgia corporation By: /s/ Robert J. Toner, JR ------------------------------------ Name: Robert J. Toner, JR Title: VP of Logistics -3- Exhibit A Premises See Attached -4- Exhibit B Schedule of Base Rent Payments Existing Premises (204,307 square feet)
Lease Year Annual Base Rent. Total Annual Base Rent Monthly Installments - ---------- --------------------- ---------------------- -------------------- 10/1/04 through 9/30/05 $3.81 per square foot $778,409.67 $64,867.47 10/1/05 through 9/30/06 $3.92 per square foot $800,833.44 $66,740.29 10/1/06 through 9/30/07 $4.04 per square foot $825,400.28 $68,783.36 10/1/06 through 11/30/07 $4.16 per square foot $849,917.12 $70,826.43
Additional Premises (51,254 square feet)
Lease Year Annual Base Rent. Total Annual Base Rent Monthly Installments - ---------- --------------------- ---------------------- -------------------- Effective Date through 9/30/05 $3.33 per square foot $170,675.82 $14,222.99 10/1/05 through 9/30/06 $3.43 per square foot $175,801.22 $14,650.10 10/1/06 through 9/30/07 $3.53 per square foot $180,926.62 $15,077.22 10/1/06 through 11/30/07 $3.64 per square foot $186,564.56 $15,547.05
** Notwithstanding anything to the contrary contained in the Lease or this Amendment, Tenant shall not be obligated to pay Base Rent with respect to the 20,577 square feet of the Additional Premises until the completion of the Tenant Improvements (as such term is defined in the Work Letter). -5- Exhibit C Work Letter 1. Landlord shall perform improvements to the Additional Premises in accordance with the space plan attached hereto as Schedule 1 (the "Space Plans") and any related construction drawings and related architectural and engineering drawings reasonably prepared by Landlord's architect (such construction drawings and related architectural and engineering drawings, together with the Space Plans, the "Plans"). The improvements to be performed by Landlord in accordance with the Plans shall be limited to the following: (i) Demolish existing office area to reduce the office square footage to 4,295 rentable square feet and restore the balance of the space to warehouse space, (ii) Install in break room area standard Vinyl composite tile (VCT), (iii) Demolish and reinstall multi-stalled mens and womens restrooms in accordance with applicable codes, and (iv) Install restroom in the south west area of the warehouse in accordance with applicable codes (collectively, the "Tenant Improvements"). No (collectively, the ("Landlord Work"). It is agreed that construction of the Landlord Work will be completed at Landlord's sole cost and expense (subject to the terms of Paragraph 2 below) using Building standard methods, materials, and finishes. Landlord shall enter into a direct contract for the Landlord Work with a general contractor selected by Landlord. In addition, Landlord shall have the right to select and/or approve of any subcontractors used in connection with the Landlord Work. 2. If Tenant shall request any revisions to the Plans, Landlord shall have such revisions prepared at Tenant's sole cost and expense and Tenant shall reimburse Landlord for the actual out of pocket cost of preparing any such revisions to the Plans, plus any applicable state sales or use tax thereon, upon demand. Promptly upon completion of the revisions, Landlord shall notify Tenant in writing of the increased cost in the Landlord Work, if any, resulting from such revisions to the Plans. Tenant, within two (2) business days, shall notify Landlord in writing whether it desires to proceed with such revisions. In the absence of such written authorization, Landlord shall have the option to continue the Landlord Work disregarding the requested revision. Tenant shall be responsible for any delay in completion of the Premises resulting from any revision to the Plans, and such delay shall constitute a Tenant Delay (as defined below). If such revisions result in an increase in the cost of Landlord Work, such increased costs, plus any applicable state sales or use tax thereon, shall be payable by Tenant upon demand, and Landlord shall not commence work with respect to such revision until Tenant's payment of such amount. Notwithstanding anything herein to the contrary, all revisions to the Plans shall be subject to the reasonable approval of Landlord. 3. Delay in the Commencement Date. (a) The "Substantial Completion Date" shall mean the earliest to occur of: (i) the date on which Landlord's Work has been substantially completed substantially in accordance with the Plans or (ii) if the substantial completion of Landlord's Work has been delayed as a result of one or more Tenant Delays (as defined below), the date on which Landlord would have substantially completed Landlord's Work but for such Tenant Delays, as so certified by the Landlord's architect. -6- (b) "Tenant Delay" shall mean any interruption or delay at any time in the progress of the Landlord Work which is the result of: (a) Tenant changes to the Plans, including, in addition to delays resulting from the actual execution of such changes to the Plans, any delay occurring because the change to the Plans requested by Tenant expressly requires the design or construction of the Premises to be halted or delayed pending resolution of any request