-----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, ERehpMJppCPMW7k0//qqrIKjWJRn4IEdcZE/UhGeJAbB6ZGZDxRfPj9yLNficTso CdoewmEAWWkrXH7aC4J+mg== 0000950144-06-002987.txt : 20060331 0000950144-06-002987.hdr.sgml : 20060331 20060331104719 ACCESSION NUMBER: 0000950144-06-002987 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 20051231 FILED AS OF DATE: 20060331 DATE AS OF CHANGE: 20060331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: INNOTRAC CORP CENTRAL INDEX KEY: 0001051114 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-BUSINESS SERVICES, NEC [7389] IRS NUMBER: 581592285 STATE OF INCORPORATION: GA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23741 FILM NUMBER: 06725940 BUSINESS ADDRESS: STREET 1: 6655 SUGARLOAF PARKWAY CITY: DULUTH STATE: GA ZIP: 30097 BUSINESS PHONE: 678-584-4000 MAIL ADDRESS: STREET 1: 1828 MECA WAY CITY: NORCROSS STATE: GA ZIP: 30093 10-K 1 g00505e10vk.txt INNOTRAC CORPORATION SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K FOR ANNUAL AND TRANSITION REPORTS PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from __________ to __________ Commission File No. 000-23741 INNOTRAC CORPORATION (Exact name of Registrant as specified in its charter) GEORGIA 58-1592285 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
6655 SUGARLOAF PARKWAY, DULUTH, GEORGIA 30097 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000 Securities registered pursuant to Section 12(b) of the Act: None. Name of each exchange on which registered: The Nasdaq National Market. Securities registered pursuant to Section 12(g) of the Act: Common Stock, Par Value $.10 Per Share. Series A Participating Cumulative Preferred Stock Purchase Rights Indicate by a check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [ ] No [X] Indicate by a check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [ ] No [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] The aggregate market value of the voting stock held by nonaffiliates (which for purposes hereof are all holders other than directors, executive officers and holders of 10% or more of the Registrant's outstanding Common Stock, and their affiliates) of the Registrant as of June 30, 2005, the last business day of the Registrant's most recently completed second fiscal quarter was $18,776,845 based on the closing sale price of the Common Stock as reported by the Nasdaq National Market on such date. See Item 12. At March 24, 2006, there were 12,280,610 shares of Common Stock, par value $0.10 per share, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Proxy Statement for the 2006 Annual Meeting of Shareholders, to be filed with the Securities and Exchange Commission (the "Commission" or the "SEC"), are incorporated by reference into Part III of this Annual Report on Form 10-K for the year ended December 31, 2005. INNOTRAC CORPORATION TABLE OF CONTENTS
PAGE ---- PART I .................................................................. 3 ITEM 1. BUSINESS .................................................... 3 CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS .................................................. 9 EXECUTIVE OFFICERS OF THE REGISTRANT ........................ 9 ITEM 1A. RISK FACTORS ................................................ 10 ITEM 1B. UNRESOLVED STAFF COMMENTS ................................... 14 ITEM 2. PROPERTIES .................................................. 15 ITEM 3. LEGAL PROCEEDINGS ........................................... 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS ......... 16 PART II ................................................................. 16 ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES .................................................. 16 ITEM 6. SELECTED FINANCIAL DATA ..................................... 17 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ......................... 18 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ........................................................ 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ................. 27 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE .................................... 44 ITEM 9A. CONTROLS AND PROCEDURES ..................................... 44 ITEM 9B. OTHER INFORMATION ........................................... 45 PART III ................................................................ 45 ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT .......... 45 ITEM 11. EXECUTIVE COMPENSATION ...................................... 45 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS .................. 45 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS .............. 45 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES ...................... 46 PART IV ................................................................. 46 ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES .................. 46 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS ............. S-1
PART I ITEM 1. BUSINESS Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and headquartered in Atlanta, Georgia, provides order processing, order fulfillment and call center services to large corporations that outsource these functions. In order to perform call center and fulfillment functions in-house, a company may be required to develop expensive, labor-intensive infrastructures, which may divert its resources and management's focus from its principal or core business. By assuming responsibility for these tasks, Innotrac strives to improve the quality of the non-core operations of our clients and to reduce their overall operating costs. Innotrac receives 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 fulfillment and customer support services interrelate and are sold as a package, however they are individually priced. Our clients may utilize our fulfillment services, our customer support services, or both, depending on their individual needs. Innotrac's core competencies include: - Fulfillment Services: - sophisticated warehouse management technology - automated shipping solutions - real-time inventory tracking and order status - purchasing and inventory management - channel development - zone skipping for shipment cost reduction - product sourcing and procurement - packaging solutions - back-order management - returns management - 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 - intuitive e-mail response The Company is 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 consumer telephones and caller ID equipment ("Telecommunications products") and Digital Subscriber Line Modems ("Modems") for clients such as BellSouth Corporation ("BellSouth"), Qwest Communications International, Inc. ("Qwest") and their customers. The Company also provides a variety of these services for a significant number of retail, catalog and direct marketing companies such as The Coca-Cola Company, Ann Taylor Retail, Inc., Smith & Hawken, Ltd., 3 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 transmissions 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 is held on a consignment basis, with certain exceptions, and includes items such as shoes, clothing, accessories, books and outdoor furniture. The Company also provides these services for business-to-business ("B2B") clients including Books are Fun, Ltd. (a subsidiary of Readers' Digest), NAPA and The Walt Disney Company. The following table sets forth the percentage of revenues generated by the Company's various business lines during 2005 and 2004:
2005 2004 ----- ----- Telecommunications products 12.2% 18.7% Modems 21.2 19.5 Retail/Catalog 32.2 30.7 Direct Marketing 23.2 20.5 B2B 11.2 10.6 ----- ----- 100.0% 100.0% ===== =====
In August 2004, we leased a 75,000 square foot fulfillment center in New Castle, Delaware. This facility provides fulfillment services for a new direct marketing client. Capital expenditures associated with this facility were approximately $260,000 in 2004. In December 2005, we entered into a five year lease for a new facility in Hebron, Kentucky. This new facility is currently under construction and will provide approximately 650,000 square feet of fulfillment and warehouse space for our Target.com operations beginning in the second quarter of 2006. With facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada, Bolingbrook, Illinois, Hebron, Kentucky and New Castle, Delaware, our national footprint is virtually complete. We are committed to deeper penetration within our existing business lines and continued diversification of our client base. Our long-term goal is to have our business mix spread evenly across a higher number of clients in diverse industries. We will continue to seek new clients and may open additional facilities in other geographic locations to service these needs. FULFILLMENT SERVICES Providing effective turnkey fulfillment solutions for our clients' products is our primary business. Our capabilities in this area are described below: FULFILLMENT. We are committed to delivering our clients' products to their customers on a timely and accurate basis. Our personnel pick, pack, verify and ship product orders and requests for promotional, technical and educational literature, shoes, clothing, electronic equipment, accessories, books and outdoor furniture for our clients. We use several custom-designed, semi-automated packaging and labeling lines to pack and ship products as well as highly automated, conveyorized systems utilizing RF scanning and pick-to-light technologies. By utilizing these technologies, we are able to reduce labor costs and provide more timely shipments to our clients' customers. We streamline and customize the fulfillment procedures for each client based upon the client request and the tracking, reporting and inventory controls necessary to implement that client's marketing support program. We also offer comprehensive product return services whereby our personnel receive, log, test, repackage and dispose of products that are returned from end-users. 4 Our Atlanta operations earned ISO 9001:2000 certification in 2002, our Hebron, Kentucky operations earned ISO 9001:2000 certification in 2003, our Pueblo operations earned ISO 9001:2000 certification in 2004 and our Chicago and Delaware operations earned ISO 9001:2000 certification in 2005. We are dedicated to providing quality service to our clients at every step in the fulfillment process. To ensure order accuracy, shipment inspection and system driven validation are performed to prove the contents exactly match the order prior to shipment. In addition, we have highly sensitive scales at the end of our packaging lines that also assist in ensuring the accuracy of every order. Our 2005 order accuracy rate exceeded 99.5%. INVENTORY MANAGEMENT. An integral part of our fulfillment services is the monitoring and control of our clients' inventories. We provide automated inventory management and reporting to assure real-time stock counts of our client's products, literature and other items. Our inventory systems enable us to provide management information to maintain consistent and timely reorder levels and supply capabilities and also enable the client to quickly assess stock balances, pricing information, reorder levels and inventory values. We offer this information to the client on a real-time basis through our internet gateway or direct system integration. Inventory management data is also utilized in our reporting services. We utilize bar coding equipment in our inventory management systems, which improves the efficiency of stock management and selection. We also perform cycle counts throughout the year to check system-maintained item balances against physical item balances. Our facilities have several layers of security. When necessary, we dispose of clients' products utilizing established guidelines. Disposal procedures vary depending on the product and client business rules. PURCHASING MANAGEMENT. For certain clients, we place orders for products we fulfill with vendors chosen by those clients. Our purchasing management services include assisting a client in negotiating product pricing with the vendor, arranging returns and credits as well as forecasting product quantities required for normal business programs or promotions. PRODUCT CONSIGNMENT AND WAREHOUSING. For substantially all of our clients, we warehouse products on a consignment basis and fulfill orders on behalf of our customers for a fee. In certain cases (primarily BellSouth), we may purchase and own inventory, but on a significantly reduced risk basis as a result of client guarantees and contractual indemnifications. CUSTOMER SUPPORT SERVICES Another of our core competencies is providing customer support services. We believe these services are critical to a comprehensive order processing and order fulfillment solution. Our customer support services are described below. INBOUND CALL CENTER SERVICES. Our customer service representatives take orders for certain clients and resolve questions regarding shipping, billing and order status as well as a variety of other questions. From time to time they may sell equipment, other products and telephone company services to customers who call us. To properly handle the call, Innotrac's automated call distributor identifies each inbound call by the toll-free number dialed and immediately routes the call to the interactive voice response ("IVR") system or an Innotrac customer service representative. If the caller is placing an order they are immediately transmitted to a customer service representative trained to take the order and enter it into our systems for transmittal to the appropriate fulfillment center. If the customer has a question, complaint or needs return information, the IVR system attempts to resolve these issues by guiding the customer through a series of interactive questions. If IVR automatic resolution cannot solve the problem, the call is routed to one of our customer service representatives who are specially trained in the applicable client's business and products and answer using the client's name. Our customer service representatives can enter customer information into our call-tracking system, listen to a question and quickly access a proprietary network database using a graphical interface to answer a customer's question. A senior representative is available to provide additional assistance for complex or unique customer questions. Customer service representatives are also trained to handle introductory level technical support issues. Customer requests are generally resolved with a single call, whether answered by a trained representative or our automated systems. 5 RETURNS AND REFUNDS PROCESSING. The representatives respond to customer calls about product returns and refunds and obtain information about customer service problems. They facilitate a customer's return of a product by providing a bar-coded label to the customer. When the returned item is processed and entered into our system, it automatically triggers a pre-set action for reshipment of a product or refund to the customer. TECHNOLOGY Our use of technology enables us to design and deliver services for each client's fulfillment and customer support needs. Our information technology group, or IT Group, has developed our database marketing support and management systems. Innotrac has a technical integration platform written in Java over an Oracle database, which contains a complete web interface and XML-based APIs that allows clients to transact with us electronically. We deploy the solution running on Sun Solaris and utilizing Veritas cluster server software, which provides a high availability computing environment. Veritas backup software, DLT tape libraries and Oracle Hot backup capabilities allow us to backup our production Oracle databases online without interruption to the business unit. Our burstable bandwidth allows us to quickly increase data capacity. Our EMC storage solutions provide rapid access to data and the ability to scale quickly depending on business demands. Network connectivity is achieved with Cisco routers and local directors. The open architecture of our computer system permits us to seamlessly interact with many different types of client systems. Our IT Group uses this platform to design and implement application software for each client's program, allowing clients to review their programs' progress on-line to obtain real-time comprehensive trend analysis, inventory levels and order status and to instantly alter certain program parameters. As the needs of a client evolve, our IT Group works with our client services team to modify the program on an ongoing basis. Information can be exchanged via direct system integration, EDI, internet access and direct-dial applications. We believe that our technology platform provides us with the resources to continue to offer leading edge services to current and new clients and to integrate our systems with theirs. We believe that the integrity of client information is adequately protected by our data security system and our off-site disaster back-up facilities. We utilize three primary warehouse management systems depending on our business line and our locations. In 2002, we completed the implementation of PKMS for clients at our Pueblo, Atlanta and Chicago-Romeoville warehouses. PKMS is an advanced fulfillment warehouse management system designed to support large volumes of transactions and users, which enable the effective management of high levels of throughput, from receiving through shipping. PKMS provides efficiencies in inventory management, outbound distribution and task management. Our Chicago-Bolingbrook and Cincinnati-Hebron facilities utilize an Optum warehouse management system, which is a highly configurable fulfillment solution for fast-moving, high volume, piece-pick operations suitable for our multi-channel retailers and catalogers. Our Reno and Delaware facilities utilize an internally-developed, customized order management system ("OMS") that is fully integrated with a customized warehouse management solution and includes front-end customer relationship management capabilities, which we believe is suitable for direct marketing clients. We believe that our use of different systems for different types of clients and products allow us to effectively and efficiently manage our warehouse operations to secure a competitive advantage in the fulfillment industry. Our Pueblo call center utilizes the Rockwell Spectrum Automatic Call Distributor, or ACD, switch to handle call management functions. The ACD system has the capacity to handle approximately 1,200 call center representatives and as of December 31, 2005 was supporting approximately 221 representatives. Additionally, the ACD system is integrated with software designed to enable management to staff and supervise the call center based on call length and call volume data compiled by the ACD system. Our call center in Reno employs an Aspect ACD Enterprise System switch and is currently supporting approximately 56 representatives. Our integrated systems allow the customer service representatives to enter orders received via telephone into their computer which transmits the data over T1 lines to one of our 6 eight fulfillment centers' order management systems where it is processed. Shortly thereafter the product is picked, packed, verified and shipped to the customer. PERSONNEL AND TRAINING Our success in recruiting, hiring and training large numbers of employees and obtaining large numbers of hourly employees during peak periods for fulfillment and call center operations is critical to our ability to provide high quality fulfillment and customer support services. Call center representatives and fulfillment personnel receive feedback on their performance on a regular basis and, as appropriate, are recognized for superior performance. Additional training is provided to all fulfillment center employees quarterly and to our call center representatives on an as-needed basis. To maintain good employee relations and to minimize employee turnover, we offer competitive pay and hire primarily full-time employees who are eligible to receive a full range of employee benefits. As of March 1, 2006, we had over 840 full-time employees supported by part-time staff on an as-needed basis. Management believes that the demographics surrounding our facilities and our reputation, stability, compensation and benefit plans should allow us to continue to attract and retain qualified employees. Currently, we are not a party to any collective bargaining agreements. None of our employees are unionized. COMPETITION In tailoring services to client needs, we compete on the basis of quality, reliability of service, scope of locations, efficiency, technical capabilities, speed and price. We compete with many companies, some of which have greater resources than us, with respect to various portions of our business. Those companies include fulfillment businesses and call center operations. We believe that our comprehensive and integrated services differentiate us from many of those competitors. We continuously explore new outsourcing service opportunities, typically in circumstances where clients are experiencing inefficiencies in non-core areas of their businesses and management believes we can develop a superior outsourced solution on a cost-effective basis. We primarily compete with the in-house operations of our current and potential clients and also compete with certain companies that provide similar services on an outsourced basis. GOVERNMENT REGULATION The Caller ID services offered by our telecommunications clients are subject to various federal and state regulations. The legality of Caller ID has been challenged in cases decided under the Electronic Communications Privacy Act (ECPA), and several state statutes. In 1994, the Federal Communications Commission (FCC) preempted certain state regulation of interstate Caller ID or other calling party number (CPN) based services, including state regulations which (1) prohibit the offering of interstate CPN-based services; (2) require blocking alternatives on intrastate calls different from those adopted by the FCC; or (3) require blocking systems that interfere with the use of "*67" to achieve blocking on interstate calls. This report further required certain common carriers to transmit CPN and its associated privacy indicator (which allows telephone callers to block the display of their phone numbers on Caller ID display units) on an interstate call to connecting carriers without charge (the "Free Passage" rule). In connection with this report, the Department of Justice issued a memorandum which concluded that the installation or use of interstate Caller ID service was not prohibited by any federal wiretap statute and that in general, the FCC had authority to preempt state laws that would hinder federal communications policy on Caller ID services. Court decisions since the FCC issued its 1994 report have consistently held that Caller ID does not violate any state or federal wiretap statute. In 1995, the FCC narrowed its initial preemption of state public utilities blocking regulations by permitting subscribers to choose per-line blocking or per-call blocking on interstate calls, provided that all carriers were required to adopt a uniform method of overriding blocking on any particular call. At the same time, the FCC preempted a California Public Utilities Commission (CPUC) per-line blocking default policy, which provided that subscribers with unlisted telephone numbers who fail to communicate their choice 7 between per-call blocking and per-line blocking of calling party number-based services, be served with a system that blocks disclosure of CPN on all calls (i.e., per-line blocking). The FCC's rules and regulations also require carriers to explain to their subscribers (1) that their telephone numbers may be transmitted to the called party, (2) that there is a privacy mechanism (i.e., the "blocking" feature) available on interstate calls, and (3) how the mechanism can be activated. The CPUC, seeking to protect the caller's privacy, has ruled that a carrier can offer Caller ID or transmit CPN to interconnecting carriers only upon CPUC approval of its customer notification and education plan. Under separate FCC rules (see below), telemarketers are required to transmit Caller ID information and are prohibited from blocking such information. Section 222 of the Telecommunications Act of 1996 introduced restrictions on telecommunications carriers' usage of customer proprietary network information (CPNI). CPNI includes information that is personal to customers, including where, when and to whom a customer places a call, as well as the types of telecommunications services to which the customer subscribes and the extent these services are used. In a series of orders since 1998, the FCC has interpreted the CPNI restrictions to permit telecommunications carriers, including BellSouth and Qwest, to use CPNI without customer approval to market services that are related to the customer's existing service relationship with the carrier. Before carriers may use CPNI to market services outside a customer's existing service relationships, the carrier must obtain express customer permission. Because we are dependent upon the efforts of our clients to promote and market their equipment and services, federal and state laws and regulations inhibiting those clients' ability to market these equipment and services to their existing customers could have a material adverse effect on our business, results of operations and financial condition. Telephone sales practices are regulated at both the federal and state level. These regulations primarily relate to outbound teleservices, which, in most cases, we outsource to another company. The few cases where we do conduct outbound teleservices are related solely to the support of our clients with catalog sales programs, and thus are exempt from the regulations most commonly associated with outbound teleservices. Outbound teleservices are regulated by the rules of the FCC and the FTC under the Federal Telephone Consumer Protection Act of 1991, as amended (TCPA), the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, as amended (FTCFAP), respectively, and by various state regulations regarding telephone solicitations. In a July 2003 Report and Order, the FCC amended its rules implementing the TCPA, providing for: (1) restrictions on calls made by automatic dialing and announcing devises; (2) limitations on the use of predictive dialers of outbound calls; (3) institution of a national "do-not-call" registry in conjunction with the FTC; (4) guidelines on maintaining an internal "do-not-call" list and honoring "do-not-call" requests; and (5) requirements for telephone solicitors to transmit Caller ID information. The FTC's Telemarketing Sales Rule (TSR) was issued pursuant to the FTCFAP to prevent deceptive and abusive telemarketing acts and practices. Recent amendments to the TSR include: (1) subjecting certain inbound calls to additional disclosure requirements; (2) prohibiting the disclosure or receipt, for consideration, of unencrypted consumer account numbers for use in telemarketing; (3) application of the TSR to charitable solicitations; (4) institution of a national "do-not-call" registry; and (4) limitations on the use of predictive dialers for outbound calls. We believe that we are in compliance with these federal statutes and the FCC and FTC rules thereunder and the various state regulations, and that we would operate in compliance with those rules and regulations if we were to engage in outbound teleservice operations in the future. We work closely with our clients, companies we outsource outbound teleservices to and their respective advisors to ensure that we and our clients are in compliance with these regulations. We cannot predict whether the status of the regulation of Caller ID services or e-commerce will change and what affect, if any, this change would have on us or our industry. 8 INTELLECTUAL PROPERTY We have used the service mark "Innotrac" since 1985 and have registered it and other marks used by us in our business through the US Patent and Trademark Office. The "innotrac.com" domain name has been a registered domain name since 1995. We also own several other internet domain names. Due to the possible use of identical or phonetically similar service marks by other companies in different businesses, there can be no assurance that our service marks will not be challenged by other users. Our operations frequently incorporate proprietary and confidential information. We rely upon a combination of contract provisions and trade secret laws to protect the proprietary technology we use and to deter misappropriation of our proprietary rights and trade secrets. CERTAIN FACTORS AFFECTING FORWARD-LOOKING STATEMENTS This Annual Report on Form 10-K contains certain forward-looking statements (as such term is defined in the Private Securities Litigation Reform Act of 1995). These statements concern the Company's operations, performance and financial condition, including, in particular, the likelihood that Innotrac will succeed in developing and expanding its business, among other things. They are based upon a number of assumptions and estimates that are inherently subject to significant uncertainties. Many of these uncertainties are beyond Innotrac's control. Consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those set forth below under Item 1A "Risk Factors." Those are representative of factors that could affect the outcome of the forward-looking statements. These and the other factors discussed elsewhere in this document are not necessarily all of the important factors that could cause our results to differ materially from those expressed in our forward-looking statements. Forward-looking statements speak only as of the date they are made and we undertake no obligation to update them. EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of Innotrac are as follows:
NAME AGE POSITION ---- --- -------- Scott D. Dorfman.......... 48 Chairman of the Board, President and Chief Executive Officer David L. Ellin............ 47 Senior Vice President--Client Services Larry C. Hanger........... 51 Senior Vice President--Client Services Robert J. Toner........... 42 Senior Vice President--Logistics James R. McMurphy......... 46 Senior Vice President--Information Technology
Mr. Dorfman founded Innotrac and has served as Chairman of the Board, President and Chief Executive Officer since its inception in 1984. Prior to founding Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc. (Paymaster), an equipment distributor. At Paymaster, Mr. Dorfman gained experience in distribution, tracking and inventory control by developing and managing Paymaster's mail order catalog. Mr. Ellin joined Innotrac in 1986 and currently serves as Senior Vice President-Client Services. He served as a Director from December 1997 through May 2004. He held the position of Senior Vice President and Chief Operating Officer from November 1997 to December 2001 and served as Vice President from 1988 to November 1997. From 1984 to 1986, Mr. Ellin was employed by the Atlanta branch of WHERE 9 Magazine, where he managed the sales and production departments. From 1980 to 1984, Mr. Ellin was employed by Paymaster, where he was responsible for Paymaster's sales and collections. Mr. Hanger joined Innotrac in 1994 and currently serves as Senior Vice President-Client Services. He served as a Director from December 1997 through February 2004. He served as Vice President--Business Development from November 1997 through April 1999. He served as Innotrac's Manager of Business Development from 1994 to November 1997, and was responsible for the management of the telecommunication equipment marketing and service business. From 1979 to 1994, Mr. Hanger served as Project Manager--Third Party Marketing at BellSouth Telecommunications, Inc., a regional telecommunications company, where he managed the marketing program for BellSouth's network services and was involved in implementing the billing options program for BellSouth with Innotrac. Mr. Toner joined Innotrac in June 2001 and currently serves as Senior Vice President--Logistics. He held the position of Vice President--Logistics from June 2001 to March 2006. Prior to joining Innotrac, Mr. Toner developed 16 years of distribution, logistics, and transportation experience; 14 of those years were with McMaster-Carr Supply Company, a distributor of industrial supplies. Subsequent to McMaster-Carr, Mr. Toner was the General Manager for East Coast Operations for Webvan Group Inc., an Internet retailer. Mr. McMurphy joined Innotrac in April 2003 as currently serves as Senior Vice President--Information Technology and Chief Information Officer. He held the position of Vice President--Information Technology and Chief Information Officer from April 2003 to March 2006. Prior to joining Innotrac, Mr. McMurphy was with Capital One Financial Corporation, a leading credit card issuer and consumer lender, from March 2002 to April 2003, where he served as Chief Information Officer for one of their divisions. Prior to Capital One, from December 1996 through December 2001, he was Chief Information Officer for Pleasant Company, a division of Mattel Toys and makers of American Girl Dolls. In addition, prior to Mattel Toys, he served as a consultant for Price Waterhouse LLP (now PricewaterhouseCoopers LLP). ITEM 1A. RISK FACTORS WE RELY ON A SMALL NUMBER OF LARGE CLIENTS. IF WE LOSE ONE OR MORE OF OUR LARGEST CLIENTS, OR IF REVENUES FROM OUR LARGEST CLIENTS DECLINE, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Innotrac focuses on developing long-term contractual relationships with large corporations. A relatively small number of our clients account for a significant portion of our revenues. Our ten largest clients accounted for 81.4% of our revenue in 2005. If we lose one or more of our largest clients, or if revenues from our largest clients decline, our business, results of operations and financial condition could be materially adversely affected. Additionally, if one of these large clients is lost, or revenues from our largest clients decline, we cannot assure you that we will be able to replace or supplement that client with others that generate comparable revenues or profits. One of our largest clients, BellSouth, recently announced that it plans to merge with AT&T. We cannot predict what impact, if any, this merger will have on our business, if consummated. OUR WRITTEN CONTRACTS GENERALLY DO NOT GUARANTEE SPECIFIC VOLUME LEVELS AND CAN USUALLY BE TERMINATED ON LITTLE NOTICE. Although we have written agreements with most of our clients, our agreements generally do not assure specific volume or revenue levels. In addition, some agreements provide for termination for any reason on short notice. Our current agreement with BellSouth may be terminated by BellSouth for any reason upon 90 days notice. Furthermore, we are contractually bound to our facility leases until their terms expire. If a client terminates its contract suddenly, we will still have obligations under our leases. 10 A SIGNIFICANT PORTION OF OUR BUSINESS IS CONCENTRATED IN THE TELECOMMUNICATIONS INDUSTRY, INCLUDING DSL MODEMS. Approximately 33% of our revenues in 2005 and approximately 38% of our revenues in 2004 were attributable to Telecommunications products and Modems clients. Consequently, we are particularly susceptible to negative changes affecting these industries in general. The telecommunications industry has suffered a material downturn since mid-2000, which has had a significant negative impact on our business. To ameliorate this risk, we have been diversifying our client base across more industries and clients, including through selective acquisitions. We cannot guarantee, however, that the telecommunications industry will strengthen in 2006 or not deteriorate further, or that our diversification strategy will be successful. A SIGNIFICANT PORTION OF OUR BUSINESS IS CONCENTRATED IN THE DIRECT RESPONSE INDUSTRY. Approximately 23% of our revenues in 2005 and approximately 21% of our revenues in 2004 were attributable primarily to clients in the direct response industry. Consequently, we are particularly susceptible to negative changes that impact this industry and our clients in particular, including potential false advertising product claims and Federal Trade Commission regulation and enforcement. The direct response industry has suffered a material downturn since the third quarter of 2001, which has had a significant negative impact on our business. This general downturn has significantly weakened the financial strength and wherewithal of companies in this sector which increases our risk pertaining to future business, growth and the collectibility of accounts receivable from our existing clients. If any of our existing direct response clients were to default on their amounts due Innotrac, this would result in a material charge against earnings. A former client, Tactica, has a material past due balance for which a reserve has been recorded. COMPETITION MAY HURT OUR BUSINESS. We operate in highly competitive and price sensitive markets and expect this environment to persist and intensify in the future. Because our services comprise marketing and product consultation, sales channel management, fulfillment and back-end support, including our call center operations and returns processing, we have many competitors who offer one or more of these services. Our competitors include: - in-house marketing support operations of our current and potential clients; - other firms offering specific services, like fulfillment and call center operations; and - large marketing support services firms. A number of our competitors have developed or may develop financial and other resources greater than ours. Additional competitors with greater name recognition and resources may enter our markets. Our existing or potential clients' in-house operations are also significant competitors. Our performance and growth could be negatively impacted if: - existing clients demand and receive pricing concessions; - existing clients decide to provide, in-house, services they currently outsource; - potential clients retain or increase their in-house capabilities; or - existing clients consolidate their outsourced services with other companies. In addition, competitive pressures from current or future competitors could result in significant price erosion, which could in turn materially adversely affect our business, financial condition and results of operations. For more information about our competition, see "Business--Competition" in Item 1. 11 IF WE ARE NOT ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY, OUR BUSINESS WILL BE MATERIALLY ADVERSELY AFFECTED. Our success depends significantly upon our ability to: - integrate new clients in a timely and cost efficient manner; - enhance existing services; - develop applications to meet our clients' needs; and - introduce new services and products to respond to technological developments. If we fail to maintain our technological capabilities or respond effectively to technological changes, our business, results of operations and financial condition could be materially adversely affected. We cannot assure you that we will select, invest in and develop new and enhanced technology on a timely basis in the future in order to meet our clients' needs and maintain competitiveness. Our Reno systems, which provide service to several of our largest clients, are completely customized and therefore not supported by third party providers. We are heavily reliant on a small number of developers. If these developers leave, it could materially adversely affect our business. We provide details about our technology in "Business--Technology" in Item 1. OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY CAUSE SIGNIFICANT SWINGS IN THE MARKET PRICE FOR OUR COMMON STOCK. Our operating results may fluctuate in the future based on many factors. These factors include, among other things: - changes in the telecommunications industry; - changes in the retail industry; - changes in the fulfillment and call center services industries; - changes in the timing and level of client-specific marketing programs, including the timing and nature of promotions; - changes in our existing client base; - pricing pressure or concessions; - increased competition; and - changes in customer purchasing patterns for products we fulfill. Due to these and any other unforeseen factors, it is possible that in some future quarter our operating results may be below the expectations of public market analysts and investors. If that variance occurs, our common stock price would likely decline materially. OUR COMMON STOCK LACKS LIQUIDITY AND IS HELD BY A SMALL NUMBER OF INVESTORS, ONE OF WHICH IS IN RECEIVERSHIP WHERE ITS CREDITORS WOULD LIKE TO SELL OUR SHARES AS SOON AS POSSIBLE. As of December 31, 2005, Innotrac officers and directors owned approximately 47.3% of the outstanding common stock and an institutional shareholder, IPOF Fund, L.P., and their affiliates held 34.0%. These ownership positions have resulted in a lack of liquidity in our common stock. Additionally, if any of Innotrac's significant shareholders decided to liquidate its or their position, our common stock price would likely decline materially. The United States District Court in Cleveland, Ohio has appointed a receiver to identify and administer the assets of the IPOF Fund, L.P. and its general partner, Mr. David Dadante. Based on information from the receiver, the Company understands that the Fund and Mr. Dadante own 4,176,725 shares of common stock of the Company, representing approximately 34.0% of the total shares outstanding, all of which are held as collateral in margin accounts maintained at several financial institutions. The Company has been engaged in discussions with the receiver in an effort to cause the shares to be sold in a manner that causes as little disruption to the market for Company stock as possible. The Federal Court has prohibited the financial 12 institutions holding Company stock owned by the IPOF Fund and Mr. Dadante in margin accounts from selling any of these shares through at least July 14, 2006. The court has permitted open market sales by the receiver as he may in his sole discretion determine to be consistent with his duty to maximize the value of the assets of IPOF Fund, and as warranted by market conditions. The receiver has indicated to the Company that he does not intend to direct any open market sales during this period except in circumstances in which he believes that there would be no material adverse impact on the market price for the Company's shares. Nevertheless, as long as these shares are held in margin accounts where the lenders desire to liquidate the positions, there will be significant downward pressure on the market price of our common stock because the market is concerned that these shares may be sold in a manner that causes the price of our common stock to decline precipitously. This concern is ameliorated to some degree by the continuing prohibition by the Federal Court on sales of our shares by financial institutions that hold the shares in margin accounts. The Federal Court has extended this prohibition on several occasions, most recently to July 14, 2006, while we and the receiver pursue the sale of these shares in a manner that would not disrupt the market for our common stock. If the Federal Court were to not extend this prohibition before the shares have been sold in such a transaction, then the financial institutions might foreclose on some or all of these shares and sell them into the market, which could have an extremely negative impact on the market price for our common stock. IF OUR GOODWILL IS DEEMED IMPAIRED AS PART OF OUR ANNUAL (OR EARLIER) IMPAIRMENT TEST, THE IMPAIRMENT CHARGE WOULD RESULT IN A DECREASE IN OUR EARNINGS AND NET WORTH. Current accounting rules require that goodwill no longer be amortized but be tested for impairment at least annually. We have a significant amount of goodwill which, based upon a negative outcome of any impairment test in the future, could result in the write-down of all or a portion of goodwill and a corresponding reduction in earnings and net worth. NONCOMPLIANCE WITH ANY OF THE COVENANTS UNDER OUR REVOLVING CREDIT AGREEMENT ALLOWS THE LENDER TO DECLARE ANY OUTSTANDING BORROWING AMOUNTS TO BE IMMEDIATELY DUE AND PAYABLE. Our revolving line of credit agreement contains a financial, change of ownership control and other restrictive covenants. Noncompliance with any of the covenants allows the lender to declare any outstanding borrowed amounts to be immediately due and payable. From time to time in the past, we have violated various restrictive covenants, and have been obligated to obtain waivers or amendments from the lender. Although we have been able to obtain waivers and amendments in the past, there is no guarantee that we will be able to do so for any future covenant breaches. If the lender does not waiver a future covenant violation, and accelerates the payment date for any amounts outstanding under the credit facility, we might not be able to pay these amounts. Failure to comply with the covenants, even if waived by our lenders, also could adversely affect our credit ratings, which could increase our costs of debt financings and impair our ability to obtain additional debt financing. DUE TO THE NATURE OF OUR BUSINESS WE HAVE A SIGNIFICANT AMOUNT OF UNSKILLED LABOR AND A HIGH TURNOVER RATE THEREBY INCREASING OUR EXPOSURE TO EMPLOYEE-RELATED LITIGATION. Our fulfillment and call centers employ a sizable amount of unskilled labor and generate a high turnover rate. We may have to terminate employees from time to time as our business mix changes and labor demands shift among our eight facilities. High employee turnover could increase our exposure to employee-related litigation. IF WE ARE NOT ABLE TO CONTINUE TO MANAGE OUR INFRASTRUCTURE AND VOLUME GROWTH, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our operations, number of facilities and volume of packages shipped have grown significantly in recent years. Our business, results of operations and financial condition could be materially adversely affected if we cannot effectively manage our growth. Our continued success depends upon our ability to: 13 - initiate, develop and maintain existing and new client relationships; - respond to competitive developments; - maintain pricing and margins; - continue to develop our sales infrastructure; - attract, train, motivate and retain management and other personnel; and - maintain the high quality of our services. IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE ADVERSELY AFFECTED. Our business, results of operations and financial condition could be materially adversely affected if the trend of businesses outsourcing services not directly related to their principal business activities declines or reverses, or if corporations bring previously outsourced functions back in-house. Particularly during general economic downturns, businesses may bring in-house previously outsourced functions in order to avoid or delay layoffs. OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES OR INCREASE OUR COSTS. In connection with the limited amount of outbound telemarketing services that we provide, we must comply with federal and state regulations. These include the Federal Communications Commission's rules under the Telephone Consumer Protection Act of 1991 and the Federal Trade Commission's regulations under the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both of which govern telephone solicitation. When we conduct outbound telemarketing services, these rules and regulations would apply to that portion of our business. Furthermore, there may be additional federal and state legislation or changes in regulatory implementation. These changes could include interpretations under the Telecommunications Act of 1996 restricting the ability of telecommunications companies to use consumer proprietary network information (CPNI) or imposing new requirements on telecommunications companies to better ensure security and privacy of CPNI. New legislation or regulatory implementation in the future may significantly increase compliance costs or limit our activities, our clients' activities or the activities of companies to which we outsource outbound telemarketing functions. Additionally, we could be responsible for failing to comply with regulations applicable to our clients or companies to which we outsource telemarketing. If unfavorable federal or state legislation or regulations affecting Caller ID service, CPNI, internet service or other technology related to products we fulfill and provide customer support for are adopted, our business, financial condition and results of operations could be materially adversely affected. See "Business -- Government Regulation" in Item 1 for further information about government regulation of our business. IF WE ARE UNABLE TO INTEGRATE ACQUIRED BUSINESSES SUCCESSFULLY AND REALIZE ANTICIPATED ECONOMIC, OPERATIONAL AND OTHER BENEFITS IN A TIMELY MANNER, OUR PROFITABILITY MAY DECREASE. If we are unable to integrate previous or potential business acquisitions successfully, we may incur substantial costs and delays in increasing our customer base. In addition, the failure to integrate acquisitions successfully may divert management's attention from Innotrac's existing business and may damage Innotrac's relationship with its key customers and suppliers. Integration of an acquired business may be more difficult when we acquire a business in a market in which we have little or no expertise, or with a corporate culture different from Innotrac's. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 14 ITEM 2. PROPERTIES Currently, the Company leases all of its facilities. Our headquarters and fulfillment facilities are located in 250,000 square feet of leased space in Duluth, Georgia. Our corporate offices occupy 50,000 square feet of this facility and the remaining 200,000 square feet are used as fulfillment space. This site also includes approximately 3.5 acres that will be available for Innotrac's expansion, if required. The lease for our Duluth facility commenced in October 1998 and has a term of 10 years with two five-year renewal options. The lease provides for an option to purchase the facility at the end of the first five years of the term or at the end of the first 10 years of the term. We have not yet determined whether we will exercise this purchase option. In June 1999, we entered into a lease for a facility in Pueblo, Colorado with an initial term of five years with two five-year renewal options. In June 2004, we exercised the first renewal option to extend the lease for five years. The facility provides approximately 87,000 square feet of floor space. Approximately 45,000 square feet are used as a call center, as well as quality assurance, administrative, training and management space. This call center supports 370 workstations of which we utilized 221 at December 31, 2005. It currently operates from 5:00am MST to 11:00pm MST seven days per week. The remaining 42,000 square feet are used for fulfillment services. In October 1999, we entered into a lease for an additional fulfillment facility in Duluth, Georgia with an initial term of five years with one three-year renewal option. In August 2000, the Company entered into a lease extension and modification that expanded the facility space from approximately 52,000 square feet to 82,000 square feet. In July 2005, we entered into a lease extension and modification that reduced the facility space to approximately 52,000 for a term of two years. We operate a facility in Reno, Nevada that consists of over 275,000 square feet and includes administrative office space, a 250,000 square foot fulfillment center and a call center that can support 200 workstations. We lease this facility through two lease agreements, which were initiated in October 2002 and October 2000. These agreements have lease terms of five years and seven years, respectively. Currently, the call center is configured with approximately 120 workstations, of which 56 were being utilized at December 31, 2005. The call center operates from 5:00 am PST to 9:00 pm PST seven days per week. We operate a 354,000 square foot facility in Bolingbrook, Illinois. The lease for this facility was initiated at the date of acquisition in July 2001, and we renewed for an additional five years, at a lower monthly rental rate, commencing January 1, 2003. This lease contains one additional five-year renewal option. This facility is used exclusively for fulfillment services and contains approximately 40,000 square feet of administrative office space. In April 2002, we entered into a lease for a facility in Hebron, Kentucky for an initial term of five years with two renewal options; the first for one year and the second for three years. The facility provides approximately 396,000 square feet of fulfillment and warehouse space. This facility is fully occupied by inventory for our client, Smith & Hawken. In September 2002, we entered into a lease for a facility in Romeoville, Illinois for an initial term of five years and two months with two five-year renewal options. In June 2005 we exercised an option to lease an additional 51,254 square feet for a total of approximately 255,561 square feet of fulfillment and warehouse space. In August 2004, we entered into a three year lease for a new facility in New Castle, Delaware. In May 2005 we amended the lease to expand the leased premises to 118,722 square feet of fulfillment and warehouse space. This facility is currently being utilized by one of our direct marketing clients. In December 2005, we entered into a five year lease for a new facility in Hebron, Kentucky. This new facility is currently under construction and will provide approximately 650,000 square feet of fulfillment and warehouse space for our Target.com operations beginning in the second quarter of 2006. 15 ITEM 3. LEGAL PROCEEDINGS We are not a party to any material legal proceeding. We are, from time to time, a party to litigation arising in the normal course of our business. Although management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operations, it is possible that such litigation and the related cost could become material in the future. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders of the Company during the fourth quarter of the fiscal year covered by this Report. PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES The Company's Common Stock trades on the Nasdaq National Market under the symbol "INOC". The following table sets forth for the periods indicated the high and low sales prices of the Common Stock on the Nasdaq National Market.
HIGH LOW ------ ------ 2005 First Quarter......................... $ 9.00 $ 7.87 Second Quarter........................ $ 8.94 $ 7.33 Third Quarter......................... $ 8.84 $ 6.77 Fourth Quarter........................ $ 8.99 $ 3.57 Fiscal Year Ended December 31, 2005... $ 9.00 $ 3.57 2004 First Quarter......................... $12.00 $10.45 Second Quarter........................ $11.83 $ 6.80 Third Quarter......................... $ 9.55 $ 7.40 Fourth Quarter........................ $ 9.28 $ 7.63 Fiscal Year Ended December 31, 2004... $12.00 $ 6.80
The approximate number of holders of record of Common Stock as of March 30, 2006 was 63. The approximate number of beneficial holders of our Common Stock as of that date was 950. The Company has never declared cash dividends on the Common Stock. The Company intends to retain its earnings to finance the expansion of its business and does not anticipate paying cash dividends in the foreseeable future. Any future determination as to the payment of cash dividends will depend upon such factors as earnings, capital requirements, the Company's financial condition, restrictions in financing agreements and other factors deemed relevant by the Board of Directors. The payment of dividends by the Company is restricted by its revolving credit facility. Item 12 of Part III contains information concerning the Company's equity compensation plans. 16 ITEM 6. SELECTED FINANCIAL DATA The following table sets forth selected financial data for the Company. The selected historical statements of operations data for each of the years ended December 31, 2005, 2004, 2003, 2002 and 2001 and the selected historical balance sheet data for the periods then ended have been derived from the Company's audited Consolidated Financial Statements for the years ended December 31, 2005, 2004, 2003, 2002 and 2001. This information should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Company's consolidated financial statements and notes thereto included elsewhere in this Report.
RESULTS FOR YEAR ENDED DECEMBER 31: 2005 2004 2003 2002 2001 - ----------------------------------- ------- ------- -------- ------- -------- (IN 000'S, EXCEPT PER SHARE AMOUNTS) Revenues $73,892 $78,322 $ 74,740 $82,420 $121,859 Cost of revenues 37,656 37,925 35,157 46,444 68,153 Special (credits) charges -- -- -- (293) -- Selling, general and administrative 34,978 34,579 34,873 36,811 39,516 Bad debt expense 1,248 221 1,571 521 3,813 Special (credits) charges -- -- (30) 404 -- Depreciation and amortization 4,524 5,202 5,622 5,336 4,864 ------- ------- -------- ------- -------- TOTAL OPERATING EXPENSES 78,406 77,927 77,193 89,223 116,346 ------- ------- -------- ------- -------- Operating income (loss) (4,514) 395 (2,453) (6,803) 5,513 ------- ------- -------- ------- -------- Interest expense (income), net 154 285 741 318 (532) Other expense (income) -- -- 15 (124) (20) ------- ------- -------- ------- -------- TOTAL OTHER EXPENSE (INCOME) 154 285 756 194 (552) ------- ------- -------- ------- -------- Income (loss) before income taxes and minority interest (4,668) 110 (3,209) (6,997) 6,065 Income tax (provision) benefit -- -- (8,772) 2,578 (2,573) ------- ------- -------- ------- -------- Net income (loss) before minority interest (4,668) 110 (11,981) (4,419) 3,492 Minority interest, net of income taxes -- -- -- -- (893) ------- ------- -------- ------- -------- NET INCOME (LOSS) $(4,668) $ 110 $(11,981) $(4,419) $ 4,385 ======= ======= ======== ======= ======== Net income (loss) per share-basic $ (0.38) $ 0.01 $ (1.04) $ (0.38) $ 0.39 Net income (loss) per share-diluted $ (0.38) $ 0.01 $ (1.04) $ (0.38) $ 0.38 COMMON STOCK INFORMATION: Average number of common shares outstanding-basic 12,196 11,865 11,542 11,516 11,318 Book value per common share(1) $ 3.84 $ 4.23 $ 4.25 $ 5.13 $ 5.57 YEAR-END FINANCIAL POSITION: Current assets $20,872 $24,430 $ 29,721 $41,619 $ 58,093 Current liabilities 9,743 11,716 20,117 20,143 35,717 Property and equipment, net 10,754 12,499 14,750 18,915 14,500 Total assets 57,972 63,373 70,962 95,499 99,393 Long-term obligations 1,038 1,098 1,083 15,497 393 Total liabilities 10,781 12,814 21,200 35,640 36,110 Total shareholders' equity $47,191 $50,559 $ 49,762 $59,859 $ 63,283
(1) Book value per common share is calculated by dividing total shareholders' equity at year end by the number of common shares outstanding at year end. 17 ITEM 7. 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 three 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 in Item 1 of this Annual Report on Form 10-K, under "Business--Certain Factors Affecting Forward-Looking Statements". 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 fulfillment and customer support services interrelate and are sold as a package, however they are individually priced. Our clients may utilize our fulfillment services, our customer support services, or both, depending on their individual needs. Our core service offering includes 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 - 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 - intuitive e-mail response 18 Prior to 2000, the Company was primarily focused on the telecommunications industry, with over 90% of its revenues being derived through this vertical. Today, 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 and client base over the past several years. BUSINESS MIX
Business Line/Vertical 2005 2004 - ---------------------- ----- ----- Telecommunications products 12.2% 18.7% Modems 21.2 19.5 Retail/Catalog 32.2 30.7 Direct Marketing 23.2 20.5 B2B 11.2 10.6 ----- ----- 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 Modems ("DSL") and other telecommunications products to companies such as BellSouth Corporation ("BellSouth") and Qwest Communications International, Inc. ("Qwest") and their customers. Inventory for our telecommunications and DSL 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 and DSL modems and ancillary equipment. Despite a decline in our telecommunications business as a result of reduced volumes due to the maturity of the telephone and Caller ID equipment business, we anticipate that the percentage of our revenues attributable to telecommunications and DSL clients will remain fairly constant during 2006 due mainly to increased volumes from our DSL modem business, which is still in a strong growth mode. 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 which include 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 transmissions 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. The percentage of our revenues attributable to our retail, catalog and direct marketing clients increased during 2005 as compared to 2004 primarily due to increased volumes from these clients and the shift in our business mix as volumes decreased for our telecommunications clients and several new retail, catalog and direct marketing clients were added. We anticipate that the percentage of our revenues attributable to our retail and catalog clients will increase during 2006 due to the addition of several new clients, including Target.com, late in the second quarter of 2006. We anticipate that the percentage of our revenues attributable to our direct marketing clients will remain fairly constant during 2006 as existing products mature and new products are introduced. Revenues attributable to our direct marketing clients increased in the first half of 2005 due to a highly successful new product introduced by one of our newer direct marketing clients, but weakened considerably in the second half as that product matured and the client's advertising for that product was reduced. On October 21, 2004, Tactica International, Inc. ("Tactica"), one of the Company's former direct response clients, filed a voluntary petition for relief under Chapter 11 in U.S. Bankruptcy Court. On October 25, 19 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. The Stipulation required that the proceeds from the sale of such inventory be split with Innotrac 55%/45% on the first $1.6 million in customer orders and 60%/40% thereafter upon receipt of Tactica customer payments. Additionally, Tactica was required to prepay Innotrac for any services prior to its inventory being shipped. 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 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 the Stipulation and an appraisal performed by a third party independent appraiser, the reserve associated with the Tactica receivable was decreased from $2.1 million at June 30, 2004 to $1.5 million at September 30, 2004. The reserve was further reduced to $1.2 million at December 31, 2004 based on the verbal agreement reached with Tactica regarding the liquidation of its inventory. Based on the approved agreement and management's estimate of the net realizable value of the inventory, the reserve associated with the Tactica receivable was further reduced from $1.2 million to $775,000 at March 31, 2005. In the fourth quarter 2005, the reserve associated with the Tactica receivable was increased to $2.5 million. The additional reserve was based on management's estimate of the net realizable value of the inventory, which was considerably reduced in the fourth quarter as a result of buyers not materializing as initially indicated by the third party independent appraiser and a continuing reduction in value of the merchandise. The actual results of the liquidation could vary from this estimate. As of March 15, 2006, 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. FACILITIES In August 2004 we leased a 75,000 square foot fulfillment center in New Castle, Delaware. This new facility provides fulfillment and warehouse space for a new direct marketing client. Capital expenditures associated with this facility were approximately $260,000. In December 2005, we entered into a five year lease for a new facility in Hebron, Kentucky. This new facility is currently under construction and will provide approximately 650,000 square feet of fulfillment and warehouse space for our Target.com operations beginning in the second quarter of 2006. Capital expenditures associated with this facility are estimated to be approximately $5.3 million and will be funded through our bank line of credit. With facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada, Bolingbrook, Illinois, Hebron, Kentucky and New Castle, Delaware, our national footprint is virtually complete. We are committed to deeper penetration within our existing business lines and continued diversification of our client base. Our long-term goal is to have our business mix spread evenly across a higher number of clients in diverse industries. We will continue to seek new clients and may open additional facilities in other geographic locations to service these needs. RESULTS OF OPERATIONS The following table sets forth summary operating data, expressed as a percentage of revenues, for the years ended December 31, 2005, 2004 and 2003. Operating results for any period are not necessarily indicative of results for any future period. 20 The financial information provided below has been rounded in order to simplify its presentation. However, the percentages below are calculated using the detailed information contained in the Consolidated Financial Statements and notes thereto.
YEAR ENDED DECEMBER 31, ----------------------- 2005 2004 2003 ----- ----- ----- Revenues, net 100.0% 100.0% 100.0% Cost of revenues 51.0 48.4 47.0 Selling, general and administrative 47.3 44.1 46.7 Bad debt expense 1.7 0.3 2.1 Depreciation and amortization 6.1 6.7 7.5 ----- ----- ----- Operating (loss) income (6.1) 0.5 (3.3) Other expense (income) 0.2 0.4 1.0 ----- ----- ----- (Loss) income before taxes and minority interest (6.3) 0.1 (4.3) Income tax (provision) benefit -- -- (11.7) ----- ----- ----- Net (loss) income (6.3)% 0.1% (16.0)% ===== ===== =====
YEAR ENDED DECEMBER 31, 2005 COMPARED TO YEAR ENDED DECEMBER 31, 2004 Revenues. The Company's net revenues decreased 5.7% to $73.9 million for the year ended December 31, 2005 from $78.3 million for the year ended December 31, 2004. The decrease in revenues is primarily attributable to a $5.6 million reduction in revenue from our telecommunications vertical as a result of reduced volumes and the conclusion of two programs for a major client offset by a net increase of approximately $996,000 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. The Company's cost of revenues, which include labor costs for the fulfillment and call centers, telephone minute fees and freight and packaging material costs, decreased 0.7% to $37.7 million for the year ended December 31, 2005 compared to $37.9 million for the year ended December 31, 2004. Cost of revenues decreased primarily due to a decrease in labor costs related to the decrease in revenue. Cost of revenues increased as a percentage of revenue in 2005 as compared to 2004 primarily due 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, which include facility and equipment costs, account services and information technology costs, management salaries and legal and accounting fees, increased 1.2% to $35.0 million or 47.3% of revenues for the year ended December 31, 2005 compared to $34.6 million or 44.1% of revenues for the year ended December 31, 2004. The increase in expenses in 2005 as compared to 2004 was primarily attributable to an increase in other professional services of approximately $255,000 related to work performed for internal control documentation and additional expense related to property taxes for our Kentucky facility of approximately $279,000. In addition, 2005 facility and equipment costs exceeded those in 2004 by approximately $447,000, primarily related to the new facility opened in Delaware in the second half of 2004. These increases were offset by a $390,000 reduction in account services related costs in 2005 as compared to 2004 and a reduction of corporate salary expense of $577,000 in 2005 as compared to 2004. The increase in S,G&A expense as a percentage of revenues was primarily due to the overall decrease in revenues. Bad Debt Expense. Bad debt expense increased to $1.2 million or 1.7% of revenues for the year ended December 31, 2005 compared to $221,000 or 0.3% of revenues for the year ended December 31, 2004. The increase in bad debt expense in 2005 as compared to 2004 was primarily attributable to a $1.3 million increase in the provision for bad debts for Tactica in 2005 compared to $78,000 recorded in 2004. 21 Income Taxes. The Company's effective tax rate for the year ended 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 taxable losses and earnings for the years ended December 31, 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 years ended December 31, 2005 and 2004. YEAR ENDED DECEMBER 31, 2004 COMPARED TO YEAR ENDED DECEMBER 31, 2003 Revenues. The Company's net revenues increased 4.8% to $78.3 million for the year ended December 31, 2004 from $74.7 million for the year ended December 31, 2003. The increase in revenues is primarily due to the addition of four new retail/catalog clients and three new direct marketing clients, primarily during the fourth quarter of 2004, which contributed $3.3 million in revenue. In addition, there was an increase of approximately $1.0 million from our existing retail clients, an increase of $770,000 from DSL clients and an increase of $1.7 million from our direct marketing clients, offset by a decrease of $2.6 million and $754,000 from our telecom and B2B businesses, respectively. Cost of Revenues. The Company's cost of revenues, which include labor costs for the fulfillment and call centers, telephone minute fees and freight and packaging material costs, increased 7.9% to $37.9 million for the year ended December 31, 2004 compared to $35.2 million for the year ended December 31, 2003. Cost of revenues increased in dollars and as a percentage of revenue primarily due the overall increase in revenues, the implementation and start-up costs associated with several new clients in the second half of 2004 and a change in the business mix. Selling, General and Administrative Expenses. S,G&A expenses, which include facility and equipment costs, account services and information technology costs, management salaries and legal and accounting fees, decreased 0.8% to $34.6 million or 44.1% of revenues for the year ended December 31, 2004 compared to $34.9 million or 46.7% of revenues for the year ended December 31, 2003. The decrease in expenses in 2004 as compared to 2003 was primarily attributable to a reduction in costs from management's efforts to control expenses resulting in $860,000 lower account services related costs, $294,000 lower equipment costs and $285,000 lower information technology related costs, offset by $960,000 higher facility costs in 2004 as compared to 2003. There was also a reduction of approximately $400,000 in general and administrative costs, including management salaries and legal and accounting fees, during 2004 as compared to 2003. Additionally, the twelve months ended December 31, 2003 included one-time credits relating to contract penalty fee reversals, property tax refunds and coupon accrual reversal, totaling approximately $485,000. The decrease in S,G&A expense as a percentage of revenues was primarily due to the overall increase in revenues. Bad Debt Expense. Bad debt expense decreased to $221,000 or 0.3% of revenues for the year ended December 31, 2004 compared to $1.6 million or 2.1% of revenues for the year ended December 31, 2003. The decrease in bad debt expense in 2004 as compared to 2003 was primarily attributable to a $1.1 million provision for bad debts recorded in the fourth quarter of 2003 for Tactica as compared to $78,000 recorded in 2004. Special (Credits)/Charges. There were no special charges or credits during 2004. During 2003, the Company recorded a special credit of $30,000 associated with the settlement of a severance claim at an amount lower then previously reserved for in 2002. Income Taxes. The Company's effective tax rate for the year ended December 31, 2004 and 2003 was 0% and 273%, respectively. At December 31, 2003, a valuation allowance of approximately $9.9 million 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, resulting in an overall tax provision of approximately $8.8 million. Income taxes associated with taxable income for the year ended December 31, 2004 were offset by a reduction of this valuation allowance resulting in an effective tax rate of 0% for the year ended December 31, 2004. 22 LIQUIDITY AND CAPITAL RESOURCES The Company funds its operations and capital expenditures primarily through cash flow from operations and borrowings under a credit facility with a bank. The Company had cash and cash equivalents of approximately $2.1 million at December 31, 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 December 31, 2005 as compared to $3.1 million at December 31, 2004. The Company generated positive cash flow from operations of $5.1 million during the year ended December 31, 2005. The Company also generated positive cash flow from operations for 2004. We anticipate positive cash flows from operations again in 2006. The Company recently renewed its revolving credit agreement to extend the facility for an additional three years, until March 2009. 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 $11.9 million at December 31, 2005. The maximum borrowing amount of this facility was reduced from $40.0 million to $25.0 million in the third quarter of 2004 as the Company does not anticipate a need for the larger amount. 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 restrictive fixed charge coverage ratio, change in ownership control and other 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. Accordingly, in the event of noncompliance, these amounts could be accelerated. As renewed, the facility requires the Company to maintain a minimum fixed charge coverage ratio of between 0.70 and 1.00 to 1.00, depending on the particular fiscal quarter, for each of the Company's quarters through the end of its fiscal year 2006, and a ratio of 1.15 to 1.00 thereafter. Although, at December 31, 2005 the Company was not in compliance with the then-current fixed charge coverage ratio requirement of 1.30 to 1.00, or with a then-existing tangible net worth requirement (which has been eliminated from the new facility), the Company received a waiver of such noncompliance from the bank. The Company's fixed charge ratio at December 31, 2005 was 1.18 to 1.00. Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Company's option, LIBOR plus up to 200 basis points. During the years ended December 31, 2005, 2004 and 2003 the Company incurred interest expense related to the line of credit of approximately $87,000, $111,000 and $704,000, respectively, resulting in a weighted average interest rate of 5.01%, 3.48% and 3.80%, respectively. At December 31, 2005, the Company had $11.9 million of additional availability under the revolving credit agreement. During the year ended December 31, 2005, the Company generated $5.1 million in cash flow from operating activities compared to $9.9 million in cash flow from operating activities in the same period in 2004. One of the primary contributors to generating cash in 2004 was the further reduction in inventory of approximately $8.2 million, of which $5.5 million related to the liquidation of wireless pager inventory as a result of our client exiting this business. This contributed to reductions in borrowings under our revolving credit facility of approximately $8.7 million. The decrease in cash provided from operating activities was primarily the result of net income in 2004 compared to a net loss in 2005 and the reduction of $8.2 million in inventory in 2004 as described in the preceding sentence compared to a $2.0 million increase in inventory in 2005. These effects were partially offset by an increase in net accounts receivable of $2.7 million in 2004 compared to a decrease of $5.7 million in 2005. In addition, there was a $499,000 reduction in prepaid and other assets in 2005 compared to a $1.3 million increase in 2004. During the year ended December 31, 2005, net cash used in investing activities was $2.6 million as compared to $2.8 million in 2004. These expenditures were funded through existing cash on hand, cash flow from operations and borrowings under the Company's credit facility. 23 During the year ended December 31, 2005, the net cash used in financing activities was $1.8 million compared to $8.0 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 $8.7 million in 2004. Additionally, during 2005, the Company generated cash of $1.3 million through the exercise of previously granted employee stock options, compared to $1.1 million generated in 2004. Capital expenditures were $2.6 million and $2.8 million for the years ended December 31, 2005 and 2004, respectively. We anticipate capital expenditures of approximately $5.6 million in 2006. The increase in spending for 2006 over 2004 and 2005 is primarily related to the new facility currently under construction for Target.com. This estimate is subject to various contingencies, including the possible need to incur additional capital expenditures related to new clients or significant new initiatives by existing clients. The Company estimates that its cash and financing needs through 2006 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 three years and anticipates doing so again in 2006. The Company may need to raise additional funds in order to take advantage of unanticipated opportunities or the opening of new facilities. There can be no assurance that the Company will be able to raise any such capital on terms acceptable to the Company or at all. The Company's primary long-term contractual commitments consist of operating leases. As of December 31, 2005, the Company did not have any off balance sheet arrangements that have or are reasonably likely to have a current or future effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. In addition, as of December 31, 2005 the Company did not participate in any guarantees of other entities' obligations, structured finance arrangements, synthetic leases, repurchase obligations or similar commercial or financing commitments. Additionally, the Company does not trade in commodity contracts. The following table sets forth the Company's contractual commitments by period. For additional information, see Note 5 to the Consolidated Financial Statements (in 000's).
Payments Due by Period ------------------------------------------------------------------ Total Less than 1 year 1-3 years 4-5 years After 5 years ------- ---------------- --------- --------- ------------- Operating leases $30,716 $9,672 $14,932 $5,319 $793 Line of credit (1) -- -- -- -- --
(1) The provisions of the revolving line of credit agreement require that the Company maintain a lockbox arrangement with the lender and allow the lender to declare any outstanding borrowing amounts to be immediately due and payable as a result of noncompliance with any of the covenants. Accordingly, in the event of noncompliance, these amounts could be accelerated. 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 forecast, 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 2 to our Consolidated Financial Statements. The policies that we believe are critical to an investor's understanding of our financial results and condition and require complex management judgment are discussed below: 24 Reserve for Uncollectible Accounts. 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. 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 adopted SFAS No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002, which changed the accounting for goodwill and other indefinite life intangibles from an amortization method to an impairment only approach. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Innotrac's goodwill carrying amount as of December 31, 2005 and 2004 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 the earnout payment made to the former UDS shareholders in February 2002), and the acquisition of iFulfillment, Inc. in July 2001. In accordance with SFAS No. 142, the Company contracted with an independent third party valuation firm to perform a valuation in the first quarter of 2006. The third party valuation supported that the fair value of the reporting unit at January 1, 2006 exceeds the carrying amount of the net assets, including goodwill, and thus no impairment currently exists. Management has reviewed and concurs with the major assumptions used in the third party's valuation at January 1, 2006. The Company will perform this impairment test annually as of January 1 or sooner if circumstances dictate. 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 is more likely than not that deferred tax assets will not be realized. Innotrac's net deferred tax asset as of December 31, 2005 is $12.2 million. 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 and 2005. Innotrac has a tax net operating loss carryforward of $37.5 million at December 31, 2005 that expires between 2020 and 2025. Innotrac's ability to generate the expected amounts of taxable income from future operations is dependent upon general economic conditions, collection of existing outstanding accounts receivable, 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 $12.2 million and $9.7 million has been recorded as of December 31, 2005 and 2004, respectively. Income taxes associated with future earnings will be offset by a reduction in the valuation allowance. For the year ended December 31, 2005, the deferred income tax benefit of $2.5 million 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, 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. 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 25 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 No. 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 noted in Note 5 to the Consolidated Financial Statements, and the Company has no long-term purchase commitments. 26 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM Board of Directors and Stockholders Innotrac Corporation We have audited the accompanying consolidated balance sheets of Innotrac Corporation and subsidiaries as of December 31, 2005 and 2004 and the related consolidated statements of operations, shareholders' equity, and cash flows for the years then ended. We have also audited the schedule listed in the Index at Item 15 as Schedule II as of and for the years ended December 31, 2005 and 2004. These consolidated financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements and schedule. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Innotrac Corporation and subsidiaries at December 31, 2005 and 2004, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related schedule presents fairly, in all material respects, the information set forth therein as of and for the years ended December 31, 2005 and 2004. /s/ BDO Seidman, LLP Atlanta, Georgia March 28, 2006 27 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of Innotrac Corporation: We have audited the accompanying consolidated statements of operations, shareholders' equity, and cash flows of Innotrac Corporation and its subsidiaries (the "Company") for the year ended December 31, 2003. Our audit also included the 2003 financial statement schedule listed in the Index at Item 15 as Schedule II. The consolidated financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such consolidated financial statements present fairly, in all material respects, the Company's consolidated results of operations and cash flows for the year ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP Atlanta, Georgia March 30, 2004 28 INNOTRAC CORPORATION CONSOLIDATED BALANCE SHEETS (IN 000'S)
DECEMBER 31, ------------------- ASSETS 2005 2004 ------ -------- -------- CURRENT ASSETS: Cash and cash equivalents $ 2,068 $ 1,377 Accounts receivable, net of allowance of $2,791 (2005) and $1,624 (2004) 12,745 18,405 Inventories, net 4,676 2,662 Prepaid expenses and other 1,383 1,986 -------- -------- TOTAL CURRENT ASSETS 20,872 24,430 -------- -------- PROPERTY AND EQUIPMENT: Rental equipment 427 556 Computers, machinery and equipment 30,514 29,034 Furniture, fixtures and leasehold improvements 5,133 4,957 -------- -------- 36,074 34,547 Less accumulated depreciation and amortization (25,320) (22,048) -------- -------- 10,754 12,499 -------- -------- Goodwill 25,169 25,169 Other assets, net 1,177 1,275 -------- -------- TOTAL ASSETS $ 57,972 $ 63,373 ======== ========
DECEMBER 31, ------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 2005 2004 ------------------------------------ -------- -------- CURRENT LIABILITIES: Accounts payable $ 6,707 $ 6,023 Line of credit -- 3,063 Accrued salaries 871 930 Accrued expenses and other 2,165 1,700 -------- -------- TOTAL CURRENT LIABILITIES 9,743 11,716 -------- -------- NONCURRENT LIABILITIES: Deferred compensation 885 875 Other noncurrent liabilities 153 223 -------- -------- TOTAL NONCURRENT LIABILITIES 1,038 1,098 -------- -------- Commitments and contingencies (see Note 5) -- -- SHAREHOLDERS' EQUITY: Preferred stock: 10,000,000 shares authorized, $0.10 par value, no shares outstanding -- -- Common stock: 50,000,000 shares authorized, $0.10 par value, 12,280,610 (2005) and 11,948,743 (2004) shares issued and outstanding 1,228 1,195 Additional paid-in capital 65,911 64,644 Accumulated deficit (19,948) (15,280) -------- -------- TOTAL SHAREHOLDERS' EQUITY 47,191 50,559 -------- -------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 57,972 $ 63,373 ======== ========
The accompanying notes are an integral part of these consolidated balance sheets. 29 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (IN 000'S, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, ---------------------------- 2005 2004 2003 ------- ------- -------- Revenues, net $73,892 $78,322 $ 74,740 Cost of revenues 37,656 37,925 35,157 Selling, general and administrative 34,978 34,579 34,873 Bad debt expense 1,248 221 1,571 Special (credits) charges, net -- -- (30) Depreciation and amortization 4,524 5,202 5,622 ------- ------- -------- Total operating expenses 78,406 77,927 77,193 ------- ------- -------- OPERATING (LOSS) INCOME (4,514) 395 (2,453) ------- ------- -------- OTHER EXPENSE: Interest expense 154 285 741 Other -- -- 15 ------- ------- -------- TOTAL OTHER EXPENSE 154 285 756 ------- ------- -------- (LOSS) INCOME BEFORE INCOME TAXES (4,668) 110 (3,209) INCOME TAX (PROVISION) BENEFIT -- -- (8,772) ------- ------- -------- NET (LOSS) INCOME $(4,668) $ 110 $(11,981) ======= ======= ======== (LOSS) EARNINGS PER SHARE: Basic $ (0.38) $ 0.01 $ (1.04) ======= ======= ======== Diluted $ (0.38) $ 0.01 $ (1.04) ======= ======= ======== WEIGHTED AVERAGE SHARES OUTSTANDING: Basic 12,196 11,865 11,542 ======= ======= ======== Diluted 12,196 12,522 11,542 ======= ======= ========
The accompanying notes are an integral part of these consolidated statements. 30 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (IN 000'S)
Retained Common Stock Earnings --------------- Paid-in (Accumulated Treasury Shares Amount Capital Deficit) Stock Total ------ ------ ------- ------------ -------- -------- BALANCE AT DECEMBER 31, 2002 11,675 $1,167 $62,614 $ (3,219) $(703) $ 59,859 Issuance of common stock from option exercises 40 4 264 -- -- 268 Restricted stock grant, net -- -- 328 -- -- 328 Issuance of treasury stock -- -- 304 -- 703 1,007 Tax benefit for stock options exercised -- -- 281 -- -- 281 Net loss -- -- -- (11,981) -- (11,981) ------ ------ ------- -------- ----- -------- BALANCE AT DECEMBER 31, 2003 11,715 $1,171 $63,791 $(15,200) $ -- $ 49,762 Issuance of common stock from option exercises 258 26 1,133 -- -- 1,159 Restricted stock grant, net -- -- (186) -- -- (186) Shares retired (24) (2) (94) (190) -- (286) Net income -- -- -- 110 -- 110 ------ ------ ------- -------- ----- -------- BALANCE AT DECEMBER 31, 2004 11,949 $1,195 $64,644 $(15,280) $ -- $ 50,559 Issuance of common stock from option exercises 332 33 1,267 -- -- 1,300 Net loss -- -- -- (4,668) -- (4,668) ------ ------ ------- -------- ----- -------- BALANCE AT DECEMBER 31, 2005 12,281 $1,228 $65,911 $(19,948) $ -- $ 47,191 ====== ====== ======= ======== ===== ========
The accompanying notes are an integral part of these consolidated statements. 31 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (IN 000'S)
YEAR ENDED DECEMBER 31, ---------------------------- 2005 2004 2003 ------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income $(4,668) $ 110 $(11,981) Adjustments to reconcile net (loss) income to net cash provided by operating activities: Depreciation and amortization 4,524 5,202 5,622 Provision for bad debts 1,247 (72) 737 Loss on disposal of fixed assets 40 106 22 Deferred income taxes -- -- 8,492 Amortization of deferred compensation -- 84 72 Changes in working capital, net of effect of businesses acquired: Decrease (increase) in accounts receivable, gross 4,412 (2,651) (2,216) (Increase) decrease in inventories (2,014) 8,234 13,202 Decrease (increase) in prepaid expenses and other assets 499 (1,304) 1,338 Increase (decrease) in accounts payable 684 285 (7,780) Increase (decrease) in accrued expenses and other 405 (93) (3,714) ------- ------- -------- Net cash provided by operating activities 5,129 9,901 3,794 ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures (2,615) (2,762) (1,182) Acquisition of businesses, net of cash acquired -- -- (181) ------- ------- -------- Net cash used in investing activities (2,615) (2,762) (1,363) ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Net repayments under line of credit (3,063) (8,740) (2,570) Repayment of capital lease and other obligations (58) (82) (119) Exercise of employee stock options 1,300 1,133 1,556 Stock reacquired to settle employee stock bonus withholding tax obligation -- (286) -- Loan fees paid (2) (15) (31) ------- ------- -------- Net cash used in financing activities (1,823) (7,990) (1,164) ------- ------- -------- Net increase (decrease) in cash and cash equivalents 691 (851) 1,267 Cash and cash equivalents, beginning of period 1,377 2,228 961 ------- ------- -------- Cash and cash equivalents, end of period $ 2,068 $ 1,377 $ 2,228 ======= ======= ======== Supplemental cash flow disclosures: Cash paid for interest $ 161 $ 321 $ 794 ======= ======= ======== Cash income tax refunds received, net of taxes paid $ -- $ -- $ (1,565) ======= ======= ========
The accompanying notes are an integral part of these consolidated statements. 32 1. ORGANIZATION Innotrac Corporation ("Innotrac" or the "Company"), a Georgia corporation, provides order processing, order fulfillment and call center services. The Company offers inventory management, inbound call center, pick/pack/ship services, order tracking, transaction processing and returns handling from its leased facilities in Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada, Bolingbrook, Illinois, Hebron, Kentucky and New Castle, Delaware. 2. SIGNIFICANT ACCOUNTING POLICIES Basis of Financial Statement Presentation. The consolidated financial statements include the accounts of the Company and its subsidiary (which was merged into the Company effective January 1, 2005). The financial statements have been prepared on the accrual basis of accounting in conformity with accounting principles generally accepted in the United States of America. All significant intercompany transactions and balances have been eliminated in consolidation. Reclassifications have been made to prior year consolidated statements of operations to conform to the 2005 presentation. Accounting Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Concentration of Revenues. Revenues earned under the Company's contracts with its telecommunication clients to provide fulfillment of telecommunications equipment and related order processing and call center support services, including DSL modems and wireless pagers, accounted for approximately 33%, 38% and 42% of total revenues for the years ended December 31, 2005, 2004 and 2003, respectively. Revenues generated from the fulfillment of DSL and cable modem equipment accounted for 21%, 20%, and 19% of the aforementioned totals. The following table sets forth the percentage of total revenues derived from each of the Company's largest clients for the years ended December 31, 2005, 2004 and 2003. Except for the major clients noted in the following table, no other single customer provided more than 10% of consolidated revenues during these years.
YEAR ENDED DECEMBER 31, ----------------------- 2005 2004 2003 ---- ---- ---- BELLSOUTH - TELECOM EQUIPMENT 8.8% 14.5% 18.5% - DSL EQUIPMENT 14.7 12.5 13.0 SMITH & HAWKEN 12.3 12.9 13.2 THANE 11.3 7.0 3.9 TACTICA 0.0 3.0 10.2
Cash and Cash Equivalents. The Company considers all short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. Fair Value of Financial Instruments. The carrying value of the Company's revolving credit facility approximates fair value given that interest rates under the facility are based on prevailing market rates. The book value of the Company's accounts receivable and accounts payable approximate fair value. 33 Inventories. Inventories, consisting primarily of telephones and Caller ID equipment are stated at the lower of cost or market, with cost determined by the first-in, first-out method. Substantially all inventory at December 31, 2005 and 2004 is for the account of one client who has indemnified the Company from substantially all risk associated with such inventory. Property and Equipment. Property and equipment are stated at cost. Depreciation is determined using straight-line methods over the following estimated useful lives: Rental equipment 3 years Computers and software 3-5 years Machinery and equipment 5-7 years Furniture and fixtures 7 years
Leasehold improvements are amortized using the straight-line method over the shorter of the service lives of the improvements or the remaining term of the lease. Depreciation expense for the years ended December 31, 2005, 2004 and 2003 were $4.3 million, $4.9 million and $5.3 million, respectively. Maintenance and repairs are expensed as incurred. Goodwill and Other Acquired Intangibles. Goodwill represents the cost of acquired enterprises in excess of the fair market value of the net tangible and identifiable intangible assets acquired. The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets" effective January 1, 2002, which changed the accounting for goodwill and other indefinite life intangibles from an amortization method to an impairment only approach. The Company tests goodwill annually for impairment at January 1 or sooner if circumstances indicate. Under SFAS No. 142, goodwill impairment is deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. Upon completion of its analysis for impairment as of January 1, 2006 in accordance with SFAS No. 142, no impairment was determined to exist at that time. Innotrac's goodwill carrying amount as of December 31, 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 the earnout payment made to the former UDS shareholders in February 2002, and the acquisition of iFulfillment, Inc. in July 2001. The Company has intangible assets that were subject to amortization under the provisions of SFAS No. 142. The intangible assets consist of acquired customer contracts, which are included in other assets in the Company's Consolidated Balance Sheets and which are amortized over a period of 1 to 5 years on a straight-line basis. At December 31, 2005 and 2004, the Company had intangible assets, consisting primarily of customer contracts, of approximately $0 and $185,000, net of accumulated amortization of approximately $1.3 million and $1.1 million, respectively. Amortization expense of these intangible assets amounted to approximately $185,000, $202,000 and $202,000 during the years ended December 31, 2005, 2004 and 2003, respectively. 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 is recorded against deferred tax assets if the Company considers it is more likely than not that deferred tax assets will not be realized. A valuation allowance has been recorded against deferred tax assets at December 31, 2005 (see Note 6). 34 Revenue Recognition. Innotrac derives its revenue primarily from two sources: (1) fulfillment operations and (2) the delivery of business services. Innotrac's fulfillment services operations record revenue at the conclusion of the material selection, packaging and shipping process. Innotrac's call center services business recognizes revenue according to written pricing agreements based on number of calls, minutes or hourly rate basis. All other revenues are recognized as services are rendered. As required by the consensus reached in Emerging Issue Task Force ("EITF") Issue No. 99-19, revenues have been recorded net of the cost of the equipment for all fee-for-service clients. As required by the consensus reached in EITF No. 01-14, "Income Statement Characterization of Reimbursements Received for Out-of Pocket Expenses Incurred," the Company records reimbursements received from customers for out-of pocket expenses, primarily freight and postage fees, as revenue and the associated expense as cost of revenue. Cost of Revenues. The primary components of cost of revenues include labor costs for the fulfillment and call centers, telephone minute fees, and freight and packaging material costs. Costs related to facilities, equipment, account services and information technology are included in selling, general and administrative expense along with other operating costs. As a result of the Company's policy to include facility, account services and information technology costs in selling, general and administrative expense, our gross margins may not be comparable to other fulfillment companies. 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 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 and net loss per share would have been the following pro forma amounts (in 000's, except per share data):
YEAR ENDED DECEMBER 31, --------------------------- 2005 2004 2003 ------- ------ -------- Net (loss) income as reported $(4,668) $ 110 $(11,981) Pro forma net loss $(8,025) $ (677) $(12,699) Basic net (loss) income per share as reported $ (0.38) $ 0.01 $ (1.04) Diluted net (loss) income per share as reported $ (0.38) $ 0.01 $ (1.04) Pro forma net loss per share $ (0.66) $(0.06) $ (1.10)
Under the fair value based method, compensation cost, net of tax is $3.4 million, $787,000 and $718,000 for the years ended December 31, 2005, 2004 and 2003, respectively. On December 31, 2005, in anticipation of the adoption of SFAS No. 123(R) on January 1, 2006, the Board of Directors amended the terms of certain outstanding options to purchase the Company's common stock that the Company previously had granted. The amendments included accelerating the vesting date of 172,250 outstanding options to a vesting date of December 31, 2005 and re-pricing 834,450 out-of-the-money outstanding options to an exercise price of $4.56, the market value of the company's common stock on December 31, 2005, to better incentivize the holders of those options. Since the amended exercise price for the options was equal to the market value of the underlying common stock on the date of amendment, no compensation cost was recognized as a result of these amendments. 35 The Company has computed for pro forma disclosure purposes the value of all options granted using the Black-Scholes option-pricing model as prescribed by SFAS No. 123 using the following weighted average assumptions:
2005 2004 2003 --------- --------- --------- Risk-free interest rate 4.47% 4.23% 4.27% Expected dividend yield 0% 0% 0% Expected lives 2.1 Years 2.3 Years 2.6 Years Expected volatility 72.4% 75.1% 80.4%
The fair value of each option was estimated on the date of grant using the Black-Scholes option pricing model with the above weighted average assumptions. The weighted average fair value of options granted was as follows:
2005 2004 2003 -------- ---------- -------- Per share option value $ 1.96 $ 4.78 $ 2.22 Aggregate total $849,200 $1,017,803 $266,028 ======== ========== ========
Earnings Per Share. Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding. In the computation of diluted earnings per share, the weighted average number of common shares outstanding is adjusted for the effect of all dilutive potential common stock equivalent shares. 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 No. 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. 3. ACCOUNTS RECEIVABLE Accounts receivable were composed of the following at December 31, 2005 and 2004 (in 000's):
2005 2004 ------- ------- Billed receivables $15,201 $19,449 Unbilled receivables 336 580 ------- ------- 15,537 20,029 Less: Allowance for doubtful accounts (2,791) (1,624) ------- ------- $12,745 $18,405 ======= =======
4. FINANCING OBLIGATIONS The Company recently renewed its revolving credit agreement to extend the facility for an additional three years, until March 2009. 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 36 totaled $11.9 million at December 31, 2005. The maximum borrowing amount of this facility was reduced from $40.0 million to $25.0 million in the third quarter of 2004 as the Company does not anticipate a need for the larger amount. 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 restrictive fixed charge coverage ratio, change in ownership control and other 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. Accordingly, in the event of noncompliance, these amounts could be accelerated. As renewed, the facility requires the Company to maintain a minimum fixed charge coverage ratio of between 0.70 and 1.00 to 1.00, depending on the particular fiscal quarter, for each of the Company's quarters through the end of its fiscal year 2006, and a ratio of 1.15 to 1.00 thereafter. Although, at December 31, 2005 the Company was not in compliance with the then-current fixed charge coverage ratio requirement of 1.30 to 1.00, or with a then-existing tangible net worth requirement (which has been eliminated from the new facility), the Company received a waiver of such noncompliance from the bank. The Company's fixed charge ratio at December 31, 2005 was 1.18 to 1.00. Interest on borrowings is payable monthly at rates equal to the prime rate, or at the Company's option, LIBOR plus up to 200 basis points. During the years ended December 31, 2005, 2004 and 2003 the Company incurred interest expense related to the line of credit of approximately $87,000, $111,000 and $704,000, respectively, resulting in a weighted average interest rate of 5.01%, 3.48% and 3.80%, respectively. At December 31, 2005, the Company had $11.9 million of additional availability under the revolving credit agreement. 5. COMMITMENTS AND CONTINGENCIES Operating Leases. Innotrac leases office and warehouse space and equipment under various operating leases. The primary office and warehouse operating leases provide for escalating payments over the lease term. Innotrac recognizes rent expense on a straight-line basis over the lease term. Aggregate future minimum lease payments under noncancellable operating leases with original periods in excess of one year as of December 31, 2005 are as follows (in 000's):
OPERATING LEASES --------- 2006 .......................... $ 9,672 2007 .......................... 9,914 2008 .......................... 5,018 2009 .......................... 2,957 2010 .......................... 2,362 Thereafter .................... 793 ------- Total minimum lease payments .. $30,716 =======
Rent expense under all operating leases totaled approximately $8.7 million, $8.6 million and $8.1 million during the years ended December 31, 2005, 2004 and 2003, respectively. Legal Proceedings. The Company is subject to various legal proceedings and claims that arise in the ordinary course of business. There are no material pending legal proceedings to which the Company is a party. Shareholder Rights Plan. In December of 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 37 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 34.0% of the shares outstanding on December 31, 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. 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 2005, 2004 and 2003, 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 $11,000, $17,000 and $11,000, respectively. 6. INCOME TAXES Details of the income tax benefit (provision) for the years ended December 31, 2005, 2004 and 2003 are as follows (in 000's):
2005 2004 2003 ---- ---- ------- Current $-- $-- $ (232) Deferred -- -- (8,540) --- --- ------- $-- $-- $(8,772) === === =======
38 Deferred income taxes reflect the net effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Company's deferred tax assets and liabilities as of December 31, 2005 and 2004 are as follows (in 000's):
2005 2004 -------- ------- Deferred tax assets: Net operating loss carryforwards $ 14,317 $12,120 Allowance for doubtful accounts 1,019 619 Reserves 215 2 Other 58 9 -------- ------- Total deferred tax assets 15,609 12,750 Valuation allowance (12,187) (9,680) -------- ------- Net deferred tax assets 3,422 3,070 Deferred tax liabilities: Goodwill (2,318) (1,749) Depreciation (1,104) (1,321) -------- ------- Net deferred taxes -- -- Net deferred taxes: Current deferred tax assets -- -- Noncurrent deferred tax assets -- -- -------- ------- $ -- $ -- ======== =======
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 December 31, 2005 is approximately $15.6 million. 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 and 2005. Innotrac has a tax net operating loss carryforward of $37.5 million at December 31, 2005 that expires between 2020 and 2025. Innotrac's ability to generate the expected amounts of taxable income from future operations is dependent upon general economic conditions, collection of existing outstanding accounts receivable, competitive pressures on sales and margins and other factors beyond management's control. These factors, combined with losses in recent years, creates uncertainty about the ultimate realization of the gross deferred tax asset in future years. Therefore, a valuation allowance of approximately $12.2 million and $9.7 million has been recorded as of December 31, 2005 and 2004, respectively. Income taxes associated with future earnings will be offset by a reduction in the valuation allowance. For the year ended December 31, 2005, the deferred income tax benefit of $2.5 million 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, the valuation allowance can be reduced or eliminated. 39 The difference between the provision for income taxes (benefit) and the amount computed by applying the U.S. federal income tax rate for the years ended December 31, 2005, 2004 and 2003 is as follows:
2005 2004 2003 ------- ----- ------- Statutory federal income tax (benefit) $(1,624) $ 37 $(1,091) State income taxes, net of federal effect (125) 4 (106) Permanent book-tax differences (179) 69 109 Valuation allowance for deferred tax assets 1,928 (110) 9,882 Other -- -- (22) ------- ----- ------- Income tax provision (benefit) $ -- $ -- $ 8,772 ======= ===== =======
7. EARNINGS PER SHARE The following table shows the shares used in computing diluted earnings per share ("EPS") in accordance with Statement of Financial Accounting Standards No. 128 (in 000's):
2005 2004 2003 ------ ------ ------ Diluted earnings per share: Weighted average shares outstanding 12,196 11,865 11,542 Employee and director stock options -- 657 -- ------ ------ ------ Weighted average shares assuming dilution 12,196 12,522 11,542 ====== ====== ======
Options and warrants outstanding to purchase shares of the Company's common stock aggregating 1.7 million, 87,500 and 1.9 million were not included in the computation of diluted EPS for the years ended December 31, 2005, 2004 and 2003, respectively, because their effect was anti-dilutive. This includes a warrant with registration rights issued to Thane International in December 2000 to purchase 150,000 shares of Innotrac common stock at the exercise price of $6.50, which vests 20% annually, which expires December 8, 2010. On December 31, 2005, in anticipation of the adoption of SFAS No. 123(R) on January 1, 2006, the Board of Directors amended the terms of certain outstanding options to purchase the Company's common stock that the Company previously had granted. The amendments included accelerating the vesting date of 172,250 outstanding options to a vesting date of December 31, 2005 and re-pricing 834,450 out-of-the-money outstanding options to an exercise price of $4.56, the market value of the company's common stock on December 31, 2005, to better incentivize the holders of those options. Since the amended exercise price for the options was equal to the market value of the underlying common stock on the date of amendment, no compensation cost was recognized as a result of these amendments. 40 8. OTHER COMPREHENSIVE LOSS SFAS No. 130, "Reporting Comprehensive Income," established standards for reporting and display of comprehensive income and its components in financial statements. For the years ended December 31, 2005, 2004 and 2003, the components of the Company's comprehensive loss are as follows (in 000's):