by Tenant for a change to the Plans, whether or not the requested change is ultimately approved by Landlord and/or Tenant; (b) the performance or non-performance of any work at the Premises by Tenant or any person, firm or corporation employed by Tenant, including but not limited to any work conducted in accordance with Section 4 below; or (c) any other act or omission of Tenant (for example, but not by way of limitation, failure to timely respond to requests for information or approval of construction related matters submitted by Landlord and failure to act in good faith and to cooperate with Landlord in finalizing and approving the Plans pursuant to Section 2 of this Work Letter). (c) "Force Majeure Delay" shall mean any interruption or delay at any time in the progress of Landlord's Work that is not a Tenant Delay and is the result of any Force Majeure (as defined in the Lease). Any delay shall be deemed to be a Force Majeure Delay notwithstanding that Landlord or its agent or Contractor with respect to which the time period for the Force Majeure Delay is being claimed is concurrently delayed by events within its control. (d) Landlord agrees that it shall exercise reasonable efforts to provide Tenant with written notice of any Tenant Delay or Force Majeure Delay (and the expected length of the applicable delay) as soon as reasonably practicable following the date Landlord has been notified of any such delay; provided, however, that Landlord's failure to furnish such notice shall in no event be deemed to a waiver by Landlord of the Tenant Delay or Force Majeure Delay or otherwise affect the operation of this Section 3. Landlord shall be deemed to have notified Tenant of a Tenant Delay or a Force Majeure Delay if the applicable delay is noted in the written job meeting minutes, if any, prepared by Landlord or any Contractor and furnished to Tenant. 4. Access by Tenant Prior to Commencement Date. Landlord will permit Tenant and Tenant's agents, suppliers, contractors and workmen to enter the Additional Premises prior to the completion of the Landlord's Work to enable Tenant to do such other things as may be required by Tenant to make the Additional Premises ready for Tenant's occupancy on or after the date of this Second Amendment, 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 Landlord Work 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 Additional Premises prior to the Commencement Date shall be deemed to be under all of the terms, covenants, conditions, and -7- provisions of the Lease (as amended by the Second Amendment) except the covenant to pay Base Rent and Tenant's Proportionate Share of Operating Expenses relating to the Additional Premises, 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 Additional 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 Landlord Work 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 Project 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 Project. (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 Additional 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 Additional Premises and not within any other portion of the Building or the Project and shall cause Tenant's contractors to leave the Additional Premises which are under construction as 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) Landlord and Tenant agree that all services and work performed on the Additional Premises by, on behalf of, or for the account of Tenant, including installation of materials and personal property delivered to the Additional Premises shall be done in a first-class workmanlike manner using only good grades of material, shall be performed in accordance with Legal Requirements, and shall be performed only by persons covered by a collective bargaining agreement with the appropriate trade union. -8- (f) Tenant agrees to protect, indemnify, defend and hold harmless Landlord and its employees, agents and contractors 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 Additional Premises and the Existing Premises, and the cost of any repairs to the Additional Premises and the Existing Premises 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 Additional Premises, policies of insurance with such coverages and such amounts as Landlord may reasonably require, which policies shall be endorsed to include Landlord and its contractors and their respective employees and agents and any mortgagee of the Project 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. 5. This Exhibit shall not be deemed applicable to any additional space added to the Existing Premises or the Additional Premises at any time hereafter, whether by any options or any additions to the Existing Premises or the Additional Premise or in the event of a renewal or extension of the original Lease Term, unless expressly so provided in the Lease or any amendment or supplement to the Lease. 