Year Ended December 31, ------------------------- 2005 2004 2003 ------- ---- -------- Other comprehensive loss: Net (loss) income $(4,668) $110 $(11,981) Unrealized gain -- -- -- Reclassification adjustment for realized gains included in consolidated statement of operations -- -- -- ------- ---- -------- Comprehensive (loss) income $(4,668) $110 $(11,981) ======= ==== ========
9. SHAREHOLDERS' EQUITY In June 2000, the Company's Board of Directors authorized the repurchase, at the direction of senior management, of up to $5.0 million of the Company's common stock. The stock repurchase program was extended for an additional twelve months by the Board of Directors in February 2002. During the years ended December 31, 2005 and 2004 the Company did not repurchase shares. At December 31, 2003, all treasury shares previously repurchased had been reissued for stock options exercised during 2003, and accordingly no treasury stock remains. 10. EMPLOYEE RETIREMENT PLANS Innotrac employees may participate in a 401(k) defined contribution plan. The plan covers all employees who have at least six months of service and are 18 years of age or older. Participants may elect to defer up to 15% of compensation up to a maximum amount determined annually pursuant to IRS regulations. Prior to July 1, 2004, Innotrac's policy was to provide matching employer contributions equal to 15% of contributions for less than five years of service, 25% of contributions for five to nine years of service, and 35% of contributions for over nine years of service. However, this match was suspended from January 1, 2002 through June 30, 2002, reinstituted from July 1, 2002 through December 31, 2002 and was temporarily suspended thereafter. Effective July 1, 2004 and through December 31, 2004, Innotrac reinstituted a matching employer contribution equal to 5% of contributions for less than five years of service, 10% of contributions for five to nine years of service and 15% of contributions for over nine years of service. These rates were adjusted effective January 1, 2005 to 5% of contributions for less than four years of service and 10% of contributions for over four years of service. Total matching contributions made to the plan and charged to expense by Innotrac for the years ended December 31, 2005, 2004 and 2003 were approximately $42,000, $16,000 and $0, respectively. The Company has an executive deferred compensation plan for certain employees, as designated by the Company's Board of Directors. Participants may elect to defer up to 30% of compensation. Innotrac's policy is to provide matching employer contributions ranging from 20% to 100% of employee contributions based on years of service. However, this match was suspended for 2005, 2004 and 2003. The Company invests these contributions in employee-directed marketable equity securities which are recorded as trading securities at fair-market value on the accompanying consolidated balance sheet (in other assets) and aggregated $884,889 and $874,865 at December 31, 2005 and 2004, respectively. The monies held by the plan are subject to general creditors of the Company in the event of a Company bankruptcy filing. 41 11. STOCK BASED COMPENSATION The Company has adopted two stock option plans: the 1997 and 2000 Stock Option and Incentive Award Plans ("The Plans"). The Plans provide key employees, officers, directors, contractors and consultants an opportunity to own shares of common stock of the Company and to provide incentives for such persons to promote the financial success of the Company. Awards under The Plans may be structured in a variety of ways, including as "incentive stock options," as defined in Section 422 of the Internal Revenue Code, as amended, non-qualified stock options, restricted stock awards, and stock appreciation rights ("SARs"). Incentive stock options may be granted only to full-time employees (including officers) of the Company. Non-qualified options, restricted stock awards, SARs, and other permitted forms of awards may be granted to any person employed by or performing services for the Company, including directors, contractors and consultants. The 1997 Stock Option Plan and 2000 Stock Option Plan, as amended, provide for the issuance of options to purchase up to an aggregate of 800,000 shares and 2,800,000 shares of common stock, respectively. At December 31, 2005, there were 1,237,850 shares available to be issued under The Plans. On December 31, 2005, in anticipation of the adoption of SFAS No. 123(R) on January 1, 2006, the Board of Directors amended the terms of certain outstanding options to purchase the Company's common stock that the Company previously had granted. The amendments included accelerating the vesting date of 172,250 outstanding options to a vesting date of December 31, 2005 and re-pricing 834,450 out-of-the-money outstanding options to an exercise price of $4.56, the market value of the company's common stock on December 31, 2005, to better incentivize the holders of those options. Since the amended exercise price for the options was equal to the market value of the underlying common stock on the date of amendment, no compensation cost was recognized as a result of these amendments. Incentive stock options are also subject to certain limitations prescribed by the Code, including the requirement that such options may not be granted to employees who own more than 10% of the combined voting power of all classes of voting stock of the Company, unless the option price is at least 110% of the fair market value of the common stock subject to the option. The Board of Directors of the Company (or a committee designated by the Board) otherwise generally has discretion to set the terms and conditions of options and other awards, including the term, exercise price and vesting conditions, if any; to select the persons who receive such grants and awards; and to interpret and administer The Plans. A summary of the options outstanding and exercisable by price range as of December 31, 2005 is as follows (shares in 000's):
Options Outstanding Options Exercisable ------------------------------------ ---------------------------------- Weighted Average Weighted Range of As of Remaining Weighted Average As of Average Exercise Prices December 31, 2005 Contractual Life Exercise Price December 31, 2005 Exercise Price - --------------- ----------------- ---------------- ---------------- ----------------- -------------- $1.77 - $3.54 283 6.0 $ 3.37 283 $ 3.37 $3.54 - $5.31 972 7.7 4.53 918 4.53 $5.31 - $7.07 0 0.0 0.00 0 0.00 $7.07 - $8.84 8 6.0 7.57 8 7.57 $8.84 - $10.61 227 1.9 9.11 227 9.11 $10.61 - $12.38 20 2.3 12.00 20 12.00 $12.38 - $14.15 0 0.0 0.00 0 0.00 $14.15 - $15.92 0 0.0 0.00 0 0.00 $15.92 - $17.68 20 3.2 16.87 20 16.87 ----- --- ------ ----- ------ 1,530 6.4 $ 5.27 1,476 $ 5.29 ===== === ====== ===== ======
42 A summary of activity in the Company's two stock option plans is as follows (shares in 000's):
Weighted Average Shares Price ------ ---------------- Outstanding at December 31, 2002 2,037 5.50 Granted 120 4.31 Exercised (306) 4.35 Forfeited (209) 5.79 ----- ----- Outstanding at December 31, 2003 1,642 5.59 Granted 213 10.45 Exercised (186) 4.53 Forfeited (154) 6.63 ----- ----- Outstanding at December 31, 2004 1,515 6.30 Granted 433 5.52 Exercised (328) 4.54 Forfeited (90) 7.57 ----- ----- Outstanding at December 31, 2005 1,530 5.27 ===== =====
Options exercisable at December 31, 2005, 2004 and 2003 were 1,476,000, 995,000 and 764,000 respectively, with a weighted average price of $5.29, $6.46 and $7.07, respectively. 12. RELATED PARTY TRANSACTIONS The Company leases a single engine aircraft from a company wholly-owned by our Chairman and Chief Executive Officer, pursuant to an agreement that provides for Innotrac to pay for 86% of all expenses associated with this aircraft. This allocation is determined annually based on actual business usage. The Company paid approximately $187,000 during 2005. For the years ended December 31, 2004 and 2003, the Company paid $205,000 and $134,000, respectively. The Company paid approximately $29,000, $29,000 and $83,000 during 2005, 2004 and 2003, respectively, in fees to an accounting firm for tax and consulting services. One of the directors of the Company is the Managing Partner and part owner of that firm. The Company paid approximately $239,000, $527,000 and $863,000 during 2005, 2004 and 2003, respectively, in fees to a print broker for services related to the printing of marketing, client, inter-company and other materials. The broker is owned by the brother of the Company's Chairman and Chief Executive Officer. In 2003, the Company and the IPOF Group (consisting of IPOF Fund, LP and its general partner, David Dadante), which as of December 31, 2005 beneficially owned approximately 4.2 million shares of Common Stock, entered into an amended Agreement to permit the IPOF Group to acquire up to 40% of the Common Stock on the terms set forth in that Agreement without becoming an "Acquiring Person" under the Company's Rights Agreement with SunTrust Bank. The Agreement with the IPOF Group contains various restrictions on the IPOF's Group right to vote and take certain other shareholder actions. Among these restrictions, the IPOF Group agreed to vote all shares in excess of 15% proportionately with vote(s) cast by the other shareholders of the Company and not seek to place a representative on the Company's Board or seek to remove any member of the Board. The IPOF Group further acknowledged that it is an "affiliate," as defined under applicable federal securities law. During 2004, the Company became aware of possible IPOF Group violations of the short-swing profit rules under Section 16(b) of the Securities and Exchange Act of 1934. Upon conclusion of the investigation of this matter, the Company and IPOF Group, on March 3, 2004, entered into a Settlement Agreement regarding the potential Section 16(b) liability issues that provides for the Company's recovery in 2006 of $301,957. 43 The United States District Court in Cleveland, Ohio has appointed a receiver to identify and administer the assets of the IPOF Fund, L.P. and its general partner, Mr. David Dadante. Based on information from the receiver, the Company understands that the Fund and Mr. Dadante own 4,176,725 shares of common stock of the Company, representing approximately 34.0% of the total shares outstanding, all of which are held as collateral in margin accounts maintained at several financial institutions. The Company has been engaged in discussions with the receiver in an effort to cause the shares to be sold in a manner that causes as little disruption to the market for Company stock as possible. The Federal Court has prohibited the financial institutions holding Company stock owned by the IPOF Fund and Mr. Dadante in margin accounts from selling any of these shares through at least July 14, 2006. The court has permitted open market sales by the receiver as he may in his sole discretion determine to be consistent with his duty to maximize the value of the assets of IPOF Fund, and as warranted by market conditions. The receiver has indicated to the Company that he does not intend to direct any open market sales during this period except in circumstances in which he believes that there would be no material adverse impact on the market price for the Company's shares. 13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(000's, except per share data) First Second Third Fourth (1) ------- ------- ------- ---------- 2005 Quarters: Revenues, net $19,239 $18,942 $17,543 $18,168 Operating loss (221) (577) (778) (2,938) Net loss (288) (619) (796) (2,965) Net loss per share-basic (0.02) (0.05) (0.07) (0.24) Net loss per share-diluted $ (0.02) $ (0.05) $ (0.07) $ (0.24) 2004 Quarters: Revenues, net $19,994 $19,808 $17,631 $20,889 Operating income (loss) 320 302 (339) 112 Net income 227 225 (402) 60 Net income per share-basic 0.02 0.02 (0.03) 0.00 Net income per share-diluted $ 0.02 $ 0.02 $ (0.03) $ 0.00
(1) Results for the fourth quarter of 2005 include a provision for bad debts for one specific account receivable. See "Management's Discussion and Analysis of Financial Condition and Results of Operations" for further explanation. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES Our management, with the participation of the Chief Executive Officer and principal financial officer, evaluated our disclosure controls and procedures (as defined in federal securities rules) as of December 31, 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 however 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. 44 There were no changes in our internal control over financial reporting during the quarter ended December 31, 2005 that has materially affected, or is reasonably likely to materially affect, Innotrac's internal control over financial reporting. ITEM 9B. OTHER INFORMATION On March 13, 2006, the Compensation Committee approved bonuses with respect to service during 2005 for the following executive officers for the following amounts: Larry C. Hanger .... $30,000 Robert J. Toner .... $50,000 James R. McMurphy .. $50,000
PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this Item 10 contained under the headings "Board Matters," "Election of Directors" and "Voting Securities and Principal Shareholders--Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2006 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. Pursuant to Instruction 3 to Paragraph (b) of Item 401 of Regulation S-K, information relating to the executive officers of the Company is included in Item 1 of this Report. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 contained under the heading "Executive Compensation" and "Board Matters--Directors' Compensation" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2006 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The information required by this Item 12 contained under the headings "Voting Securities and Principal Shareholders" and "Equity Compensation Plans" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2006 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. For purposes of determining the aggregate market value of the Company's voting stock held by nonaffiliates, shares held by all current directors and executive officers of the Company and holders of 10% or more of the Company's Common Stock have been excluded. The exclusion of such shares is not intended to, and shall not, constitute a determination as to which persons or entities may be "affiliates" of the Company as defined by the Commission. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 contained under the heading "Related Party Transactions" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2006 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. 45 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The information required by this Item 14 contained under the heading "Independent Registered Public Accounting Firm" in the definitive Proxy Statement used in connection with the solicitation of proxies for the Company's 2006 Annual Meeting of Shareholders, to be filed with the Commission, is hereby incorporated herein by reference. PART IV ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) FINANCIAL STATEMENTS, FINANCIAL STATEMENT SCHEDULES AND EXHIBITS 1. FINANCIAL STATEMENTS The following financial statements and notes thereto are included in Item 8 of this Report. Reports of Independent Registered Public Accounting Firms Consolidated Balance Sheets as of December 31, 2005 and 2004 Consolidated Statements of Operations for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Shareholders' Equity for the years ended December 31, 2005, 2004 and 2003 Consolidated Statements of Cash Flows for the years ended December 31, 2005, 2004 and 2003 2. FINANCIAL STATEMENT SCHEDULES Reports of Independent Registered Public Accounting Firms as to Schedules Schedule II - Valuation and Qualifying Accounts 3. EXHIBITS The following exhibits are required to be filed with this Report by Item 601 of Regulation S-K:
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - -------------- ----------------------- 2.1 Agreement and Plan of Merger dated December 8, 2000, by and among the Registrant, UDS, Patrick West, Daniel Reeves and The Estate of John R. West (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the commission on March 28, 2002) 3.1 Amended and Restated Articles of Incorporation of the Registrant, (incorporated by reference to Exhibit 3.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 3.2 Amended and Restated By-laws of the Registrant (incorporated by reference to Exhibit 3.2 to the Registrant's Registration Statement on Form S-1/A (Commission File No. 333-79929), filed with the Commission on July 22, 1999) 4.1 Form of Common Stock Certificate of the Registrant (incorporated by reference to Exhibit 4.1 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 4.2(a) Rights Agreement between Company and Reliance Trust Company as Rights
46 Agent, dated as of December 31, 1997 (incorporated by reference to Exhibit 4.2 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) (b) First Amendment to the Rights Agreement dated as of November 30, 2000 between the Company, Reliance Trust Company and SunTrust Bank (incorporated by reference to Exhibit 4.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) (c) Second Amendment to the Rights Agreement dated as of August 14, 2003 between the Company and SunTrust Bank (incorporated by reference to Exhibit 4.2 to Amendment No. 1 to the Registrant's Quarterly Report on Form 10-Q/A for the quarterly period ended June 30, 2003 (Commission File No. 000-23741), filed with the Commission on August 20, 2003) (d) Third Amendment to the Rights Agreement dated as of November 24, 2003 between the Company and SunTrust Bank (incorporated by reference to Exhibit 4.2(d) to Amendment No. 2 to the Registrant's Registration of Securities on Form 8-A/A (Commission File No. 000-23741), filed with the Commission on November 25, 2003) 10.1+ 2000 Stock Option and Incentive Award Plan and amendment thereto (incorporated by reference to Exhibit 4.3 and 4.4 to the Registrant's Form S-8 (Commission File No. 333-54970) filed with the Commission on February 5, 2001) 10.2(a) Sublease Agreement, dated May 26, 1999, by and between HSN Realty LLC and Universal Distribution Services, Inc. (incorporated by reference to Exhibit 10.8 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 (Commission File No. 000-23741), filed with the Commission on March 30, 2001) (b) Lease, dated March 23, 2000 by and between Dermody Industrial Group and Universal Distribution Services, Inc. (incorporated by reference to Exhibit 10.2(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 000-23741), filed with the Commission on March 31, 2003) 10.4(a) Amended and Restated Loan and Security Agreement between the Registrant and SouthTrust Bank, N.A., dated January 25, 1999 (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 0-23741), filed with the Commission on March 26, 1999) (b) First Amendment to Amended and Restated Loan and Security Agreement by and between the Registrant and SouthTrust Bank, N.A., dated April 29, 1999 (incorporated by reference to Exhibit 10.14(b) to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-79929), filed with the Commission on June 3, 1999) (c) Letter Modification/Waiver to Amended and Restated Loan and Security Agreement, as amended, effective August 14, 2000 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 (Commission File No. 0-23741), filed with the
47 Commission on November 13, 2000) (d) Letter of Amendment to Amended and Restated Loan and Security Agreement by and between the Registrant and SouthTrust Bank, N.A. effective September 10, 2001 (Incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2001 (Commission File No. 0-23741) filed with the Commission on November 13, 2001) (e) Letter Modification/Waiver to Amended and Restated Loan and Security Agreement, as amended, effective May 31, 2002 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2002 (Commission File No. 000-23740) filed with the Commission on August 13, 2002) (f) Letter Modification/Waiver to Amended and Restated Loan and Security Agreement, as amended, effective November 13, 2002 (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 (Commission File No. 000-23740) filed with the Commission on November 19, 2002) (g) Letter Modification to Amended and Restated Loan and Security Agreement, dated February 18, 2003, as amended, effective January 1, 2003 (incorporated by reference to Exhibit 10.4(g) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 000-23741), filed with the Commission on March 31, 2003) (h) Second Amended and Restated Loan and Security Agreement by and between the Registrant and SouthTrust Bank, N.A., dated April 3, 2003 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 (Commission File No. 000-23740), filed with the Commission on May 14, 2003) (i) Letter Modification/Waiver to Second Amended and Restated Loan and Security Agreement, as amended, effective February 6, 2004 (incorporated by reference to Exhibit 10.4(i) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File No. 000-23741), filed with the Commission on March 30, 2004) (j) Letter Modification to Second Amended and Restated Loan and Security Agreement, as amended, effective February 26, 2004 (incorporated by reference to Exhibit 10.4(j) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File No. 000-23741), filed with the Commission on March 30, 2004) (k) Letter Modification/Wavier to Second Amended and Restated Loan and Security Agreement, as amended, effective March 26, 2004 (incorporated by reference to Exhibit 10.4(k) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2003 (Commission File No. 000-23741), filed with the Commission on March 30, 2004) (l) Loan Documents Modification Agreement between the Registrant and SouthTrust Bank, dated May 10, 2004 (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2004 (Commission File No. 000-23740), filed with the Commission on May 14, 2004)
48 (m) Loan Documents Modification Agreement between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated May 20, 2005 (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (Commission File No. 000-23740), filed with the Commission on August 12, 2005) (n) Loan Documents Modification Agreement between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated August 19, 2005 (incorporated by reference to Exhibit 10.4(n) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 (Commission File No. 000-23740), filed with the Commission on November 14, 2005) (o) Loan Documents Modification Agreement between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated October 24, 2005 (incorporated by reference to Exhibit 10.4(o) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 (Commission File No. 000-23740), filed with the Commission on November 14, 2005) (p) Loan Documents Modification Agreement between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated November 7, 2005 (incorporated by reference to Exhibit 10.4(p) to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2005 (Commission File No. 000-23740), filed with the Commission on November 14, 2005) (q)* Loan Documents Modification Agreement between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated November 28, 2005 (r)* Loan Documents Modification Agreement between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated December 29, 2005 (s)* Loan Documents Modification Agreement between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated January 20, 2006 (t)* Loan Documents Modification Agreement between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated February 21, 2006 (u)* Waiver Agreement by and between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated March 13, 2006 (v)* Third Amended and Restated Loan and Security Agreement by and between the Registrant and Wachovia Bank, National Association, Successor by merger to SouthTrust Bank, dated March 28, 2006 10.5+ 2002 Senior Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.14 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the Commission on March 28, 2002)
49 10.7+ Employment Agreement dated August 31, 2000, by and between Scott D. Dorfman and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 (Commission File No. 0-23741), filed with the Commission on November 13, 2000) 10.8+ Employment Agreement dated August 31, 2000, by and between David L. Ellin and the Registrant (incorporated by reference to Exhibit 10.3 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 (Commission File No. 0-23741), filed with the Commission on November 13, 2000) 10.9+ Employment Agreement dated August 31, 2000, by and between Larry C. Hanger and the Registrant (incorporated by reference to Exhibit 10.4 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2000 (Commission File No. 0-23741), filed with the Commission on November 13, 2000) 10.13(a) Lease, dated July 23, 2001, by and between The Lincoln National Life Insurance Company and iFulfillment, Inc. (incorporated by reference to Exhibit 10.23 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the Commission on March 28, 2002) (b) Lease, dated August 5, 2002, by and between The Lincoln National Life Insurance Company and the Registrant (incorporated by reference to Exhibit 10.13(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 000-23741), filed with the Commission on March 31, 2003) 10.14+ Employment Agreement dated December 31, 2001, by and between Robert J. Toner, Jr. and the Registrant (incorporated by reference to Exhibit 10.24 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2001 (Commission File No. 000-23741), filed with the Commission on March 28, 2002) 10.16(a) Lease, dated April 23, 2002, by and between ProLogis Development Services Incorporated and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2002 (Commission File No. 000-23740) filed with the Commission on November 19, 2002) (b) First Amendment to Lease Agreement dated October 15, 2002 by and between ProLogis Development Services Incorporated and the Registrant (incorporated by reference to Exhibit 10.16(b) to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 000-23741), filed with the Commission on March 31, 2003) (c) Second Amendment to Lease Agreement dated March 5, 2003 by and between ProLogis-Macquarie Kentucky I LLC and the Registrant (incorporated by reference to Exhibit 10.16 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (Commission File No. 000-23740), filed with the Commission on August 12, 2005) 10.17(a) Lease, dated September 17, 2002, by and between The Prudential Insurance Company of America and the Registrant (incorporated by reference to Exhibit
50 10.17 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 2002 (Commission File No. 000-23741), filed with the Commission on March 31, 2003) (b) First Amendment to Lease Agreement dated April 4, 2003 by and between The Prudential Insurance Company of America and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2003 (Commission File No. 000-23740), filed with the Commission on May 14, 2003) (c) Second Amendment to Lease Agreement dated June 23, 2005 by and between The Prudential Insurance Company of America and the Registrant (incorporated by reference to Exhibit 10.17 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (Commission File No. 000-23740), filed with the Commission on August 12, 2005) 10.18+ Employment Agreement dated April 7, 2003, by and between James McMurphy and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2003 (Commission File No. 000-23741), filed with the Commission on August 14, 2003) 10.19(a) Agreement dated August 14, 2003 by and between IPOF Fund, LP, an Ohio limited partnership ("IPOF"), David Dadante, an individual resident of Ohio and the general partner of IPOF and the Registrant (incorporated by reference to Exhibit 10.2 to the Registrant's Quarterly Report on Form 10-Q/A for the quarterly period ended June 30, 2003 (Commission File No. 000-23740), filed with the Commission on August 20, 2003) (b) First Amendment dated November 24, 2003 to the Agreement by and between IPOF Fund, LP, an Ohio limited partnership ("IPOF"), David Dadante, an individual resident of Ohio and the general partner of IPOF and the Registrant (incorporated by reference to Exhibit 10.1 to the Registrant's Current Report on Form 8-K (Commission File No. 000-23740), filed with the Commission on November 24, 2003) 10.20(a) Lease, dated August 16, 2004, by and between Centerpoint 800 LLC and the Registrant (incorporated by reference to Exhibit 10.20 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2004 (Commission File No. 000-23740), filed with the Commission on November 12, 2004) (b)* First Amendment to Lease Agreement, dated May 1, 2004, by and between Centerpoint 800 LLC and the Registrant 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 the Registrant (incorporated by reference to Exhibit 10.21 to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2005 (Commission File No. 000-23740), filed with the Commission on August 12, 2005) 10.22* Lease dated December 28, 2005 by and between Duke Realty Limited Partnership and the Registrant 21.1* List of Subsidiaries
51 23.1* Consent of BDO Seidman, LLP 23.2* Consent of Deloitte & Touche LLP 24.1* Power of Attorney (included on signature page) 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)/15d-14(a) 32.1* Certification of Chief Executive Officer Pursuant to 18 U.S.C.ss. 1350 32.2* Certification of principal financial officer Pursuant to 18 U.S.C.ss. 1350
* Filed herewith. + Management contract or compensatory plan or arrangement required to be filed as an exhibit. 52 INNOTRAC CORPORATION SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance at Charged to Balance at Beginning of Charged to Other End of Description Period Expenses Accounts Deductions Period - ----------- ------------ ---------- ---------- ---------- ---------- (in 000's) Provision for uncollectible accounts Year ended December 31, 2005 .......................... $1,624 $1,248 $-- $ (81) $2,791 2004 .......................... $1,696 $ 221 $-- $(293) $1,624 2003 .......................... $ 959 $1,571 $-- $(834) $1,696 Provisions for returns and allowances Year ended December 31, 2005 .......................... $ 5 $ 12 $-- $ (12) $ 5 2004 .......................... $ 12 $ 5 $-- $ (12) $ 5 2003 .......................... $ 10 $ 29 $-- $ (27) $ 12 Provisions for restructuring charge Year ended December 31, 2005 .......................... $ -- $ -- $-- $ -- $ -- 2004 .......................... $ -- $ -- $-- $ -- $ -- 2003 .......................... $ 277 $ -- $-- $(277) $ --
S-1 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized, on the 31st day of March, 2006. INNOTRAC CORPORATION /s/ Scott D. Dorfman ---------------------------------------- Scott D. Dorfman Chairman of the Board, President and Chief Executive Officer (Principal Executive Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the capacities indicated on the 31st day of March 2006. Know all men by these presents, that each person whose signature appears below constitutes and appoints Scott D. Dorfman and Christine A. Herren, or either of them, as attorneys-in-fact, with power of substitution, for him in any and all capacities, to sign any amendments to this Annual Report on Form 10-K, and to file the same, with exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, hereby ratifying and confirming all that said attorneys-in-fact may do or cause to be done by virtue hereof.
Signature Title - --------- ----- /s/ Scott D. Dorfman Chairman of the Board, President and - ------------------------------------- Chief Executive Officer (Principal Scott D. Dorfman Executive Officer) /s/ Christine A. Herren Senior Director and Controller - ------------------------------------- (Principal Financial Officer and Christine A. Herren Principal Accounting Officer) /s/ Thomas J. Marano Director - ------------------------------------- Thomas J. Marano /s/ Bruce V. Benator Director - ------------------------------------- Bruce V. Benator /s/ Martin J. Blank Director - ------------------------------------- Martin J. Blank /s/ Joel E. Marks Director - ------------------------------------- Joel E. Marks
EX-10.4(Q) 2 g00505exv10w4xqy.txt EX-10.4(Q) LOAN DOCUMENT MODIFICATION AGREEMENT DATED NOVEMBER 28, 2005 Exhibit 10.4(q) LOAN DOCUMENTS MODIFICATION AGREEMENT THIS LOAN DOCUMENTS MODIFICATION AGREEMENT (hereinafter referred to as this "Amendment") is made and entered into as of the 28th day of November, 2005, by and among INNOTRAC CORPORATION, a Georgia corporation and successor by merger to iFULFILLMENT, Inc., a Georgia corporation (hereinafter referred to as "Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, (hereinafter referred to as "Lender"). BACKGROUND STATEMENT Borrower and Lender are parties to that certain Third Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrower (and iFulfillment, Inc.) 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 Borrower 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"). Borrower and Lender have agreed to amend the Loan Agreement and to modify all of the other Loan Documents to extend the Commitment Period through December 31,2005, subject to the terms and conditions set forth below. 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, Borrower 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. Effective as of the date hereof, Section 1.1 of the Loan Agreement is amended by deleting the definition of "Commitment Period" 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 December 31, 2005, unless sooner terminated according to the provisions hereof." 2. MODIFICATION OF NOTE. Effective as of the date hereof, the paragraph on page 2 of the Note starting with the words "Interest only at said rates..." is hereby amended by deleting the second sentence of such paragraph and replacing such sentence with the following substitute sentence: "On December 31, 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, Borrower hereby reaffirms and restates 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, Borrower agrees 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 Borrower 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 acknowledges, represents and agrees: that Borrower has no defenses, setoffs, claims, counterclaims, recoupments or causes of action of any kind or nature whatsoever with respect to the Loan, the Note and the other Loan Documents or the indebtedness evidence 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 any other administration or funding of the Loan, or with respect to any other transaction, matter of 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, recoupments or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrower may be deemed to have any Loan Related Claims, Borrower does hereby expressly waive, release and relinquish any and such Loan Related Claims, whether or not known to or suspected by Borrower; that Borrower shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any 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 by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 6. NO NOVATION. Borrower 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 are hereby ratified 2 and affirmed and shall remain valid and in full force and effect except as may be hereinabove modified and amended. 7. NO RELEASE OF COLLATERAL. Borrower further acknowledges and agrees 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. 8. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. IN WITNESS WHEREOF, this Amendment has been duly executed and under seal by Borrower and Lender, as of the day and year first above written. BORROWER: INNOTRAC CORPORATION, a Georgia corporation (SEAL) By: /s/ Scott D. Dorfman ------------------------------------ Scott D. Dorfman Chairman, President and Chief Executive Officer Attest: /s/ Christine A. Herren -------------------------------- Christine A. Herren, Assistant Secretary LENDER: WACHOVIA BANK, NATIONAL ASSOCIATION successor by merger to SouthTrust Bank By: ------------------------------------ Catherine Cowan, Director 3 EX-10.4(R) 3 g00505exv10w4xry.txt EX-10.4(R) LOAN DOCUMENT MODIFICATION AGREEMENT DATED DECEMBER 29, 2005 Exhibit 10.4(r) LOAN DOCUMENTS MODIFICATION AGREEMENT THIS LOAN DOCUMENTS MODIFICATION AGREEMENT (hereinafter referred to as this "Amendment") is made and entered into as of the 29th day of December, 2005, by and among INNOTRAC CORPORATION, a Georgia corporation and successor by merger to iFULFILLMENT, Inc., a Georgia corporation (hereinafter referred to as "Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, (hereinafter referred to as "Lender"). BACKGROUND STATEMENT Borrower and Lender are parties to that certain Third Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrower (and iFulfillment, Inc.) 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 Borrower 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"). Borrower and Lender have agreed to amend the Loan Agreement and to modify all of the other Loan Documents to extend the Commitment Period through January 31, 2005, subject to the terms and conditions set forth below. 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, Borrower 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. Effective as of the date hereof, Section 1.1 of the Loan Agreement is amended by deleting the definition of "Commitment Period" 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 January 31, 2005, unless sooner terminated according to the provisions hereof." 2. MODIFICATION OF NOTE. Effective as of the date hereof, the paragraph on page 2 of the Note starting with the words "Interest only at said rates..." is hereby amended by deleting the second sentence of such paragraph and replacing such sentence with the following substitute sentence: "On January 31, 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, Borrower hereby reaffirms and restates 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, Borrower agrees 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 Borrower 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 acknowledges, represents and agrees: that Borrower has no defenses, setoffs, claims, counterclaims, recoupments or causes of action of any kind or nature whatsoever with respect to the Loan, the Note and the other Loan Documents or the indebtedness evidence 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 any other administration or funding of the Loan, or with respect to any other transaction, matter of 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, recoupments or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrower may be deemed to have any Loan Related Claims, Borrower does hereby expressly waive, release and relinquish any and such Loan Related Claims, whether or not known to or suspected by Borrower; that Borrower shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any 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 by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 6. NO NOVATION. Borrower 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 are hereby ratified 2 and affirmed and shall remain valid and in full force and effect except as may be hereinabove modified and amended. 7. NO RELEASE OF COLLATERAL. Borrower further acknowledges and agrees 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. 8. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. IN WITNESS WHEREOF, this Amendment has been duly executed and under seal by Borrower and Lender, as of the day and year first above written. BORROWER: INNOTRAC CORPORATION, a Georgia corporation (SEAL) By: /s/ Christine A. Herren ------------------------------------ Christine A. Herren, Principal Financial and Accounting Officer Attest: /s/ Christine A. Herren -------------------------------- Christine A. Herren, Assistant Secretary LENDER: WACHOVIA BANK, NATIONAL ASSOCIATION successor by merger to SouthTrust Bank By: ------------------------------------ Catherine Cowan, Director 3 EX-10.4(S) 4 g00505exv10w4xsy.txt EX-10.4(S) LOAN DOCUMENT MODIFICATION AGREEMENT DATED JANUARY 20, 2006 Exhibit 10.4(s) 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 January, 2006, by and among INNOTRAC CORPORATION, a Georgia corporation and successor by merger to iFULFILLMENT, Inc., a Georgia corporation (hereinafter referred to as "Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, (hereinafter referred to as "Lender"). BACKGROUND STATEMENT Borrower and Lender are parties to that certain Third Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrower (and iFulfillment, Inc.) 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 Borrower 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"). Borrower and Lender have agreed to amend the Loan Agreement and to modify all of the other Loan Documents to extend the Commitment Period through February 28, 2006, subject to the terms and conditions set forth below. 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, Borrower 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. Effective as of the date hereof, Section 1.1 of the Loan Agreement is amended by deleting the definition of "Commitment Period" 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 February 28, 2006, unless sooner terminated according to the provisions hereof." 2. MODIFICATION OF NOTE. Effective as of the date hereof, the paragraph on page 2 of the Note starting with the words "Interest only at said rates..." is hereby amended by deleting the second sentence of such paragraph and replacing such sentence with the following substitute sentence: "On February 28, 2006, 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, Borrower hereby reaffirms and restates 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, Borrower agrees 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 Borrower 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 acknowledges, represents and agrees: that Borrower has no defenses, setoffs, claims, counterclaims, recoupments or causes of action of any kind or nature whatsoever with respect to the Loan, the Note and the other Loan Documents or the indebtedness evidence 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 any other administration or funding of the Loan, or with respect to any other transaction, matter of 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, recoupments or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrower may be deemed to have any Loan Related Claims, Borrower does hereby expressly waive, release and relinquish any and such Loan Related Claims, whether or not known to or suspected by Borrower; that Borrower shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any 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 by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 6. NO NOVATION. Borrower 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 are hereby ratified 2 and affirmed and shall remain valid and in full force and effect except as may be hereinabove modified and amended. 7. NO RELEASE OF COLLATERAL. Borrower further acknowledges and agrees 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. 8. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. IN WITNESS WHEREOF, this Amendment has been duly executed and under seal by Borrower and Lender, as of the day and year first above written. BORROWER: INNOTRAC CORPORATION, a Georgia corporation (SEAL) By: ------------------------------------ Scott D. Dorfman, Chairman, President and Chief Executive Officer Attest: -------------------------------- Christine A. Herren, Assistant Secretary LENDER: WACHOVIA BANK, NATIONAL ASSOCIATION successor by merger to SouthTrust Bank By: ------------------------------------ Catherine Cowan, Director 3 EX-10.4(T) 5 g00505exv10w4xty.txt EX-10.4(T) LOAN DOCUMENT MODIFICATION AGREEMENT DATED FEBRUARY 21, 2006 Exhibit 10.4(t) LOAN DOCUMENTS MODIFICATION AGREEMENT THIS LOAN DOCUMENTS MODIFICATION AGREEMENT (hereinafter referred to as this "Amendment") is made and entered into as of the 21st day of February, 2006, by and among INNOTRAC CORPORATION, a Georgia corporation and successor by merger to iFULFILLMENT, Inc., a Georgia corporation (hereinafter referred to as "Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, (hereinafter referred to as "Lender"). BACKGROUND STATEMENT Borrower and Lender are parties to that certain Third Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrower (and iFulfillment, Inc.) 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 Borrower 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"). Borrower and Lender have agreed to amend the Loan Agreement and to modify all of the other Loan Documents to extend the Commitment Period through March 31, 2006, subject to the terms and conditions set forth below. 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, Borrower 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. Effective as of the date hereof, Section 1.1 of the Loan Agreement is amended by deleting the definition of "Commitment Period" 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 March 31, 2006, unless sooner terminated according to the provisions hereof." 2. MODIFICATION OF NOTE. Effective as of the date hereof, the paragraph on page 2 of the Note starting with the words "Interest only at said rates..." is hereby amended by deleting the second sentence of such paragraph and replacing such sentence with the following substitute sentence: "On March 31, 2006, 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, Borrower hereby reaffirms and restates 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, Borrower agrees 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 Borrower 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 acknowledges, represents and agrees: that Borrower has no defenses, setoffs, claims, counterclaims, recoupments or causes of action of any kind or nature whatsoever with respect to the Loan, the Note and the other Loan Documents or the indebtedness evidence 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 any other administration or funding of the Loan, or with respect to any other transaction, matter of 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, recoupments or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrower may be deemed to have any Loan Related Claims, Borrower does hereby expressly waive, release and relinquish any and such Loan Related Claims, whether or not known to or suspected by Borrower; that Borrower shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any 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 by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 6. NO NOVATION. Borrower 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 are hereby ratified 2 and affirmed and shall remain valid and in full force and effect except as may be hereinabove modified and amended. 7. NO RELEASE OF COLLATERAL. Borrower further acknowledges and agrees 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. 8. SUCCESSORS AND ASSIGNS. This Amendment shall be binding upon and inure to the benefit of Borrower and Lender and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. IN WITNESS WHEREOF, this Amendment has been duly executed and under seal by Borrower and Lender, as of the day and year first above written. BORROWER: INNOTRAC CORPORATION, a Georgia corporation (SEAL) By: /s/ Scott D. Dorfman ------------------------------------ Scott D. Dorfman, Chairman, President and Chief Executive Officer Attest: /s/ Christine A. Herren -------------------------------- Christine A. Herren, Assistant Secretary LENDER: WACHOVIA BANK, NATIONAL ASSOCIATION successor by merger to SouthTrust Bank By: /s/ Catherine Cowan ------------------------------------ Catherine Cowan, Director 3 EX-10.4(U) 6 g00505exv10w4xuy.txt EX-10.4(U) WAIVER AGREEMENT DATED MARCH 13, 2006 Exhibit 10.4(u) WAIVER AGREEMENT THIS WAIVER AGREEMENT (hereinafter referred to as this "Agreement") is made and entered into as of the 13th day of March, 2006, by and among INNOTRAC CORPORATION, a Georgia corporation and successor by merger to iFULFILLMENT, Inc., a Georgia corporation (hereinafter referred to as "Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, successor by merger to SOUTHTRUST BANK, (hereinafter referred to as "Bank"). BACKGROUND STATEMENT Borrower and Bank are parties to that certain Third Amended and Restated Line of Credit Note dated May 10, 2004, made by Borrower (and iFulfillment, Inc.) to the order of Bank 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 Borrower and Bank 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"). Borrower has (i) advised Bank that Borrower did not comply with Section 6.22(1) or Section 6.22(3) for its fiscal quarter ending December 31, 2005 (collectively, the "2005 Financial Covenant Defaults"), and (ii) requested Bank waive the 2005 Financial Covenant Defaults. Bank has so agreed to waive the 2005 Financial Covenant Defaults, subject to the terms and conditions more specifically set forth below. 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, Borrower and Bank do hereby agree as follows: 1. WAIVER OF 2005 FINANCIAL COVENANT DEFAULTS. Bank hereby waives the 2005 Financial Covenant Defaults and Borrower agrees to strictly comply with the Loan Agreement hereafter. Borrower hereby agrees that nothing herein shall constitute a waiver by Bank of any default (except as expressly provided in this paragraph 1 with respect to the 2005 Financial Covenant Defaults), whether known or unknown, which may exist under the Loan Agreement or any other Loan Document. Borrower hereby further agrees that no action, inaction or agreement by Bank, 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 Loans or other Obligations or any portion thereof, or with respect to matters involving collateral security for the Loans or other Obligations, or with respect to any other matter relating to the Loans or other Obligations, shall require or imply any further extension, indulgence, waiver, consent or agreement by Bank. Except as expressly provided in this paragraph 1, Borrower hereby acknowledges and agrees that Bank has not made any agreement, and is in no way obligated, to grant any further extension, indulgence, waiver or consent with respect to the Loans, the other Obligations, the Loan Agreement or any other Loan Document. 2. 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 Bank agreeing to modify the Loan Agreement, Borrower agrees to pay all fees and expenses incurred in connection with this Agreement, including Bank's attorneys' fees and expenses. 3. NO DEFENSES; RELEASE. For purposes of this Paragraph 3, the terms "Borrower Parties" and "Bank Parties" shall mean and include Borrower and Bank, 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 acknowledges, represents and agrees: that Borrower has no defenses, setoffs, claims, counterclaims, recoupments or causes of action of any kind or nature whatsoever with respect to the Loan, the Note and the other Loan Documents or the indebtedness evidence 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 any other administration or funding of the Loan, or with respect to any other transaction, matter of occurrence between any of the Borrower Parties and any Bank Parties or with respect to any acts or omissions of any Bank 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, recoupments or causes of action being hereinafter referred to as "Loan Related Claims"); that, to the extent that Borrower may be deemed to have any Loan Related Claims, Borrower does hereby expressly waive, release and relinquish any and such Loan Related Claims, whether or not known to or suspected by Borrower; that Borrower shall not institute or cause to be instituted any legal action or proceeding of any kind based upon any Loan Related Claims and any and all losses, damages, liabilities, costs and expenses suffered or incurred by any Bank Parties as a result of any assertion by any Borrower Parties of any Loan Related Claims or as a result of any legal action related thereto. 4. NO NOVATION. Borrower and Bank hereby acknowledge and agree that this Agreement shall not constitute a novation of the indebtedness evidenced by the Loan Documents, and further that the terms and provisions of the Loan Documents are hereby ratified and affirmed and shall remain valid and in full force and effect except as may be hereinabove modified and amended. 5. NO RELEASE OF COLLATERAL. Borrower further acknowledges and agrees that this Agreement shall in no way occasion a release of any collateral held by Bank as security to or for the Loan, and that all collateral held by Bank as security to or for the Loan shall continue to secure the Loan. 2 6. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to the benefit of Borrower and Bank and their respective successors and assigns, whether voluntary by act of the parties or involuntary by operation of law. 7. CONDITIONS PRECEDENT. This Agreement shall become effective only upon (i) payment by Borrower to Bank of a fully-earned and non-refundable waiver fee in immediately available funds equal to $10,000 and (ii) execution and delivery of this Agreement. IN WITNESS WHEREOF, this Agreement has been duly executed and under seal by Borrower and Bank, as of the day and year first above written. BORROWER: INNOTRAC CORPORATION, a Georgia corporation (SEAL) BY: /s/ Scott D. Dorfman ------------------------------------ Scott D. Dorfman, Chairman, President and Chief Executive Officer Attest: /s/ Christine A. Herren -------------------------------- Christine A. Herren, Assistant Secretary BANK: WACHOVIA BANK, NATIONAL ASSOCIATION successor by merger to SouthTrust Bank By: /s/ Catherine Cowan ------------------------------------ Catherine Cowan, Director 3 EX-10.4(V) 7 g00505exv10w4xvy.txt EX-10.4(V) THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT DATED MARCH 28, 2006 Exhibit 10.4(v) THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT between INNOTRAC CORPORATION "Borrower" and WACHOVIA BANK, NATIONAL ASSOCIATION "Bank" Dated: March 28, 2006 TABLE OF CONTENTS TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS........................................................ 1 1.1 DEFINED TERMS:............................................. 1 1.2 FINANCIAL TERMS............................................ 12 2. THE CREDIT FACILITY; LETTERS OF CREDIT; INTEREST AND FEES.......... 12 2.1 THE CREDIT FACILITY........................................ 12 2.2 COLLECTIONS ACCOUNT........................................ 12 2.3 INTEREST................................................... 13 2.4 INTEREST RATE ADJUSTMENTS.................................. 13 2.5 NOTICE AND MANNER OF BORROWING AND RATE CONVERSION......... 14 2.6 REPAYMENT OF LOANS......................................... 15 2.7 ADDITIONAL PAYMENT PROVISIONS.............................. 15 2.8 DEFAULT RATE............................................... 16 2.9 CALCULATION OF INTEREST.................................... 16 2.10 LETTERS OF CREDIT.......................................... 16 2.11 FEES....................................................... 17 2.12 STATEMENT OF ACCOUNT....................................... 17 2.13 TERMINATION................................................ 17 2.14 USA PATRIOT ACT NOTICE..................................... 17 3. CONDITIONS PRECEDENT TO EXTENSIONS OF CREDIT....................... 17 3.1 CONDITIONS PRECEDENT TO INITIAL LOANS...................... 17 3.2 CONDITIONS PRECEDENT TO EACH LOAN.......................... 19 4. REPRESENTATIONS AND WARRANTIES..................................... 20 4.1 VALID EXISTENCE AND POWER.................................. 20 4.2 AUTHORITY.................................................. 20 4.3 FINANCIAL CONDITION........................................ 20 4.4 LITIGATION................................................. 20 4.5 AGREEMENTS, ETC............................................ 21 4.6 AUTHORIZATIONS............................................. 21 4.7 TITLE...................................................... 21 4.8 COLLATERAL................................................. 21 4.9 JURISDICTION OF ORGANIZATION; LOCATION..................... 21 4.10 TAXES...................................................... 21 4.11 LABOR LAW MATTERS.......................................... 22 4.12 ACCOUNTS................................................... 22 4.13 JUDGMENT LIENS............................................. 22 4.14 CORPORATE STRUCTURE........................................ 22 4.15 DEPOSIT ACCOUNTS........................................... 22 4.16 ENVIRONMENTAL.............................................. 22 4.17 ERISA...................................................... 23
i 4.18 INVESTMENT COMPANY ACT..................................... 23 4.19 INSIDER.................................................... 23 4.20 SANCTIONED PERSONS; SANCTIONED COUNTRIES................... 23 4.21 COMPLIANCE WITH COVENANTS; NO DEFAULT...................... 23 4.22 FULL DISCLOSURE............................................ 23 4.23 BORROWER INFORMATION CERTIFICATE........................... 23 5. AFFIRMATIVE COVENANTS OF BORROWER.................................. 23 5.1 USE OF LOAN PROCEEDS....................................... 23 5.2 MAINTENANCE OF BUSINESS AND PROPERTIES..................... 24 5.3 INSURANCE.................................................. 24 5.4 NOTICE OF DEFAULT.......................................... 24 5.5 INSPECTIONS OF BOOKS AND RECORDS AND FIELD EXAMINATIONS.... 24 5.6 FINANCIAL INFORMATION...................................... 24 5.7 MAINTENANCE OF EXISTENCE AND RIGHTS........................ 26 5.8 PAYMENT OF TAXES, ETC...................................... 26 5.9 SUBORDINATION.............................................. 26 5.10 COMPLIANCE; HAZARDOUS MATERIALS............................ 26 5.11 FURTHER ASSURANCES......................................... 26 5.12 COVENANTS REGARDING COLLATERAL............................. 27 6. NEGATIVE COVENANTS OF BORROWER..................................... 27 6.1 DEBT....................................................... 27 6.2 LIENS...................................................... 28 6.3 RESTRICTED PAYMENTS........................................ 29 6.4 LOANS AND OTHER INVESTMENTS................................ 29 6.5 CHANGE IN BUSINESS......................................... 29 6.6 ACCOUNTS................................................... 29 6.7 TRANSACTIONS WITH AFFILIATES............................... 29 6.8 NO CHANGE IN NAME, OFFICES OR JURISDICTION OF ORGANIZATION; REMOVAL OF COLLATERAL...................................... 29 6.9 NO SALE, LEASEBACK......................................... 29 6.10 MARGIN STOCK............................................... 30 6.11 TANGIBLE COLLATERAL........................................ 30 6.12 SUBSIDIARIES............................................... 30 6.13 LIQUIDATION, MERGERS, CONSOLIDATIONS AND DISPOSITIONS OF SUBSTANTIAL ASSETS, NAME AND GOOD STANDING................. 30 6.14 CHANGE OF FISCAL YEAR OR ACCOUNTING METHODS................ 30 6.15 DEPOSIT ACCOUNTS........................................... 30 7. OTHER COVENANTS OF BORROWER........................................ 30 8. DEFAULT............................................................ 31 8.1 EVENTS OF DEFAULT.......................................... 31 8.2 REMEDIES................................................... 33 8.3 RECEIVER................................................... 33 8.4 DEPOSITS; INSURANCE........................................ 33 9. SECURITY AGREEMENT................................................. 34 9.1 SECURITY INTEREST.......................................... 34 9.2 FINANCING STATEMENTS; POWER OF ATTORNEY.................... 34
ii 9.3 ENTRY...................................................... 35 9.4 OTHER RIGHTS............................................... 35 9.5 ACCOUNTS................................................... 35 9.6 WAIVER OF MARSHALING....................................... 35 9.7 CONTROL.................................................... 35 10. MISCELLANEOUS...................................................... 35 10.1 NO WAIVER, REMEDIES CUMULATIVE............................. 35 10.2 SURVIVAL OF REPRESENTATIONS................................ 36 10.3 INDEMNITY BY BORROWER; EXPENSES............................ 36 10.4 NOTICES.................................................... 36 10.5 GOVERNING LAW.............................................. 37 10.6 SUCCESSORS AND ASSIGNS..................................... 37 10.7 COUNTERPARTS; TELECOPIED SIGNATURES........................ 37 10.8 NO USURY................................................... 37 10.9 POWERS..................................................... 37 10.10 APPROVALS; AMENDMENTS...................................... 38 10.11 PARTICIPATIONS AND ASSIGNMENTS............................. 38 10.12 DEALINGS WITH MULTIPLE BORROWERS........................... 38 10.13 WAIVER OF CERTAIN DEFENSES................................. 38 10.14 ADDITIONAL PROVISIONS...................................... 38 10.15 INTEGRATION; FINAL AGREEMENT............................... 39 10.16 LIMITATION ON LIABILITY; WAIVER OF PUNITIVE DAMAGES........ 39 10.17 BINDING ARBITRATION; PRESERVATION OF REMEDIES.............. 39
iii THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT THIS THIRD AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT (the "Agreement"), dated as of March 28, 2006, between INNOTRAC CORPORATION, a Georgia corporation ("Borrower"), and WACHOVIA BANK, NATIONAL ASSOCIATION, a national banking association, successor by merger to SouthTrust Bank (together with its successors and assigns, "Bank"); WITNESSETH: In consideration of the premises and of the mutual covenants herein contained and to induce Bank to extend credit to Borrower, the parties hereto agree that this Agreement amends and restates in its entirety that certain Second Amended and Restated Loan and Security Agreement dated April 3, 2003, as previously amended, as follows: 1. DEFINITIONS. Capitalized terms that are not otherwise defined herein shall have the meanings set forth in this Section 1. 1.1 DEFINED TERMS: "Accession" has the meaning set forth in the Code. "Account" has the meaning set forth in the Code, together with any guaranties, letters of credit, Letter-of-Credit Rights, and other security therefor, including Supporting Obligations. "Account Debtor" means a Person who is obligated under any Account, Chattel Paper, General Intangible or Instrument. "Affiliate" of a Person means (a) any Person directly or indirectly owning 5% or more of the voting stock or equity interests of such named Person or of which the named Person owns 5% or more of such voting stock or equity interests; (b) any Person controlling, controlled by or under common control with such named Person; (c) any officer, director or employee of such named Person or any Affiliate of the named Person; and (d) any family member of the named Person or any Affiliate of such named Person. "Applicable Margin" means, at any time of determination by Bank, as to any Base Rate Loan or LMIR Loan, the relevant percentage below corresponding to the Borrower's Average Excess Availability set forth below:
AVERAGE EXCESS AVAILABILITY BASE RATE LOANS LMIR LOANS - ---------------------------- --------------- ---------- < or = $5,000,000 0.00% 2.00% > $5,000,000 0.00% 1.50% but < or = $7,500,000
> $7,500,000 0.00% 1.25% but < or = $10,000,000 > $10,000,000 0.00% 1.00%
In addition, at all times during which the Fixed Charge Coverage Ratio is less than 1.00 to 1.00, the Applicable Margin for Base Rate Loans then in effect shall be increased by an additional 0.50% and the Applicable Margin for LMIR Loans then in effect shall be increased by an additional 0.35%. Nothing in this paragraph shall limit Bank's rights to impose the Default Rate under Section 2.8 of this Agreement, if applicable. Solely for the purposes of the definition of "Applicable Margin," the Borrowing Base shall be calculated without subtracting (i) the Target Reserve when in effect or (ii) the Availability Reserve when in effect. "Arbitration Rules" has the meaning set forth in Section 10.17. "Availability" means, on any date, the excess, if any, of (i) the lesser of the Borrowing Base on such date or the Revolver Commitments on such date minus (ii) the aggregate principal amount of outstanding Loans and the aggregate amount of outstanding Letter of Credit Obligations on such date. "Availability Reserve" means, at all times during which the Fixed Charge Coverage Ratio is less than 1.00 to 1.00, an amount equal to $2,000,000. "Average Excess Availability" means, on any date, an amount equal to the total amount of Availability for each day during the immediately preceding 90 day period, as determined by Bank pursuant to the terms hereof, divided by 90. "Base Rate" means, for any day, the rate per annum (rounded upwards, if necessary, to the nearest whole multiple of 1/100 of 1%) equal to the greater of (i) the Federal Funds Rate in effect on such day plus 1/2 of 1% or (ii) the Prime Rate in effect on such day. If for any reason Bank shall have determined (which determination shall be conclusive absent manifest error) that it is unable after due inquiry to ascertain the Federal Funds Rate for any reason, including the inability or failure of Bank to obtain sufficient quotations in accordance with the terms hereof, the Base Rate shall be determined without regard to clause (i) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Base Rate due to a change in the Prime Rate or the Federal Funds Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Rate, respectively. "Base Rate Loan" means a Loan, or portion thereof, during any period in which it bears interest at a rate based upon the Base Rate. "BellSouth Agreement" means (i) that certain Innotrac Corporation Master Services Agreement No. R13017M, (ii) all letter purchase orders thereunder and (iii) all other contracts between Borrower and BellSouth Corporation relating to the agreement described in clause (i) in this definition, as all of the foregoing may be amended or otherwise modified from time to time. 2 "Borrower Information Certificate" means a certificate submitted by Borrower to Bank on or before the Closing Date pursuant to Section 3.1 hereto concerning certain factual information about Borrower, to be substantially in the form of Exhibit 3.1.2 hereto. "Borrowing Base" means, on any date of determination thereof, an amount equal to: (i) up to 85% of the total amount of Eligible Accounts, plus (ii) the lesser of (a) $5,000,000 or (b) up to 50% of the total amount of Eligible Inventory; minus (iii) any Reserves. "Borrowing Base Certificate" has the meaning set forth in Section 5.6(a). "Business Day" means a weekday on which Bank is open for business in Charlotte, North Carolina and Atlanta, Georgia. "Chattel Paper" has the meaning set forth in the Code, including Electronic Chattel Paper and Tangible Chattel Paper, together with any guaranties, letters of credit, Letter-of-Credit Rights, and other security therefore, including Supporting Obligations. "Closing Date" means the date on which all of the conditions precedent in Section 3 of this Agreement are satisfied or otherwise waived or postponed by Bank in writing and the initial Loans are made under this Agreement. "Code" means the Uniform Commercial Code (or any successor statute), as adopted and in force in the Jurisdiction or, when the laws of any other state govern the method or manner of the perfection or enforcement of any security interest in any of the Collateral, the Uniform Commercial Code (or any successor statute) of such state. Any term used in this Agreement and in any financing statement filed in connection herewith which is defined in the Code and not otherwise defined in this Agreement or in any other Loan Document has the meaning given to the term in the Code. "Collateral" means all personal property of Borrower, wherever located and whether now owned by Borrower or hereafter acquired, including but not limited to: (a) all Inventory; (b) all General Intangibles; (c) all Accounts; (d) all Chattel Paper; (e) all Instruments and Documents and any other instrument or intangible representing payment for goods or services; (f) all Equipment; (g) all Investment Property; (h) all Commercial Tort Claims; (i) all Letter-of-Credit Rights; (j) all Deposit Accounts and funds on deposit therein, including but not limited to any Disbursements Account, Collections Account or funds otherwise on deposit with or under the control of Bank or its agents or correspondents; (k) all Fixtures; and (l) all parts, replacements, substitutions, profits, products, Accessions and cash and non-cash Proceeds and Supporting Obligations of any of the foregoing (including, but not limited to, insurance proceeds) in any form and wherever located. Collateral shall include all written or electronically recorded books and records relating to any such Collateral and other rights relating thereto. "Collateral Location" means any location where Collateral is located, as identified and certified by Borrower on the Borrower Information Certificate. "Collections Account" means any Deposit Account maintained by Borrower at Bank to which collections, deposits and other payments on or with respect to Collateral may be made pursuant to the 3 terms hereof, to which only Bank shall have access to withdraw or otherwise direct the disposition of funds on deposit therein. "Commercial Tort Claim" has the meaning set forth in the Code. "Debt" means all liabilities of a Person as determined under GAAP and all obligations which such Person has guaranteed or endorsed or is otherwise secondarily or jointly liable for, and shall include, without limitation (a) all obligations for borrowed money or purchased assets, (b) obligations secured by assets whether or not any personal liability exists, (c) the capitalized amount of any capital or finance lease obligations, (d) the unfunded portion of pension or benefit plans or other similar liabilities, (e) obligations as a general partner, (f) contingent obligations pursuant to guaranties, endorsements, letters of credit and other secondary liabilities, (g) obligations for deposits, and (h) obligations under Swap Agreements. "Default" has the meaning set forth in the definition of Event of Default. "Default Rate", on any date, means a rate per annum that is equal to (i) in the case of each Loan outstanding on such date, 2.0 % in excess of the rate otherwise applicable to such Loan on such date, and (ii) in the case of any other Obligations outstanding on such date, 2.0% in excess of the Prime Rate in effect on such date, provided that Obligations under Swap Agreements shall bear interest at the Default Rate determined in accordance with the terms of said Swap Agreements. "Deposit Account" has the meaning set forth in the Code. "Disbursements Account" means any Deposit Account maintained by Borrower with Bank for the purpose of depositing the proceeds of Loans made pursuant hereto. "Document" has the meaning set forth in the Code. "Electronic Chattel Paper" has the meaning set forth in the Code. "Eligible Accounts" means all Accounts in U.S. dollars evidenced by a paper invoice or electronic equivalent (valued at the face amount of such invoice, less maximum discounts, credits and allowances which may be taken by Account Debtors on such Accounts, and net of any sales tax, finance charges or late payment charges included in the invoiced amount) created or acquired by Borrower arising from the sale of Inventory and/or (as approved by Bank) the provision of certain services in Borrower's ordinary course of business in which Bank has a first (and only) priority, perfected security interest, but excluding any of the following, without duplication, (a) Accounts outstanding for longer than (i) one hundred twenty (120) days from original invoice date or (ii) ninety (90) days from the original due date, which ever is shorter; (b) all Accounts owed by an Account Debtor if more than 50% of the Accounts owed by such Account Debtor to Borrower are deemed ineligible hereunder pursuant to clause (a); (c) Accounts owing from any Affiliate of Borrower; (d) Accounts owed by a creditor of Borrower to the extent of the amount of the Debt of Borrower to such creditor; 4 (e) Accounts which are in dispute or subject to any counterclaim, contra-account, volume rebate, cooperative advertising accrual, deposit or offset, to the extent thereof; (f) Accounts owed by an Account Debtor for whom Borrower maintains Inventory purchased from Borrower's suppliers on hand to the extent amounts Borrower owes such suppliers exceeds such Accounts; (g) Accounts owing by any Account Debtor which is not Solvent; (h) Accounts arising from a sale on a bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval, consignment or similar basis or which is subject to repurchase, return, rejection, repossession, loss or damage; (i) Accounts owed by an Account Debtor that (1) is a Sanctioned Person or (2) is located outside of the United States of America; (j) Accounts owed by the United States of America or other governmental or quasi-governmental unit, agency or subdivision, unless, with respect to the United States of America, or any governmental or quasi-governmental unit, agency or subdivision thereof, Borrower has complied with the Assignment of Claims Act of 1940, as amended, to the extent necessary in order for Bank to be able to require payment on such Accounts to be made directly to Bank during the existence of an Event of Default; (k) Accounts as to which the goods giving rise to the Account have not been delivered to and accepted by the Account Debtor or the service giving rise to the Account has not been completely performed or which do not represent a final sale; (l) Accounts evidenced by a note or other Instrument or Chattel Paper or reduced to judgment; (m) Accounts for which the total of all Accounts from an Account Debtor (together with the Affiliates of the Account Debtor) exceed 10% of the total Accounts of Borrower (to the extent of such excess) or Accounts for which the total of all Accounts from Smith & Hawken, Ltd., exceed 15% of the total Accounts of Borrower (to the extent of such excess), or Accounts for which the total of all Accounts from Target.com exceed 20% of the total Accounts of Borrower (to the extent of such excess), or Accounts for which the total of all Accounts from BellSouth exceed 40% of the total Accounts of Borrower (to the extent of such excess); (n) Accounts which, by contract, subrogation, mechanics' lien laws or otherwise, are subject to claims by Borrower's creditors or other third parties or which are owed by Account Debtors as to whom any creditor of Borrower (including any bonding company) has lien or retainage rights; (o) Accounts the validity, collectibility, or amount of which is determined in good faith by Borrower or Bank to be doubtful; (p) Accounts owed by an Account Debtor which is located in a jurisdiction where Borrower is required to qualify to transact business or to file reports, unless Borrower has so qualified or filed; (q) Accounts owed by an Account Debtor who disputes the liability therefor; 5 (r) Accounts owed by an Account Debtor that shall be the subject of any proceeding of the type described in Section 8.1(g) or (h); (s) Accounts for which aged credit balances are outstanding for longer than the sooner of (i) one hundred twenty (120) days from original invoice date or (ii) ninety (90) days from the original due date; or (t) Any other Account which Bank otherwise in its sole and absolute discretion deems to be ineligible. No Account shall be an Eligible Account if any representation, warranty or covenant herein relating thereto shall be untrue, misleading or in default. "Eligible Inventory" means all Inventory acquired by Borrower in the ordinary course of its business as presently conducted consisting of raw materials, and finished goods which Bank has determined to be eligible for credit extensions hereunder, valued at the lower of cost or market on a first-in, first-out basis, but excluding, however, in any event, without limitation of the foregoing, unless otherwise approved by Bank, any such Inventory which (a) is not at all times subject to a duly perfected, first priority (and only) security interest in favor of Bank; (b) is not in good and saleable condition; (c) is on consignment from, or subject to, any repurchase agreement with any supplier; (d) constitutes returned, repossessed, damaged, defective, obsolete, or slow-moving goods as determined by Bank; (e) does not conform in all respects to the warranties and representations set forth in the Loan Documents in respect of Inventory Collateral or Collateral generally; (f) is subject to a negotiable document of title (unless issued or endorsed to Bank); (g) is subject to any license or other agreement that limits or restricts Borrower's or Bank's right to sell or otherwise dispose of such inventory (unless the licensor and Borrower enter into a licensor waiver in form and substance satisfactory to Bank); (h) is not located at a Collateral Location; (i) constitutes inventory-in-transit; (j) is located at a Collateral Location with respect to which, if not owned and controlled by Borrower, Bank has not received from the Person owning such property or in control thereof a Third Party Waiver (unless Reserves are imposed with regard thereto as determined by Bank in its sole and absolute discretion); (k) consists of any packaging materials, supplies or promotional materials; or 6 (l) which Bank otherwise in its sole and absolute discretion deems to not be Eligible Inventory. "Environmental Laws" means, collectively the following acts and laws, as amended: the Comprehensive Environmental Response, Compensation and Liability Act of 1980; the Superfund Amendments and Reauthorization Act of 1986; the Resource Conservation and Recovery Act; the Toxic Substances Act; the Clean Water Act; the Clean Air Act; the Oil Pollution and Hazardous Substances Control Act of 1978; and any other "Superfund" or "Superlien" law or any other federal, state or local statute, law, ordinance, code, rule, regulation, order or decree relating to, or imposing liability or standards of conduct concerning, any hazardous, toxic or dangerous waste, substance or material, as now or at any time hereafter in effect. "Equipment" has the meaning set forth in the Code. "ERISA" has the meaning set forth in Section 4.17. "Eurodollar Reserve Percentage" means, for any day, the percentage (expressed as a decimal and rounded upwards, if necessary, to the next higher 1/100th of 1%) which is in effect for such day as prescribed by the Federal Reserve Board (or any successor) for determining the maximum reserve requirement (including without limitation any basic, supplemental or emergency reserves) in respect of eurocurrency liabilities or any similar category of liabilities for a member bank of the Federal Reserve System in New York City. "Event of Default" means any event specified as such in Section 8.1 hereof ("Events of Default"), provided that there shall have been satisfied any requirement in connection with such event for the giving of notice or the lapse of time, or both; "Default" or "default" means any of such events, whether or not any such requirement for the giving of notice or the lapse of time or the happening of any further condition, event or act shall have been satisfied. "Federal Funds Rate" means, for any period, a fluctuating interest rate per annum equal, for each day during such period, to the weighted average of the rates on overnight Federal Funds transactions with members of the Federal Reserve System arranged by Federal Funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York, or, if such rate is not so published for any day that is a Business Day, the average of the quotations for such day on such transactions received by Bank from three Federal Funds brokers of recognized standing selected by it. "Financial Covenants" means the covenants set forth in Section 7 hereof. "Fixtures" has the meaning set forth in the Code. "GAAP" means generally accepted accounting principles as in effect in the United States from time to time. "General Intangibles" has the meaning set forth in the Code, and includes, without limitation, general intangibles of Borrower, whether now owned or hereafter created or acquired by Borrower, including all choses in action, causes of action, company or other business records, inventions, blueprints, designs, patents, patent applications, trademarks, trademark applications, trade names, trade secrets, service marks, goodwill, brand names, copyrights, registrations, licenses, franchises, customer lists, permits, tax refund claims, computer programs, operational manuals, internet addresses and domain names, insurance refunds and premium rebates, all claims under guaranties, security interests or other 7 security held by or granted to Borrower to secure payment of any of any of Borrower's Accounts by an Account Debtor, all rights to indemnification and all other intangible property of Borrower of every kind and nature (other than Accounts). "Guarantor" means any Person now or hereafter guaranteeing, endorsing or otherwise becoming liable for any Obligations. "Guaranty Agreement" means any guaranty of all or any Obligations now or hereafter executed and delivered by any Guarantor to Bank, as amended or otherwise modified from time to time. "Instrument" has the meaning set forth in the Code. "Inventory" has the meaning set forth in the Code. "Investment Property" has the meaning set forth in the Code. "Item" means any "item" as defined in Section 4-104 of the Code, and shall also mean and include checks, drafts, money orders or other media of payment. "Jurisdiction" means the State of Georgia. "Letter of Credit" means a letter of credit issued by Bank for the account of Borrower as provided in Section 2.1.1 and 2.10 hereof. "Letter of Credit Obligations" means all obligations of Borrower to Bank, including but not limited to reimbursement obligations, commissions and fees, incurred by Borrower in connection with Bank's issuance, amendment, renewal or extension of Letters of Credit hereunder. "Letter-of-Credit Right" has the meaning set forth in the Code. "Lien" means any mortgage, deed of trust, deed to secure debt, pledge, statutory lien or other lien arising by operation of law, security interest, trust arrangement, security deed, financing lease, collateral assignment or other encumbrance, conditional sale or title retention agreement, or any other interest in property designed to secure the repayment of obligations, whether arising by agreement or under any statute or law or otherwise. "LIBOR Market Index Rate", for any day, means the LIBOR Rate where LIBOR is defined as the rate for 1 month U.S. dollar deposits as reported on Telerate page 3750 as of 11:00 a.m., London time, on such day, or if such day is not a London business day, then the immediately preceding London business day (or if not so reported, then as determined by Bank from another recognized source or interbank quotation). "LIBOR Rate" means a rate per annum (rounded upwards, if necessary, to the next higher 1/100th of 1%) determined by Bank pursuant to the following formula: LIBOR Rate= LIBOR ------------------------------------ 1.00 - Eurodollar Reserve Percentage "LMIR Loan" means a Loan, or portion thereof, during any period in which it bears interest at a rate based upon the LIBOR Market Index Rate. 8 "Loan" means a loan made by Bank as provided in Section 2.1.1 hereof. "Loan Documents" means this Agreement, each other Security Agreement, the Notes, each Guaranty Agreement, the Notice of Borrowings, the Borrower Information Certificate, Borrowing Base Certificates, UCC financing statements and all other documents and instruments now or hereafter evidencing, describing, guaranteeing or securing the Obligations contemplated hereby or delivered in connection herewith, as they may be modified, amended, extended, renewed or substituted from time to time, but does not include Swap Agreements. "Material Adverse Effect" means any (i) material adverse effect upon the validity, performance or enforceability of any of the Loan Documents or any of the transactions contemplated hereby or thereby, (ii) material adverse effect upon the properties, business, prospects or condition (financial or otherwise) of Borrower and/or any other Person obligated under any of the Loan Documents, (iii) material adverse effect upon the ability of Borrower or any other Person to fulfill any obligation under any of the Loan Documents, or (iv) material adverse effect on the Collateral. "Material Agreement" means (a) the BellSouth Agreement and (b) all other agreements to which Borrower or any Guarantor is a party (other than the Loan Documents) (i) which is deemed to be a material contract as provided in Regulation S-K promulgated by the Securities and Exchange Commission under the Securities Act of 1933 or (ii) for which breach, termination, cancellation, nonperformance or failure to renew could reasonably be expected to have a Material Adverse Effect. "Net Proceeds" means, with respect to a disposition of any Collateral, proceeds (including cash receivable (when received) by way of deferred payment) received by Borrower in cash from the sale, lease, transfer or other disposition of such Collateral, including insurance proceeds and awards of compensation received with respect to the destruction or condemnation of all or part of such Collateral, net of: (i) the reasonable and customary costs and expenses of such sale, lease, transfer or other disposition (including legal fees and sales commissions); (ii) amounts applied to repayment of Debt for borrowed money (other than the Obligations) secured by a Permitted Lien on such Collateral disposed of that is senior to Bank's Liens; and (iii) in connection with any sale of Collateral, a reasonable reserve (not to exceed 5% of the total purchase price) for post-closing adjustments to the purchase price, provided that upon the expiration of not more than ninety (90) days after the sale, any remaining reserve balance is remitted to Bank for application to the Obligations. "Notes" shall mean the Revolver Note and any other promissory note now or hereafter evidencing any Obligations, and all amendments, modifications, extensions and renewals thereof. "Notice of Borrowing" with respect to Loans means the written request for a Loan as identified in Section 2.5.2 hereof. "OFAC" means the United States Department of the Treasury's Office of Foreign Assets Control or any successor thereto. "Obligations" means all obligations now or hereafter owed to Bank or any Affiliate of Bank by Borrower, whether related or unrelated to the Loans, this Agreement or the Loan Documents, including, without limitation, amounts owed or to be owed under the terms of the Loan Documents, or arising out of the transactions described therein, including, without limitation, the Loans, any Debt arising out of or relating to any Deposit Accounts of Borrower at Bank or any Affiliate of Bank or any cash management services or other products or services, including merchant card and ACH transfer services, Letter of Credit Obligations for outstanding Letters of Credit, obligations for banker's acceptances issued for the account of Borrower or its Subsidiaries, amounts paid by Bank under Letters of Credit or drafts accepted 9 by Bank for the account of Borrower or its Subsidiaries, together with all interest accruing thereon, including any interest on pre-petition Debt accruing after bankruptcy, all existing and future obligations under any Swap Agreements between Bank or any Affiliate of Bank and Borrower whenever executed (including obligations under Swap Agreements entered into prior to any transfer or sale of Bank's interests hereunder if Bank ceases to be a party hereto) , all fees, all costs of collection, attorneys' fees and expenses of or advances by Bank which Bank pays or incurs in discharge of obligations of Borrower or to inspect, repossess, protect, preserve, store or dispose of any Collateral, whether such amounts are now due or hereafter become due, direct or indirect and whether such amounts due are from time to time reduced or entirely extinguished and thereafter re-incurred. "Permitted Debt" has the meaning set forth in Section 6.1 hereof. "Permitted Liens" has the meaning set forth in Section 6.2 hereof. "Person" means any natural person, corporation, unincorporated organization, trust, joint stock company, joint venture, association, company, limited or general partnership, limited liability company, any government or any agency or political subdivision of any government, or any other entity or organization. "Prime Rate" means that rate announced by Bank from time to time as its prime rate and is one of several interest rate bases used by Bank. Bank lends at rates both above and below Bank's Prime Rate, and Borrower acknowledges that Bank's Prime Rate is not represented or intended to be the lowest or most favorable rate of interest offered by Bank. "Proceeds" has the meaning set forth in the Code. "Properly Contested" means, in the case of any Debt of Borrower or any Guarantor (including any taxes) that is not paid as and when due or payable by reason of Borrower's or such Guarantor's bona fide dispute concerning its liability to pay same or concerning the amount thereof, (i) such Debt is being properly contested in good faith by appropriate proceedings promptly instituted and diligently conducted; (ii) Borrower or such Guarantor has established appropriate reserves as shall be required in conformity with GAAP; (iii) the non-payment of such Debt will not have a Material Adverse Effect and will not result in a forfeiture or sale of any assets of Borrower or such Guarantor; (iv) no Lien is imposed upon any of Borrower's or such Guarantor's assets with respect to such Debt unless such Lien is at all times junior and subordinate in priority to the Liens in favor of Bank (except only with respect to property taxes that have priority as a matter of applicable state law) and enforcement of such Lien is stayed during the period prior to the final resolution or disposition of such dispute; (v) if the Debt results from, or is determined by the entry, rendition or issuance against Borrower or such Guarantor or any of its assets of a judgment, writ, order or decree, enforcement of such judgment, writ, order or decree is stayed pending a timely appeal or other judicial review; and (vi) if such contest is abandoned, settled or determined adversely (in whole or in part) to Borrower or such Guarantor, Borrower or such Guarantor forthwith pays such Debt and all penalties, interest and other amounts due in connection therewith. "Regulated Materials" means any hazardous, toxic or dangerous waste, substance or material, the generation, handling, storage, disposal, treatment or emission of which is subject to any Environmental Law. "Reserves" means reserved amounts as may be required by Bank at any time and from time to time in Bank's sole and absolute discretion, including but not limited to (i) the Target Reserve, (ii) the Availability Reserve and (iii) reserves for Swap Agreement Obligations. 10 "Revolver Commitment" means the commitment of Bank, subject to the terms and conditions herein, to make Loans and issue Letters of Credit in accordance with the provisions of Section 2 hereof in an aggregate amount not to exceed $25,000,000 at any one time. "Revolver Note" has the meaning set forth in Section 2.1.2 hereof. "Sanctioned Country" means a country subject to the sanctions program identified on the list maintained by OFAC and available at http://www.treas.gov/offices/eotffc/ofac/sanctions/index.html or as otherwise published from time to time. "Sanctioned Person" means (i) a Person named on the list of Specially Designated Nationals or Blocked Persons maintained by OFAC available at http://www.treas.gov/offices/eotffc/ofac/sdn/ index.html or as otherwise published from time to time, or (ii) (A) an agency of the government of a Sanctioned Country, (B) an organization controlled by a Sanctioned Country, or (C) a Person resident in a Sanctioned Country, to the extent subject to a sanctions program administered by OFAC. "Security Agreement" means this Agreement as it relates to a security interest in the Collateral, and any other mortgage instrument, security agreement or similar instrument now or hereafter executed by Borrower or other Person granting Bank a security interest in any Collateral to secure the Obligations, as each may be amended or otherwise modified from time to time. "Senior Officer" means the chairman of the board of directors, the president or the controller of, or in-house legal counsel to, Borrower. "Solvent" means, as to any Person, that such Person has capital sufficient to carry on its business and transactions in which it is currently engaged and all business and transactions in which it is about to engage, is able to pay its debts as they mature, and has assets having a fair value greater than its liabilities, at fair valuation. "Subsidiary" means any corporation, partnership or other entity in which Borrower, directly or indirectly, owns more than fifty percent (50%) of the stock, capital or income interests, or other beneficial interests, or which is effectively controlled by such Person. "Supporting Obligation" has the meaning set forth in the Code. "Swap Agreement" has the meaning for swap agreement as defined in 11 U.S.C. Section 101, as in effect from time to time, or any successor statute, and includes, without limitation, any rate swap agreement, forward rate agreement, commodity swap, commodity option, interest rate option, forward foreign exchange agreement, spot foreign exchange agreement, rate cap agreement, rate floor agreement, rate collar agreement, currency swap agreement, cross-currency rate swap agreement, currency option and any other similar agreement. "Tangible Chattel Paper" has the meaning set forth in the Code. "Target Capital Expenditures" means Borrower's Capital Expenditures incurred in connection with Borrower's agreements with and provision of services to Target Corporation or its Affiliates. "Target Reserve" means an amount equal to the greater of (x) 50% of all scheduled Target Capital Expenditures that are not yet payable or (y) 100% of all Target Capital Expenditures that are payable but not yet paid. 11 "Term" means the period from and including the Closing Date to but not including the Termination Date. "Termination Date" means the earliest of (i) March 1, 2009, (ii) the date on which Borrower terminates this Agreement and the credit facilities provided hereunder pursuant to Section 2.13 hereof, and (iii) the date on which Bank terminates its obligation to make Loans and other extensions of credit to Borrower pursuant to Section 8.2(a) hereof. "Third Party Waiver" means a waiver or subordination of Liens satisfactory to Bank from any lessors, mortgages, warehouse operators, processors or other third parties that might have lien holders' enforcement rights against any Collateral, waiving or subordinating those rights in favor of Bank and assuring Bank's access to the Collateral in exercise of Bank's rights hereunder. "USA Patriot Act" means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001, as amended. 1.2 FINANCIAL TERMS. All financial terms used herein shall have the meanings assigned to them under GAAP unless another meaning shall be specified. 2. THE CREDIT FACILITY; LETTERS OF CREDIT; INTEREST AND FEES. 2.1 THE CREDIT FACILITY 2.1.1 Revolver Commitment. Bank agrees, on the terms and conditions set forth in this Agreement, to make Loans to Borrower and to issue Letters of Credit on behalf of Borrower from time to time during the Term in amounts such that the aggregate principal amount of Loans and the face amount of any Letters of Credit at any one time outstanding will not exceed the lesser of (i) the Revolver Commitment and (ii) the Borrowing Base. Loans may be Base Rate Loans, or LMIR Loans. Within the foregoing limit, Borrower may borrow, prepay and reborrow Loans at any time during the Term. The proceeds of the Loans shall be used solely by Borrower for the following purposes: to refinance Debt existing on the Closing Date and for Borrower's working capital and general corporate needs. 2.1.2 Revolver Note. Borrower shall execute and deliver to Bank, on the Closing Date, a promissory note in the form of Exhibit A attached hereto and made a part hereof (the "Revolver Note"), which Revolver Note, in addition to the records of Bank, shall evidence the Loans and interest accruing thereon. All outstanding principal amounts and accrued interest under the Revolver Note shall be due and payable in accordance with the terms of the Revolver Note and this Agreement. 2.2 COLLECTIONS ACCOUNT. 2.2.1 Lockbox; Collections Account. Borrower shall notify and direct all Account Debtors to forward all payments on Accounts to the lockbox under Bank's control on the Closing Date from which all items of payment will be deposited in the Collections Account; provided, however, that Bank shall have the right to directly contact Account Debtors at any time to ensure that payments on the Accounts are directed to the lockbox. Borrower shall continue to pay all of Bank's standard fees and charges in connection with such lockbox arrangement and Collections Account as such fees and charges may change from time to time. All payment items received by Borrower on Accounts and sale of Inventory and other Collateral shall be held by Borrower in trust for Bank and not commingled with Borrower's funds and shall be sent promptly by Borrower to the lockbox. All such items shall be the exclusive property of Bank upon the earlier of the receipt thereof by Bank or by Borrower. Borrower 12 hereby grants to Bank a security interest in and lien upon all items and balances held in any lockbox, the Disbursements Account and the Collections Account as Collateral for the Obligations, in addition to and cumulative with the general security interest in all assets of Borrower (including all Deposit Accounts) contained in Section 9.1 hereof. 2.2.2 Power of Attorney. Borrower hereby irrevocably appoints Bank (and any duly authorized Person designated by Bank) as Borrower's attorney-in-fact to endorse Borrower's name on any checks, drafts, money orders or other media of payment which come into Bank's possession or control; this power being coupled with an interest is irrevocable so long as any of the Obligations remain outstanding. Such endorsement by Bank under power of attorney shall, for all purposes, be deemed to have been made by Borrower (prior to any subsequent endorsement by Bank) in negotiation of the item. 2.2.3 Application of Payments. Payment items received into the Collections Account shall be applied by Bank on account of the Loans on the Business Day after deposited by Borrower, subject to chargebacks for uncollected payment items, and if no Event of Default exists and no Loans are then outstanding or have been repaid, Bank shall pay over such of the proceeds of such payments to a Deposit Account maintained by Borrower at Bank and designated in writing by Borrower. No payment item received by Bank shall constitute payment to Bank until such item is actually collected by Bank and credited to the Collections Account; provided, however, that Bank shall have the right to charge back to the Collections Account (or any other account of Borrower maintained at Bank) an item which is returned for inability to collect, plus accrued interest during the period of Bank's provisional credit for such item prior to receiving notice of dishonor. 2.3 INTEREST. Borrower agrees to pay interest in respect of all unpaid principal amounts of the Loans from the respective dates such principal amounts are advanced until paid (whether at stated maturity, on acceleration or otherwise) at a rate per annum equal to the applicable rate indicated below: 2.3.1 LMIR Loans. Except as set forth in Section 2.3.2, all Loans shall constitute LMIR Loans and shall bear interest at the Applicable Margin in effect from time to time for such LMIR Loans plus the LIBOR Market Index Rate in effect from time to time. The LIBOR Market Index Rate on the date hereof is 4.63% per annum and, therefore, the rate of interest in effect hereunder on the date hereof, expressed in simple interest terms, is 4.63% per annum with respect to any portion of the Loans bearing interest as a LMIR Loan. 2.3.2 Base Rate Loans. Notwithstanding anything to the contrary in this Agreement, if (a) Borrower should request or (b) Bank should at any time determine that (i) it is not possible to determine the LIBOR Market Index Rate or (ii) that the LIBOR Market Index Rate is no longer available or (iii) a Default or Event of Default exists, then all Loans shall constitute Base Rate Loans and shall bear interest at the Applicable Margin in effect from time to time for such Base Rate Loans plus the Base Rate in effect from time to time. 2.4 INTEREST RATE ADJUSTMENTS. 2.4.1 Base Rate Loan. When a Base Rate Loan is selected, the interest rate shall be adjusted from time to time, effective as of the date of each change in the Base Rate, and the Base Rate shall continue to apply until another interest rate option is selected by Borrower for that Loan. 13 2.4.2 LMIR Loan. When a LMIR Loan is selected, the interest rate shall be adjusted daily as applicable to reflect the LIBOR Market Index Rate then in effect and the LIBOR Market Index Rate shall continue to apply until another interest rate option is selected by Borrower for that Loan. 2.5 NOTICE AND MANNER OF BORROWING AND RATE CONVERSION. 2.5.1 Loans. Borrower shall give Bank irrevocable telephonic notice of each proposed Loan or permitted rate conversion not later than 11:00 a.m. (local time in Atlanta, Georgia) (a) on the same business day as each proposed Loan or rate conversion to a Base Rate Loan or a LMIR Loan. Each such notice shall specify (i) the date of such Loan or rate conversion, which shall be a Business Day, (ii) the amount of each Loan or the amount to be converted, and (iii) the interest rate selected by Borrower from the interest rate options set forth in this Agreement. Notices received after 11:00 a.m. (local time in Atlanta, Georgia) shall be deemed received on the next Business Day. Bank's acceptance of such a request shall be indicated by its making the Loan requested. Such a Loan shall be made available to Borrower in immediately available funds by deposit into the Disbursement Account. 2.5.2 Additional Provisions for Requests for Loans. Bank, in its discretion, may require from Borrower a signed written request for a Loan in form of a Notice of Borrowing satisfactory to Bank, which request shall be irrevocable and shall be delivered to Bank no later than 11:00 a.m. (local time in Atlanta, Georgia) on the date determined in accordance with Section 2.5.1, and shall set forth the calculation of the Borrowing Base and a reconciliation to the previous request or Borrowing Base Certificate, specify the information required by Section 2.5.1 for the proposed Loan and provide such other information as Bank may require. (a) Subject to subsection 2.5.2(c) below, unless payment is otherwise timely made by Borrower, the becoming due of any amount required to be paid with respect to any of the Obligations (whether as principal, accrued interest, fees or other charges owed to Bank or any Affiliate of Bank) shall be deemed irrevocably to be a request (without the requirement for the submission of a Notice of Borrowing) for Loans on the due date of, and in an aggregate amount required to pay, such Obligations, and Bank may disburse the proceeds of such Loans by way of direct payment of the relevant Obligations, and such Loans shall bear interest as Base Rate Loans. (b) Subject to subsection 2.5.2(c) below, the presentation for payment of any check or other item of payment drawn on the Disbursement Account at a time when there are insufficient funds in such account to cover such item shall be deemed irrevocably to be a request (without any requirement for the submission of a Notice of Borrowing) for Loans on the date of such presentation in an amount equal to the aggregate amount of the items presented for payment, and Bank may disburse the proceeds of such Loans to the Disbursement Account and such Loans shall bear interest as Base Rate Loans. (c) Bank shall have no obligation to Borrower to honor any deemed request for a Loan under Section 2.5.2(a) or Section 2.5.2(b) above after the Termination Date or when the principal amount of such Loan, when added to the aggregate outstanding principal amount of all Loans and the Letter of Credit Obligations would exceed the lesser of the Revolver Commitment and the Borrowing Base at such time or when any condition precedent in Section 3.2 hereof is not satisfied, but may do so in its sole and absolute discretion and without regard to the existence of, and without being deemed to have waived, any Default or Event of Default. 2.5.3 Excess Outstandings. Notwithstanding the foregoing, Bank may, in its sole and absolute discretion, make or permit to remain outstanding Loans which, when added to the principal amount of all other Loans and Letter of Credit Obligations, exceed the Revolver Commitment 14 or the Borrowing Base, and all such amounts shall (i) be part of the Obligations evidenced by the Revolver Note, (ii) bear interest as provided herein, (iii) be payable upon demand by Bank, and (iv) be secured by the Collateral and be entitled to all rights and security as provided under the Loan Documents. 2.6 REPAYMENT OF LOANS. 