6. Landlord's and Tenant's representatives for coordination of construction and approval of change orders will be as follows, provided that either party may change its representative upon written notice to the other: LANDLORD'S REPRESENTATIVE: NAME Linda Armstrong ADDRESS PDC Properties, Inc. 1099 Hawthorn Itasca, Illinois 60143 PHONE (630)250-0255 TENANT'S REPRESENTATIVE: NAME Robert J. Toner ADDRESS 6655 Sugarloaf Parkway Duluth, Georgia 30097 PHONE 678-584-4200 -9- Schedule 1 Space Plans -10- (FLOOR PLAN) PARTIAL FLOOR PLAN EX-10.21 5 g96900exv10w21.txt EX-10.21 FOURTH LEASE EXTENSION AND MODIFICATION AGREEMENT Exhibit 10.21 FOURTH LEASE EXTENSION AND MODIFICATION AGREETMENT THIS FOURTH LEASE EXTENSION AND MODIFICATION AGREEMENT (hereinafter referred to as this "Fourth Amendment") is entered into as of 8th of July, 2005 (hereinafter referred to as the "New Premises Commencement Date" or the "NPCD"), by and between TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, FOR THE BENEFIT OF ITS SEPARATE REAL ESTATE ACCOUNT (hereinafter referred to as "Landlord"), and INNOTRAC CORPORATION, a Georgia corporation (hereinafter referred to as "Tenant"). WITNESSETH: WHEREAS, Tenant and Satellite Triangle Properties, L.L.C., a Georgia limited liability company (hereinafter referred to as "Satellite"), entered into that certain Lease Agreement, dated October 6, 1999 (hereinafter referred to as the "Warehouse Lease"), as amended by that certain First Lease Extension and Modification Agreement between Tenant and Landlord, as the successor-in-interest to Satellite, dated October 3, 2000 (hereinafter referred to as the "First Amendment"), as amended by that certain Second Lease Extension and Modification Agreement between Tenant and Landlord, dated April 15, 2004 (hereinafter referred to as the "Second Amendment"), and as amended by that certain Third Lease Extension and Modification Amendment between Tenant and Landlord, dated as of February 1, 2005 (hereinafter referred to as the "Third Amendment"; the Warehouse Lease, as amended by the First Amendment, the Second Amendment and the Third Amendment, is hereinafter sometimes referred to as the "Lease"), pursuant to which Tenant leased from Landlord certain premises known as Suite B of the building located at 1620 Satellite Boulevard, Duluth, Gwinnett County, Georgia 30097 (hereinafter referred to as the "Building") which premises are more particularly described in the Lease (hereinafter referred to as the "Original Premises"); WHEREAS, Landlord is the successor-in-interest to Satellite and has acquired all of Satellite's right, title and interest in, to and under the Lease; WHEREAS, the parties desires to relocate Tenant's space to certain space in the Building, which consists of fifty-two thousand one hundred twenty (52,120) square feet, said new premises being more particularly shown on Exhibit A-4. attached hereto and incorporated herein by this reference (hereinafter referred to as the "New Premises"), and Landlord has agreed to Tenant's relocation to the New Premises, subject to the provisions hereinafter set forth; WHEREAS, subsequent to such relocation, Tenant intends to lease the New Premises from Landlord upon the same terms and conditions as set forth in the Lease, as modified by this Fourth Amendment; and WHEREAS, the parties desire to amend the Lease to expand the space leased by Tenant to relocate such space to the New Premises, to extend the term of the Lease and to provide for such other related matters as are hereinafter set forth. NOW, THEREFORE, for and in consideration of the mutual covenants and conditions set forth herein, and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Landlord and Tenant agree to amend the Lease as follows: 1. Defined Terms. Capitalized terms used herein, unless otherwise defined herein, shall have the same meanings as given such terms in the Lease. 2. Relocation to New Premises. The Lease is hereby further amended to provide for the relocation of the space leased by Tenant thereunder from the Original Premises to the New Premises. Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord the New premises in accordance with all of the terms and conditions of the Lease, except as further modified or amended hereby. 3. Term of Lease of New Premises. a. Except as otherwise may be expressly provided in this Fourth Amendment, Tenant takes and accepts the New Premises from Landlord in its present "AS IS" condition and as suited for the use intended by Tenant without any representation or warranty whatsoever to have and to hold the same for the term of the Lease, as amended hereby. The term of the Lease as to the New Premises shall commence on the New Premises Commencement Date, and shall expire on July 31, 2007 (the "New Premises Expiration Date" or "NPED"). The term of the Lease as to the Original Premises shall expire on the New Premises Commencement Date. From and after the New Premises Commencement Date, all references in the Lease to the "Commencement Date" shall be deemed to refer to the New Premises Commencement Date and all references to the "expiration date" or "Expiration Date" shall be deemed to refer to the New Premises Expiration Date. The rental and other payments due hereunder from Tenant with respect to the New Premises shall commence on the New Premises Commencement Date. If, for any reason whatsoever, the New Premises are not substantially completed by the New Premises Commencement Date, or if Landlord, for any reason whatsoever, cannot deliver possession of the New Premises to Tenant on or before the New Premises Commencement Date, this Lease shall not be void or voidable, nor