2.6.1 Repayment of Loans. (a) The outstanding principal amount of the Loans shall be repaid as follows: Any portion of the Loans shall be paid by Borrower to Bank immediately upon each receipt by Bank or Borrower of any proceeds of any Accounts or Inventory, to the extent of such proceeds. Bank may apply all proceeds of Accounts or other Collateral received by Bank and all other payments in respect of the Obligations to the Loans whether or not then due or to any other Obligations then due, in whatever order or manner Bank shall determine. In any event, the outstanding principal amount of Loans shall be due and payable on the Termination Date. Unless otherwise specified by Borrower, all principal repayment of Loans shall be applied by Bank first to outstanding Base Rate Loans, and then to outstanding LMIR Loans. (b) Interest accrued on the Loans shall be due and payable on (i) the first day of each month for the immediately preceding month), computed through the last calendar day of the preceding month whether a Base Rate Loan or a LMIR Loan; and (ii) on the Termination Date. 2.7 ADDITIONAL PAYMENT PROVISIONS. 2.7.1 Payment of Other Obligations. The balance of the Obligations under the Loan Documents requiring the payment of money shall be repaid by Borrower to Bank as and when provided in the relevant Loan Documents, or, if no date of payment is otherwise specified in the Loan Documents, on demand. 2.7.2 Authorization to Debit. Bank may debit the Disbursement Account, the Collections Account and any account subject to Bank's control (as such term is used in Article 9 of the Code) and/or make Loans to Borrower (whether or not in excess of the lesser of the Revolver Commitment and the Borrowing Base) and apply such amounts to the payment of interest, fees, expenses and other amounts to which Bank may be entitled from time to time and Bank is hereby irrevocably authorized to do so without the consent of Borrower. 2.7.3 Time and Location of Payment. Borrower shall make each payment of principal of and interest on the Loans and fees hereunder not later than 2:00 p.m. (local time Atlanta, Georgia) on the date when due, without set off, counterclaim or other deduction, in immediately available funds to Bank at its address referred to in Section 10.4. Whenever any payment of principal of, or interest on, the Loans or of fees shall be due on a day which is not a Business Day, the date for payment thereof shall be extended to the next succeeding Business Day. If the date for any payment of principal is extended by operation of law or otherwise, interest thereon shall be payable for such extended time. 2.7.4 Excess Over Borrowing Base. To the extent that the aggregate amount of all Loans and the Letter of Credit Obligations exceeds the Borrowing Base at any time, the amount of such excess will be paid immediately to Bank upon Borrower's obtaining knowledge of same. 2.7.5 Swaps Are Independent. Any prepayment of any Loans shall not affect Borrower's obligation to continue making payments under any Swap Agreement, which shall remain in full force and effect notwithstanding such prepayment, subject to the terms of such Swap Agreement. 15 2.7.6 Capital Requirements. If either (a) the introduction of, or any change in, or in the interpretation of, any applicable law or (b) compliance with any guideline or request from any central bank or comparable agency or other governmental authority (whether or not having the force of law), has or would have the effect of reducing the rate of return on the capital of, or has affected or would affect the amount of capital required to be maintained by Bank or any corporation controlling Bank as a consequence of, or with reference to, the Revolver Commitment and other commitments of this type, below the rate which Bank or such other corporation could have achieved by for such introduction, change or compliance, then within five (5) Business Days after written demand by Bank, Borrower shall pay to Bank from time to time as specified by Bank additional amounts sufficient to compensate Bank or such other corporation for such reduction. A certificate as to such amounts submitted to Borrower by Bank shall, in the absence of manifest error, be presumed to be correct and binding for all purposes. 2.8 DEFAULT RATE. In addition to all other rights contained in the Loan Documents, if an Event of Default occurs, the principal amount of all outstanding Obligations, other than Obligations under any Swap Agreements between Borrower and Bank or its affiliates, may, at Bank's option, bear interest at the Default Rate. The Default Rate shall apply from acceleration until such Obligations or any judgment thereon is paid in full. 2.9 CALCULATION OF INTEREST. All fees and other charges provided for in this Agreement that are calculated as a per annum percentage of any amount and all interest shall be calculated daily and shall be computed on the actual number of days elapsed over a year of 360 days. For purposes of computing interest and other charges hereunder, all payment items and other forms of payment received by Bank shall be deemed applied by Bank on account of the Obligations (subject to final payment of such items) on the first Business Day after Bank receives such items in immediately available funds in the Collections Account. Each determination by Bank of interest and fees hereunder shall be presumptive evidence of the correctness of such interest and fees. 2.10 LETTERS OF CREDIT. 2.10.1 Issuance of Letters of Credit. Bank shall from time to time issue, upon five (5) Business Days prior written notice, extend or renew Letters of Credit for the account of Borrower or its Subsidiaries; provided that (i) the aggregate face amount of Letters of Credit issued by Bank which are outstanding at any one time shall not exceed $1,250,000, (ii) Bank shall have no obligation to issue any Letter of Credit if, after giving effect thereto, the principal amount of all Loans and all Letter of Credit Obligations would exceed the lesser of the Borrowing Base and the Revolver Commitment, and (iii) all other conditions precedent to the issuance of each such Letter or Credit as set forth herein are satisfied or waived in writing by Bank. All payments made by Bank under any such Letters of Credit (whether or not Borrower is the account party) and all fees, commissions, discounts and other amounts owed or to be owed to Bank in connection therewith, shall be paid on demand, unless Borrower instructs Bank to make a Loan to pay such amount, Bank agrees to do so, and the necessary amount remains available to be drawn as a Loan hereunder. All Letter of Credit Obligations shall be secured by the Collateral. Borrower shall complete and sign such applications and supplemental agreements and provide such other documentation as Bank may require in respect to the issuance and administration of the Letters of Credit. The form and substance of all Letters of Credit, including expiration dates, shall be subject to Bank's approval, and Bank shall have no obligation to issue any Letter of Credit or accept which has a maturity date later than the Termination Date. Bank may charge certain fees or commissions for the issuance, handling, renewal or extension of a Letter of Credit. Borrower unconditionally guarantees all obligations of any Subsidiary with respect to Letters of Credit issued by Bank for the account of such Subsidiary. Upon a Default, Borrower shall, on demand, deliver to Bank good funds equal to 105% of Bank's maximum liability under all outstanding Letters of Credit, to be held as cash Collateral for Borrower's reimbursement obligations and other Obligations. 16 2.10.2 Law Governing Letter of Credit. Any Letter of Credit issued hereunder shall be governed, as applicable, by the Uniform Customs and Practice for Documentary Credits International Chamber of Commerce ("ICC") Publication 500 or any subsequent revision or restatement thereof adopted by the ICC and in use by Bank or the International Standby Practices, ICC Publication No. 590 or any subsequent revision or restatement thereof adopted by the ICC and in use by Bank, except to the extent that the terms of such publication would limit or diminish rights granted to Bank hereunder or in any other Loan Document. 2.11 FEES. 2.11.1 Administration Fee. Borrower shall pay to Bank a monthly non-refundable administration fee in the amount of $275 payable on the first day of each month for the immediately preceding month. 2.11.2 Unused Line Fees. Borrower shall pay to Bank an unused line fee with respect to the Revolver Commitment for each day equal to the product of (i) 25 basis points per annum multiplied by (ii) the difference between (A) the Revolver Commitment and (B) the aggregate outstanding amount of the Loans and Letter of Credit Obligations on such day, payable quarterly on the first day of each calendar quarter with respect to the immediately preceding quarter. 2.11.3 Letter of Credit Fees. Borrower shall pay to Bank, at such times as Bank shall require, Bank's standard fees in connection with Letters of Credit, as in effect from time to time, and with respect to Letters of Credit, at the time of issuance of each Letter of Credit, a fee equal to the Applicable Margin then in effect for LMIR Loans per annum on the face amount of the Letter of Credit for the period of time the Letter of Credit will be outstanding. 2.12 STATEMENT OF ACCOUNT. If Bank provides Borrower with a statement of account on a periodic basis, such statement will be presumed complete and accurate and will be definitive and binding on Borrower, unless objected to with specificity by Borrower in writing within forty-five (45) days after receipt. 2.13 TERMINATION. Upon at least thirty (30) days prior written notice to Bank, Borrower may, at its option, terminate this Agreement and the Revolver Commitment in its entirety but not partially; provided however, no such termination by Borrower shall be effective until the full, final and indefeasible payment of the Obligations in cash or immediately available funds and in the case of any Obligations consisting of contingent obligations, Bank's receipt of either cash or a direct pay letter of credit naming Bank as beneficiary and in form and substance and from an issuing bank acceptable to Bank, in each case in an amount not less than 105% of the aggregate amount of all such contingent obligations. Any notice of termination given by Borrower shall be irrevocable unless Bank otherwise agrees in writing. Bank may terminate this Agreement and the Revolver Commitment at any time, without notice, upon or after the occurrence of a Default or Event of Default. 2.14 USA PATRIOT ACT NOTICE. To help fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each Person who opens an account. For purposes of this section, account shall be understood to include loan accounts. 3. CONDITIONS PRECEDENT TO EXTENSIONS OF CREDIT. 3.1 CONDITIONS PRECEDENT TO INITIAL LOANS. In addition to any other requirement set forth in this Agreement, Bank shall not be required to fund any Loan on the Closing Date or make any 17 other extension of credit hereunder on the Closing Date unless and until the following conditions shall have been satisfied, in the sole opinion of Bank and its counsel: 3.1.1 Loan Documents. Borrower and each other party to any Loan Document, as applicable, shall have executed and delivered this Agreement, the Notes, and all other required Loan Documents, all in form and substance satisfactory to Bank. 3.1.2 Supporting Documents and Other Conditions. Borrower shall cause to be delivered to Bank the following documents and shall satisfy the following conditions: (a) A copy of the governing instruments of Borrower and each Subsidiary, and good standing certificates of Borrower and each Subsidiary, certified by the appropriate official of their respective states of incorporation and each state in which Borrower or such Subsidiary is qualified to do business; (b) Incumbency certificate and certified resolutions of the board of directors (or other appropriate governing body) of Borrower and each other Person executing any Loan Documents, signed by the Secretary or another authorized officer of Borrower or such other Person, authorizing the execution, delivery and performance of the Loan Documents; (c) The legal opinion of Borrower's legal counsel addressed to Bank regarding such matters as Bank and its counsel may request; (d) A satisfactory Borrowing Base Certificate duly completed by Borrower, together with all supporting statements, schedules and reconciliations as required by Bank; (e) UCC searches and other Lien searches showing no existing security interests in or Liens on the Collateral; (f) A satisfactory Borrower Information Certificate duly completed by Borrower; (g) Satisfactory evidence of insurance meeting the requirements of Section 5.3. (h) UCC financing statements and, if applicable, certificates of title covering the Collateral shall duly have been recorded or filed in the manner and places required by law to establish, preserve, protect and perfect the interests and rights created or intended to be created by the Security Agreement; and all taxes, fees and other charges in connection with the execution, delivery and filing of the Security Agreement and the financing statements shall duly have been paid; (i) Subordinations satisfactory to Bank from all Persons as required by Section 5.9. (j) Third Party Waivers as required by Section 5.12 (c). (k) All required field exams shall have been completed to Bank's satisfaction; (l) All additional opinions, documents, certificates and other assurances that Bank or its counsel may require; 18 (m) Satisfactory evidence of payment of all fees due and reimbursement of all costs reasonably incurred by Bank, and evidence of payment to other parties of all fees or costs which Borrower is required under the Loan Documents to pay by the date of the initial Loan; (n) There shall be no litigation in which Borrower or any Guarantor or Subsidiary is a party defendant, which Bank determines may have a Material Adverse Effect; and (o) Bank shall have received Borrower's financial statements for its most recently concluded fiscal quarter and fiscal year and such other financial reports and information concerning Borrower as Bank shall request, and Bank shall be satisfied therewith. 3.2 CONDITIONS PRECEDENT TO EACH LOAN. In addition to any other requirements set forth in this Agreement, Bank shall not be required to fund any Loan or issue any Letter of Credit unless and until the following conditions shall have been satisfied, in the sole opinion of Bank, and each Notice of Borrowing (whether or not a written Notice of Borrowing is required) shall be deemed to be a representation that all such conditions have been satisfied: 3.2.1 Notice of Borrowing. Borrower shall have delivered to Bank a Notice of Borrowing and such other information, as Bank may reasonably request. 3.2.2 No Default. No Default shall have occurred and be continuing or could occur upon the making of the Loan or the issuance of any Letter of Credit in question and, if Borrower is required to deliver a written Notice of Borrowing, Borrower shall have delivered to Bank an officer's certificate to such effect, which may be incorporated in the Notice of Borrowing. 3.2.3 Correctness of Representations. All representations and warranties made by Borrower and any Guarantor herein or otherwise in writing in connection herewith shall be true and correct in all material respects with the same effect as though the representations and warranties had been made on and as of date of the proposed Loan or Letter of Credit (except to the extent such representations and warranties relate expressly to a prior date), and, if Borrower is required to deliver a written Notice of Borrowing, Borrower shall have delivered to Bank an officer's certificate to such effect, which may be incorporated in the Notice of Borrowing. 3.2.4 No Adverse Change. There shall have been no change which could have a Material Adverse Effect on Borrower, any Subsidiary or any Guarantor since the date of the most recent financial statements of such Person delivered to Bank from time to time. 3.2.5 Limitations Not Exceeded. Any proposed Loan or Letter of Credit shall not cause the aggregate outstanding principal balance of the Loans plus Letter of Credit Obligations to exceed the lesser of the Revolver Commitment and the Borrowing Base. 3.2.6 No Termination. Bank shall not have received notice from any Guarantor or any surety terminating or repudiating such Person's guaranty of the Obligations incurred by Borrower. 3.2.7 Further Assurances. Borrower shall have delivered such further documentation or assurances as Bank may reasonably require. 19 4. REPRESENTATIONS AND WARRANTIES. In order to induce Bank to enter into this Agreement and to make the Loans or extend credit as provided for herein, Borrower makes the following representations and warranties, all of which shall survive the execution and delivery of the Loan Documents. Unless otherwise specified, such representations and warranties shall be deemed made as of the date hereof and as of the date of each request for a Loan or extension of credit hereunder : 4.1 VALID EXISTENCE AND POWER. Each Borrower and each Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization and is duly qualified or licensed to transact business in all places where the failure to be so qualified would have a Material Adverse Effect. Each of Borrower and each other Person which is a party to any Loan Document (other than Bank) has the power to make and perform the Loan Documents executed by it and all such instruments will constitute the legal, valid and binding obligations of such Person, enforceable in accordance with their respective terms, subject only to bankruptcy and similar laws affecting creditors' rights generally. Borrower is organized under the laws of the State of Georgia and has not changed the jurisdiction of its organization within the five years preceding the date hereof except as previously reported to Bank in writing. 4.2 AUTHORITY. The execution, delivery and performance thereof by Borrower and each other Person (other than Bank) executing any Loan Document have been duly authorized by all necessary actions of such Person, and do not and will not violate any provision of law or regulation, or any writ, order or decree of any court or governmental or regulatory authority or agency or any provision of the governing instruments of such Person, and do not and will not, with the passage of time or the giving of notice, result in a breach of, or constitute a default or require any consent under, or result in the creation of any Lien upon any property or assets of such Person pursuant to, any law, regulation, instrument or agreement to which any such Person is a party or by which any such Person or its respective properties may be subject, bound or affected. 4.3 FINANCIAL CONDITION. Other than as disclosed in financial statements delivered on or prior to the date hereof to Bank or as incurred by Borrower or any Subsidiary in the ordinary course of business since the date of the last financial statements delivered to Bank, neither Borrower nor any Subsidiary nor (to the knowledge of Borrower) any Guarantor has any material direct or contingent obligations or liabilities (including any guarantees or leases) that are required to be disclosed in financial statements or notes thereto in accordance with GAAP or any material unrealized or anticipated losses from any commitments of such Person except as described on Exhibit 4.3. All such financial statements have been prepared in accordance with GAAP and, together with the notes thereto, fairly present in all material respects the financial condition of Borrower, Subsidiary or Guarantor, as the case may be, as of the date thereof in accordance with GAAP. Borrower is not aware of any material adverse fact (other than facts which are generally available to the public and not particular to Borrower, such as general economic trends) concerning the condition (financial or otherwise) or future prospects of Borrower or any Subsidiary or any Guarantor which has not been fully disclosed to Bank, including any adverse change in the operations or financial condition of such Person since the date of the most recent financial statements delivered to Bank. Borrower is Solvent, and after consummation of the transactions set forth in this Agreement and the other Loan Documents, Borrower will be Solvent. 4.4 LITIGATION. Except as disclosed on Exhibit 4.4, there are no suits or proceedings pending, or to the knowledge of Borrower threatened, before any court or by or before any governmental or regulatory authority, commission, bureau or agency or public regulatory body against or affecting Borrower, any Subsidiary or (to Borrower's knowledge) any Guarantor, or their assets, which if adversely determined would have a Material Adverse Effect on the financial condition or business of Borrower, such Subsidiary or such Guarantor. 20 4.5 AGREEMENTS, ETC. Neither Borrower nor any Subsidiary is a party to any agreement or instrument or subject to any court order, governmental decree or any charter or other corporate restriction, adversely affecting its business, assets, operations or condition (financial or otherwise), nor is any such Person in default in the performance, observance or fulfillment of any of the material obligations, covenants or conditions contained in any agreement or instrument to which it is a party, or any law, regulation, decree, order or the like that could reasonably be expected to result in a Material Adverse Effect. 4.6 AUTHORIZATIONS. All authorizations, consents, approvals and licenses required under applicable law or regulation for the ownership or operation of the property owned or operated by Borrower or any Subsidiary or for the conduct of any business in which it is engaged have been duly issued and are in full force and effect, and it is not in default, nor has any event occurred which with the passage of time or the giving of notice, or both, would constitute a default, under any of the terms or provisions of any part thereof, or under any order, decree, ruling, regulation, closing agreement or other decision or instrument of any governmental commission, bureau or other administrative agency or public regulatory body having jurisdiction over such Person, which default would have a Material Adverse Effect on such Person. Except as noted herein, no approval, consent or authorization of, or filing or registration with, any governmental commission, bureau or other regulatory authority or agency is required with respect to the execution, delivery or performance of any Loan Document. 4.7 TITLE. Each of Borrower and each Subsidiary has good title to all of the assets shown in its financial statements free and clear of all Liens, except Permitted Liens. Borrower alone has full ownership rights in all Collateral. 4.8 COLLATERAL. The security interests granted to Bank herein and pursuant to any other Security Agreement (a) constitute and, as to subsequently acquired property included in the Collateral covered by the Security Agreement, will constitute, security interests under the Code entitled to all of the rights, benefits and priorities provided by the Code and (b) are, and as to such subsequently acquired Collateral will be, fully perfected, superior and prior to the rights of all third persons, now existing or hereafter arising, except for Permitted Liens. All of the Collateral is intended for use solely in Borrower's business. 4.9 JURISDICTION OF ORGANIZATION; LOCATION. The jurisdiction in which each of Borrower and each Subsidiary is organized, existing and in good standing, the chief executive office of Borrower and each Subsidiary, the office where Borrower's and each Subsidiary's business records are located, all of Borrower's and each Subsidiary's other places of business and any other places where any Collateral is kept, are all correctly and completely indicated on the Borrower Information Certificate. The Collateral is located and shall at all times be kept and maintained only at Borrower's location or locations as described on the Borrower Information Certificate. No such Collateral is attached or affixed to any real property so as to be classified as a fixture unless Bank has otherwise agreed in writing. Borrower has not changed it legal status or the jurisdiction in which it is organized or moved its chief executive office within the five (5) years preceding the date hereof. 4.10 TAXES. Borrower and each Subsidiary have filed all federal and state income and other tax returns which are required to be filed, and have paid all taxes as shown on said returns and all taxes, including withholding, FICA and ad valorem taxes, shown on all assessments received by it to the extent that such taxes have become due. Neither Borrower nor any Subsidiary is subject to any federal, state or local tax Liens nor has such Person received any notice of deficiency or other official notice to pay any taxes. Borrower and each Subsidiary have paid all sales and excise taxes due and payable by it. 21 4.11 LABOR LAW MATTERS. No goods or services have been or will be produced by Borrower or any Subsidiary in violation of any applicable labor laws or regulations or any collective bargaining agreement or other labor agreements or in violation of any minimum wage, wage-and-hour or other similar laws or regulations. 4.12 ACCOUNTS. Each Account, Instrument, Chattel Paper and other writing constituting any portion of the Collateral (a) is genuine and enforceable in accordance with its terms except for such limits thereon arising from bankruptcy and similar laws relating to creditors' rights; (b) is not subject to any deduction or discount (other than as stated in the invoice and disclosed to Bank in writing), defense, set off, claim or counterclaim of a material nature against Borrower except as to which Borrower has notified Bank in writing; (c) is not subject to any other circumstances that would impair the validity, enforceability or amount of such Collateral except as to which Borrower has notified Bank in writing; (d) arises from a bona fide sale of goods or delivery of services in the ordinary course and in accordance with the terms and conditions of any applicable purchase order, contract or agreement; (e) is free of all Liens; and (f) is for a liquidated amount maturing as stated in the invoice therefor. Each Account included in any Notice of Borrowing, Borrowing Base Certificate, report or other document as an Eligible Account meets all the requirements of an Eligible Account set forth herein. 4.13 JUDGMENT LIENS. Neither Borrower nor any Subsidiary, nor any of their assets, are subject to any unpaid judgments (whether or not stayed) or any judgment liens in any jurisdiction. 4.14 CORPORATE STRUCTURE. Except as set forth on Exhibit 4.14 hereto, the Borrower has no Subsidiaries and no corporate or joint venture Affiliates. Since the date of the last audited financial statements of Borrower and its Subsidiaries delivered to Bank, Borrower has not made, or obligated itself to make, any dividends (other than stock dividends) or other distribution on or with respect to, or any purchase, redemption, retirement or other acquisition of, any equity interests of Borrower, except as otherwise permitted hereunder. Except as set forth on Exhibit 4.14 hereto, there are no outstanding options to purchase, or any rights or warrants to subscribe for, or any commitments or agreements to issue or sell, or any equity interests or obligations convertible into, or any powers of attorney relating to, equity interests of Borrower or any of its Subsidiaries. Except as set forth on Exhibit 4.14 hereto, there are no outstanding agreements or instruments binding upon the holders of any Subsidiary's equity interests relating to the ownership of its equity interests. 4.15 DEPOSIT ACCOUNTS. Borrower and its Subsidiaries have no Deposit Accounts other than (a) on the Closing Date, those listed in the Borrower Information Certificate and (b) after the Closing Date, those otherwise permitted by Section 6.15. 4.16 ENVIRONMENTAL. Except as disclosed on Exhibit 4.16, and except for ordinary and customary amounts of solvents, cleaners and similar materials used in the ordinary course of Borrower's business and in material compliance with all Environmental Laws, neither Borrower, nor any Subsidiary, nor to Borrower's knowledge any other previous owner or operator of any real property currently owned or operated by Borrower, has generated, stored or disposed of any Regulated Material on any portion of such property, or transferred any Regulated Material from such property to any other location in violation of any applicable Environmental Laws. Except as disclosed on Exhibit 4.16, no Regulated Material has been generated, stored or disposed of on any portion of the real property currently owned or operated by Borrower or any Subsidiary by any other Person, or is now located on such property. Except as disclosed on Exhibit 4.16, each of Borrower and each Subsidiary is in material compliance with all applicable Environmental Laws and neither Borrower nor any Subsidiary has been notified of any action, suit, proceeding or investigation which calls into question compliance by Borrower with any Environmental Laws or which seeks to suspend, revoke or terminate any license, permit or approval necessary for the generation, handling, storage, treatment or disposal of any Regulated Material. 22 4.17 ERISA. If requested by Bank, Borrower has furnished to Bank true and complete copies of the latest annual report required to be filed pursuant to Section 104 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), with respect to each employee benefit plan or other plan maintained for employees of Borrower or any Subsidiary and covered by Title IV of ERISA (a "Plan"), and no Termination Event (as hereinafter defined) with respect to any Plan has occurred and is continuing. For the purposes of this Agreement, a "Termination Event" shall mean a "reportable event" as defined in Section 4043(b) of ERISA, or the filing of a notice of intent to terminate under Section 4041 of ERISA. Neither Borrower nor any Subsidiary has any unfunded liability with respect to any such Plan. 4.18 INVESTMENT COMPANY ACT. Neither Borrower nor any Subsidiary is an "investment company" as defined in the Investment Company Act of 1940, as amended. 4.19 INSIDER. Borrower is not, and no Person having "control" (as that term is defined in 12 U.S.C. Section 375(b)(5) or in regulations promulgated pursuant thereto) of Borrower is, an "executive officer," "director," or "principal shareholder" (as those terms are defined in 12 U.S.C. 375(b) or in regulations promulgated pursuant thereto) of Bank, of a bank holding company of which Bank is a subsidiary, or of any subsidiary of a bank holding company of which Bank is a subsidiary. 4.20 SANCTIONED PERSONS; SANCTIONED COUNTRIES. None of Borrower, its Subsidiaries or its Affiliates or any Guarantor (i) is a Sanctioned Person or (ii) does business in a Sanctioned Country or with a Sanctioned Person in violation of the economic sanctions of the United States administered by OFAC. The proceeds of any Loan will not be used to fund any operation in, finance any investments or activities in or make any payments to, a Sanctioned Person or a Sanctioned Country. 4.21 COMPLIANCE WITH COVENANTS; NO DEFAULT. Borrower is, and upon funding of the initial Loans on the Closing Date will be, in compliance with all of the covenants hereof. No Default has occurred, and the execution, delivery and performance of the Loan Documents and the funding of the initial Loans on the Closing Date will not cause a Default. 4.22 FULL DISCLOSURE. There is no material fact which is known or which should be known by Borrower that Borrower has not disclosed to Bank which could have a Material Adverse Effect. No Loan Document, nor any agreement, document, certificate or statement delivered by Borrower to Bank, contains any untrue statement of a material fact or omits to state any material fact which is known or which should be known by Borrower necessary to keep the other statements from being misleading. 4.23 BORROWER INFORMATION CERTIFICATE. All representations, warranties and statements made by Borrower in the Borrower Information Certificate executed and delivered by Borrower to Bank in connection with the Loan are true and correct except to the extent (i) any information contained therein has changed, (ii) no Default or Event of Default has occurred as a result thereof and (iii) Borrower has complied with any notice or other reporting obligation to Bank with respect to such change. 5. AFFIRMATIVE COVENANTS OF BORROWER. Borrower covenants and agrees that from the date hereof and until payment in full of the Obligations and the formal termination of this Agreement, Borrower and each Subsidiary: 5.1 USE OF LOAN PROCEEDS. Shall use the proceeds of Loans only for working capital and general corporate purposes to be used in the operation of Borrower's business and furnish Bank all evidence that it may require with respect to such use. 23 5.2 MAINTENANCE OF BUSINESS AND PROPERTIES. Shall at all times maintain, preserve and protect all Collateral and all the remainder of its property used or useful in the conduct of its business, and keep the same in good repair, working order and condition, and from time to time make, or cause to be made, all material needful and proper repairs, renewals, replacements, betterments and improvements thereto so that the business carried on in connection therewith may be conducted properly and in accordance with standards generally accepted in businesses of a similar type and size at all times, and maintain and keep in full force and effect all licenses and permits necessary to the proper conduct of its business. 5.3 INSURANCE. Shall maintain such liability insurance, workers' compensation insurance, business interruption insurance and casualty insurance in amounts as may be required by law, if applicable, or in such amounts as in place on the Closing Date any other insurance that may be reasonably required by Bank and shall insure and keep insured all Collateral and other properties with insurance companies satisfactory to Bank. All hazard insurance covering Collateral shall be in amounts acceptable to Bank, shall name and directly insure Bank as secured party and loss payee and shall not be terminable except upon 30 days' written notice to Bank. Borrower shall furnish to Bank copies of all such policies and shall provide evidence of insurance on an annual basis or such more frequent basis as may be requested by Bank from time to time. 5.4 NOTICE OF DEFAULT. Shall provide to Bank immediate notice of (a) the occurrence of a Default and what action (if any) Borrower is taking to correct the same, (b) any litigation involving an amount at issue in excess of $100,000 or material adverse changes in existing litigation or any judgment against it or its assets in excess of $50,000, (c) any damage or loss to property in excess of $75,000, (d) any notice from taxing authorities as to claimed deficiencies or any tax lien or any notice relating to alleged ERISA violations, (e) any Reportable Event, as defined in ERISA, (f) any rejection, return, offset, dispute, loss or other circumstance in an amount equal to $100,000 or otherwise having a Material Adverse Effect on any Collateral, (g) the cancellation or termination of, or any default under, any Material Agreement to which Borrower is a party or by which any of its properties are bound, or any acceleration of the maturity of any Debt of Borrower; and (h) any loss or threatened loss of material licenses or permits. 5.5 INSPECTIONS OF BOOKS AND RECORDS AND FIELD EXAMINATIONS. Shall permit inspections of the Collateral and the records of such Person pertaining thereto and verification of the Accounts, at such times and in such manner as may be required by Bank and shall further permit such inspections, reviews and field examinations of its other books and records and properties (with such frequency and at such times as Bank may desire) by Bank as Bank may deem necessary or desirable from time to time. The cost of all such field examinations, reviews, verifications and inspections shall be borne by Borrower, provided that (i) the cost of field examinations shall not exceed $850 per examiner per day, plus Bank's reasonable out-of-pocket expenses, and (ii) Borrower is not obligated to pay Bank the costs of more than one field exam in a calendar year unless at the time of such field exam either (1) an Event of Default is in existence, or (2) Borrower's Average Excess Availability, as determined by Bank, is less than $10,000,000, in which event under the immediately preceding clauses (1) or (2) Borrower shall be obligated to pay Bank the costs of all such field examinations, reviews, verifications and inspections. 5.6 FINANCIAL INFORMATION. Shall maintain books and records in accordance with GAAP and shall furnish to Bank the following periodic financial information: (a) Periodic Borrowing Base Information. During all periods in which Average Excess Availability (1) is less than $5,000,000, within fifteen (15) days of the end of each month (and more frequently if required by Bank), and (2) equals or exceeds $5,000,000, within thirty (30) days of the end of each month, a completed Borrowing Base Certificate in the form attached hereto as Exhibit 24 5.6(a) (a "Borrowing Base Certificate"). Borrower shall attach the following to each Borrowing Base Certificate, which shall be certified electronically or manually by the controller or president of Borrower to be accurate and complete and in compliance with the terms of the Loan Documents: (i) a report listing all Accounts of Borrower as of the last Business Day of such month (an "Accounts Receivable Report") which shall include the amount and age of each Account on an original invoice date aging basis, the name and mailing address of each Account Debtor, a detailing of all Accounts which do not constitute Eligible Accounts, and such other information as Bank may require in order to verify the Eligible Accounts, all in reasonable detail and in form acceptable to Bank, (ii) a report listing all Inventory and all Eligible Inventory of Borrower as of the last Business Day of such month, the cost thereof, specifying raw materials, work-in-process, finished goods and all Inventory which has not been timely sold by Borrower in the ordinary course of business, and such other information as Bank may require relating thereto, all in form acceptable to Bank (an "Inventory Report"), and (iii) any other report as Bank may from time to time require in its sole discretion, each prepared with respect to such periods and with respect to such information and reporting as Bank may require. (b) Interim Statements. Within thirty (30) days after the end of each fiscal month of Borrower, (i) a consolidated and consolidating balance sheet of Borrower and its Subsidiaries at the end of that period and a consolidated and consolidating income statement and statement of cash flows for that period (and for the portion of the fiscal year of Borrower ending with such period), together with all supporting schedules, setting forth in comparative form the figures for the same period of the preceding fiscal year and (ii) a report reconciling (x) the Accounts and Inventory of Borrower as set forth on the Accounts Receivable Report and the Inventory Report attached to the Borrowing Base Certificate to (y) the aggregate Accounts and Inventory set forth in the financial statements delivered to Bank pursuant hereto (which shall be based upon Borrower's general ledger and verified by a physical Inventory count conducted on a frequency acceptable to Bank). The foregoing statements and report shall be certified by the controller of Borrower as true and correct and fairly representing the financial condition of Borrower and its Subsidiaries and that such statements are prepared in accordance with GAAP, except without footnotes and subject to normal year end audit adjustments. (c) Annual Statements. Within ninety (90) days after the end of each fiscal year of Borrower, a detailed audited financial report of Borrower and its Subsidiaries containing a consolidated and unaudited consolidating balance sheet at the end of that period and a consolidated and unaudited consolidating income statement and statement of cash flows for that period, setting forth in comparative form the figures for the preceding fiscal year, together with all supporting schedules and footnotes, and containing an unqualified audit opinion of independent certified public accountants acceptable to Bank that the financial statements were prepared in accordance with GAAP. Borrower shall obtain such written acknowledgments from Borrower's independent certified public accountants as Bank may require permitting Bank to rely on such annual financial statements. (d) Compliance and No Default Certificates. Together with each report required to be delivered by Subsection (b) in connection with the end of each fiscal quarter and required to be delivered by Subsection (c), a compliance certificate in the form annexed hereto as Exhibit 5.6(d) and a certificate of its president or controller certifying that no Default then exists or if a Default exists, the nature and duration thereof and Borrower's intention with respect thereto, and in addition, shall cause Borrower's independent auditors (if applicable) to submit to Bank, together with its audit report, a statement that, in the course of such audit, it discovered no circumstances which it believes would result in a Default or if it discovered any such circumstances, the nature and duration thereof. (e) Auditor's Management Letters. Promptly upon receipt thereof, copies of each report submitted to Borrower by independent public accountants in connection with any annual, interim or special audit made by them of the books of Borrower including, without limitation, each report 25 submitted to Borrower concerning its accounting practices and systems and any final comment letter submitted by such accountants to management in connection with the annual audit of Borrower. (f) Payables Report. Within thirty (30) days of the end of each fiscal month of Borrower (or more frequently if required by Bank), a schedule of all accounts payable of Borrower setting forth for each such account the number of days which have elapsed since the original date of invoice and containing the name and address of each vendor and such other detail requested by Bank. (g) SEC Reports. Within ten (10) days after the issuance thereof, copies of such other financial statements and reports as the Borrower sends to its stockholders and copies of all regular and periodic reports which the Borrower may be required to file with the Securities and Exchange Commission or any similar or corresponding governmental commission, department or agency substituted therefor, or any similar or corresponding governmental authority. (h) Other Information. Such other information reasonably requested by Bank from time to time concerning the business, properties or financial condition of Borrower, Guarantor and their respective Subsidiaries. (i) Projections. Not later than the thirtieth (30th) day before the commencement of each fiscal year of Borrower, deliver Projections (as hereinafter defined) to Bank for Borrower for such fiscal year. "Projections" means Borrower's forecasted consolidated and consolidating (i) profit and loss statements prepared on a month by month basis and (iii) balance sheets and cash flow statements prepared on a quarter by quarter basis, all of the foregoing to be on a consistent basis with Borrower's historical financial statements, together with appropriate supporting details and a statement of underlying assumptions. 5.7 MAINTENANCE OF EXISTENCE AND RIGHTS. Shall preserve and maintain its corporate existence, authorities to transact business, rights and franchises, trade names, patents, trademarks and permits necessary to the conduct of its business. 5.8 PAYMENT OF TAXES, ETC. Shall pay before delinquent all of its Debts and taxes, except and to the extent only that such taxes are being Properly Contested. 5.9 SUBORDINATION. Shall cause all Debts and other obligations now or hereafter owed to any Guarantor or Affiliate to be subordinated in right of payment and security to the Obligations in accordance with subordination agreements satisfactory to Bank. 5.10 COMPLIANCE; HAZARDOUS MATERIALS. Shall comply with all material laws, regulations, ordinances and other legal requirements, specifically including, without limitation, ERISA, all securities laws and all laws relating to hazardous materials and the environment. Unless approved in writing by Bank, neither Borrower nor any Subsidiary shall engage in the storage, manufacture, disposition, processing, handling, use or transportation of any hazardous or toxic materials, whether or not in compliance with applicable laws and regulations. Borrower shall promptly report to Bank any notices of any violations of such laws or regulations received from any regulatory or governmental body, along with Borrower's proposed corrective action as to such violation. 5.11 FURTHER ASSURANCES. Shall take such further action and provide to Bank such further assurances as may be reasonably requested to ensure compliance with the intent of this Agreement and the other Loan Documents. 26 5.12 COVENANTS REGARDING COLLATERAL. Borrower makes the following covenants with Bank regarding the Collateral for itself and each Subsidiary. Borrower and each Subsidiary: (a) will use the Collateral only in the ordinary course of its business and will not permit the Collateral to be used in violation of any applicable law or policy of insurance; (b) will defend the Collateral against all claims and demands of all Persons, except for Permitted Liens; (c) will, at Bank's request, use commercially reasonable efforts to obtain and deliver to Bank such Third Party Waivers as Bank may require; (d) will promptly deliver to Bank all promissory notes, drafts, trade acceptances, chattel paper, Instruments or documents of title which are Collateral in tangible form, appropriately endorsed to Bank's order, and Borrower will not create or permit any Subsidiary to create any Electronic Chattel Paper without taking all steps deemed necessary by Bank to confer control of the Electronic Chattel Paper upon Bank in accordance with the Code; (e) except for sales of Inventory in the ordinary course of business and the voluntary termination of Swap Agreements to which Borrower or such Subsidiary is a party, will not sell, assign, lease, transfer, pledge, hypothecate or otherwise dispose of or encumber any Collateral or any interest therein; (f) shall promptly notify Bank of any future patents, trademarks or copyrights owned by Borrower or any Subsidiary and any license agreements entered into by Borrower or any Subsidiary authorizing said Person to use any patents, trademarks or copyrights owned by third parties; and (g) shall promptly notify Bank in writing of any new trade or fictitious name. Borrower's or any Subsidiary's use of any trade or fictitious name shall be in compliance with all laws regarding the use of such names. 6. NEGATIVE COVENANTS OF BORROWER. Borrower covenants and agrees that from the date hereof and until payment in full of the Obligations and the formal termination of this Agreement, Borrower and each Subsidiary: 6.1 DEBT. Shall not create or permit to exist any Debt, including any guaranties or other contingent obligations, except the following ("Permitted Debt"): (a) The Obligations; (b) Endorsement of checks for collection in the ordinary course of business; (c) Accounts payable to trade creditors which are not aged more than ninety (90) days from billing date and current operating expenses (other than for borrowed money) which are not more than thirty (30) days past due, in each case incurred in the ordinary course of business and paid within such time period, unless the same are actively being Properly Contested; (d) Purchase money Debt not exceeding $500,000 in aggregate principal amount at any time outstanding for Borrower and all Subsidiaries incurred to purchase Equipment, 27 provided that the amount of such Debt shall not at any time exceed the purchase price of the Equipment purchased; and (e) Debt for taxes not at the time due and payable or deferred taxes or which are being actively Properly Contested; (f) Debt issued by Borrower subordinated in favor of Bank pursuant to an executed subordination agreement on terms and conditions satisfactory to Bank in all respects not exceeding $500,000 in aggregate principal amount at any time outstanding; (g) Accrued pension fund and other employee benefit plan obligations and liabilities (provided, however, that such Debt does not result in the existence of any Event of Default hereunder); and (h) Debt existing on the Closing Date and not otherwise permitted under this Section 6.1, as set forth on Exhibit 6.1 hereto, and the renewal and refinancing (but not the increase in the aggregate principal amount) thereof. 6.2 LIENS. Shall not create or permit any Liens on any of its property except the following ("Permitted Liens"): (a) Liens securing the Obligations; (b) Liens for taxes, assessments and other governmental charges or levies (excluding any Lien imposed pursuant to any of the provisions of ERISA or Environmental Laws) not yet due and payable or which are being Properly Contested; (c) The claims of materialmen, mechanics, carriers, warehousemen, processor or landlords arising out of operation of law so long as the obligations secured thereby are not past due or are being Properly Contested; (d) Liens consisting of deposits or pledges made in the ordinary course of business in connection with workers' compensation, unemployment insurance, social security and similar laws; (e) Judgment and other similar non-tax Liens arising in connection with court proceedings but only if and for so long as (a) the execution or enforcement of such Liens is and continues to be effectively stayed and bonded on appeal, (b) the validity and/or amount of the claims secured thereby are being Properly Contested and (c) such Liens do not, in the aggregate, materially detract from the value of the assets of the Person whose assets are subject to such Lien or materially impair the use thereof in the operation of such Person's business; (f) Liens securing Permitted Debt incurred solely for the purpose of purchase money financing for the acquisition of Equipment, provided that such Lien does not secure more than the purchase price of such Equipment and does not encumber property other than the purchased property; and (g) Liens not otherwise permitted by this Section 6.2, in existence on the Closing Date and described on Exhibit 6.2. 28 6.3 RESTRICTED PAYMENTS. Shall not pay or declare any dividends (other than stock dividends) or other distribution or purchase, redeem or otherwise acquire any stock or other equity interests or pay or acquire any Debt subordinate to the Obligations except that (i) any Subsidiary may pay dividends to Borrower or another Subsidiary wholly-owned by Borrower and (ii) so long as no Default or Event of Default is in existence before or after giving effect thereto, Borrower may declare and pay dividends to its stockholders not exceeding 40% of Borrower's consolidated net income, determined in accordance with GAAP, in the aggregate in any fiscal year. 6.4 LOANS AND OTHER INVESTMENTS. Shall not make or permit to exist any advances or loans to, or guarantee or become contingently liable, directly or indirectly, in connection with the obligations, leases, stock or dividends of, or own, purchase or make any commitment to purchase any stock, bonds, notes, debentures or other securities of, or any interest in, or make any capital contributions to any Person, except for (a) purchases of direct obligations of the federal government, (b) deposits in commercial banks, (c) commercial paper of any U.S. corporation having the highest ratings then given by the Moody's Investors Services, Inc. or Standard & Poor's Corporation, (d) loans and investments in Subsidiaries created, acquired and existing in compliance with Section 6.12, (e) endorsement of negotiable instruments for collection in the ordinary course of business, and (f) advances to employees for business travel and other expenses incurred in the ordinary course of business which do not at any time exceed $50,000 in the aggregate. 6.5 CHANGE IN BUSINESS. Shall not enter into any business which is substantially different from the business in which it is engaged on the Closing Date. 6.6 ACCOUNTS. (a) Shall not sell, assign or discount any of its Accounts, Chattel Paper or any promissory notes held by it other than the discount of such notes in the ordinary course of business for collection; (b) shall not create or accept any Account, Instrument, Chattel Paper or other obligation of any kind due from or owed by a Sanctioned Person or enter into any lease that secures the Obligations where the lessee is a Sanctioned Person; and (c) shall notify Bank promptly in writing of any discount, offset or other deductions not shown on the face of an Account invoice and any dispute over an Account, and any information relating to an adverse change in any Account Debtor's financial condition or ability to pay its obligations or if it learns that any Account Debtor is a Sanctioned Person. 6.7 TRANSACTIONS WITH AFFILIATES. Shall not directly or indirectly purchase, acquire or lease any property from, or sell, transfer or lease any property to, pay any management fees to or otherwise deal with, in the ordinary course of business or otherwise, any Affiliate (other than a Subsidiary); provided, however, that (i) the acts or transactions described on Exhibit 6.7 hereto are not prohibited by this Section 6.7 and (ii) any acts or transactions prohibited by this Section may be performed or engaged in if upon terms not less favorable to Borrower or such Subsidiary than if no such relationship existed. 6.8 NO CHANGE IN NAME, OFFICES OR JURISDICTION OF ORGANIZATION; REMOVAL OF COLLATERAL. Shall not change its name or the jurisdiction in which Borrower or such Subsidiary is organized or, unless it shall have given 30 days' advance written notice thereof to Bank, change the location of its chief executive office or other office where books or records are kept, or permit any Inventory or other tangible Collateral to be located at any location other than as specified in the Borrower Information Certificate. 6.9 NO SALE, LEASEBACK. Shall not enter into any sale-and-leaseback or similar transaction. 29 6.10 MARGIN STOCK. Shall not use any proceeds of the Loan to purchase or carry any margin stock (within the meaning of Regulation U of the Board of Governors of Federal Reserve System) or extend credit to others for the purpose of purchasing or carrying any margin stock. 6.11 TANGIBLE COLLATERAL. Shall not, except as otherwise provided herein, allow any Inventory or other tangible Collateral to be commingled with, or become an accession to or part of, any property of any other Person so long as such property is Collateral; nor allow any tangible Collateral to become a fixture unless Bank shall have given its prior written authorization. 6.12 SUBSIDIARIES. Shall not acquire, form or dispose of any Subsidiaries or permit any Subsidiary to issue capital stock except to its parent. 6.13 LIQUIDATION, MERGERS, CONSOLIDATIONS AND DISPOSITIONS OF SUBSTANTIAL ASSETS, NAME AND GOOD STANDING. Shall not merge, reorganize, consolidate or amalgamate with any Person, liquidate, wind up its affairs or dissolve itself, acquire by purchase, lease or otherwise all or substantially all of the assets of any Person, or sell, transfer, lease or otherwise dispose of any of its property or assets, except for the sale of Inventory in the ordinary course of business and the voluntary termination of Swap Agreements to which Borrower or such Subsidiary is a party or sell or dispose of any equity ownership interests in any Subsidiary, in each case whether in a single transaction or in a series of related transactions; or change its name or jurisdiction of organization or conduct business under any new fictitious name; change its Federal Employer Identification Number; or fail to remain in good standing and qualified to transact business as a foreign entity in any state or other jurisdiction in which it is required to be qualified to transact business as a foreign entity and in which the failure to be so qualified could reasonably be expected to have a Material Adverse Effect. 6.14 CHANGE OF FISCAL YEAR OR ACCOUNTING METHODS. Shall not change its fiscal year or its accounting methods. Borrower's fiscal year end is December 31 as of the Closing Date. 6.15 DEPOSIT ACCOUNTS. Borrower shall not open or maintain any Deposit Accounts except for (i) Deposit Accounts opened or maintained at Bank, (ii) those listed on the Borrower Information Certificate, (iii) Deposit Accounts which are not opened or maintained at Bank but which are subject to Bank's "control" (as such term is used in Article 9 of the Code) on terms reasonably satisfactory to Bank, and (iv) such other Deposit Accounts as shall be necessary for payroll, petty cash, local trade payables, and other occasional needs of Borrower. The aggregate balance of any Deposit Accounts which are not subject to Bank's "control" (as such term is used in Article 9 of the Code) on terms reasonably acceptable to Bank shall never exceed $25,000 without Bank's prior written consent. Borrower shall maintain its primary Deposit Account and cash management Deposit Accounts with Bank. All Deposit Accounts maintained at Bank shall be deemed to be under Bank's "control" as such term is used in Article 9 of the Code. 7. OTHER COVENANTS OF BORROWER. Borrower covenants and agrees that from the date hereof and until payment in full of the Obligations and the termination of this Agreement, Borrower and each Subsidiary shall comply with the following additional covenants: (a) Fixed Charge Coverage Ratio. At the end of each fiscal quarter of Borrower, commencing with the first fiscal quarter ending after the Closing Date, Borrower shall maintain a Fixed Charge Coverage Ratio of not less than (i) 0.75 to 1.00 for the fiscal quarter ending March 31, 2006, (ii) 0.70 to 1.00 for the fiscal quarter ending on June 30, 2006, (iii) 0.75 to 1.00 for the fiscal quarter ending September 30, 2006, (iv) 1.00 to 1.00 for the fiscal quarter ending December 31, 2006, and (iv) 1.15 to 1.00 for each fiscal quarter thereafter. As used herein, "Fixed Charge Coverage Ratio" means during any period of determination (i) EBITDA, plus rent expense incurred during any 30 Applicable Period less the sum of (A) all unfinanced Capital Expenditures (excluding from such unfinanced Capital Expenditures all Target Capital Expenditures in an amount not exceeding $5,400,000 on a cumulative basis for all periods through December 31, 2006, but including in such unfinanced Capital Expenditures all Target Capital Expenditures in an amount exceeding $5,400,000 during such periods) made in the Applicable Fiscal Period, and (B) any dividends and distributions paid in the Applicable Fiscal Period and (C) cash taxes paid in the Applicable Fiscal Period (without benefit of any refunds), divided by (ii) the sum of (A) the current portion of scheduled principal amortization on Funded Debt coming due in the next 12 months as of the end of the most recent fiscal quarter plus (B) cash interest payments paid in the Applicable Fiscal Period, plus (C) rent expense paid during any Applicable Period. As used herein, (i) "EBITDA" means the sum of (A) consolidated net income of Borrower and its Subsidiaries in the Applicable Fiscal Period (computed without regard to any extraordinary items of gain or loss) plus (B) to the extent deducted from revenue in computing consolidated net income for such period, the sum of (1) interest expense, (2) income tax expense, (3) depreciation and amortization and (4) with respect to the bad debt reserve for Accounts owed to Borrower from Tactica International, any increases thereto occurring after September 30, 2005, but not exceeding $2,000,000 in such increases in the aggregate less (C) non-cash gains; (ii) "Capital Expenditures" means for any period the aggregate cost of all capital assets acquired by Borrower and its Subsidiaries during such period, as determined in accordance with GAAP; (iii)"Applicable Fiscal Period" means a period of four (4) consecutive, trailing fiscal quarters ending at the end of each prescribed fiscal quarter of Borrower; and (iv) "Funded Debt" means (A) Debts for borrowed funds, and (B) Debt for the deferred payment by one (1) year or more of any purchase money obligation. 8. DEFAULT. 8.1 EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default: (a) There shall occur any default by Borrower in the payment, when due, of any principal of or interest on any Note or any fee due, any other amounts due hereunder or any other Loan Document, or any other Obligations; or (b) There shall occur any default by Borrower in the performance of any agreement, covenant or obligation contained in Section 5.1, 5.4, 5.5, 5.6, 5.9, 5.12, or Section 6 or Section 7 of this Agreement; or (c) There shall occur any default by Borrower or any other party to any Loan Document (other than Bank) in the performance of any other agreement, covenant or obligation contained in this Agreement or such Loan Document not provided for elsewhere in this Section 8 and the breach of such other agreement, covenant or obligation is not cured to Bank's satisfaction within 30 days after the sooner to occur of any Senior Officer's receipt of notice of such breach from Bank or the date on which such failure or neglect first becomes known to any Senior Officer; provided, however, that such notice and opportunity to cure shall not apply in the case of any failure to perform, keep or observe any covenant which is not capable of being cured at all or within such 30 day period or which is a willful and knowing breach by Borrower or such other party; or (d) Any representation or warranty made by Borrower or any other party to any Loan Document (other than Bank) herein or therein or in any certificate or report furnished in connection herewith or therewith shall prove to have been untrue or incorrect in any material respect when made; or 31 (e) Any other obligation now or hereafter owed by Borrower or any Subsidiary or any Guarantor to Bank or any Affiliate of Bank shall be in default and not cured within the grace period, if any, provided therein; or (f) Borrower or any Subsidiary or Guarantor shall fail to make any payment in respect of outstanding Debt (other than the Obligations) in an aggregate principal amount of $50,000 or more when due after the expiration of any applicable grace period, or any event or condition shall occur which results in the acceleration of the maturity of such Debt (including, without limitation, any required mandatory prepayment or "put" of such Debt to any such Person) or enables (or, with the giving of notice or lapse of time or both, would enable) the holders of such Debt or a commitment related to such Debt (or any Person acting on such holders' behalf) to accelerate the maturity thereof or terminate any such commitment prior to its normal expiration (including, without limitation, any required mandatory prepayment or "put" of such Debt to such Person); or (g) Borrower or any Subsidiary or any Guarantor shall (A) voluntarily dissolve, liquidate or terminate operations or apply for or consent to the appointment of, or the taking of possession by, a receiver, custodian, trustee or liquidator of such Person or of all or of a substantial part of its assets, (B) admit in writing its inability, or be generally unable, to pay its debts as the debts become due, (C) make a general assignment for the benefit of its creditors, (D) commence a voluntary case under the federal Bankruptcy Code (as now or hereafter in effect), (E) file a petition seeking to take advantage of any other law relating to bankruptcy, insolvency, reorganization, winding up, or composition or adjustment of debts, (F) fail to controvert in a timely and appropriate manner, or acquiesce in writing to, any petition filed against it in an involuntary case under Bankruptcy Code, or (G) take any corporate action for the purpose of effecting any of the foregoing; or (h) An involuntary petition or complaint shall be filed against Borrower or any Subsidiary or any Guarantor seeking bankruptcy relief or reorganization or the appointment of a receiver, custodian, trustee, intervenor or liquidator of Borrower or any Subsidiary or any Guarantor, of all or substantially all of its assets, and such petition or complaint shall not have been dismissed within sixty (60) days of the filing thereof; or an order, order for relief, judgment or decree shall be entered by any court of competent jurisdiction or other competent authority approving or ordering any of the foregoing actions; or (i) A judgment in excess of $100,000 shall be rendered against Borrower or any Subsidiary or any Guarantor and shall remain undischarged, undismissed and unstayed for more than 20 days or there shall occur any levy upon, or attachment, garnishment or other seizure of, any portion of the Collateral or other assets of Borrower, any Subsidiary or any Guarantor in excess of $50,000 by reason of the issuance of any tax levy, judicial attachment or garnishment or levy of execution; or (j) Any Guarantor shall repudiate or revoke any Guaranty Agreement; or (k) Loss, theft, damage or destruction of any material portion of the tangible Collateral for which there is either no insurance coverage or for which, in the reasonable opinion of Bank, there is insufficient insurance coverage; or (l) There shall occur any default by Borrower under any Material Agreement in the performance of Borrower's duties and obligations thereunder resulting in the termination of such Material Agreement; or 32 (m) There shall occur any change in the condition (financial or otherwise) of Borrower, any Subsidiary and/or any Guarantor which, in the reasonable opinion of Bank, would have a Material Adverse Effect; or (n) Scott D. Dorfman (on a fully diluted basis) shall cease to control, with sole power to vote, at least 40% of each class of voting stock or other equity or income interests of Borrower. 8.2 REMEDIES. If any Default shall occur, Bank may, without notice to Borrower, at its option, withhold further Loans or other extensions of credit to Borrower. If an Event of Default shall have occurred and be continuing, Bank may at its option take any or all of the following actions: (a) Bank may declare any or all Obligations (other than Obligations under any Swap Agreements, between Borrower and Bank or any Affiliate of Bank, which shall be due in accordance with and governed by the provisions of said Swap Agreements) to be immediately due and payable (if not earlier demanded) (provided, that, upon the occurrence of any Event of Default described in Sections 8.1(g) or 8.1(h), all Obligations shall automatically become immediately due and payable), terminate its obligation to make Loans and other extensions of credit to Borrower, bring suit against Borrower to collect the Obligations, exercise any remedy available to Bank hereunder or at law and take any action or exercise any remedy provided herein or in any other Loan Document or under applicable law. No remedy shall be exclusive of other remedies or impair the right of Bank to exercise any other remedies. (b) Without waiving any of its other rights hereunder or under any other Loan Document, Bank shall have all rights and remedies of a secured party under the Code (and the Uniform Commercial Code of any other applicable jurisdiction) and such other rights and remedies as may be available hereunder, under other applicable law or pursuant to contract. If requested by Bank, Borrower will promptly assemble the Collateral and make it available to Bank at a place to be designated by Bank. Borrower agrees that any notice by Bank of the sale or disposition of the Collateral or any other intended action hereunder, whether required by the Code or otherwise, shall constitute reasonable notice to Borrower if the notice is mailed to Borrower by regular or certified mail, postage prepaid, at least five days before the action to be taken. Borrower shall be liable for any deficiencies in the event the proceeds of the disposition of the Collateral do not satisfy the Obligations in full. (c) Bank may demand, collect and sue for all amounts owed pursuant to Accounts, General Intangibles, Chattel Paper, Instruments, Documents or for proceeds of any Collateral (either in Borrower's name or Bank's name at the latter's option), with the right to enforce, compromise, settle or discharge any such amounts. 8.3 RECEIVER. In addition to any other remedy available to it, Bank shall have the absolute right, upon the occurrence of an Event of Default, to seek and obtain the appointment of a receiver to take possession of and operate and/or dispose of the business and assets of Borrower and any costs and expenses incurred by Bank in connection with such receivership shall bear interest at the Default Rate, at Bank's option, and shall be secured by all Collateral. 8.4 DEPOSITS; INSURANCE. After the occurrence of an Event of Default, Borrower authorizes Bank to collect and apply against the Obligations when due any cash or Deposit Accounts in its possession, and any refund of insurance premiums or any insurance proceeds payable on account of the loss or damage to any of the Collateral and irrevocably appoints Bank as its attorney in fact to endorse any check or draft or take other action necessary to obtain such funds. 33 9. SECURITY AGREEMENT. 9.1 SECURITY INTEREST. (a) As security for the payment and performance of any and all Obligations and the performance of all obligations and covenants of Borrower to Bank and its Affiliates, whether hereunder and under the other Loan Documents, Swap Agreements between Bank or any Affiliate of Bank and Borrower or otherwise, certain or contingent, now existing or hereafter arising, which are now, or may at any time or times hereafter be owing by Borrower to Bank or any of Bank's Affiliates, Borrower hereby grants to Bank (for itself and its Affiliates) a continuing security interest in and general lien upon and right of set off against, all right, title and interest of Borrower in and to the Collateral, whether now owned or hereafter acquired by Borrower. (b) Except as herein or by applicable law otherwise expressly provided, Bank shall not be obligated to exercise any degree of care in connection with any Collateral in its possession, to take any steps necessary to preserve any rights in any of the Collateral or to preserve any rights therein against prior parties, and Borrower agrees to take such steps. In any case Bank shall be deemed to have exercised reasonable care if it shall have taken such steps for the care and preservation of the Collateral or rights therein as Borrower may have reasonably requested Bank to take and Bank's omission to take any action not requested by Borrower shall not be deemed a failure to exercise reasonable care. No segregation or specific allocation by Bank of specified items of Collateral against any liability of Borrower shall waive or affect any security interest in or Lien against other items of Collateral or any of Bank's options, powers or rights under this Agreement or otherwise arising. (c) Bank may at any time and from time to time, with or without notice to Borrower during the continuance of an Event of Default, (i) transfer into the name of Bank or the name of Bank's nominee any of the Collateral, (ii) notify any Account Debtor or other obligor of any Collateral to make payment thereon direct to Bank of any amounts due or to become due thereon and (iii) receive and direct the disposition of any proceeds of any Collateral. (d) Notwithstanding the foregoing, (i) no Account, Instrument, Chattel Paper or other obligation or property of any kind due from, owed by or belonging to, a Sanctioned Person or (ii) any lease in which the lessee is a Sanctioned Person shall be Collateral or shall be credited toward the payment of the Obligations. 9.2 FINANCING STATEMENTS; POWER OF ATTORNEY. Borrower authorizes Bank at Borrower's expense to file any financing statements and/or amendments thereto relating to the Collateral (without Borrower's signature thereon) which Bank deems appropriate that (a) indicate the Collateral (i) as "all assets" of Borrower or words of similar effect, if appropriate, regardless of whether any particular asset comprised in the Collateral falls within the scope of Article 9 of the Code, or (ii) by specific Collateral category, and (b) provide any other information required by part 5 of Article 9 of the Code for the sufficiency or filing office acceptance of any financing statement or amendment. Borrower irrevocably appoints Bank as its attorney in fact to execute any such financing statements and/or control agreements in Borrower's name and to perform all other acts, at Borrower's expense, which Bank deems necessary to perfect and to continue perfection of the security interest of Bank. Borrower hereby appoints Bank as Borrower's attorney in fact to endorse, present and collect on behalf of Borrower and in Borrower's name any draft, checks or other documents necessary or desirable to collect any amounts which Borrower may be owed. During the continuance of an Event of Default, Bank is hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks and advertising matter, or any Property of a similar nature, as it pertains to the Collateral, in advertising for sale and selling any Collateral, and Borrower's rights 34 under all licenses and all franchise agreements shall inure to Bank's benefit. The proceeds realized from the sale or other disposition of any Collateral may be applied, after allowing two (2) Business Days for collection, first to the reasonable costs, expenses and attorneys' fees and expenses incurred by Bank for collection and for acquisition, completion, protection, removal, storage, sale and delivering of the Collateral; second, to interest due upon any of the Obligations; third, to the principal amount of the Obligations and to any other Obligations then outstanding; and fourth to any other Person as required by applicable law. If any deficiency shall arise, Borrower and each Guarantor shall remain jointly and severally liable to Bank therefor. 9.3 ENTRY. Borrower hereby irrevocably consents to any act by Bank or its agents in entering upon any premises for the purposes of either (i) inspecting the Collateral or (ii) during the continuance of an Event of Default, taking possession of the Collateral and Borrower hereby waives its right to assert against Bank or its agents any claim based upon trespass or any similar cause of action, to the extent that Bank has acted in accordance with this Section 9.3, for entering upon any premises where the Collateral may be located. 9.4 OTHER RIGHTS. Borrower authorizes Bank without affecting Borrower's obligations hereunder or under any other Loan Document from time to time (i) to take from any party and hold additional Collateral or guaranties for the payment of the Obligations or any part thereof, and to exchange, enforce or release such collateral or guaranty of payment of the Obligations or any part thereof and to release or substitute any endorser or guarantor or any party who has given any security interest in any collateral as security for the payment of the Obligations or any part thereof or any party in any way obligated to pay the Obligations or any part thereof; and (ii) upon the occurrence of any Event of Default to direct the manner of the disposition of the Collateral and the enforcement of any endorsements, guaranties, letters of credit or other security relating to the Obligations or any part thereof as Bank in its sole discretion may determine. 9.5 ACCOUNTS. During the continuance of an Event of Default, Bank may notify any Account Debtor of Bank's security interest and may direct such Account Debtor to make payment directly to Bank for application against the Obligations. Any such payments received by or on behalf of Borrower at any time, during the continuance of an Event of Default, shall be the property of Bank, shall be held in trust for Bank and not commingled with any other assets of any Person (except to the extent they may be commingled with other assets of Borrower in an account with Bank) and shall be immediately delivered to Bank in the form received. 9.6 WAIVER OF MARSHALING. Borrower hereby waives any right it may have to require marshaling of its assets. 9.7 CONTROL. Borrower will cooperate with Bank in obtaining control of, or control agreements with respect to, Collateral for which control or a control agreement is required for perfection of the Bank's security interest under the Code. 10. MISCELLANEOUS. 10.1 NO WAIVER, REMEDIES CUMULATIVE. No failure on the part of Bank to exercise, and no delay in exercising, any right hereunder or under any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any right hereunder preclude any other or further exercise thereof or the exercise of any other right. The remedies herein provided are cumulative and are in addition to any other remedies provided by law, any Loan Document or otherwise. 35 10.2 SURVIVAL OF REPRESENTATIONS. All representations and warranties made herein shall survive the making of the Loan hereunder and the delivery of the Note, and shall continue in full force and effect so long as any Obligations is outstanding, there exists any commitment by Bank to Borrower, and until this Agreement is formally terminated in writing. 10.3 INDEMNITY BY BORROWER; EXPENSES. In addition to all other Obligations, Borrower agrees to defend, protect, indemnify and hold harmless Bank and its Affiliates and all of their respective officers, directors, employees, attorneys, consultants and agents from and against any and all losses, damages, liabilities, obligations, penalties, fines, fees, costs and expenses (including, without limitation, attorneys' and paralegals' fees, costs and expenses, and fees, costs and expenses for investigations and experts) incurred by such indemnitees, whether prior to or from and after the date hereof, as a result of or arising from or relating to (i) the due diligence effort (including, without limitation, public record search, recording fees, examinations and investigations of the properties of Borrower and Borrower's operations), negotiation, preparation, execution and/or performance of any of the Loan Documents or of any document executed in connection with the transactions contemplated thereby and the perfection of Bank's Liens in the Collateral, maintenance of the Loan by Bank, and any and all amendments, modifications, and supplements of any of the Loan Documents or restructuring of the Obligations, (ii) any suit, investigation, action or proceeding by any Person (other than Borrower), whether threatened or initiated, asserting a claim for any legal or equitable remedy against any Person under any statute, regulation or common law principle, arising from or in connection with Bank's furnishing of funds to Borrower under this Agreement, (iii) Bank's preservation, administration and enforcement of its rights under the Loan Documents and applicable law, including the 15% of the outstanding Obligations as attorneys fees if collected by or through an attorney at law] and disbursements of counsel for Bank in connection therewith, whether suit be brought or not and whether incurred at trial or on appeal, and all costs of repossession, storage, disposition, protection and collection of Collateral, (iv) periodic field exams, audits and appraisals performed by Bank pursuant to Section 5.5 hereof;(v) any civil penalty or fine assessed by OFAC against Bank or any Affiliate of Bank and all reasonable costs and expense (including counsel fees and disbursements) incurred in connection with defense thereof by Bank or such Affiliate, as a result of the funding of Loans or the extension of credit, the acceptance of payments due under the Loan Documents or any Swap Agreement or acceptance of Collateral, and/or (vi) any matter relating to the financing transactions contemplated by the Loan Documents or by any document executed in connection with the transactions contemplated thereby; but in all instances, other than for such loss, damage, liability, obligation, penalty, fee, cost or expense arising from such indemnitee's gross negligence or willful misconduct. If Borrower should fail to pay any tax or other amount required by this Agreement to be paid or which may be reasonably necessary to protect or preserve any Collateral or Borrower's or Bank's interests therein, Bank may make such payment and the amount thereof shall be payable on demand, may at Bank's option be debited against any Deposit Account of Borrower at Bank or converted to a Loan hereunder, shall bear interest at the Default Rate from the date of demand until paid and shall be deemed to be Obligations entitled to the benefit and security of the Loan Documents. In addition, Borrower agrees to pay and save Bank harmless against any liability for payment of any state documentary stamp taxes, intangible taxes or similar taxes (including interest or penalties, if any) which may now or hereafter be determined to be payable in respect to the execution, delivery or recording of any Loan Document or the making of any Loan, whether originally thought to be due or not, and regardless of any mistake of fact or law on the part of Bank or Borrower with respect to the applicability of such tax. Borrower's obligation for indemnification for all of the foregoing losses, damages, liabilities, obligations, penalties, fees, costs and expenses of Bank shall be part of the Obligations, secured by the Collateral, chargeable against Borrower's loan account, and shall survive termination of this Agreement. 10.4 NOTICES. Any notice or other communication hereunder or under the Note to any party hereto or thereto shall be by hand delivery, overnight delivery via nationally recognized overnight delivery service, facsimile with receipt confirmed, telegram, telex or registered or certified United States 36 mail with return receipt and unless otherwise provided herein shall be deemed to have been given or made when delivered, telegraphed, telexed, faxed or, if sent via United States mail, when receipt signed by the receiver, postage prepaid, addressed to the party at its address specified below (or at any other address that the party may hereafter specify to the other parties in writing): Bank: Wachovia Bank, National Association 171 17th Street, N.W., 4th Floor GA4524 Atlanta, Georgia 30363 Attn: Catherine Cowan, Director Borrower: Innotrac Corporation 6655 Sugarloaf Pkwy. Duluth, Georgia 30097 Attn: Scott D. Dorfman 10.5 GOVERNING LAW. This Agreement and the Loan Documents shall be deemed contracts made under the laws of the Jurisdiction and shall be governed by and construed in accordance with the laws of the Jurisdiction (excluding its conflict of laws provisions if such provisions would require application of the laws of another jurisdiction) except insofar as the laws of another jurisdiction may, by reason of mandatory provisions of law, govern the perfection, priority and enforcement of security interests in the Collateral. 10.6 SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and shall inure to the benefit of Borrower and Bank, and their respective successors and assigns; provided, that Borrower may not assign any of its rights hereunder without the prior written consent of Bank, and any such assignment made without such consent will be void. 10.7 COUNTERPARTS; TELECOPIED SIGNATURES. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed and delivered shall be deemed an original and all of which when taken together shall constitute but one and the same instrument. Any signature delivered by a party by facsimile transmission shall be deemed to be an original signature hereto. 10.8 NO USURY. Regardless of any other provision of this Agreement, the Note or in any other Loan Document, if for any reason the effective interest should exceed the maximum lawful interest, the effective interest shall be deemed reduced to, and shall be, such maximum lawful interest, and (i) the amount which would be excessive interest shall be deemed applied to the reduction of the principal balance of the Note and not to the payment of interest, and (ii) if the loan evidenced by the Note has been or is thereby paid in full, the excess shall be returned to the party paying same, such application to the principal balance of the Note or the refunding of excess to be a complete settlement and acquittance thereof. 10.9 POWERS. All powers of attorney granted to Bank are coupled with an interest and are irrevocable. 37 10.10 APPROVALS; AMENDMENTS. If this Agreement calls for the approval or consent of Bank, such approval or consent may be given or withheld in the discretion of Bank unless otherwise specified herein. This Agreement and the other Loan Documents may not be modified, altered or amended, except by an agreement in writing signed by Borrower and Bank and may not be modified in any manner adverse to a provider under any secured or guarantied Swap Agreement without that provider's prior written consent. 10.11 PARTICIPATIONS AND ASSIGNMENTS. Bank shall have the right to enter into one or more participations with other lenders with respect to the Obligations and, upon receipt of Borrower's prior written consent (which consent shall not be unreasonably withheld or delayed), to assign to one or more assignees all or a portion of its interest, rights and obligations under the Loan Documents, provided that any such consent from Borrower shall not be required during the continuance of an Event of Default. Upon prior notice to Borrower of such participation or assignment, Borrower shall thereafter furnish to such participant or assignee any information furnished by Borrower to Bank pursuant to the terms of the Loan Documents. Nothing in this Agreement or any other Loan Document shall prohibit Bank from pledging or assigning this Agreement and Bank's rights under any of the other Loan Documents, including collateral therefor, to any Federal Reserve Bank in accordance with applicable law. 10.12 DEALINGS WITH MULTIPLE BORROWERS. If more than one Person is named as Borrower hereunder, all Obligations, representations, warranties, covenants and indemnities set forth in the Loan Documents to which such Person is a party shall be joint and several. Bank shall have the right to deal with any individual of any Borrower with regard to all matters concerning the rights and obligations of Bank hereunder and pursuant to applicable law with regard to the transactions contemplated under the Loan Documents. All actions or inactions of the officers, managers, members and/or agents of any Borrower with regard to the transactions contemplated under the Loan Documents shall be deemed with full authority and binding upon all Borrowers hereunder. 10.13 WAIVER OF CERTAIN DEFENSES. To the fullest extent permitted by applicable law, upon the occurrence of any Event of Default, neither Borrower nor anyone claiming by or under Borrower will claim or seek to take advantage of any law requiring Bank to attempt to realize upon any Collateral or collateral of any surety or guarantor, or any appraisement, evaluation, stay, extension, homestead, redemption or exemption laws now or hereafter in force in order to prevent or hinder the enforcement of this Agreement. Borrower, for itself and all who may at any time claim through or under Borrower, hereby expressly waives to the fullest extent permitted by law the benefit of all such laws. All rights of Bank and all obligations of Borrower hereunder shall be absolute and unconditional irrespective of (i) any change in the time, manner or place of payment of, or any other term of, all or any of the Obligations, or any other amendment or waiver of or any consent to any departure from any provision of the Loan Documents, (ii) any exchange, release or non-perfection of any other collateral given as security for the Obligations, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Obligations, or (iii) any other circumstance which might otherwise constitute a defense available to, or a discharge of, Borrower or any third party, other than payment and performance in full of the Obligations. 10.14 ADDITIONAL PROVISIONS. Time is of the essence of this Agreement and the other Loan Documents. This Agreement and the other Loan Documents, together with all other instruments, agreements and certificates executed by the parties in connection therewith or with reference thereto, embody the entire understanding and agreement between the parties hereto and thereto with respect to the subject matter hereof and thereof and supersede all prior agreements, understandings and inducements, whether express or implied, oral or written. No provision of this Agreement or any of the other Loan Documents shall be construed against or interpreted to the disadvantage of any party hereto by any court 38 or other governmental or judicial authority by reason of such party having or being deemed to have structured, drafted or dictated such provision. 10.15 INTEGRATION; FINAL AGREEMENT. This Agreement and the other loan documents represent the final agreement between the parties and may not be contradicted by evidence of prior, contemporaneous or subsequent oral agreements of the parties. There are no unwritten oral agreements between the parties. 10.16 LIMITATION ON LIABILITY; WAIVER OF PUNITIVE DAMAGES. EACH OF THE PARTIES HERETO, INCLUDING BANK BY ACCEPTANCE HEREOF, AGREES THAT IN ANY JUDICIAL, MEDIATION OR ARBITRATION PROCEEDING OR ANY CLAIM OR CONTROVERSY BETWEEN OR AMONG THEM (A "DISPUTE") THAT MAY ARISE OUT OF OR BE IN ANY WAY CONNECTED WITH THIS AGREEMENT, THE LOAN DOCUMENTS OR ANY OTHER AGREEMENT OR DOCUMENT BETWEEN OR AMONG THEM OR THE OBLIGATIONS EVIDENCED HEREBY OR RELATED HERETO, IN NO EVENT SHALL ANY PARTY HAVE A REMEDY OF, OR BE LIABLE TO THE OTHER FOR, (1) INDIRECT, SPECIAL OR CONSEQUENTIAL DAMAGES OR (2) PUNITIVE OR EXEMPLARY DAMAGES. EACH OF THE PARTIES HEREBY EXPRESSLY WAIVES ANY RIGHT OR CLAIM TO PUNITIVE OR EXEMPLARY DAMAGES THEY MAY HAVE OR WHICH MAY ARISE IN THE FUTURE IN CONNECTION WITH ANY DISPUTE, WHETHER THE DISPUTE IS RESOLVED BY ARBITRATION, MEDIATION, JUDICIALLY OR OTHERWISE. 10.17 BINDING ARBITRATION; PRESERVATION OF REMEDIES. (a) Binding Arbitration. Upon demand of any party hereto, whether made before or after institution of any judicial proceeding, any claim or controversy between parties hereto arising out of or relating to this Agreement or any other Loan Documents shall be resolved by binding arbitration conducted under and governed by the Commercial Financial Disputes Arbitration Rules (the "Arbitration Rules") of the American Arbitration Association (the "AAA") and the Federal Arbitration Act. Disputes may include, without limitation, tort claims, counterclaims, a dispute as to whether a matter is subject to arbitration, claims brought as class actions, or claims arising from documents executed in the future. A judgment upon the award may be entered in any court having jurisdiction. Notwithstanding the foregoing, this arbitration provision does not apply to disputes under or related to Swap Agreements. (b) Special Rules. All arbitration hearings shall be conducted in the city named in the address of Bank first stated above. A hearing shall begin within 90 days of demand for arbitration and all hearings shall conclude within 120 days of demand for arbitration. These time limitations may not be extended unless a party shows cause for extension and then for no more than a total of 60 days. The expedited procedures set forth in Rule 51 et seq. of the Arbitration Rules shall be applicable to claims of less than $1,000,000.00. Arbitrators shall be licensed attorneys selected from the Commercial Financial Dispute Arbitration Panel of the AAA. The parties do not waive applicable Federal or state substantive law except as provided herein. (c) Preservation and Limitation of Remedies. Notwithstanding the preceding binding arbitration provisions, the parties agree to preserve, without diminution, certain remedies that any party may exercise before or after an arbitration proceeding is brought. The parties shall have the right to proceed in any court of proper jurisdiction or by self-help to exercise or prosecute the following remedies, as applicable: (i) all rights to foreclose against any real or personal property or other security by exercising a power of sale or under applicable law by judicial foreclosure including a proceeding to confirm the sale; (ii) all rights of self-help including peaceful occupation of real property 39 and collection of rents, set-off, and peaceful possession of personal property; (iii) obtaining provisional or ancillary remedies including injunctive relief, sequestration, garnishment, attachment, appointment of receiver and filing an involuntary bankruptcy proceeding; and (iv) when applicable, a judgment by confession of judgment. Any claim or controversy with regard to any party's entitlement to such remedies is a Dispute. (d) Waiver of Jury Trial. THE PARTIES ACKNOWLEDGE THAT BY AGREEING TO BINDING ARBITRATION THEY HAVE IRREVOCABLY WAIVED ANY RIGHT THEY MAY HAVE TO JURY TRIAL WITH REGARD TO A DISPUTE. [Signatures on following page] 40 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed under seal as of the day and year first above written. INNOTRAC CORPORATION By /s/ Scott Dorfman ------------------------------------- Its President Attest: /s/ Dena Rosenzweig -------------------------------- Its: General Counsel [CORPORATE SEAL] Accepted in Atlanta, Georgia: WACHOVIA BANK, NATIONAL ASSOCIATION By /s/ Catherine Cowan ------------------------------------- Its Director 41 SCHEDULE OF EXHIBITS
Exhibit Section Reference Title - ------- ----------------- ----- A 2.1.2 Revolver Note Article 3 Exhibits: 3.1.2 3.1.2(g) ("Supporting Documents") Borrower Information Certificate Article 4 Exhibits: 4.3 4.3 ("Financing Condition") Direct or Contingent Liabilities 4.4 4.4 ("Litigation") Litigation 4.14 4.14 ("Corporate Structure") Agreements Relating to Equity Interests 4.16 4.16 ("Environmental") Environmental Disclosures Article 5 Exhibits: 5.6(a) 5.6(a) ("Periodic Borrowing Base Borrowing Base Certificate Information") 5.6(d) 5.6(d) ("Compliance and No Default Compliance and No Default Certificate Certificates") Article 6 Exhibits: 6.1 6.1 ("Debt") Scheduled Permitted Debt 6.2 6.2 ("Liens") Scheduled Permitted Liens 6.7 6.7 ("Transactions with Affiliates") Transactions with Affiliates
EXHIBIT A AMENDED AND RESTATED LINE OF CREDIT NOTE $25,000,000.00 March 28, 2006 FOR VALUE RECEIVED, the undersigned INNOTRAC CORPORATION, organized under the laws of the State of Georgia, ("Borrower"), promises to pay to the order of WACHOVIA BANK, NATIONAL ASSOCIATION ("Bank") at the place and times provided in the Agreement referred to below, the principal sum of TWENTY-FIVE MILLION DOLLARS ($25,000,000.00) or the principal amount of all Loans made by Bank from time to time pursuant to that certain Third Amended and Restated Loan and Security Agreement dated as of even date herewith (as amended, restated or otherwise modified, the "Agreement") by and between Borrower and Bank. Capitalized terms used herein and not defined herein shall have the meanings assigned thereto in the Agreement. The unpaid principal amount of this Revolver Note from time to time outstanding is subject to mandatory repayment from time to time as provided in the Agreement and shall bear interest as provided in the Agreement. All payments of principal and interest on this Revolver Note shall be payable to Bank or the holder of this Revolver Note in lawful currency of the United States of America in immediately available funds in the manner and location indicated in the Agreement or wherever else Bank or such holder may specify. This Revolver Note amends, restates and supersedes in its entirety that certain Third Amended and Restated Line of Credit Note dated May 10, 2004 (as previously amended) and is entitled to the benefits of, and evidences Obligations incurred under, the Agreement, to which reference is made for a description of the security for this Revolver Note and for a statement of the terms and conditions on which Borrower is permitted and required to make prepayments and repayments of principal of the Obligations evidenced by this Revolver Note and on which such Obligations may be declared to be immediately due and payable. This Revolver Note shall be governed, construed and enforced in accordance with the laws of the State of Georgia, without reference to the conflicts or choice of law principles thereof. Borrower hereby waives all requirements as to diligence, presentment, demand of payment, protest and (except as required by the Agreement) notice of any kind with respect to this Revolver Note. IN WITNESS WHEREOF, the undersigned has executed this Revolver Note under seal as of the day and year first written above. INNOTRAC CORPORATION By /s/ Scott Dorfman ------------------------------------- Name: Scott Dorfman Title: President Attest: /s/ Dena Rosenzweig -------------------------------- Name: Dena Rosenzweig Title: General Counsel [CORPORATE SEAL] EXHIBIT 3.1.2 BORROWER INFORMATION CERTIFICATE We, ____________________, the chief executive officer, and ______________, the chief legal officer of INNOTRAC CORPORATION, a Georgia corporation ("Borrower"), hereby certify with reference to the Third Amended and Restated Loan and Security Agreement dated as of even date herewith between Borrower and WACHOVIA BANK, NATIONAL ASSOCIATION ("Bank") (terms defined therein being used herein as therein defined), to Bank as follows: 1. NAMES, FORM, JURISDICTION OF ORGANIZATION AND TAX I.D. NUMBER. A. The exact name of Borrower as it appears in its certificate of incorporation or formation, as amended to date, is as follows: B. Set forth below is each other name Borrower has had since its organization, together with the date of the relevant change: C. The following is a list of all other names (including trade names or similar appellations) used by Borrower or any of its divisions or other business units at any time during the past five years: D. Except as set forth in Schedule 1 to this Certificate, Borrower has not changed its identity or structure or the jurisdiction of its organization in any way within the past five years. E. Borrower is organized as a _______________________ under the laws of _______________. F. Borrower's tax i.d. number is: _____________________________. G. Please provide the information in 1. A - F for each Subsidiary and Guarantor as applicable that is providing Collateral. For any individual Guarantor, if that Person is providing Collateral, please provide exact legal name. 2. CURRENT LOCATIONS. A. The chief executive office of Borrower is located at the following address:
Street Address County State - -------------- ------ -----
B. The following are all the places of business of Borrower and its Subsidiaries not identified above:
Street Address County State - -------------- ------ -----
C. The following are all the locations where Borrower and its Subsidiaries maintain any books or records relating to any Accounts:
Street Address County State - -------------- ------ -----
D. The following are all the locations not identified above where Borrower and its Subsidiaries maintain any Inventory, Equipment, Instruments, documents of title, warehouse receipts or other tangible Collateral:
Collateral Does Collateral Street Address County State Description Include Fixtures? - -------------- ------ ----- ----------- -----------------
E. The following are all the locations identified above where Borrower or the applicable Subsidiary is not the owner of the premises but is a tenant, together with the name and address of the landlord: Location Full Address: __________________________________________ Landlord's Name and Address: ____________________________________ F. The following are the names and addresses of all Persons other than the Borrower or a Subsidiary which have possession of any of Borrower's or a Subsidiary's Inventory, Equipment, Instruments, documents of title, warehouse receipts or other tangible Collateral:
Collateral Name Street Address County State Description - ---- -------------- ------ ----- -----------
G. The following are all locations where the Borrower or a Subsidiary maintains any of the following: 1. wellheads or mineheads with respect to which Borrower has an interest in unextracted minerals or the like (including oil and gas); 2. timber to be cut; or 3. equipment used in farming operations, farm products, grain or crops growing or to be growing.
Collateral Name Street Address County State Description - ---- -------------- ------ ----- -----------
H. The following are the names and jurisdictions of incorporation or organization of each company with respect to which the Borrower or a Subsidiary holds certificated securities, together with information identifying such securities: I. The following are all of the securities accounts, custody account(s) and mutual funds of Borrower and its Subsidiaries, together with account number(s) and the name(s) and address(es) of the broker or other securities intermediary that maintains the account: J. The following are all the Deposit Accounts of Borrower and its Subsidiaries, together with the account number(s) and the name(s) and address(es) of the bank of deposit where each account is maintained. K. The following are all items of Collateral with respect to which a certificate of title has been issued by any jurisdiction or with respect to which Borrower or a Subsidiary has or intends to file an application for a certificate of title. Attached hereto as Schedule 2(J) are all certificates of title, applications for certificates of title or similar evidence of ownership of such Collateral. 3. PRIOR LOCATIONS. A. Set forth below is the information required by subparagraphs A., B. and C. of paragraph 2 with respect to each location or place of business maintained by Borrower or any Subsidiary at any time during the past five years: B. Set forth below is the information required by subparagraphs D., F. and G. of paragraph 2 with respect to each location or bailee where or with whom Collateral has been lodged at any time during the past four months: 4. UNUSUAL TRANSACTIONS. Except as set forth in Schedule 1 to this Certificate, all Accounts have been originated by Borrower or a Subsidiary, as applicable, and all Inventory and Equipment has been acquired by Borrower or as Subsidiary, as applicable, in the ordinary course of its business from a dealer in goods of that type. 5. EXISTING LIENS. As of the date hereof, there are no (i) UCC financing statements naming Borrower or a Subsidiary as debtor or seller and covering any of the Collateral, (ii) notices of the filing of any federal tax lien (filed pursuant to section 6323 of the Code) or any lien of the PBGC (filed pursuant to Section 4068 of ERISA) covering any of the Collateral or (iii) judgment liens filed against Borrower or any Subsidiary, except Permitted Liens 6. PATENTS, TRADEMARKS AND COPYRIGHTS. All Patents, Trademarks and Copyrights owned by Borrower or any Subsidiary as of the date hereof and all Patent Licenses, Trademark Licenses and Copyright Licenses to which Borrower or a Subsidiary is a party, as licensor or licensee, as of the date hereof are listed on Schedule 6 hereto. 7. MATERIAL CONTRACTS. Material contracts and agreements are specified in Schedule 7 hereto. IN WITNESS WHEREOF, we have hereunto set our hands this _________ day of ________________________________________, 200__. ---------------------------------------- Title ---------------------------------------- Title SCHEDULE 1 TO BORROWER INFORMATION CERTIFICATE CHANGES OF NAME, IDENTITY OR CORPORATE STRUCTURE; UNUSUAL TRANSACTIONS SCHEDULE 2(J) TO BORROWER INFORMATION CERTIFICATE CERTIFICATES OF TITLE SCHEDULE 6 TO BORROWER INFORMATION CERTIFICATE LIST OF PATENTS, TRADEMARKS AND COPYRIGHTS U.S. PATENTS
Number Date Issue Title Patent Holder - ------ ---- ----------- -------------
PATENT LICENSES
Licensor Licensee Patent Number Date - -------- -------- ------------- ----
TRADEMARK REGISTRATIONS
Trademark Number Registration Date - --------- ------ -----------------
TRADEMARK APPLICATIONS
Trademark Number Registration Date - --------- ------ -----------------
TRADEMARK LICENSES COPYRIGHTS COPYRIGHT LICENSES SCHEDULE 7 TO BORROWER INFORMATION CERTIFICATE MATERIAL CONTRACTS EXHIBIT 5.6(D) COMPLIANCE AND NO DEFAULT CERTIFICATES In accordance with the terms of the Third Amended and Restated Loan and Security Agreement dated _____________, 2 _____ (the "Loan Agreement") by and between Wachovia Bank, National Association and Innotrac Corporation ("Borrower"), I hereby certify that: 1. I am the [president] [controller] of Borrower; 2. The enclosed financial statements are prepared in accordance with generally accepted accounting principles; 3. No Default (as defined in the Loan Documents) or any event which, upon the giving of notice or lapse of time or both, would constitute such a Default, has occurred. 4. Borrower is in compliance with the Financial Covenant(s) set forth in the Loan Agreement, as demonstrated by the calculations contained in the Covenant Compliance Certificate attached hereto as Schedule 1. ---------------------------------------- Signature Name: ---------------------------------- Title: --------------------------------- SCHEDULE 1 COVENANT COMPLIANCE CERTIFICATE INNOTRAC CORPORATION For the fiscal ________________________ ended ____________________ ALL CAPITALIZED TERMS USED BUT NOT DEFINED HEREIN SHALL HAVE THE MEANINGS GIVEN IN THE LOAN AGREEMENT.