shall Landlord be liable to Tenant for any resulting loss or damages. If Landlord is unable to deliver possession on or before the New Premises Commencement Date, then the New Premises Commencement Date shall be deferred by the number of days such delivery is delayed beyond the originally scheduled New Premises Commencement Date, except that if the New Premises Commencement Date, as so deferred, is not the last day of a calendar month, the New Premises Commencement Date shall be further deferred until the last day of such calendar month. Except for such deferral, the lease of the New Premises shall remain in full force and effect in accordance with the terms and conditions of the Lease and no delay in delivery of possession shall relieve Tenant of Tenant's obligations to Landlord (including the payment of rent and other amounts) as provided therein. Such deferral of the New Premises Commencement Date shall be Tenant's sole remedy for Landlord's failure to deliver timely possession of the New Premises. -2- b. Within twenty (20) days after the New Premises Commencement Date, Tenant shall execute and deliver to Landlord a Memorandum of Commencement of Rent in the form attached hereto as Exhibit D-4. 4. Vacation of Original Premises. Tenant hereby covenants to Landlord that Tenant shall surrender the Original Premises to Landlord by no later than 10:00 p.m. EST on the fifth (5th) business day following the New Premises Commencement Date, as same may be deferred (the "Complete Exit Date"), in accordance with the Lease, the same as if, the Complete Exit Date were the expiration date of the term of the Lease with respect to the Original Premises; provide, that from and after the New Premises Commencement Date, rent for the New Premises shall be governed by the rent schedule set forth in Paragraph 5.c. of this Fourth Amendment, and Tenant's only interest in the Original Premises after the New Premises Commencement Date shall be the right to store its property in the Original Premises until the Complete Exit Date and the right to access the Original Premises until the Complete Exit Date in order to retrieve its property therefrom. After the Complete Exit Date, Tenant shall have no further right, claim or interest with respect to the Original Premises and shall remove all its equipment and property therefrom. Any property not so removed from the Original Premises by Tenant by the Complete Exit Date may be deemed abandoned, and Landlord shall be authorized to retain such property, or any portion thereof, as Landlord's own property or to dispose of such property in any manner Landlord deems appropriate, in Landlord's sole discretion. Tenant shall remain liable for any and all out of pocket costs incurred by Landlord relating to its removal or disposition of any property in the Original Premises after the Complete Exit Date and Tenant releases Landlord of any and all liability in connection therewith. Tenant acknowledges that Landlord has relied and will rely on Tenant's covenants set forth in this Paragraph 4 in entering into a new lease with a third party with respect to the Original Premises and in performing Landlord's obligations under such new lease. In the event the New Premises Commencement Date occurs after June 1, 2005, Tenant shall be permitted to remain in occupancy of the Original Premises until the New Premises Commencement Date pursuant to all of the terms and conditions of the lease as in effect on the date immediately preceding the date of this Fourth Amendment and no rental shall be owed by Tenant with respect to the New Premises until the New Premises Commencement Date. If Tenant fails to vacate the Original Premises on or before the Complete Exit Date, Tenants occupancy of the Original Premises shall be a tenancy-at-sufferance and Tenant shall be required to pay Base Rent for the Original Premises, in addition to Base Rent for the New Premises, at a rate of one hundred fifty percent (150%) of the Base Rent provided for in the Lease as of the New Premises Commencement Date for each calendar month that Tenant remains in occupancy of the Original Premises, with rental to be pro rated per diem. 5. Terms of the New Premises Lease. The lease of the New Premises shall be pursuant to all of the terms and conditions of the Lease as in effect from time to time from and after the New Premises Commencement Date; provided, however, that Landlord and Tenant hereby agree that, from and after the New Premises Commencement Date, the Lease shall be further modified as follows: a. Premises. -3- (i) For all purposes under the Lease, from and after the New Premises Commencement Date, all references in the Lease to the "Premises" shall be deemed to refer to the Original Premises for the portion of the term of the Lease falling prior to the New Premises Commencement Date, and to the New Premises for the portion of the term of the Lease falling on or after the New Premises Commencement Date; and (ii) The New Premises is stipulated by Landlord and Tenant to have 52,120 square feet for all purposes under the Lease. (iii) Tenant's "proportionate share" shall be amended to provide that Tenant's proportionate share from and after the New Premises Commencement Date shall be 33.51%. b. Term. The term of the Lease is extended through and including the New Premises Expiration Date. c. Rent. (i) On and after the New Premises Commencement Date, rent for the New Premises under Paragraph 2 of the Lease shall be payable to Landlord without demand, deduction or setoff, in the following amounts:
Base Rent Per Square Foot Monthly Base Period Per Annum Rent ------ ------------- ------------ NPCD - 05/31/06 $2.70 $11,727.00 06/01/06 - ED $2.78 $12,074.47