COVENANT ACTUAL REQUIRED - -------- ------ --------
[Insert Financial Covenant Calculations] EXHIBIT 6.1 SCHEDULED PERMITTED DEBT The following shall be Permitted Debt: EXHIBIT 6.2. SCHEDULED PERMITTED LIENS The following shall be Permitted Liens: EX-10.20(B) 8 g00505exv10w20xby.txt EX-10.20(B) FIRST AMENDMENT TO LEASE AGREEMENT DATED MAY 1, 2004 Exhibit 10.20(b) First Amendment to Lease Agreement This First Amendment to Lease Agreement dated May 1, 2005 is attached to and made a part of the Lease Agreement dated August 16, 2004 (the "Original Lease") by and between Centerpoint 800 LLC ("Landlord") and INNOTRAC CORPORATION ("Tenant"). WHEREAS, Landlord and Tenant are parties to the Original Lease dated August 16, 2004 demising certain premises containing 75,000 s.f. ("Premises") in the building known as Centerpoint 800 (the "Building"). WHEREAS, Landlord and Tenant have agreed to expand the Premises and amend the Lease upon the terms and conditions set forth herein. NOW THEREFORE, for valuable consideration and intending to be legally bound, the parties agree to amend and modify the Lease as follows: 1. Expansion of Premises. On the Expansion Premises Turnover Date (as hereinafter defined), Landlord shall deliver to Tenant possession of additional premises (the "Expansion Premises") located in the Building containing approximately 43,722 square feet as more particularly described on Exhibit "A". Effective as of the Expansion Premises Turnover Date, the "Premises" when used in the Lease shall mean, collectively, the Existing Premises and the Expansion Premises totaling 118,722 square feet. 2. Expansion Premises Turnover Date. Landlord shall deliver possession of the Expansion Premises to Tenant on May 1, 2005. The date on which Landlord delivers possession of the Expansion Premises to Tenant shall be the "Expansion Premises Turnover Date" as such term is utilized in this Amendment. 3. Rent Payments. Tenant shall be obligated to pay Basic Rental and all expenses pertaining to the taxes, insurance and operating expenses for the Expansion Premises pursuant to the Lease effective as of Expansion Premises Turnover Date. Basic Rental for the existing Premises shall follow the new Basic Rental schedule attached as Exhibit "B". 4. Proportionate Share: Taxes, Insurance and Operating Expenses. Effective as of the Expansion Premises Turnover Date Tenant's Proportionate Share shall be sixty-six point one-five percent (66.15%). The definitions of Annual Operating Expenses applicable to Existing Premises shall remain as specified in the Lease. 5. Condition of Expansion Premises. Tenant accepts the Expansion Premises in "AS-IS" and "WHERE-IS" condition. 6. Brokers. Tenant represents and warrants to Landlord that it has not employed, dealt with or negotiated with any broker or agent other than McConnell Johnson Real Estate Company, LLC ("McConnell") and CBRE in connection with this Amendment. Tenant agrees to indemnify, defend and hold Landlord harmless from and against any and all demands, actions, 1 loss, damage or liability, including, without limitation, attorneys' fees, to which Landlord may now or hereafter become subject as a result of a breach by Tenant of its representation contained in the immediately preceding sentence. Landlord acknowledges any sums due McConnell in connection with this Amendment shall be the responsibility of Landlord. 7. Miscellaneous. (a) In the event any of the terms of this Amendment are inconsistent with the terms of the Lease, the terms of this Amendment shall take precedence. (b) All capitalized terms in this Amendment not otherwise defined herein shall have the meaning set forth in this Lease. This Amendment may be signed in counterparts. (c) All of the recitals set forth above are hereby ratified and confirmed by Landlord and Tenant and incorporated herein by reference. (d) The individual signing below on behalf of the Tenant represents that she/he has the authority and power to bind Tenant. (e) The submission by Landlord to Tenant of this Amendment shall have no binding force or effect, shall not constitute an option of the leasing of the Expansion Premises nor confer any rights or impose any obligations upon either party until the execution thereof by Landlord and the delivery of an executed original copy thereof to Tenant. (f) All of the terms, conditions and provisions of the Lease are incorporated herein by reference as fully as though set forth in this Amendment. All exhibits referred to in this Amendment are attached thereto and incorporated herein by reference. (g) Landlord and Tenant hereby ratify and confirm the Lease, which, except as specifically modified herein, shall remain in full force and effect unmodified. IN WITNESS WHEREOF, the parties have executed this Amendment the date first above written. ATTEST: LANDLORD: CENTERPOINT 800 LLC By: /s/ Paul M. McConnell - ------------------------------------- ------------------------------------ Name: Paul M. McConnell Title: Managing Member TENANT: ATTEST: INNOTRAC CORPORATION /s/ Illegible By: /s/ Robert Toner - ------------------------------------- ------------------------------------ Name: Robert Toner Title: VP of Logistics 2 EXHIBIT "A" (MAP) 3 EXHIBIT "B" Basic Rental as of MAY 1, 2005 EXISTING & EXPANSION PREMISES RENT SCHEDULE
Square Basic Rental Basic Rental Term Rate Feet per Month per year - ----------------- ---------- ------- ------------ ------------ 05/01/05-10/15/05 $3.75/s.f. 118,722 $37,100.63* $445,207.50* 10/16/05-10/15/06 $3.85/s.f. 118,722 $38,089.98* $457,079.70* 10/16/06-10/15/07 $3.95/s.f. 118,722 $39,079.33* $468,951.90*
* Plus Additional Rent owed as outlined in Lease Agreement. 4 EX-10.22 9 g00505exv10w22.txt EX-10.22 LEASE DATED DECEMBER 28, 2005 Exhibit 10.22 LEASE THIS LEASE (the "Lease") is executed this 28th day of December, 2005, by and between. DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited partnership ("Landlord"), and INNOTRAC CORPORATION, a Georgia corporation ("Tenant"). ARTICLE 1 - LEASE OF PREMISES Section 1.01. Basic Lease Provisions and Definitions. (a) Leased Premises (shown outlined on EXHIBIT A attached hereto): the Rentable Area (as defined in (b) below) within a building to be constructed by Landlord and located at 2305 Litton Lane, Hebron, Kentucky 41048 (the "Building"), to be constructed on an approximate 29.69 acre site, the legal description of which is attached hereto and made a part hereof as EXHIBIT A-1 (the "Site") in Hebron Industrial Park (the "Park"). The Leased Premises consists of approximately 356,160 rentable square feet of space (the "Initial Space") and approximately 290,308 rentable square feet of space (the "Remaining Space") in the Building. The Initial Space and the Remaining Space are each shown on EXHIBIT A. (b) Rentable Area: Month 1 approximately 348,616 square feet* Months 2-12 approximately 356,160 square feet* Months 13-60 approximately 646,468 square feet
* or such greater area occupied by Tenant for a Permitted Use (as defined below) as measured from the outside surface of the exterior wall of the Building to the outside surface of the exterior wall of the Building by Landlord from time-to-time pursuant to Section 1.0l(e) below. (c) Tenant's Proportionate Share: 100%, subject to Section 16.17. (d) Minimum Annual Rent: Month 1 $ 90,640.16 (1 month)** Months 2 -12 $1,018,617.60 (11 months)* Year 2 $2,055,768.24*** Year 3 $2,101,020.96 Year 4 $2,139,809.04 Year 5 $2,185,061.88
(e) Monthly Rental Installments: Month 1 $90,640.16 per month** Months 2-12 $92,601.60 per month* Month&sl3-24 $171,314.02 per month*** Months 25-36 $175,085.08 per month Months 37-48 $178,317.42 per month Months 49-60 $182,088.49 per month,
* Based on 356,160 rentable square feet, beginning on die Commencement Date (as defined in Section 2.01): Landlord and Tenant agree to jointly measure the area of the Leased Premises actually occupied by Tenant for the Permitted Use every thirty (30) days following the Commencement Date during the first twelve (12) months of the Lease Term, and Tenant's Monthly Rental Installments and Minimum Annual Rent shall be adjusted using the net rental rate of Three Dollars and Twelve Cents ($3.12) per square foot for any square footage in excess of the Initial Space occupied and used by Tenant for the storage and/or shipment of third party inventory during the first twelve (12) months of the Lease Term only. Upon such measurement and adjustment the rent shall not be reduced. ** Based upon 348,616 rentable square feet which consists of the Initial Space less the Office Space (as hereinafter defined) *** Based on 646,468 reusable square feet (f) [INTENTIONALLY OMITTED]. (g) Target Commencement Date: May 1,2006. (h) Lease Term: Five (5) years from the Commencement Date, as may be extended pursuant to the provisions of this Lease. (i) Security Deposit: $50,000,00. (j) Brokers: Duke Realty Services Limited Partnership representing Landlord and Grubb & Ellis West Shell Commercial representing Tenant. (k) Permitted Use: General office, warehousing, distribution, and storage of consumer goods, call centers, fulfillment and handling for third parties and related purposes. (l) Address for notices and payments are as follows: Landlord: Duke Realty Limited Partnership Attn.: Senior Property Manager 4555 Lake Forest Drive, Suite 400 Cincinnati, OH 45242 With Payments to: Duke Realty Limited Partnership 75 Remittance Drive, Suite 3205 Chicago, IL 60675-3205 Tenant (prior to occupancy): Innotrac Corporation Attn.: Robert Toner, Vice President 6655 Sugarloaf Parkway Duluth, GA 30097 With a Copy to: Kitchens Kelley Gaynes, P.C. Attn.: David F. Cooper, Esq. 11 Piedmont Center, Suite 900 3495 Piedmont Road, NE Atlanta, GA 30305 Tenant (following occupancy): Innotrac Corporation 2305 Litton Lane Hebron, KY 41048. and Innotrac Corporation Attn.: Robert Toner, Vice President 6655 Sugarloaf Parkway Duluth, GA 30097 With a Copy to: Kitchens Kelley Gaynes, P.C. Attn.: David F. Cooper, Esq. 11 Piedmont Center, Suite 900 3495 Piedmont Road, NE Atlanta, GA 30305. (m) Goarantor(s): Not applicable. -2- EXHIBITS Exhibit A Initial Space, Leased Premises, Refusal Space, Building Parking, Monument Sign Exhibit A-l Legal Description of Site Exhibit B-l Plans and Specifications Exhibit B-2 Project Schedule Exhibit B-3 Rules of Conduct Exhibit B-4 Letter of Understanding Exhibit B-5 Materials Handling Consultant's Requirements Exhibit C Operating Expense Exclusions Exhibit D Rules and Regulations Exhibit E Load Capacity Exhibit F Maintenance Criteria Section 1.02. Lease of Premises. Landlord hereby leases to Tenant and Tenant hereby leases from Landlord the Leased Premises, under the terms and conditions herein, together with a non-exclusive right, in common with other tenants of the Building, if any, to use the following (collectively, the "Common Areas"): the areas of the Building and the underlying land and improvements thereto that are designed for use in common by all tenants of the Building and their respective employees, agents, customers, invitees and others. ARTICLE 2 - TERM AND POSSESSION Section 2.02. Term. The Lease Term shall commence as of the date (the "Commencement Date") that Substantial Completion (as defined in Section 2.02 below) of the Initial Space Work (as defined in Section 2.02) occurs, but in no event shall Minimum Annual Rent be required to be paid earlier than May 1, 2006 unless Tenant is receiving and/or shipping Target (defined below) product in the Initial Space. Section 2.02. Construction of Improvement. (a) Landlord shall construct in a good and workmanlike manner the Building and the interior tenant finish improvements (collectively, the "Work") depicted and described in the plans and specifications set forth in EXHIBIT B-1 attached hereto and made a part hereof (the "Plans and Specifications"), and in accordance with all applicable laws, codes and regulations. The Work described in the Plans and Specifications consists of the portion of the Work to be performed in and with respect to the Initial Space (the "Initial Space Work") and the portion of the Work to be performed in and with respect to the Remaining Space (the "Remaining Space Work") Landlord shall supply all work, labor, materials equipment and everything else necessary to complete the Work, which shall include, without limitation, the installation of landscaping, parking lots, driveways, roadways, and all improvements as shown on the Plans and Specifications for the benefit of the Leased Premises. To the extent that street and roadway improvements are contemplated in connection with the development and use of the Building, Site and Park but not fully shown in the Plans and Specifications, Landlord shall assure that such street and roadway improvements are completed as part of the Work. (b) The schedule for the construction, installation and completion of the Work is attached hereto and made a part hereof as EXHIBIT B-2 (the "Project Schedule"). Landlord shall notify Tenant of any material changes to the Project Schedule. Tenant agrees to coordinate with Landlord regarding the installation of Tenant's phone and data wiring and any other fixtures, trade fixtures (such as racking), furniture and materials handling equipment and systems that are not a part of the Work that Tenant desires to install in the Leased Premises prior to Substantial Completion ("Tenant Equipment"). If and to the extent permitted by applicable laws, rules and ordinances, Tenant shall have the right to enter (i) the warehouse portion of the Initial Space (the "Warehouse Space") on and after March 24, 2006, by which date Landlord shall have performed the Initial Space Work to a state of completion described in EXHIBIT B-5, (ii) the Remaining Space on and after July 3, 2006, and (iii) the office portion of the Initial Space (the "Office Space") on and after May 1, 2006 for wiring and cabling and May 22, 2006 for furniture installation (the "Office Fit-Out"); in order to install Tenant Equipment in the Warehouse Space and the Remaining Space and to complete the Office Fit-Out in the Office Space, and otherwise prepare such space, for occupancy, which right of entry shall expressly exclude making any structural modifications to the Building; provided, the anchoring of Tenant Equipment shall not be deemed a material structural modification, but any such anchoring shall require Landlord's prior written approval. Tenant acknowledges that Tenant may not support or anchor Tenant Equipment from the roof of the Building. During any entry permitted under this Section 2.02(b) (a) Tenant shall comply with all terms and conditions of this Lease other than the obligation to pay rent, (b) Tenant shall not interfere with Landlord's completion of the Work, (c) Tenant shall cause its personnel and contractors to comply with the terms and conditions of Landlord's rules of conduct attached hereto as EXHIBIT B-3, and (d) Tenant -3- shall not begin receiving and/or shipping third party product. Tenant acknowledges that Tenant shall be responsible for obtaining all applicable permits and inspections relating to any such entry by Tenant. (c) Landlord shall provide Tenant with an allowance equal to Five Thousand Dollars ($5,000.00) ("Allowance"). The Allowance shall be applied solely toward the actual cost of installing, at Tenant's option, (i) a monument sign in front of the Building in the location shown on EXHIBIT A, or (ii) an exterior Building sign bearing Tenant's trade name and logo. The design, form and content of any sign shall be approved by Landlord and Tenant in advance of installation, subject to all zoning and other municipal and county regulations. Landlord shall install the signage, provided that any signage costs which exceed the Signage Allowance shall be paid by Tenant to Landlord within thirty (30) days of Tenant's receipt of an invoice therefor. (d) Tenant shall have the right to request changes to the Plans and Specifications at any time by way of written change order (each, a "Change Order", and collectively, "Change Orders"). Provided such Change Order is reasonably acceptable to Landlord, Landlord shall prepare and submit promptly to Tenant a memorandum setting forth the impact on cost and schedule resulting from said Change Order (the "Change Order Memorandum of Agreement"), but not less than three (3) business days following a Change Order request. Tenant shall, within three (3) business days following Tenant's receipt of the Change Order Memorandum of Agreement, either (i) execute and return the Change Order Memorandum of Agreement to Landlord, or (ii) be deemed to have retracted its request for the Change Order. At Landlord's option, Tenant shall pay to Landlord (or Landlord's designee), within ten (10) days following Landlord's request, any increase in the cost to construct the Work resulting from the Change Order, as set forth in the Change Order Memorandum of Agreement. Landlord shall not commence any work set forth in a Change Order until such time as Tenant has delivered to Landlord the Change Order Memorandum of Agreement executed by Tenant and, if applicable, Tenant has paid Landlord in full for said Change Order. (e) At least thirty (30) days prior to Substantial Completion of the Initial Space Work in the Warehouse Space or the Office Space or tee Remaining Space Work, as the case may be, Landlord shall notify Tenant as to when such Substantial Completion will occur. Such work shall be deemed to be substantially completed ("Substantially Complete" or "Substantial Completion") at such time as (i) all the improvements described in the Plans and Specifications with respect to such work have been completed, subject only to minor punchlist items to be identified by Tenant and Landlord during a joint inspection of the applicable space prior to Tenant's occupancy thereof (other than for purposes permitted under Section 2.02(b)). (ii) a certificate of occupancy for such space has been issued, or other similar authorization has been issued, by the appropriate governmental authority that permits Tenant to operate its business from such space; provided that the certificate of occupancy for the Warehouse Space may be a temporary certificate permitting Tenant to receive and store third party inventory only, and, (iii) all utilities, including water, sewer, gas, electric and telephone, are immediately available for Tenant's use in such space. "Tenant Delay" shall mean any delay after November 3, 2005 in the completion of the Initial Space Work in the Warehouse Space or the Office Space or the Remaining Space Work, as the case may be, to the extent attributable to acts or omissions of Tenant that actually cause a delay in the performance and completion of such work, including, without limitation delays that may be caused by (i) Tenant's failure to meet any time deadlines specified herein, (ii) Change Orders, (iii) the performance of any other work in such space by any person, firm or corporation employed by or on behalf of Tenant, or any failure to complete or delay in completion of such work to the extent not attributable to Landlord's failure to make such space available at the time or in the condition required under Section 2.02(b), (iv) Landlord's inability to obtain an occupancy permit for such space, because of the need for completion of all or a portion of improvements, including, without limitation, Tenant Equipment, being installed in such space directly by Tenant and which are not the responsibility of Landlord, and (v) any other act or omission of Tenant. (f) Notwithstanding anything to the contrary contained in the Lease, if Substantial Completion of the Initial Space Work in the Warehouse Space is delayed beyond the Target Commencement Date as a result of Tenant Delay, then, for purposes of determining the Commencement Date, Substantial Completion of Work shall be deemed to have occurred on the date that Substantial Completion of such work would have occurred but for such Tenant Delay. In the event the Landlord fails to Substantially Complete such work on or before May 6, 2006, subject to Tenant Delay and force majeure, then (i) Tenant shall be entitled to an abatement of one (1) day's Minimum Annual Rent for each day beyond such date that such work is not Substantially Completed, said abatement to commence at such time as Minimum Annual Rent becomes due and payable by Tenant hereunder, and (ii) Landlord shall reimburse Tenant for forty percent (40%) of the amounts that are payable and paid as damages by Tenant to Target Corporation or Target.com ("Target") on account of delays in achieving post-May 6, 2006 milestones pursuant to that certain agreement between Tenant and Target dated October 12, 2005 (the "Target Agreement"), which reimbursement shall be payable by Landlord within fifteen (15) days following the date that Tenant delivers to Landlord evidence that such amounts have been paid to Target -4- by Tenant. Tenant represents to Landlord that the schedule of liquidated damages payable by Tenant to Target on account of missed post-May 6, 2006 milestones under the Target Agreement is: (i) $1,000 per day for each of the first 15 days following the Milestone Achievement Date (as defined in the Target Agreement) in which the Milestone (as defined in the Target Agreement) is failed to be achieved, (ii) $2,500 per day for each of the days following the 15th day but prior to the 30th day following the Milestone Achievement Date in which the Milestone is failed to be achieved, and (iii) $5,000 per day for each day following the 30th day following the Milestone Achievement Date in which the Milestone is failed to be achieved; provided, however, if the missed Milestone is the Go-Live Date (as defined in the Target Agreement), then the amount of liquidated damages is (i) $60,000 for the first week of delay after the Go-Live Date, (ii) $70,000 for the second week of delay after the Go-Live Date, and (iii) $15,000 per day thereafter, and said liquidated damages are specified in the Target Agreement to be Target.com's exclusive remedy. (g) Promptly following the Substantial Completion of the Initial Space Work in the Warehouse Space and of the Remaining Space Work, Tenant shall execute Landlord's Letter of Understanding in substantially the form attached hereto as EXHIBIT B-4 and made a part hereof. If Tenant takes possession of and occupies the initial Space or the Remaining Space, or any portion thereof, other than for purposes permitted under Section 2.02(b). Tenant shall be deemed to have accepted such space and that the condition of such space and the Building was at the time satisfactory and in conformity with the provisions of this Lease in all respects, subject to any punchlist items and the performance of Landlord's obligations under this Lease. (h) Landlord warrants that all Work will be free of defects in workmanship and/or materials for a period of one (1) year from the date of Substantial Completion of all the Work. Landlord further warrants that any defects in workmanship and/or materials occurring within the period covered by this warranty shall be remedied, including revisions thereto that may be required to correct a design or engineering defect at Landlord's cost and expense, to Tenant's reasonable satisfaction. Landlord shall exercise for the benefit of Tenant all manufacturer's and subcontractor warranties. Section 2.03. Surrender of the Premises. Upon the expiration or earlier termination of this Lease Tenant shall, at its sole cost and expense, immediately (a) surrender the Leased Premises to Landlord in broom-clean condition and in good order, condition and repair, (b) remove from the Leased Premises (i) Tenant's Property (as defined in Section 8.01 below), (ii) all data and communications wiring and cabling (including above ceiling, below raised floors and behind walls), and (iii) any alterations required to be removed pursuant to Section 7.03 below, and (c) repair any damage caused by any such removal and restore the Leased Premises to the condition existing upon the Commencement Date, reasonable wear and tear excepted, and all of Tenant's Property that is not so removed within thirty (30) days following Landlord's written demand therefor shall be conclusively deemed to have been abandoned, and Landlord shall be entitled to dispose of such property at Tenant's cost without incurring any liability to Tenant. This Section 2.03 shall survive the expiration or any earlier termination of this Lease. Section 2.04. Holding Over. If Tenant retains possession of the Leased Premises after me expiration or earlier termination of this Lease, Tenant shall be a tenant at sufferance at one hundred fifty percent (150%) of the Monthly Rental Installments and Annual Rental Adjustment (as hereinafter defined) for the Leased Premises in effect upon the date of such expiration or earlier termination, and otherwise upon the terms, covenants and conditions herein specified, so far as applicable. Acceptance by Landlord of rent after such expiration or earlier termination shall not result in a renewal of this Lease, nor shall such acceptance create a month-to-month tenancy. In the event a month-to-month tenancy is created by operation of law, either party shall have the right to terminate such month-to-month tenancy upon thirty (30) days' prior written notice to the other, whether or not said notice is given on the rent paying date. This Section 2.04 shall in no way constitute a consent by Landlord to any holding over by Tenant upon the expiration or earlier termination of this Lease, nor limit Landlord's remedies in such event. ARTICLE 3 - RENT Section 3.01. Base Rent. Tenant shall pay to Landlord the Minimum Annual Rent in the Monthly Rental Installments in advance, without demand, deduction or offset, on the Commencement Date and on or before the first day of each and every calendar month thereafter during the Lease Term. The Monthly Rental Installments for partial calendar months shall be prorated. Notwithstanding any provision of this Lease to the contrary, in the absence of Tenant receiving and/or shipping Target product in the Remaining Space, die installation of Tenant's Equipment within the Remaining Space prior to the thirteenth (13th) month of the Lease Term shall not require Tenant to commence paying Minimum Annual Rent on the Remaining Space. -5- Section 3.02. Annual Rental Adjustment Definitions. (a) "Annual Rental Adjustment" shall mean the amount of Tenant's Proportionate Share of Operating Expenses for a particular calendar year. (b) "Operating Expenses" shall mean the amount of all of Landlord's costs and expenses paid or incurred in operating, repairing, replacing and maintaining the Building and the Common Areas in good condition and repair for a particular calendar year (including all additional costs and expenses that Landlord reasonably determines that it would have paid or incurred during such year if the Building had been fully occupied), including by way of illustration and not limitation, the following: all Real Estate Taxes (as hereinafter defined), insurance premiums and deductibles; water, sewer, electrical and other utility charges other than the separately billed electrical and other charges paid by Tenant as provided in this Lease (or other tenants in the Building); painting; stormwater discharge fees; tools for Landlord's employees and supplies; repair costs; landscape maintenance costs; access patrols; license, permit and inspection fees; management fees; administrative fees; supplies, costs, wages and related employee benefits payable for the management, maintenance and operation of the Building; maintenance, repair and replacement of the driveways, parking areas, curbs and sidewalk areas (including snow and ice removal), landscaped areas, drainage strips, sewer lines, exterior walls, foundation, structural frame, roof, gutters and lighting; and maintenance and repair costs, dues, fees and assessments incurred under any covenants or charged by any owners association. The cost of any Operating Expenses that are Capital Items (as defined in and not excluded pursuant to EXHIBIT C) shall be amortized over the useful life of the improvement (as reasonably determined by Landlord), and only the amortized portion shall be included in Operating Expenses. The Annual Rental Adjustment shall be prorated for partial calendar years during the Lease Term. Notwithstanding the foregoing, Operating Expenses shall exclude the items listed on EXHIBIT C attached hereto and made a part hereof. (c) "Tenant's Proportionate Share of Operating Expenses" shall mean an amount equal to the product of Tenant's Proportionate Share times the Operating Expenses. (d) "Real Estate Taxes" shall mean any form of real estate tax or assessment or service payments in lieu thereof, and any license fee, commercial rental tax, improvement bond or other similar charge or tax (other than inheritance, income, capital levy, sales, excise, franchise, gift, succession, inheritance, corporate, partnership, estate or transfer taxes) imposed upon the Building or Common Areas, or against Landlord's business of leasing the Building, by any authority having the power to so charge or tax, together with costs and expenses of contesting the validity or amount of the Real Estate Taxes. Notwithstanding any provisions to the contrary. Landlord shall promptly pay all Real Estate Taxes before the imposition of any interest and penalty thereon by the applicable taxing authority and if Landlord fails to pay any Real Estate Taxes before the imposition of any interest and penalty thereon by the applicable taxing authority, Landlord shall be solely responsible for the interest and penalties and, at Tenant's option with prior written notice to Landlord, Tenant may pay directly to the applicable taxing authorities such Real Estate Taxes and setoff the same against Minimum Annual Rental thereafter due. (e) Operating Expenses shall be reduced by all cash discounts, trade discounts, or quantity discounts received by Landlord or Landlord's managing agent in the purchase of any goods, utilities, or services in connection with the operation of the Building. Landlord will make payments for goods, utilities, or services in a timely manner in order to obtain the maximum possible discount. Operating expenses shall also be reduced by the amount of any tax abatements, to the extent the taxes abated are otherwise includable as Operating Expenses. (f) If any facilities, services or utilities used in connection with the Building are provided from another building owned or operated by Landlord or vice-versa, the costs incurred by Landlord in connection with them will be allocated to Operating Expenses by Landlord on an equitable basis if and to the extent that such expenses are permitted to be included within the meaning of Operating Expenses. Section 3.03. Payment of Additional Rent. (a) Any amount required to be paid by Tenant hereunder (in addition to Minimum Annual Rent) and any charges or expenses incurred by Landlord on behalf of Tenant under {he terms of this Lease shall be considered "Additional Rent" payable in the same manner and upon the same terms and conditions as the Minimum Annual Rent reserved hereunder, except as set forth herein to the contrary. Any failure on the part of Tenant to pay such Additional Rent when and as the same shall become due shall entitle Landlord to the remedies available to it far non-payment of Minimum Annual Rent. -6- (b) In addition to the Minimum Annual Rent specified in this Lease, commencing as of the Commencement Date, Tenant shall pay to Landlord as Additional Rent for the Leased Premises, in each calendar year or partial calendar year during the Lease Term, an amount equal to the Annual Rental Adjustment for such calendar year; provided, if the Commencement Date occurs at any time other than the commencement or end of a calendar year, the Annual Rental Adjustment and Real Estate Taxes shall be prorated based on the date of the Commencement Date. Landlord shall estimate the Annual Rental Adjustment annually, and written notice thereof shall be given to Tenant prior to the beginning of each calendar year. Tenant shall pay to Landlord each month, at the same time the Monthly Rental Installment is due, an amount equal to one-twelfth (1/12) of the estimated Annual Rental Adjustment. If Operating Expenses increase during a calendar year, Landlord may increase the estimated Annual Rental Adjustment during such year by giving Tenant written notice to that effect if the overall budgeted Operating Expenses are expected to increase, and thereafter Tenant shall pay to Landlord, in each of the remaining months of such year, an amount equal to the amount of such increase in the estimated Annual Rental Adjustment divided by the number of months remaining in such year. Within a reasonable time after the end of each calendar year, but not later than April 30, Landlord shall prepare and deliver to Tenant a statement showing the actual Annual Rental Adjustment. Within thirty (30) days after receipt of the aforementioned statement, Tenant shall pay to Landlord, or Landlord shall credit against the next rent payment or payments due from Tenant, as the case may be, the difference between the actual Annual Rental Adjustment for the preceding calendar year and the estimated amount paid by Tenant during such year. This Section 3.O3 shall survive the expiration or any earlier termination of this Lease. Section 3.04. Late Charges. Tenant acknowledges that Landlord shall incur certain additional unanticipated administrative and legal costs and expenses if Tenant fails to pay timely any payment required hereunder. Therefore, in addition to the other remedies available to Landlord hereunder, if any payment required to be paid by Tenant to Landlord hereunder shall become overdue, such unpaid amount shall bear interest from the due date thereof to the date of payment at the prime rate of interest, as reported in the Wall Street Journal (the "Prime Rate") plus three percent (3%) per annum. Section 3.05. Inspection and Audit Rights. (a) Tenant shall have the right to inspect, at reasonable times and in a reasonable manner, during the ninety (90) day period following the delivery of Landlord's statement of the actual amount of the Annual Rental Adjustment (the "Inspection Period"), such of Landlord's books of account and records as pertain to and contain information concerning the Annual Rental Adjustment for the prior calendar year in order to verify the amounts thereof, including documentation evidencing the amount of the components of Operating Expenses. Such inspection shall take place at Landlord's office upon at least fifteen (15) days prior written notice from Tenant to Landlord. Only Tenant or a third party representative of Tenant that is not being compensated for his/her services on a contingency fee basis shall conduct such inspection. Tenant shall also agree to follow Landlord's reasonable procedures for auditing such books and records. Landlord and Tenant shall act reasonably in assessing the other party's calculation of the Annual Rental Adjustment, Tenant shall endeavor to provide Landlord with a copy of its findings within thirty (30) days after completion of the audit, but shall in any case provide such copy within ten (10) days after Tenant's receipt of such findings. Tenant's failure to exercise its rights hereunder within the Inspection Period shall be deemed a waiver of its right to inspect or contest the method, accuracy or amount of such Annual Rental Adjustment. (b) If Landlord and Tenant agree that Landlord's calculation of the Annual Rental Adjustment for the inspected calendar year was incorrect, the parties shall enter into a written agreement confirming such undisputed error and then Landlord shall make a correcting payment in full to Tenant within thirty (30) days after the determination of the amount of such error or credit such amount against future Additional Rent if Tenant overpaid such amount, and Tenant shall pay Landlord within thirty (30) days after the determination of such error if Tenant underpaid such amount. If Tenant provides Landlord with written notice disputing the correctness of Landlord's statement, and if such dispute shall have not been settled by agreement within thirty (30) days after Tenant provides Landlord with such written notice, either Tenant or Landlord may submit the dispute to a reputable firm of independent certified public accountants selected by Tenant and Landlord, and the decision of such accountants shall be conclusive and binding upon the parties. If such accountants decide that there was an error, Landlord will make a correcting payment if Tenant overpaid such amount, and Tenant shall pay Landlord if Tenant underpaid such amount. The fees and expenses involved in such decision shall be borne equally by the parties; provided if one party is required to pay the other an amount that is more than ten percent (10%) of the amount such party asserted it owed, or less than ten percent (10%) of the amount such party asserted it was entitled to receive, such party shall pay all of such fees and expenses. (c) All of the information obtained through Tenant's inspection (including, without limitation, costs, expenses and income) as well as any compromise, settlement or adjustment reached between Landlord and Tenant relative to the results of the inspection shall be held in strict confidence by -7- Tenant and its officers, agents, and employees; and Tenant shall cause its independent representatives to be similarly bound. The obligations within the preceding sentence shall survive the expiration or earlier termination of the Lease. Section 3.06. Maximum Increase in Operating Expenses. Beginning with the first Annual Rental Adjustment in calendar year 2007, the Annual Rental Adjustment shall not be increased, except as to Uncontrollable Expenses, by more than Four Cents ($0.04) per square foot. "Uncontrollable Expenses" are Real Estate Taxes utilities; insurance premiums; snow removal; the portion of fees and assessments imposed by any covenants or owners' association that are otherwise uncontrollable expenses herein (e.g., insurance premiums, snow removal, utilities); management fees; and any other expenses which, except for management fees, are charged by third parties and which Landlord cannot control the amount of the expenses, but only to the extent such costs are includable as Operating Expenses, without regard to the level of increase in any or all of the above in any year or other period of time. ARTICLE 4 - SECURITY DEPOSIT Upon execution and delivery of this Lease by Tenant, Tenant shall deposit the Security Deposit with Landlord as security for the performance by Tenant of all of Tenant's obligations contained in this Lease. In the event of a default by Tenant, Landlord may apply ail or any part of the Security Deposit to cure all or any part of such default; provided, however, that any such application by Landlord shall not be or be deemed to be an election of remedies by Landlord or considered or deemed to be liquidated damages. Tenant agrees promptly, upon demand, to deposit such additional sum with Landlord as may be required to maintain the full amount of the Security Deposit. All sums held by Landlord pursuant to this Article 4 shall be without interest and may be commingled by Landlord. At the end of the Lease Term, Landlord shall return the Security Deposit to Tenant or so much thereof as remains after application to cure any uncured default or pay for repairs required to be made by Tenant pursuant to Section 2.03 above or Section 7.02 below. ARTICLE 5 - OCCUPANCY AND USE Section 5.01. Use. Tenant shall use the Leased Premises for the Permitted Use and for no other purpose without the prior written consent of Landlord. Section 5.02. Covenants of Tenant Regarding Use. (a) Tenant shall (i) use and maintain the Leased Premises and conduct its business thereon in a safe, careful, reputable and lawful manner, (ii) comply with all covenants that encumber the Building and all laws, rules, regulations, orders, ordinances, directions and requirements of any governmental authority or agency, now in force or which may hereafter be in force, including, without limitation, those which shall impose upon Landlord or Tenant any duty with respect to or triggered by a change in the use or occupation of, or any improvement or alteration to, the Leased Premises, and (iii) comply with and obey all reasonable directions, rules and regulations of Landlord, including the Building Rules and Regulations attached hereto as EXHIBIT D and made a part hereof, as may be reasonably modified from time to time by Landlord on reasonable notice to Tenant. (b) Tenant shall not do or permit anything to be done in or about the Leased Premises that will in any way cause a nuisance, obstruct or interfere with the rights of other tenants or occupants of the Park or injure them; provided that the ordinary and customary operations of Tenant's business shall not in themselves be deemed a nuisance, obstruction or interference. Landlord shall not be responsible to Tenant for the non-performance by any other tenant or occupant of die Building of any of Landlord's directions, rules and regulations, but agrees that any enforcement thereof shall be done uniformly. Tenant shall not overload the floors of the Leased Premises. All damage to the floor structure or foundation of the Building to the extent due to improper positioning or storage of items or materials, but not to the extent due to a construction defect, shall be repaired by Landlord at the sole expense of Tenant, who shall reimburse Landlord immediately therefor upon demand. Landlord warrants that the load bearing capacity for the Leased Premises is as set forth in EXHIBIT E hereto and Landlord shall not be responsible for Tenant's failure to abide by such capacity. Tenant shall not use the Leased Premises, nor allow the Leased Premises to be used, for any purpose or in any manner that would (i) invalidate any policy of insurance now or hereafter carried by Landlord on the Building, or (ii) increase the rate of premiums payable on any such insurance policy unless Tenant reimburses Landlord for any increase in premium charged. Section 5.03. Landlord's Rights Regarding Use. (a) Landlord shall have the right at any time, without notice to Tenant, to control, change or otherwise alter the Common Areas in such manner as it deems necessary or proper, and (b) Landlord, its agents, employees and contractors and any mortgagee of -8- the Building shall have the right to enter any part of the Leased Premises at reasonable times upon reasonable advance written notice (except in the event of an emergency where no notice shall be required) for the purposes of examining or inspecting the same (including, without limitation, testing to confirm Tenant's compliance with this Lease), showing the same to prospective purchasers, mortgagees or tenants, and making such repairs, alterations or improvements to the Leased Premises or the Building as Landlord may deem necessary or desirable. Landlord shall incur no liability to Tenant for such entry, nor shall such entry constitute an eviction of Tenant or a termination of this Lease, or entitle Tenant to any abatement of rent therefor. Notwithstanding the foregoing, Landlord shall make commercially reasonable efforts to minimize interference with Tenant's access or use of the Leased Premises when exercising its rights under this Section 5.03. This provision is subject to Section 16.11. ARTICLE 6 - UTILITIES Tenant shall obtain in its own name and pay directly to the appropriate supplier the cost of all utilities and services serving the Leased Premises, excepting utilities used in constructing the Work. However, if any services or utilities are jointly metered with other property, Landlord shall make a reasonable determination of Tenant's proportionate share of the cost of such utilities and services (at rates that would have been payable if such utilities and services had been directly billed by the utilities or services providers) and Tenant shall pay such share as Operating Expenses, subject to EXHIBIT C, to Landlord within fifteen (15) days after receipt of Landlord's written statement. Landlord shall not be liable in damages or otherwise for any failure or interruption of any utility or other Building service and no such failure or interruption shall entitle Tenant to terminate this Lease or withhold sums due hereunder. Notwithstanding anything in this Lease to the contrary, Landlord shall use commercially reasonable efforts to promptly restore utility service and in the event restoration of service is within Landlord's control and Landlord negligently fails to restore such service within a reasonable time, thereby causing the Leased Premises to be rendered untenantable (meaning that Tenant is unable to use such space in the then normal course of its business in the Leased Premises) by Tenant for the use permitted under this Lease for more than ten (10) consecutive days, or three (3) consecutive business days if such interruption is the result of a defect in the installation of such utility service that was a part of the Work, after notice from Tenant to Landlord that such service has been interrupted and a reasonable opportunity for Landlord to restore such service. Minimum Annual Rent and Annual Rental Adjustment shall abate on a per diem basis for each day after such ten (10) day or three (3) business day period, as the case may be, during which the Leased Premises remain untenantable. ARTICLE 7 - REPAIRS, MAINTENANCE AND ALTERATIONS Section 7.01. Repair and Maintenance of Building. Landlord shall make all necessary repairs, replacements and maintenance to the roof, sprinkler systems, exterior walls, foundation, structural frame of the Building and the parking and landscaped areas and other Common Areas and shall perform its warranty obligations under Section 2.02(h). The cost of such repairs, replacements and maintenance shall be included in Operating Expenses to the extent provided in Section 3.02: provided however, to the extent any such repairs, replacements or maintenance are required because of the negligence, misuse or default of Tenant, its employees, agents, contractors, customers or invitees, Landlord shall make such repairs at Tenant's sole expense. Section 7.02. Repair and Maintenance of Leased Premises. Tenant shall, at its own cost and expense, maintain in good condition (normal wear and tear excepted), the portions of the Leased Premises that are not the responsibility of Landlord to maintain or repair under Landlord's warranty under Section 2.02(h) or as otherwise expressly provided in this Lease, regularly servicing and promptly making all repairs and replacements thereto, including but not limited to the electrical systems, heating and air conditioning systems, plate glass, floors, windows and doors, and plumbing systems. Tenant shall obtain a preventive maintenance contract on the heating, ventilating and air-conditioning systems and provide Landlord with a copy thereof. The preventive maintenance contract shall meet or exceed Landlord's standard maintenance criteria, as set forth in EXHIBIT F, hereto, and shall provide for the inspection and maintenance of the heating, ventilating and air conditioning system on at least a semiannual basis. Section 7.03. Alterations. Tenant shall not permit alterations in or to the Leased Premises unless and until Landlord has approved the plans therefor in writing. As a condition of such approval, Landlord may require Tenant to remove the alterations and restore the Leased Premises upon termination of this Lease; otherwise, all such alterations (other than trade fixtures) shall at Landlord's option become a part of the realty and the property of Landlord, and shall not be removed by Tenant. Tenant shall ensure that all alterations shall be made in accordance with all applicable laws, regulations and building codes, in a good and workmanlike manner and of quality equal to or better than the original construction of the -9- Building. No person shall be entitled to any lien derived through or under Tenant for any labor or material furnished to the Leased Premises, and nothing in this Lease shall be construed to constitute Landlord's consent to the creation of any lien. If any lien is filed against the Leased Premises for work claimed to have been done for or material claimed to have been furnished to Tenant, Tenant shall cause such lien to be discharged of record within thirty (30) days after filing. Tenant shall indemnify Landlord from ail costs, losses, expenses and attorneys' fees in connection with any construction or alteration and any related lien. Tenant agrees that at Landlord's option, Duke Construction Limited Partnership or a subsidiary or affiliate of Landlord, who shall receive a ten percent (10%) fee as Landlord's construction manager or general contractor, shall perform all work on any alterations to the Leased Premises unrelated to installation of Tenant Equipment. ARTICLE 8 - INDEMNITY AND INSURANCE Section 8.01. Release. All of Tenant's trade fixtures, merchandise, inventory and all other personal property in or about the Leased Premises, the Building or the Common Areas, which is deemed to include the trade fixtures, merchandise, inventory and personal property of others located in or about the Leased Premises or Common Areas at the invitation, direction or acquiescence (express or implied) of Tenant (all of which property shall be referred to herein, collectively, as "Tenant's Property"), shall be and remain at Tenant's sole risk. Landlord shall not be liable to Tenant or to any other person for, and Tenant hereby releases Landlord from (a) any and all liability for theft or damage to Tenant's Property, and (b) any and all liability for any injury to Tenant or its employees, agents, contractors, guests and invitees in or about the Leased Premises, the Building or the Common Areas, except to the extent of personal injury (but not property loss or damage) caused directly by the negligence or willful misconduct of Landlord, its agents, employees or contractors. Nothing contained in this Section 8.01 shall limit (or be deemed to limit) the waivers contained in section 8.06 below. In the event of any conflict between the provisions of Section 8.06 below and this Section 8.01, the provisions of Section 8.06 shall prevail. This Section 8.01 shall survive the expiration or earlier termination of this Lease. Section 8.02. Indemnification by Tenant. Tenant shall protect, defend, indemnify and hold Landlord, its agents, employees and contractors harmless from and against any and all claims, damages, demands, penalties, costs, liabilities, losses, and expenses (including reasonable attorneys' fees and expenses at the trial and appellate levels) to the extent (a) arising out of or relating to any act, omission, negligence, or willful misconduct of Tenant or Tenant's agents, employees, contractors, customers or invitees in or about the Leased Premises, the Building or the Common Areas, (b) arising out of or relating to any of Tenant's Property, or (c) arising out of any other act or occurrence within the Leased Premises, in all such cases except to the extent of personal injury (but not property loss or damage) caused directly by the negligence or willful misconduct of Landlord, its agents, employees or contractors. Nothing contained in this Section 8.02 shall limit (or be deemed to limit) the waivers contained in Section 8.06 below. In the event of any conflict between the provisions of Section 8.06 below and this Section 8.02. the provisions of Section 8.06 shall prevail. This Section 8.02 shall survive the expiration or earlier termination of this Lease. Section 8.03. Indemnification by Landlord. Landlord shall protect, defend, indemnify and hold Tenant, its agents, employees and contractors harmless from and against any and all claims, damages, demands, penalties, costs, liabilities, losses and expenses (including reasonable attorneys' fees and expenses at the trial and appellate levels) to the extent arising out of or relating to any act, omission, negligence or willful misconduct of Landlord or Landlord's agents, employees or contractors. Nothing contained in this Section 8.03 shall limit (or be deemed to limit) the waivers contained in Section 8.06 below. In the event of any conflict between the provisions of Section 8.06 below and this Section 8.03, the provisions of Section 8.06 shall prevail. This Section 8.03 shall survive the expiration or earlier termination of this Lease. Section 8.04. Tenant's Insurance. (a) During the Lease Term (and any period of early entry or occupancy or holding over by Tenant, if applicable), Tenant shall maintain the following types of insurance, in the amounts specified below: (i) Liability Insurance. Commercial General Liability Insurance (which insurance shall not exclude blanket contractual liability, broad form property damage, personal injury, or fire damage coverage) covering the Leased Premises and Tenant's use thereof against claims for bodily injury or death and property damage, which insurance shall provide coverage on an occurrence basis with a per occurrence limit of not less than $3,000,000, and with general aggregate limits of not less than $10,000,000 for each policy year, which limits may be satisfied by any combination of primary and excess or umbrella per occurrence policies. -10- (ii) Property Insurance. Special Form Insurance (which insurance shall not exclude flood or earthquake) in the amount of the full replacement cost of Tenant's Property and betterments (including alterations or additions performed by Tenant pursuant hereto, but excluding those improvements, if any, made pursuant to Section 2.02 above), which insurance shall include an agreed amount endorsement waiving coinsurance limitations. (iii) Worker's Compensation Insurance. Worker's Compensation insurance in amounts required by applicable law. (iv) Business Interruption Insurance. Business Interruption Insurance with limits not less than an amount equal to two (2) years rent hereunder. (b) All insurance required by Tenant hereunder shall (i) be issued by one or more insurance companies reasonably acceptable to Landlord, licensed to do business in the State in which the Leased Premises is located and having an AM Best's rating of A IX or better, and (ii) provide that said insurance shall not be materially changed, canceled or permitted to lapse on less than thirty (30) days' prior written notice to Landlord. In addition, Tenant's insurance shall protect Tenant and Landlord as their interests may appear, naming Landlord, Landlord's managing agent, and any mortgagee requested by Landlord, as additional insureds under its commercial general liability policies. On or before the Commencement Date (or the date of any earlier entry or occupancy by Tenant), and thereafter, within thirty (30) days prior to the expiration of each such policy, Tenant shall furnish Landlord with certificates of insurance in the form of ACORD 25 or ACORD 25-S (or other evidence of insurance reasonably acceptable to Landlord), evidencing all required coverages, together with a copy of the endorsements to Tenant's commercial general liability policy evidencing primary and non-contributory coverage afforded to the appropriate additional insureds. Upon Tenant's receipt of a request from Landlord, Tenant shall provide Landlord with copies of all insurance policies, including all endorsements, evidencing the coverages required hereunder. If Tenant fails to carry such insurance and furnish Landlord with such certificates of insurance or copies of insurance policies (if applicable). Landlord may obtain such insurance on Tenant's behalf and Tenant shall reimburse Landlord upon demand for the cost thereof as Additional Rent. Section 8.05. Landlord's Insurance. During the Lease Term, Landlord shall maintain the following types of insurance, in the amounts specified below (the cost of which shall be included in Operating Expenses): (a) Liability Insurance. Commercial General Liability Insurance (which insurance shall not exclude blanket, contractual liability, broad form property damage, personal injury, or fire damage coverage) covering the Common Areas against claims for bodily injury or death and property damage, which insurance shall provide coverage on an occurrence basis with a per occurrence limit of not less than $3,000,000, and with general aggregate limits of not less than $ 10,000,000 for each policy year, which limits may be satisfied by any combination of primary and excess or umbrella per occurrence policies. (b) Property Insurance. Special Form Insurance (which insurance snail not exclude flood or earthquake) in the amount of the full replacement cost of the Building, including, without limitation, any improvements, if any, made pursuant to Section 2.02 above, but excluding Tenant's Property and any other items required to be insured by Tenant pursuant to Section 8.04 above. Section 8.06. Waiver of Subrogation. Notwithstanding anything contained in this Lease to the contrary, Landlord and Tenant hereby waive any rights each may have against the other on account of any loss of or damage to their respective property, the Leased Premises, its contents, or other portions of the Building or Common Areas arising from any risk which is required to be insured against by Sections 8.04(a)(ii) and 8.05(b) above. The special form coverage insurance policies maintained by Landlord and Tenant as provided in this Lease shall include an endorsement containing an express waiver of any rights of subrogation by the insurance company against Landlord and Tenant, as applicable. ARTICLE 9-CASUALTY In the event of total or partial destruction of the Building or the Leased Premises by fire or other casualty, Landlord agrees promptly to restore and repair same; provided, however, Landlord's obligation hereunder with respect to the Leased Premises shall be limited to the reconstruction of such of the leasehold improvements as were originally required to be made by Landlord pursuant to Section 2.02 above, if any. Rent shall proportionately abate during the time that the Leased Premises or part thereof are unusable because of any such damage. Notwithstanding the foregoing, if the Leased Premises are (a) so destroyed that they cannot be repaired or rebuilt to a condition in which Tenant can resume the Permitted Use within the Leased Premises to the extent existing prior to the casualty within one hundred eighty (180) days from the casualty date or such shorter number of days as the Target Agreement may -11- require Tenant to resume business after a casualty (but not fewer that 120 days); provided, with an allowance for an additional twenty (20) days in the event reconstruction or repairs are to occur in the months of January or February; provided further that notwithstanding the Target Agreement, in the event of a casualty, Tenant shall (i) exercise any right it may have in the Target Agreement to extend such resumption period, and (ii) if no such extension right is provided for in the Target Agreement, use commercially reasonable efforts to obtain an extension of time from Target; (b) destroyed by a casualty that is not covered by the insurance required hereunder or, if covered, such insurance proceeds are not released by any mortgagee entitled thereto or are insufficient to rebuild the Building and the Leased Premises; or (c) destroyed or damaged prior to the Commencement Date such that Landlord will be unable to Substantially Complete the Work per the Project Schedule; then, in case of a clause (a) casualty, either Landlord or Tenant may, or, in the case of a clause (b) casualty, then Landlord may, upon thirty (30) days' written notice to the other party, terminate this Lease with respect to matters thereafter accruing and, in the event of a clause (c) casualty, Tenant may terminate this Lease by giving written notice to Landlord of such termination within ten (10) days of such casualty. Tenant waives any right under applicable laws inconsistent with the terms of this paragraph. ARTICLE 10 - EMINENT DOMAIN If all or any substantial part of the Building or Common Areas shall he acquired by the exercise of eminent domain, Landlord may terminate this Lease by giving written notice to Tenant on or before the date possession thereof is so taken. If all or any part of the Leased Premises shall be acquired by the exercise of eminent domain so that the Leased Premises shall become impractical for Tenant to use for the Permitted Use in Tenant's reasonable discretion, Tenant may terminate this Lease by giving written notice to Landlord as of the date possession thereof is so taken. All damages awarded shall belong to Landlord; provided, however, that Tenant may claim its relocation, dislocation damages and business interruption damages to the extent permitted by law. ARTICLE 11 - ASSIGNMENT AND SUBLEASE Section 11.01. Assignment and Sublease. (a) Tenant shall not assign this Lease or sublet the Leased Premises in whole or in part without Landlord's prior written consent. In the event of any permitted assignment or subletting, Tenant shall remain primarily liable hereunder. In the absence of a permitted assignment or subletting under Section 11.02. any extension, expansion, rights of first offer, rights of first refusal or other options granted to