If the term of the Lease commences at any time other man the first day of a month or terminates at any time other than the last day of a month, the amount of rent due from Tenant shall be proportionately adjusted based on that portion of the month that this Lease is in effect. (ii) Notwithstanding the foregoing in subparagraph 5.c.(i) to the contrary, Landlord hereby agrees to abate the first two (2) monthly installments of rent coming due and payable under the Lease after the NPCD, as amended hereby, in the amount of Eleven Thousand Seven Hundred Twenty-Seven and No/100 Dollars ($11,727.00) per month ($23,454.00 in total). Notwithstanding anything in this Paragraph 5 to the contrary, Tenant shall have no right to any such rent abatement of rent under this Paragraph 5 at any time after which (i) a default or an event of default has occurred with respect to Tenant under the Lease, as amended hereby, (ii) the Lease, as amended hereby, is not in full force and effect, (iii) Tenant has assigned the Lease, as amended hereby, or has entered into a sublease of all or any portion of the New Premises or (iv) -4- Tenant is in default under any other written agreement with Landlord. d. Tenant Improvements. Except as otherwise expressly provided in the Lease, Tenant accepts the New Premises in its "AS IS" condition with all faults and without any representation or warranty whatsoever, and Landlord shall not have any obligation whatsoever to make any improvements, alterations or refurbishment to the New Premises or to provide any allowance therefor. 6. Right of First Negotiation. Landlord grants Tenant a right of first negotiation (the "First Negotiation Right") to lease additional space in the Building in accordance with the following: a. The space that is subject to such First Negotiation Right shall be the space contiguous to the New Premises and consisting of approximately 29,600 square feet and more particularly described as the "First Negotiation Space" on Exhibit A-4, attached hereto and incorporated herein by this reference (the "First Negotiation Space"), as such space becomes available for lease, subject to and in accordance with the provisions of this Paragraph. b. Before Landlord enters a transaction to lease any portion of the First Negotiation Space, Landlord shall notify Tenant in writing (such notice being hereafter called the "Offer Notice") of the availability of such space. Such Offer Notice shall constitute an offer by Landlord to lease the space described in the Offer Notice to Tenant in accordance with the terms of this Paragraph. Tenant shall have seven (7) days after its receipt of such Offer Notice to accept such offer pursuant to this First Negotiation Right and to lease all of such First Negotiation Space from Landlord in accordance with the terms of this Paragraph. c. Acceptance by Tenant of the offer set forth in the Offer Notice shall be deemed effective only if such acceptance is given to Landlord in a written notice of acceptance (the "Acceptance Notice") specifically referring to the Offer Notice to which it relates, received by Landlord within the seven (7) day period prescribed above for such acceptance. To be effective, such Acceptance Notice must accept the offer set forth in the subject Offer Notice with respect to all of the First Negotiation Space described in such Offer Notice. d. If Tenant duly and timely delivers to Landlord its Acceptance Notice within such seven (7) day period in accordance with this Paragraph, then Landlord and Tenant shall negotiate in good faith the terms and conditions of a lease of the First Negotiation Space. If Landlord and Tenant have not executed a written amendment to the Lease setting forth the terms and conditions of the lease of the First Negotiation Space within thirty (30) days after Tenant's receipt of Landlord's Offer Notice with respect to such space, then (i) Landlord's Offer Notice and Tenant's Acceptance Notice shall be null and void and of no further force or effect, (ii) neither Landlord nor Tenant shall have any further duty to continue such negotiations nor any further liability to the other with respect to the negotiations pursuant to the Offer Notice and Acceptance Notice, and (iii) Tenant shall have no further rights with respect to the First Negotiation Space. -5- e. If Tenant does not duly and timely deliver to Landlord its Acceptance Notice within the aforesaid five (5) business day period in accordance with this Paragraph, then Tenant shall be deemed to have elected not to accept Landlords' offer set forth in the subject Offer Notice, and Tenant's rights with respect to the portion of the First Negotiation Space described in such Offer Notice shall terminate and be of no further force or effect and Landlord shall be free to enter into a lease with a prospective tenant with respect to all or any part of that portion of the First Negotiation Space that was the subject of such Offer Notice, plus additional space leased in conjunction therewith (including, without limitation, an additional portion of the First Negotiation Space, provided such additional portion of the First Negotiation Space does not contain more than thirty percent (30%) of the rentable area of the portion of the First Negotiation Space that was offered to Tenant pursuant to the Offer Notice). Notwithstanding the foregoing, following execution and delivery of such lease by Landlord and such third party tenant, Tenant's rights under this Paragraph or otherwise under the Lease shall be subject and subordinate to the rights and options of the third party tenant under such lease, including, without limitation, any expansion, extension or renewal options or other rights of such third party set forth therein. f. Tenant's rights under this Paragraph are and shall be subject and subordinate to the rights and options of tenants under other leases of portions of the Building, as such rights and options exist on the date of this Fourth Amendment. Accordingly, Landlord shall not be obligated to give Tenant an Offer Notice prior to or in conjunction with the exercise of any such rights or options. Furthermore, Landlord shall have the right to enter into a lease of all or a portion of the First Negotiation Space with a tenant or subtenant other than Tenant occupying such space on the date such space would otherwise become available for lease without first being required to submit an Offer Notice to Tenant; and such lease with any such occupant shall be superior to, but shall not have the effect of terminating, Tenant's rights under this Paragraph. Landlord represents, to its knowledge, that it is unaware of any tenant under other leases of portions of the Building having any rights respecting the First Negotiation Space. g. Notwithstanding anything in this Paragraph to the contrary, Tenant shall have no right to exercise any right or option under this Paragraph, nor shall Landlord have any obligation to submit an Offer Notice to Tenant with respect to any portion of the First Negotiation Space before entering into a third party lease with respect thereto, or to enter into any lease of any portion of the First Negotiation Space with Tenant, at any time after which either (i) a default or an event of default has occurred with respect to Tenant under the Lease, as amended hereby, (ii) the Lease, as amended hereby, is not in full force and effect, (iii) Tenant has assigned the Lease, as amended hereby, or has entered into a sublease of all or any portion of the New Premises or (iv) Tenant is in default under any other written agreement with Landlord. 7. Brokerage Commissions. Except for Scotland Wright and Associates, Inc. ("Broker"), Tenant represents and warrants that it has not retained or consulted with a broker, agent or commission salesperson with respect to the negotiation of this Fourth Amendment, and that no commissions, fees or compensation of any kind are due and payable in connection herewith to any -6- broker, agent or commission salesperson acting for or on behalf of Tenant, other than to Broker. Tenant agrees to indemnify and hold Landlord harmless from all loss, cost and damage suffered or incurred by Landlord as the result of any breach by Tenant of the representation and warranty contained in this Paragraph 7. Except for CB Richard Ellis, Inc., no broker, agent or commission salesperson has represented Landlord in the negotiation of this Fourth Amendment, and Landlord has agreed to compensate both Broker and CB Richard Ellis, Inc. for their services in accordance with the terms of separate commission agreements between Landlord and Broker, on the one hand, and between Landlord and CB Richard Ellis, Inc., on the other. 8. Confidential Settlement Agreement. As a material inducement to Landlord entering into this Fourth Amendment, the Confidential Settlement Agreement entered into by and between Landlord and Tenant, dated April 15, 2004 (the "Settlement Agreement"), and all the terms and provisions thereof, including, without limitation, the release of Landlord set forth in subparagraph 3(A) thereof, is hereby ratified and confirmed by Landlord and Tenant and by this reference expressly incorporated herein. Tenant hereby expressly acknowledges and agrees that Landlord makes no representations or warranties whatsoever with respect to the New Premises unless expressly set forth. Tenant, at its sole cost and expense, shall keep and maintain the floor of the New Premises in good condition; provided however, with respect to issues of moisture and moisture infiltration in or on the floor, Tenant's floor maintenance obligation shall be limited to abiding the HVAC standards set forth in Exhibit C-4, attached hereto and incorporated herein by this reference (the "HVAC Standards"). 9. Cancellation Right. Landlord and Tenant shall have the right to terminate the Lease (the "Cancellation Right") during the term thereof in accordance with the following: a. If and only if (i) there is a reoccurrence of water or moisture on the floor of the New Premises (the "Moisture Infiltration") and (ii) the Moisture Infiltration was not caused by Tenant or by Tenant's failure to maintain the HVAC Standards, both as determined in a report by Capital City Mechanical Services, Inc. (hereinafter referred to as the "HVAC Contractor"), which report shall be issued within three (3) business days after Landlord's receipt of written notification from Tenant of any such Moisture Infiltration, either Landlord or Tenant may, at its sole option, terminate the Lease with respect to the entire New Premises by delivering written notice thereof to the other within three (3) business days after receipt of the HVAC Contractor's report, which termination shall be effective on the date (the "Cancellation Effective Date") that is no later than twenty-one (21) days after delivery of such notice (the "Cancellation Notice") to the other. b. If either party validly and timely exercises its cancellation right hereunder, Tenant shall nonetheless continue to be liable for its obligations accruing under the Lease, as amended hereby, with respect to the New Premises to and including the Cancellation Effective Date, including, without limitation, additional rental, and all such obligations having accrued prior to the Cancellation Effective Date shall survive the termination of the Lease, as amended hereby. Notwithstanding anything else to the contrary, if Tenant terminates timely, no rental shall be due or payable for the 21 day period between the date that Tenant gives notice of termination and the date that Tenant is being given to exit the New Premises. -7- c. Any determination made by the HVAC Contractor shall be final and binding on both Landlord and Tenant. The party determined by the HVAC Contractor to have caused the Moisture Infiltration shall be solely responsible for the fees and expenses of the HVAC Contractor. The provisions contained in this subparagraph c. shall survive the termination or expiration of the Lease. d. The rights granted to Tenant under this Paragraph 9 are personal to Tenant, and in the event of any assignment of the Lease or sublease of the Premises by Tenant, Tenant's cancellation rights hereunder shall thenceforth be void and of no further force or effect. Notwithstanding anything in this Paragraph 9 to the contrary, Tenant shall have no cancellation right at any time after which (i) a default or an event of default has occurred with respect to Tenant under the Lease, as amended hereby, (ii) the Lease, as amended hereby, is not in full force and effect, or (iii) Tenant is in default under any other written agreement with Landlord. e. Tenant hereby acknowledges and agrees that Tenant's sole remedy in the event of any such Moisture Infiltration that is not caused by Tenant or by Tenant's failure to maintain the HVAC Standards is the termination of the Lease subject to and in accordance with the provisions of this Cancellation Right. 10. Basic Lease Information. As a result of the relocation of the Premises, the Basic Lease Information, as originally attached to the Third Amendment, is hereby deleted in its entirety and Exhibit B-4 attached hereto is hereby inserted in lieu thereof. The provisions of the Lease as they relate to the Premises for the portion of the term of the Lease commencing on the New Premises Commencement Date, to the extent they are in conflict with the Basic Lease Information are hereby superseded by the provisions of the Basic Lease Information that are attached hereto as Exhibit B-4. Notwithstanding the foregoing, the original Basic Lease Information attached to the Third Amendment shall remain binding on Landlord and Tenant with respect to that portion of the term of the Lease falling on or prior to the day immediately preceding the New Premises Commencement Date. 11. No Further Amendments; Ratification. Except as expressly amended herein, all terms and conditions of the Lease remain unamended in full force and effect and are hereby ratified and confirmed by Landlord and Tenant. In the event of any conflict between the terms and conditions of the Lease and the terms and conditions of this Fourth Amendment, the terms and conditions of this Fourth Amendment shall control. A condition precedent to Landlord's obligations under this Fourth Amendment is the approval of this Fourth Amendment by all lenders holding a deed to secure debt and security agreement and related loan documents affecting or imposing a lien or security title on the Building. Submission of this instrument for examination or signature by Tenant does not constitute an agreement between Landlord and Tenant and shall not become effective until execution and delivery by both Landlord and Tenant. -8- IN WITNESS WHEREOF, the parties have caused their duly authorized officers or partners to execute this Fourth Amendment with intent to be bound hereby effective as of the day and year first above written. LANDLORD: TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, FOR THE BENEFIT OF ITS SEPARATE REAL ESTATE ACCOUNT By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- TENANT: INNOTRAC CORPORATION, a Georgia corporation By: /s/ Robert J. Toner, JR ------------------------------------ Name: Robert J. Toner, JR Title: VP of Logistics -9- EXHIBIT B-4 BASIC LEASE INFORMATION LEASE DATE October 6, 1999 (amended by the First Amendment, dated October 3, 2000; Second Amendment, dated April 15, 2004; Third Amendment, dated as of February 1, 2005; and Fourth Amendment, dated as of June 1, 2005) LANDLORD TEACHERS INSURANCE AND ANNUITY ASSOCIATION OF AMERICA, for the Benefit of its Separate Real Estate Account TENANT INNOTRAC CORPORATION, a Georgia corporation BUILDING ADDRESS 1620 Satellite Boulevard Duluth, Georgia 30097 TERM Approximately twenty-five (25) months* NEW PREMISES COMMENCEMENT DATE Date of Execution of this Fourth Amendment NEW PREMISES EXPIRATION DATE July 31, 2007 RENTABLE AREA OF THE BUILDING 155,520 square feet RENTABLE AREA OF NEW PREMISES 52,120 square feet PROPORTIONATE SHARE 33.51% BASE MONTHLY RENT (PER ANNUM PER SQ. FT. OF THE NEW PREMISES) NPCD-05/31/2006 $2.70 06/01/06-ED $2.78
*Note: This Basic Lease Information reflects information that is applicable for the portion of the term of the Lease commencing on the New Premises Commencement Date, subject to the terms of the Lease. It does not address the portion of the term of the Lease falling prior to that date. B-1 LANDLORD'S CONTRIBUTION N/A LANDLORD'S ADDRESSES For Notices: Director of Asset Management Real Estate Separate Account TIAA-CREF 730 Third Avenue New York, New York 10017 TENANT'S ADDRESS For Notices: INNOTRAC CORPORATION 6655 Sugarloaf Parkway Duluth, Georgia 30097 Attn: Robert Toner, Vice President - Logistics With a copy to: INNOTRAC CORPORATION 6655 Sugarloaf Parkway Duluth, Georgia 30097 Attn: General Counsel TENANT'S BROKER Scotland Wright and Associates, Inc.
B-2 EXHIBIT C-4 HVAC STANDARDS Tenant hereby acknowledges and agrees that in order to maintain the normal functioning of the HVAC system in the New Premises and to prevent the occurrence of excessive moisture on the floor of the New Premises, Tenant shall comply with the following operating standards: 1. Keep the exterior doors closed except as may reasonably be required for customary exit, entry and delivery; 2. Maintain the humidity settings for the HVAC system at or below 56% RH; 3. Do not use warehouse exhaust fans unless required to remove smoke and fumes created in the normal and customary course of Tenant's business, in which event the fans shall be utilized by Tenant only for such period of time as is reasonably required to remove such smoke and fumes; 4. Keep floors regularly maintained in broom clean condition, clean and free of debris that cause moisture infiltration; 5. Enter into and maintain during the term of the Lease a maintenance program with Capital City Mechanical Services, Inc. at Tenant's sole cost and expense. C-1 IN WITNESS WHEREOF, Tenant has caused its duly authorized officers or partners to execute this Memorandum the day and year first above written. TENANT: INNOTRAC CORPORATION, a Georgia corporation By: /s/ Robert J. Toner, JR ------------------------------------ Name: Robert J. Toner, JR Title: VP of Logistics D-2 EX-31.1 6 g96900exv31w1.txt EX-31.1 SECTION 302 CERTIFICATION OF THE CEO EXHIBIT 31.1 CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) I, Scott D. Dorfman, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Innotrac Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2005 /s/ Scott D. Dorfman ---------------------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) EX-31.2 7 g96900exv31w2.txt EX-31.2 SECTION 302 CERTIFICATION OF THE CFO EXHIBIT 31.2 CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) I, Christine A. Herren, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Innotrac Corporation; 2. Based on my knowledge, this 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 report; 3. Based on my knowledge, the financial statements, and other financial information included in this 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 report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, 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 report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 12, 2005 /s/ Christine A. Herren ---------------------------------------- Christine A. Herren Senior Director and Controller (Principal Financial Officer and Principal Accounting Officer) EX-32.1 8 g96900exv32w1.txt EX-32.1 SECTION 906 CERTIFICATION OF THE CEO EXHIBIT 32.1 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. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2005 (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 results of operations of the Company. Dated: August 12, 2005 /s/ Scott D. Dorfman ---------------------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board EX-32.2 9 g96900exv32w2.txt EX-32.2 SECTION 906 CERTIFICATION OF THE CFO EXHIBIT 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Christine A. Herren, Principal Financial and Accounting Officer of Innotrac Corporation (the "Company"), certify, pursuant to 18 U.S.C. Section 1350 as adopted by Section 906 of the Sarbanes-Oxley Act of 2002, that: (1) the Quarterly Report on Form 10-Q of the Company for the quarter ended June 30, 2005 (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 results of operations of the Company. Dated: August 12, 2005 /s/ Christine A. Herren ---------------------------------------- Christine A. Herren Senior Director and Controller (Principal Financial Officer and Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----