Tenant under this Lease shall be rendered void and of no further force or effect. The acceptance of rent from any other person shall not be deemed to be a waiver of any of the provisions of this Lease or to be a consent to the assignment of this Lease or the subletting of the Leased Premises. Any assignment or sublease consented to by Landlord shall not relieve Tenant (or its assignee) from obtaining Landlord's consent to any subsequent assignment or sublease. (b) By way of example and not limitation, Landlord shall be deemed to have reasonably withheld consent to a proposed assignment or sublease if in Landlord's opinion (i) the Leased Premises are or may be physically adversely affected; (ii) the business reputation of the proposed assignee or subtenant is unacceptable; (iii) the net worth of the proposed assignee or subtenant is insufficient to meet the obligations hereunder and less than that of the Tenant as of the date of this Lease, or (iv) buildings located in the Park and owned by Landlord or its affiliates are not fully Leased and the prospective assignee or subtenant is a current tenant at the Park or is a bona-fide third-party prospective tenant seeking to lease space at then market rents and Landlord has available space of sufficient size to accommodate the prospect's leasing requirements. Landlord further expressly reserves the right to refuse to give its consent to any subletting if the proposed rental rate is publicly advertised to be less than the then current rental rate for similar premises in the Park. If Landlord refuses to give its consent to any proposed assignment that is not an assignment to a Permitted Transferee or subletting of substantially all of the Leased Premises for substantially the balance of the Lease Term, Landlord may, at its option, within thirty (30) days after receiving a request to consent, terminate this Lease by giving Tenant thirty (30) days' prior written notice of such termination, whereupon unless Tenant rescinds in writing its request for Landlord's consent to such assignment or subletting within ten (10) days of receipt of Landlord's termination notice, each party shall be released from all further obligations and liability hereunder, except those which expressly survive the termination of this Lease. (c) If Tenant shall make any assignment or sublease, with Landlord's consent, for a rental in excess of the rent payable under this Lease, Tenant shall pay to Landlord fifty percent (50%) of any such excess rental upon receipt. Tenant agrees to pay Landlord $500.00 upon demand by Landlord for reasonable accounting and attorneys' fees incurred in conjunction with the processing and documentation of any requested assignment, subletting or any other hypothecation of this Lease or Tenant's interest in and to the Leased Premises as consideration for Landlord's consent. -12- Section 11.02. Permitted Transfer. Notwithstanding anything to the contrary contained in Section 11.01 above, Tenant shall have the right, without Landlord's consent, but upon ten (10) days' prior notice to Landlord, to (a) sublet all or part of the Leased Premises to any related corporation or other entity which controls Tenant, is controlled by Tenant or is under common control with Tenant; (b) assign all or any part of this Lease to (x) any related corporation or other entity which controls Tenant, is controlled by Tenant, or is under common control with Tenant, (y) to a successor entity into which or with which Tenant is merged or consolidated or which acquires substantially all of Tenant's assets or property, or (z) to Target Corporation; or (c) effectuate any public offering of Tenant's stock on the New York Stock Exchange or in the NASDAQ over the counter market, provided that in the event of a transfer pursuant to clause (b), the tangible net worth after any such transaction is not less than the tangible net worth of Tenant as of the date hereof and provided further that such successor entity assumes all of the obligations and liabilities of Tenant (any such entity hereinafter referred to as a "Permitted Transferee"). For the purpose of this Article 11 (i) "control" shall mean ownership of not less than fifty percent (50%) of all voting stock or legal and equitable interest in such corporation or entity, and (ii) "tangible net worth" shall mean the excess of the value of tangible assets (i.e. assets excluding those which are intangible such as goodwill, patents and trademarks) over liabilities. Any such transfer shall not relieve Tenant of its obligations under this Lease. Nothing in this paragraph is intended to nor shall permit Tenant to transfer its interest under this Lease as part of a fraud or subterfuge to intentionally avoid its obligations under this Lease (for example, transferring its interest to a shell corporation that subsequently files a bankruptcy), and any such transfer shall constitute a Default hereunder. Any change in control of Tenant resulting from a merger, consolidation, or a transfer of partnership or membership interests, a stock transfer, or any sale of substantially all of the assets of Tenant that do not meet the requirements of this Section 11.02 shall be deemed an assignment or transfer that requires Landlord's prior written consent pursuant to Section 11.01 above. ARTICLE 12 - TRANSFERS BY LANDLORD Section 12.01. Sale of the Building. Landlord shall have the right to sell the Building at any time during the Lease Term, subject only to the rights of Tenant hereunder; and such sale shall operate to release Landlord from liability hereunder after the date of such conveyance but not as to matters that accrued prior to the date of transfer. Nothing in this paragraph is intended to nor shall permit Landlord to make a transfer as part of a fraud or subterfuge to intentionally avoid its obligations under this Lease (for example, transferring its interest to a shell corporation that subsequently files a bankruptcy), and any such transfer shall constitute a default hereunder by Landlord. Section 12.02. Estoppel Certificate. Within ten (10) days following receipt of a written request from Landlord, Tenant shall execute and deliver to Landlord, without cost to Landlord, an estoppel certificate in substantially such form as Landlord may reasonably request certifying (a) that this Lease is in full force and effect and unmodified or stating the nature of any modification, (b) the date to which rent has been paid, (c) that there are not, to Tenant's actual knowledge (without investigation being required), any uncured defaults or specifying such defaults if any are claimed, and (d) any other matters or state of facts reasonably required respecting the Lease. Such estoppel may be conditioned or qualified as is reasonable, and may be relied upon by Landlord and by any purchaser or mortgagee of the Building. Section 12.03. Subordination. Subject to Tenant's rights of non-disturbance set forth hereinafter, Landlord shall have the right to subordinate this Lease to any mortgage, deed to secure debt, deed of trust or other instrument in the nature thereof, and any amendments or modifications thereto (collectively, a "Mortgage") presently existing or hereafter encumbering the Building by so declaring in such Mortgage. Within ten (10) days following receipt of a written request from Landlord, Tenant shall execute and deliver to Landlord, without cost, any instrument that Landlord deems reasonably necessary or desirable to confirm the subordination of this Lease. Notwithstanding the foregoing, if the holder of the Mortgage shall take title to the Leased Premises through foreclosure or deed in lieu of foreclosure, Tenant shall be allowed to continue in undisturbed possession of the Leased Premises as provided for in this Lease so long as Tenant is not in Default Landlord shall use commercially reasonable efforts to obtain a non-disturbance agreement from any future mortgage of the Building. ARTICLE 13 - DEFAULT AND REMEDY Section 13.01. Default. The occurrence of any of the following shall be a "Default": (a) Tenant fails to pay any Monthly Rental Installments or Additional Rent within five (5) days after the same is due. (b) Tenant fails to perform or observe any other term, condition, covenant or obligation required under this Lease for a period of thirty (30) days after written notice thereof from Landlord; -13- provided, however, that if the nature of Tenant's default is such that more than thirty (30) days are reasonably required to cure, then such default shall be deemed to have been cured if Tenant commences such performance within said thirty (30) day period and thereafter diligently completes the required action within a reasonable time. (c) Tenant shall vacate or abandon all of the Leased Premises. (d) Tenant shall assign or sublet all or a portion of the Leased Premises in contravention of the provisions of Article II of this Lease. (e) All or substantially all of Tenant's assets in the Leased Premises or Tenant's interest in this Lease are attached or levied under execution (and Tenant does not discharge the same within sixty (60) days thereafter); a petition in bankruptcy, insolvency or for reorganization or arrangement is filed by or against Tenant (and Tenant fails to secure a stay or discharge thereof within sixty (60) days thereafter); Tenant is insolvent and unable to pay its debts as they become due; Tenant makes a general assignment for the benefit of creditors; Tenant takes the benefit of any insolvency action or law; the appointment of a receiver or trustee in bankruptcy for Tenant or its assets if such receivership has not been vacated or set aside within thirty (30) days thereafter; or, dissolution or other termination of Tenant's corporate charter if Tenant is a corporation. In addition to the defaults described above, the parties agree that if Tenant receives written notice of a violation of the performance of any (but not necessarily the same) term or condition of this Lease three (3) or more times during any twelve (12) month period, regardless of whether such violations are ultimately cured, then such conduct shall, at Landlord's option, represent a separate Default. Section 13.02. Remedies. Upon the occurrence of any Default, Landlord shall have the following rights and remedies, in addition to those stated elsewhere in this Lease and those allowed by law or in equity, any one or more of which may be exercised without further notice to Tenant: (a) Landlord may re-enter the Leased Premises and cure any Default of Tenant, and Tenant shall reimburse Landlord as Additional Rent for any costs and expenses which Landlord thereby incurs; and Landlord shall not be liable to Tenant for any loss or damage which Tenant may sustain by reason of Landlord's action. (b) Without terminating this Lease, Landlord may terminate Tenant's right to possession of the Leased Premises, and thereafter, neither Tenant nor any person claiming under or through Tenant shall be entitled to possession of the Leased Premises, and Tenant shall immediately surrender the Leased Premises to Landlord, and Landlord may re-enter the Leased Premises and dispossess Tenant and any other occupants of the Leased Premises by any lawful means and may remove their effects, without prejudice to any other remedy that Landlord may have. Upon termination of possession, Landlord may (i) re-let all or any part thereof for a term different from that which would otherwise have constituted the balance of the Lease Term and for rent and on commercially reasonable terms and conditions different from those contained herein, whereupon Tenant shall be immediately obligated to pay to Landlord an amount equal to the present value (discounted at the Prime Rate) of the difference between the rent provided for herein and that provided for in any lease on commercially reasonable terms and conditions covering a subsequent re-letting of the Leased Premises, for the period which would otherwise have constituted the balance of the Lease Term or the period reletting if a smaller period (the "Accelerated Rent Difference"), or (ii) without re-letting, declare the present value (discounted at the Prime Rate) of all rent which would have been due under this Lease for the balance of the Lease Term less the fair market value of the Leased Premises for the balance of the Lease Term to be immediately due and payable as liquidated damages (the "Accelerated Rent"). Upon termination of possession, Tenant shall be obligated to pay to Landlord (A) the Accelerated Rent Difference or the Accelerated Rent, whichever is applicable, (B) all loss or damage that Landlord may sustain by reason of Tenant's Default ("Default Damages"), which shall include, without limitation, expenses of preparing the Leased Premises for re-letting, demolition, repairs, tenant finish improvements, brokers' commissions and attorneys' fees, and (C) all unpaid Minimum Annual Rent and Additional Rent that accrued prior to the date of termination of possession, plus any interest and late fees due hereunder (the "Prior Obligations"). (c) Landlord may terminate this Lease and declare the Accelerated Rent to be immediately due and payable, whereupon Tenant shall be obligated to pay to Landlord (i) the Accelerated Rent, (ii) all of Landlord's Default Damages, and (iii) all Prior Obligations. It is expressly agreed and understood that all of Tenant's liabilities and obligations set forth in this subsection (c) shall survive termination. (d) Landlord and Tenant acknowledge and agree that the payment of the Accelerated Rent Difference or the Accelerated Rent as set above shall not be deemed a penalty, but merely shall constitute payment of liquidated damages, it being understood that actual damages to Landlord are extremely -14- difficult, if not impossible, to ascertain. Neither the filing of a dispossessory proceeding nor an eviction of personalty in the Leased Premises shall be deemed to terminate the Lease. (e) Landlord may sue for injunctive relief or to recover damages for any loss resulting from the Default. Section 13.03. Landlord's Default and Tenant's Remedies. Landlord shall be in default if it fails to perform any term, condition, covenant or obligation required under this Lease for a period of thirty (30) days after written notice thereof from Tenant to Landlord; provided, however, that if the term, condition, covenant or obligation to be performed by Landlord is such that it cannot reasonably be performed within thirty (30) days, such default shall be deemed to have been cured if Landlord commences such performance within said thirty-day period and thereafter diligently undertakes to complete the same. Upon the occurrence of any such default, Tenant may sue for injunctive relief or to recover damages for any loss directly resulting from the breach, but Tenant shall not be entitled to terminate this Lease or to withhold, offset or abate any sums due hereunder. This Section 13.03 shall not be applicable to Landlord's obligation to perform the Work which is subject solely to the provisions of Section 2.02. Section 13.04. Limitation of Landlord's Liability. If Landlord shall fail to perform any term, condition, covenant or obligation required to be performed by it under this Lease and if Tenant shall, as a consequence thereof, recover a money judgment against Landlord, Tenant agrees that it shall look solely to Landlord's right, title and interest in and to the Building for the collection of such judgment, including, insurance proceeds, rents and profits therefrom and net proceeds of sale thereof; and Tenant further agrees that no other assets of Landlord shall be subject to levy, execution or other process for the satisfaction of Tenant's judgment. Section 13.05. Nonwaiver of Defaults. Neither party's failure or delay in exercising any of its rights or remedies or other provisions of this Lease shall constitute a waiver thereof or affect its right thereafter to exercise or enforce such right or remedy or other provision. No waiver of any default shall be deemed to be a waiver of any other default. Landlord's receipt of less than the full rent due shall not be construed to be other than a payment on account of rent then due, nor shall any statement on Tenant's check or any letter accompanying Tenant's check be deemed an accord and satisfaction. No act or omission by Landlord or its employees or agents during the Lease Term shall be deemed an acceptance of a surrender of the Leased Premises, and no agreement to accept such a surrender shall be valid unless in writing and signed by Landlord. Section 13.06. Attorneys' Fees. If either party defaults in the performance or observance of any of the terms, conditions, covenants or obligations contained in this Lease and the non-defaulting party obtains a judgment against the defaulting party, then the defaulting party agrees to reimburse the non-defaulting party for reasonable attorneys' fees incurred in connection therewith. ARTICLE 14 - LANDLORD'S RIGHT TO RELOCATE TENANT [INTENTIONALLY OMITTED]. ARTICLE 15 - TENANT'S RESPONSIBILITY REGARDING ENVIRONMENTAL LAWS AND HAZARDOUS SUBSTANCES Section 15.01. Environmental Definitions. (a) "Environmental Laws" shall mean all present or future federal, state and municipal laws, ordinances, rules and regulations applicable to the environmental and ecological condition of the Leased Premises, and the rules and regulations of the Federal Environmental Protection Agency and any other federal, state or municipal agency or governmental board or entity having jurisdiction over the Leased Premises. (b) "Hazardous Substances" shall mean those substances included within the definitions of "hazardous substances," "hazardous materials," "toxic substances" "solid waste" or "infectious waste" under Environmental Laws and petroleum products. Section 15.02. Restrictions on Tenant. Tenant shall not cause or permit the use, generation, release, manufacture, refining, production, processing, storage or disposal of any Hazardous Substances on, under or about the Leased Premises, or the transportation to or from the Leased Premises of any Hazardous Substances, except as necessary and appropriate for its Permitted Use in which case the use, storage or disposal of such Hazardous Substances shall be performed in compliance with the Environmental Laws and the highest standards prevailing in the industry. -15- Section 15.03. Notices, Affidavits, Etc. Tenant shall immediately (a) notify Landlord of (i) any violation by Tenant, its employees, agents, representatives, customers, invitees or contractors of any Environmental Laws on, under or about the Leased Premises, or (ii) the presence or suspected presence of any Hazardous Substances on, under or about the Leased Premises, and (b) deliver to Landlord any notice received by Tenant relating to (a)(i) and (a)(ii) above from any source, Tenant shall execute affidavits, representations and the like within five (5) days of Landlord's request therefor concerning Tenant's best knowledge and belief regarding the presence of any Hazardous Substances on, under or about the Leased Premises. Section 15.04. Tenant's Indemnification. Tenant shall indemnify Landlord and Landlord's managing agent from any and all claims, losses, liabilities, costs, expenses and damages, including attorneys' fees, costs of testing and remediation costs, incurred by Landlord in connection with any breach by Tenant of its obligations under this Article 15. The covenants and obligations under this Article 15 shall survive the expiration or earlier termination of this Lease. Section 15.05. Existing Conditions. Notwithstanding anything contained in this Article 15 to the contrary, Tenant shall not have any liability to Landlord under this Article 15 resulting from any conditions existing, or events occurring, or any Hazardous Substances existing or generated, at, in, on, under or in connection with the Leased Premises prior to the Commencement Date of this Lease (or any earlier occupancy of the Leased Premises by Tenant) except to the extent Tenant knowingly exacerbates the same. ARTICLE 16 - MISCELLANEOUS Section 16.01. Benefit of Landlord and Tenant. This Lease shall inure to the benefit of and be binding upon Landlord and Tenant and their respective successors and assigns. Section 16.02. Governing Law. This Lease shall be governed in accordance with the laws of the State where the Building is located. Section 16.03. Force Majeure. Landlord and Tenant (except with respect to the payment of any monetary obligation) shall be excused for the period of any delay in the performance of any obligation hereunder when such delay is due to an event of force majeure. Landlord shall not claim a weather-related force majeure event until it has incurred fifteen (15) days of weather-related delays in which it is unable to perform the Work (which fifteen days Landlord has included in the Project Schedule) and Landlord shall provide to Tenant written notice of the date when such fifteen (15) days have been exhausted and written notice of any force majeure claims that Landlord may assert. Landlord may claim any delay days dating back to November 1,2005. Section 16.04. Examination of Lease. Submission of this instrument by Landlord to Tenant for examination or signature does not constitute an offer by Landlord to lease the Leased Premises. This Lease shall become effective, if at all, only upon the execution by and delivery to both Landlord and Tenant. Execution and delivery of this Lease by Tenant to Landlord constitutes an offer to lease the Leased Premises on the terms contained herein. Section 16.05. Indemnification for Leasing Commissions. The parties hereby represent and warrant that the only real estate brokers involved in the negotiation and execution of this Lease are the Brokers and that no other party is entitled, as a result of the actions of the respective party, to a commission or other fee resulting from the execution of this Lease. Each party shall indemnify the other from any and all liability for the breach of this representation and warranty on its part and shall pay any compensation to any other broker or person who may be entitled thereto. Landlord shall pay any commissions due Brokers based on this Lease pursuant to separate agreements between Landlord and Brokers. Section. 16.06. Notices. Any notice required or permitted to be given under this Lease or by law shall be deemed to have been given if it is written and delivered in person or by UPS, Federal Express, DHL, or a similar reputable overnight courier or mailed by certified mail, postage prepaid, to the party who is to receive such, notice at the address specified in Section 1.01(1). If sent by overnight courier, the notice shall be deemed to have been given and received one (1) business day after sending. If mailed, the notice shall be deemed to have been given on the date that is three (3) business days following mailing. Either party may change its address by giving written notice thereof to the other party. Section 16.07. Partial Invalidity: Complete, Agreement. If any provision of this Lease shall be held to be invalid, void or unenforceable, the remaining provisions shall remain in full force and effect. This Lease represents the entire agreement between Landlord and Tenant covering everything agreed -16- upon or understood in this transaction. There are no oral promises, conditions, representations, understandings, interpretations or terms of any kind as conditions or inducements to the execution hereof or in effect between the parties. No change or addition shall be made to this Lease except by a written agreement executed by Landlord and Tenant. Section 16.08. Financial Statements. During the Lease Term and any extensions thereof, Tenant shall provide to Landlord on an annual basis, within ninety (90) days following the end of Tenant's fiscal year, a copy of Tenant's most recent annual report prepared as of the end of Tenant's fiscal year. Without limiting the foregoing, in the event that Tenant is no longer a publicly traded company, Tenant shall provide Landlord on an annual basis, within ninety (90) days following the end of Tenant's fiscal year, a copy of Tenant's most recent financial statements prepared as of the end of Tenant's fiscal year. Such financial statements shall be signed by Tenant or an officer of Tenant, if applicable, who shall attest to the truth and accuracy of the information set forth in such statements, or if the Minimum Annual Rent hereunder exceeds $100,000.00, said statements shall be certified and audited. All financial statements provided by Tenant to Landlord hereunder shall be prepared in conformity with generally accepted accounting principles, consistently applied. Section 16.09. Representations and Warranties. (a) Tenant hereby represents and warrants that (i) Tenant is duly organized, validly existing and in good standing (if applicable) in accordance with the laws of the State under which it was organized; (ii) Tenant is authorized to do business in the State where the Building is located; and (iii) the individual(s) executing and delivering this Lease on behalf of Tenant has been properly authorized to do so, and such execution and delivery shall bind Tenant to its terms. (b) Landlord hereby represents and warrants that (i) Landlord is duly organized, validly existing and in good standing (if applicable) in accordance with the laws of the State under which it was organized; (ii) Landlord is authorized to do business in the State where the Building is located; and (iii) the individual(s) executing and delivering this Lease on behalf of Landlord has been properly authorized to do so, and such execution and delivery shall bind Landlord to its terms. Section 16.10. Signage. Subject to Section 2.02(c), Tenant may, at its own expense, erect a sign concerning the business of Tenant that shall be in keeping with the decor and other signs on the Building. All signage (including the signage described in the preceding sentence) in or about the Leased Premises shall be first approved by Landlord and shall be in compliance with the any codes and recorded restrictions applicable to the sign or the Building. The location, size and style of all signs shall be approved by Landlord. Tenant agrees to maintain any sign in good state of repair, and upon expiration of the Lease Term, Tenant agrees to promptly remove such signs and repair any damage to the Leased Premises. Section 16.11. Parking. Tenant shall be entitled to the exclusive use of the parking spaces and trailer areas designated for the Building by Landlord and shown on EXHIBIT A and a security fence may be erected around said exclusive parking areas for trailers, for so long as Tenant leases the entire Leased Premises of approximately 646,468 rentable square feet. If there are other tenants of the Building, subject to Tenant's exclusive rights above, Tenant agrees not to overburden the parking facilities and agrees to cooperate with Landlord and other tenants in the use of the parking facilities. If there are other tenants of the Building, subject to Tenant's exclusive rights above. Landlord reserves the right in its reasonable discretion to determine whether parking facilities are becoming crowded and, in such event, to allocate parking spaces between Tenant and other tenants. If there are other tenants of the Building, subject to Tenants exclusive rights above, there will be no assigned parking unless Landlord, in its sole discretion, deems such assigned parking advisable. No vehicle may be repaired or serviced in the parking area and any vehicle brought into the parking area by Tenant, or any of Tenant's employees, contractors or invitees, and reasonably deemed abandoned by Landlord will be towed and all costs thereof shall be borne by the Tenant. If there are other tenants of the Building, subject to Tenant's exclusive rights above, all driveways, ingress and egress, and all parking spaces are for the joint use of all tenants. There shall be no parking permitted on any of the streets or roadways located within the Park. In addition, Tenant agrees that its employees will not park in the spaces designated visitor parking. Section 16.12. Consent. Where the consent or approval of a party is required or requested, such consent or approval shall not be unreasonably withheld, conditioned or delayed. Section 16.13. Time. Time is of the essence of each term and provision of this Lease. Section 16.14. Agency Disclosure. Tenant acknowledges having previously received the Agency Disclosure Statement attached. Duke Realty Services Limited Partnership, set forth in Section 1.01(j) above as Landlord's broker, its agents and employees, have represented only Landlord, and have -17- not in any way represented Tenant, in the marketing, negotiation, and completion of this lease transaction. Section 16.15. Right of First Refusal. (a) Provided that (i) no default has occurred and is then continuing, (ii) the creditworthiness of Tenant is then reasonably acceptable to Landlord, and (iii) Tenant originally named herein or a Permitted Transferee remains in possession of and has been continuously operating in the entire Leased Premises throughout the Lease Terra, Tenant shall have a continuing right of first refusal ("Refusal Option") to lease additional space to be constructed as either an expansion of the Building or in a separate building to be built near the Building by Landlord, on the 16.2 acre parcel of land located contiguous to the Site (the "Contiguous Land") as shown on the attached EXHIBIT A ("Refusal Space"). Prior to entering into any lease for the Refusal Space, Landlord shall notify Tenant in writing ("Landlord's Notice") of Landlord's receipt of an arms-length, offer to lease such space that Landlord is willing to accept from a bona fide third party offeror ("Bona Fide Offer") and setting forth all of the material terms of the Bona Fide Offer and such other terms as are herein provided. Tenant shall have seven (7) days after Tenant receives Landlord's Notice in which to notify Landlord in writing of its election to lease the Refusal Space upon the terms set forth in Landlord's Notice. If Tenant declines to exercise this Refusal Option or fails to give such written notice within the time period required. Tenant shall be deemed to have waived this Refusal Option as to the transaction contemplated in the Bona Fide Offer, and thereafter this Refusal Option shall be void and of no further force or effect, and Landlord shall be free to lease the Refusal Space to the bona fide offeror on the terms in the Bona Fide Offer. (b) If Tenant shall exercise the Refusal Option, the parties shall enter into an amendment to this Lease adding the Refusal Space to the Leased Premises upon the terms and conditions set forth in the Bona Fide Offer and making such other modifications to this Lease as are appropriate under the circumstances. (c) If Tenant does not exercise its Refusal Option, in the event Landlord expands the Building or constructs a new building on the Contiguous Land, Tenant shall cooperate with Landlord, at no cost to Tenant, in the construction of such expansion or new Building, including, without limitation, assuring access of construction personnel and equipment to the Contiguous Land consistent with Tenant's obligations to furnish security measures at the Leased Premises under the Target Agreement, providing for changes in utilities, including shared utilities to the expansion space and/or new building, and providing for reasonable changes or additions to the parking facilities that do not reduce the amount of parking allocated to Tenant as shown on EXHIBIT A and do not relocate such parking areas more than 50 feet from their locations as shown in EXHIBIT A. In the event any portion of the Building, including any expansion thereto, or any new building on the Contiguous Land is leased to one or more tenants other than Tenant, Landlord shall at its sole cost alter any outside security facilities, such as fencing and/or guard shacks, to permit access by other tenants, their agents, employees, contractors, customers and invitees to the portion of the Building or the new building leased by such tenant(s) and the parking and other Common Areas associated therewith. Section 16.16. Options to Extend. (a) Grant and Exercise of Option. Provided that (i) no default has occurred and is then continuing (ii) the creditworthiness of Tenant is not less than that of the date hereof and (iii) Tenant originally named herein or a Permitted Transferee remains in possession of and has been continuously operating in the entire Leased Premises throughout the term immediately preceding the Extension Term (as defined below), Tenant shall have the option to extend the Lease Term for two (2) additional periods of three (3) years each (the "Extension Term(s)"). Each Extension Term shall be upon the same terms and conditions contained in the Lease except (x) this provision giving two (2) extension options shall be amended to reflect the remaining options to extend, if any, and (y) any improvement allowances or other concessions applicable to the Leased Premises under the Lease shall not apply to the Extension Term, and (z) the Minimum Annual Rent shall be adjusted as set forth below (the "Rent Adjustment"). Tenant shall exercise each option by (i) delivering to Landlord, no later than nine (9) months prior to the expiration of the preceding term, written notice of Tenant's desire to extend the Lease Term. Tenant's failure to timely exercise such option shall be deemed a waiver of such option and any succeeding option. Landlord shall notify Tenant of the amount of the Rent Adjustment no later than ninety (90) days prior to the commencement of the Extension Term. Tenant shall be deemed to have accepted the Rent Adjustment if it fails to deliver to Landlord a written objection thereto within five (5) business days after receipt thereof. If Tenant properly exercises its option to extend, Landlord and Tenant shall execute an amendment to the Lease (or, at Landlord's option, a new lease on the form then in use for the Building) reflecting the terms and conditions of the Extension Term within thirty (30) days after Tenant's acceptance (or deemed acceptance) of the Rent Adjustment. -18- (b) Rent Adjustment. The Minimum Annual Rent for the applicable Extension Term shall be an amount equal to the Minimum Annual Rent then being quoted by Landlord to prospective renewal tenants of the Building for space of comparable size and quality and with similar or equivalent improvements as are found in the Building, and if none, then in similar buildings in the Park, provided, however, that if Tenant delivers to Landlord a written objection to Landlord's calculation of the Rent Adjustment within five (5) business days after Tenant's receipt of Landlord's determination of the Rent Adjustment, and the parties cannot agree on a Rent Adjustment within ten (10) days after Tenant's written objection then Tenant may retract its exercise of its option to extend, or Tenant may choose arbitration to determine the Rent Adjustment. If Tenant chooses arbitration, Tenant shall give Landlord written notice of its desire to seek arbitration within three (3) days after expiration of such ten (10) day period ("Arbitration Notice"). Within ten (10) days after Tenant provides Landlord with its Arbitration Notice, the parties shall each appoint an appraiser to determine the Rent Adjustment for the Leased Premises. Each appraiser so selected shall be either an MAI appraiser or a licensed real estate broker, each having at least ten (10) years prior experience in the appraisal or leasing of comparable space in the metropolitan area in which the Leased Premises are located and with a working knowledge of current rental rates and practices. If the two appraisers cannot agree upon the Rent Adjustment for the Leased Premises within twenty (20) days after their appointment, then, within ten (10) days after the expiration of such twenty (20) day period, the two appraisers shall select a third appraiser meeting the above criteria. Once the third appraiser has been selected as provided for above, then such third appraiser shall within ten (10) days after appointment make its determination of the Rent Adjustment. The average of the three (3) determinations of the Rent Adjustment shall be used as the Minimum Annual Rent for the applicable Extension Term and shall be binding on both Landlord and Tenant. Landlord and Tenant shall each bear the cost of its appraiser and shall share the cost of the third. If Tenant fails to provide the Arbitration Notice as provided above, then Tenant's exercise of its option to extend shall be deemed retracted. IN WITNESS WHEREOF, the parties hereto have executed this Lease as of the day and year first above written. LANDLORD: DUKE REALTY LIMITED PARTNERSHIP, an Indiana limited partnership By: Duke Realty Corporation, its general partner By: /s/ Kevin T. Rogus ------------------------------------ Kevin T. Rogus Senior Vice President STATE OF OHIO ) ) SS: COUNTY OF HAMILTON ) Before me, a Notary Public in and for said County and State, personally appeared Kevin T. Rogus, by me known and by me known to be the Senior Vice President of Duke Realty Corporation, an Indiana corporation, the general partner of Duke Realty Limited Partnership, an Indiana limited partnership, who acknowledged the execution of the foregoing "Lease" on behalf of said partnership. WITNESS my hand and Notarial Seal this 28th day of December, 2005. (STATE SEAL) ROSE ANDRIACCO /s/ Rose Andriacco Notary Public State of Ohio --------------------------- My Commission Expires March 8, 2010 Notary Public ---------------------------------------- (Printed Signature) My Commission Expires: _____________ My County of Residence: CHERMONT -19- TENANT: INNOTRAC CORPORATION, a Georgia corporation By: /s/ ROBERT TONER ------------------------------------ Name: ROBERT TONER Title: VP of Logistics STATE OF GA ) ) SS: COUNTY OF GWINNETT ) Before me, Notary Public in and for said County and State, personally appeared Robert J. Toner Jr, by me known and by me known to be the VP, Logistics of Innotrac Corporation, a Georgia corporation, who acknowledged the execution of the foregoing "Lease" on behalf of said corporation. WITNESS my hand and Notarial Seal this 23 day of December, 2005. /s/ SHANIN CROWTHER ---------------------------------------- Notary Public /s/ SHANIN CROWTHER ---------------------------------------- (Printed Signature) My Commission Expires: 10/19/09 (NOTARY PUBLIC STAMP) My County of Residence: Gwinnett My Comm. Expires June 19, 2009 -20- (FLOOR PLAN) EXHIBIT A-1 LEASE EXHIBIT LEGAL DESCRIPTION 29.69 ACRES Situated in the City of Hebron, Boons County, Kentucky, being part of the 22.9439 acre tract of land heretofore conveyed to Duke Weeks Realty, Ltd. by deed recorded in Deed Book 808, Page 496 (all references to deeds and plats cited herein are of the Boone County, Kentucky records) and part of the 25.3375 acre tract of land heretofore conveyed to Duke Weeks Realty, Ltd. by deed recorded in Deed Book 808, Page 487, the perimeter thereof being more particularly described as follows: Beginning at a stone monument found at the northeasterly corner of Lot 21 of Mars Hill Subdivision, as recorded on Plat 235B; Thence from said beginning point, along the westerly line of the said 25.3375 acre tract, North 26 degrees 34'34" East a distance of 1,032.35 feet to a point, being the westerly terminus of the proposed southerly right-of-way line of Litton Lane; Thence through the saw 25.3375 acre tract along the said proposed southerly right-of-way line, in part, and the existing southerly right-of-way line of Litton Lane, in part, South 57 degrees 36'02" (East, a distance of 879.54 feet to the northeast corner of the said 25.3375 acre tract; Thence through the said 22.9439 acre tract, North 63 degrees 25'26" West, a distance of 875.00 feet to the westerly property line of said 22.9439 acre tract. Thence along the westerly line of the said 22.9439 acre tract, North 26 degrees 34'34" East, a distance of 490.17 feet to the point of beginning; Containing 29.6867 acres, more or less, and being subject to all other easements, restrictions, covenants and/or conditions of record. Exhibit A-1 Page 1 of 1 EXHIBIT B-1 BUILDING PERMIT ISSUE OCTOBER 24, 2005 INDEX OF SPECIFICATIONS DIVISION 0 - BIDDING AND CONTRACT REQUIREMENTS: Section 00020 Notice to Bidders ......................................... 1 Section 00104 Instructions to Bidders ................................... 3 Section 00310 Bid Form .................................................. 12 Section 00500 Subcontract Agreement Forms ............................... 1 Agreement Between Contractor and Subcontractor ............ 25 DIVISION 1 - GENERAL REQUIREMENTS: Section 01010 Summary of Work ........................................... 3 Section 01020 Allowances ................................................ 2 Section 01041 Project Coordination ...................................... 3 Section 01045 Construction Safety ....................................... 12 Section 01050 Field Engineering ......................................... 1 Section 01100 Alternates ................................................ 1 Section 01200 Project Meeting ........................................... 2 Section 01310 Construction Schedules .................................... 1 Section 01320 CAD Drawing Standards ..................................... 1 Section 01340 Shop Drawings, Product Data and Samples ................... 3 Section 01350 Product Handling .......................................... 1 Section 01410 Independent Testing Laboratory Servies .................... 5 Section 01501 Temporary Protection ...................................... 1 Section 01505 Temporary Equipment and Work .............................. 1 Section 01510 Temporary Utilities and services .......................... 2 Section 01518 Temporary Fire Protection ................................. 2 Section 01551 Access and Haul Roads, Parking and Traffic Regulations .... 1 Section 01563 Water Control ............................................. 1 Section 01580 Project Identification and Signs .......................... 1 Section 01590 Field Office and Sheds .................................... 2 Section 01600 Material and Equipment .................................... 1 Section 01620 Storage and Protection .................................... 2 Section 01630 Substitutions and Product Options ......................... 2 Section 01700 Contract Close-out ........................................ 2 Section 01710 Cleaning .................................................. 1 Section 01715 Hazardous Waste ........................................... 2 Section 01720 Project Record Documents .................................. 1 Section 01730 Operating and Maintenance Data ............................ 2 Section 01740 Warranties and Bonds ...................................... 1 Section 01810 Soil Investigation Report ................................. 1 DIVISION 2 - SITEWORKS: Section 02230 Site Clearing ............................................. 5 Section 02260 Excavation Support and Protection ......................... 4 Section 02300 Earthwork ................................................. 9 Section 02510 Water Distribution ........................................ 9 Section 02530 sanitary Sewerage ......................................... 7 Section 02630 Storm Drainage ............................................ 7 Section 02741 Hot-Mix Asphalt Paving .................................... 6 Section 02751 Cement Concrete Pavement .................................. 10 Section 02920 Lawns and Grasses ......................................... 12 DIVISION 3 - CONCRETE: Section 03300 Cast-In-Place Concrete .................................... 16 Section 03410 Structural Precast Concrete - Plant ....................... 7 Section 03430 Precast Panel Modifications ............................... 3 DIVISION 4 - MASONRY: Section 04810 Unit Masonry .............................................. 9
Exhibit B-1 Page 1 of 3 EXHIBIT B-1 DIVISION 5 - METALS: Section 05120 Structural Steel .......................................... 6 Section 05220 Steel Joists and Joist Girders ............................ 3 Section 05310 Steel Deck ................................................ 3 Section 05500 Metal Fabrications ........................................ 3 Section 05511 Metal Stairs .............................................. 10 DIVISION 6 - WOODS & PLASTICS: Section 06105 Miscellaneous Carpentry ................................... 3 Section 06402 Interior Architectural Woodwork ........................... 4 DIVISION 7 - THERMAL/MOISTURE: Section 07210 Insulation ................................................ 3 Section 07241 Exterior Insulation and Finish Systems - Class PB ......... 5 Section 07531 E.P.D.M. Membrane Roofing ................................. 6 Section 07620 Flashing and Sheet Metal .................................. 5 Section 07720 Roof Hatch ................................................ 4 Section 07920 Joint Sealers ............................................. 8 DIVISION 8 - DOORS & WINDOWS: Section 08110 Steel Doors and Frames .................................... 4 Section 08200 Wood Doors ................................................ 4 Section 08361 Sectional Overhead Doors .................................. 5 Section 08410 Aluminum entrances and Storefronts ........................ 11 Section 08711 Finish Hardware ........................................... 8 Section 08800 Glass and Glazing ......................................... 8 DIVISION 9 - FINISHES: Section 09250 Gypsum Wallboard Systems .................................. 5 Section 09300 Tile ...................................................... 5 Section 09510 Acoustical Cellings ....................................... 3 Section 09650 Resilient Flooring ........................................ 5 Section 09680 Carpeting ................................................. 5 Section 09775 Fiberglass Reinforced Polyester Panels (FRP) .............. 3 Section 09900 Painting and Finishing .................................... 6 DIVISION 10 - SPECIALTIES: Section 10150 Toilet accessories ........................................ 3 Section 10520 Fire Protection Specialties ............................... 6 DIVISION 11 - EQUIPMENT: Section 11160 Loading Dock Equipment .................................... 3 DIVISION 12 - FURNISHINGS: Section 12491 Horizontal Louver Blinds .................................. 3
Exhibit B-1 Page 2 of 3 EXHIBIT B-1 DIVISION 15 - MECHANICAL: Section 15000 Table of Contents Mechanical............................... 3 Section 1S010 Basic Mechanical Requirements.............................. 21 Section 15030 Eletrical Provisions of Mechanical Work................... 4 Section 15045 Shell Industrial Space Design Parameters................... 6 Section 15140 Pipe Hangers, Supports, and Anchors........................ 4 Section 15190 Mechanical Identification.................................. 3 Section 15300 Fire Protection Systems.................................... 8 Section 15400 Plumbing Piping Systems.................................... 11 Section 15420 Floor and Roof Drains...................................... 3 Section 15440 Plumbing Fixtures and Trim................................. 6 Section 15458 Electric Water Heaters..................................... 2 Section 15854 Roof Top Constant Air Volume Units......................... 8 Section 15856 Gas-Fired Heating and Ventilating Units (80/20)............ 5 Section 15860 Fans and Ventilators....................................... 4 Section 15891 Ductwork................................................... 10 Section 15910 Ductwork Accessories....................................... 5 Section 15940 Air Outlets and Inlets..................................... 2 Section 15990 HVAC Operational Testing, Adjusting, and Balancing......... 4 Section 15995 Shell Mechanical Commissioning............................. 34 DIVISION 16 - ELECTRICAL: Section 16000 Table of Contents Electrical............................... 2 Section 16010 Basic Electrical Requirements.............................. 21 Section 16040 Shell Office Space Design Parameters....................... 8 Section 16041 Interior Finish Office Design Parameters................... 6 Section 16045 Shell Industrial Space Design Parameters................... 4 Section 16046 Interior Finish Industrial Design Parameters............... 5 Section 16110 Electrical Raceways and Fittings........................... 8 Section 16120 Cable, Wire, and Connectors................................ 7 Section 16121 Electrical Connections for Equipment....................... 3 Section 16130 Electrical Boxes and Fittings.............................. 7 Section 16140 Wiring Devises............................................. 4 Section 16401 Electrical Service Entrance................................ 3 Section 16425 Switchboards............................................... 6 Section 16440 Safety and Disconnect Switches............................. 3 Section 16450 Electrical Grounding....................................... 4 Section 16460 Transformers............................................... 5 Section 16465 Busway..................................................... 4 Section 16470 Panelboards and Enclosures................................. 4 Section 16475 Fuses...................................................... 2 Section 16480 Motor Control Centers...................................... 6 Section 16482 Motor Starters............................................. 4 Section 16501 Lighting Fixtures and Lamps................................ 6 Section 16625 Emergency Power System..................................... 10 Section 16670 Lighting Protection System................................. 3 Section 16720 Fire Alarm System.......................................... 12 Section 16721 Combination Fire Alarm System.............................. 13 Section 16725 Fire Supervisory System.................................... 8 Section 16740 Telephone System........................................... 2 Section 16780 Closed Circuit Television System........................... 4 Section 16945 Miscellaneous Electrical Controls and Control Wiring....... 4 Section 16995 Shell Electrical Commissioning............................. 17 Section 16996 Interior Finish Electrical Commissioning .................. 5
Exhibit B-1 Page 3 of 3 EXHIBIT B-2 INNOTRAC PRE-CONSTRUCTION SCHEDULE [CHART] Exhibit B-2 Page 1 of 2 EXHIBIT B-2 INNOTRAC PRE-CONSTRUCTION SCHEDULE [CHART] Exhibit B-2 Page 2 of 2 EXHIBIT B-3 CONTRACTOR'S AND VENDORS' "JOBSITE RULES OF CONDUCT" In an effort to maintain a high standard of professionalism, we have prepared the following "Rules of Conduct". Your personnel's compliance with these rules will help us collectively acquire Complete Customer Satisfaction. - Conduct yourselves as guests in tenant spaces as well as in the building. No radios or audio equipment are permitted in Duke buildings. - No graffiti. - Be neat, clean and QUIET while in or NEAR, occupied space. Protect hallway and entries with temporary carpet runners. - No vehicles to be brought into the buildings, parted in loading areas or at entries. - Dress properly. Shirts with at least 3" sleeves, long pants and shoes are required. Hard hats should be worn where applicable. - Identification or uniform is required when working in occupied space. - Always check-in at front desk in an occupied space. - Do not use Tenants' telephones. - REMOVE ALL DIRT AND DEBRIS CAUSED BY YOUR ACTIVITY. PROJECT TO BE BROOM SWEPT AND TRASH REMOVED EVERY NIGHT BY EACH RESPECTIVE TRADE. - Do not smoke or use tobacco. - Loud and/or foul language is prohibited. - Do not bring food or drink into CARPETED areas. - Do not leave material or debris in occupied or vacant spaces. - Exterior exits and entrances to suites are the responsibility of all contractors to be locked at night. Also, turn off all lights at night. - Generally thermostats are to be left alone. However, in vacant spaces and construction areas, thermostats are not to be set above 72 degrees in winter or below 74 degrees in summer. - Loading docks are for loading and unloading only. No parking at dock level to check on your workmen. - In dealing with tenants, be courteous at all times, keep all negative comments to yourself or discuss them with job staff personnel away from the tenant space. - Special care is to be taken to protect Tenants' furnishings and finishes, (i.e., dust protection, etc.). - No work causing noxious odors is to be done within any building. Any floor sealing or other such odoriferous work is to be coordinated with Duke Property Management personnel to allow notification and coordination with the tenants and adjoining tenants. - Notify Duke Property Management personnel 72 hours prior to any work causing disruption of utilities, or if access is needed in an adjoining tenant space (i.e. before any drilling is started). - Ail contractors and vendors to use only freight elevators or protected elevators where available. NON-COMPLIANCE WITH THESE RULES MAY BE CONSIDERED GROUNDS FOR REMOVAL FROM A DUKE PROTECT, Exhibit B-3 Page 1 of 1 EXHIBIT B-4 LETTER OF UNDERSTANDING Duke Realty Limited Partnership Attn.: Senior Property Manager 4555 Lake Forest Drive, Suite 400 Cincinnati, OH 45242 RE: Lease Agreement between Duke Realty Limited Partnership, an Indiana limited partnership ("Landlord") and Innotrac Corporation, a Georgia corporation ("Tenant") for the Leased Premises located at 2305 Litton Lane, Hebron, Kentucky 41048 (the "Leased Premises"), within Hebron Industrial Park (the "Park") dated _________________, 2005 (the "Lease"). Dear _______________________________: The undersigned, on behalf of Tenant, certifies to Landlord as follows: 1. The Commencement Date under the Lease is ____________________________. 2. The rent commencement date is _______________________________________. 3. The expiration date of the Lease is _________________________________. 4. The Lease (including amendments) is the entire agreement between Landlord and Tenant as to the leasing of the Leased Premises and is in full force and effect. 5. The Landlord has completed the portion of the Work (as defined in the Lease) associated with the Initial Space (excluding punchlist items as agreed upon by Landlord and Tenant), if any, and Tenant has accepted the Initial Space as of the Commencement Date. 6. To the best of the undersigned's knowledge, there are no uncured events of default by either Tenant or Landlord under the Lease. IN WITNESS WHEREOF, the undersigned has caused this Letter of Understanding to be executed this __ day of _________________, 2005. INNOTRAC CORPORATION, a Georgia corporation By: ------------------------------------ Printed Name: -------------------------- Title: --------------------------------- Exhibit B-4 Page 1 of 1 EXHIBIT B-5 MATERIALS HANDLING CONSULTANT'S REQUIREMENTS (1) Concrete drive-up ramp for entrance into the Building. (2) Lighting installed in the Building sufficient to permit installation of Tenant Equipment in the Warehouse Space, (3) Sufficient power to allow use of hand tools. (4) Floor space free and clear of obstructions as necessary for Tenant to begin installation of Tenant Equipment in the Warehouse Space. (5) Area available outside of Building for dropping of up to five (5) tractor trailers for staging. Exhibit B-5 Page 1 of 1 EXHIBIT C OPERATING EXPENSE EXCLUSIONS (1) costs and expenses of correction of defects in the design or construction of the Work and any part thereof; (2) costs and expenses to the extent covered by any construction warranty or placed under manufacturers' warranties; (3) costs and expenses associated with financing incurred by Landlord or its affiliates, including principal, interest, amortization and/or amounts owed under loan documents; (4) impact fees; (5) development fees; (6) ground lease rental; (7) costs of items considered capital repairs, replacements, improvements and equipment customarily treated as capital expenses under generally accepted accounting principles ("Capital Items") except to the extent such repairs, replacements, improvements or equipment are intended to achieve a savings in Operating Expenses, but only to the extent of actual savings, or are made for the purpose of complying with governmental laws, rules and regulations enacted or made applicable to the Site or the Building after the date of construction; (8) rentals for items (except when needed in connection with normal repairs and maintenance of permanent systems) which if purchased, rather than rented, would constitute a Capital Item that is not permitted in Item 11 (excluding, however, equipment not affixed to the Building that is used in providing janitorial or similar services) (9) costs and expenses incurred by Landlord for the repair of damage to the Building to the extent that Landlord is reimbursed by insurance proceeds; (10) costs and expenses, including permit, license and inspection costs, incurred with respect to the installation of tenant or other occupants' improvements in the Building or incurred in renovating or otherwise improving, decorating, painting or redecorating vacant space for tenants or other occupants of the Building; (11) depreciation, amortization and interest payments, except on materials, tools, supplies and vendor-type equipment purchased by Landlord to enable Landlord to supply services Landlord might otherwise contract for with a third party where such depreciation, amortization and interest payments would otherwise have been included in the charge for such third party's services, all as reasonably determined by Landlord, and when depreciation or amortization is permitted or required, the item will be amortized over its reasonably anticipated useful life; (12) marketing costs, including without limitation, leasing commissions, attorneys' fees in connection with the negotiation and preparation of letters, deal memos, letters of intent, leases, subleases or assignments, space planning costs, and other costs and expenses incurred in connection with lease, sublease or assignment negotiations, and transactions with present or prospective tenants or other occupants of the Building; (13) costs and expenses in connection with services or other benefits that are not available to Tenant or for which Tenant is charged for directly but that are provided to another tenant or occupant of the Building at a lesser cost, but only as to the difference between the amount charged to Tenant and another tenant or occupant; (14) costs and expenses incurred by Landlord due to the violation by Landlord or any tenant of the terms and conditions of any lease of space in the Building; (15) overhead and profit increment paid to subsidiaries or affiliates of Landlord for goods and services in or to the Building to the extent the same exceeds the costs of such goods and services rendered by unaffiliated third parties on a competitive basis; (16) Landlord's general corporat overhead and general and administrative expenses; Exhibit C Page 1 of 3 (!7) compensation paid to clerks, attendants or other persons in commercial concessions operated by Landlord or in the parking garages of or serving the Building or wherever Tenant is granted its parking privileges and ail fees paid to any parking facility operator; (18) rentals and other related expenses incurred in leasing HVAC systems, elevators or other equipment ordinarily considered to be Capital Items, except for (a) expenses in connection with making repairs on or keeping Building systems in operation while repairs are being made; (b) costs of equipment not affixed to the Building that is used in providing janitorial or similar services, and (c) Capital Items permitted to be included in Operating Expenses under Item 9 or 11 above; (19) advertising and promotional expenditures, and costs of signs in or on the Building identifying the owner of the Building or other tenants' signs; (20) costs and expenses of any electric power used by any tenant in the Building measurably in excess of the Building-standard amount, or electric power costs for which any tenant directly contracts with the local public service company or of which any tenant is separately metered or submetered and pays Landlord directly; however, if any tenant in the Building contracts directly for electric power service or is separately metered or submetered during any portion of the relevant period, the total electric power costs for the Building will be "grossed up" to reflect what those costs would have been had each tenant in the Building used the Building-standard amount of electric power; (21) costs and expenses incurred in connection with upgrading the Building to comply with life, fire and safety codes, ordinances, statutes or other laws in effect prior to the Commencement Date including, without limitation, the ADA, including penalties or damages incurred due to non-compliance; (22) any management fees in excess of those management fees that are normally and customarily charged by landlords of comparable buildings; (23) any and all costs arising from the presence of hazardous materials or substances (as defined by applicable laws in effect on the date this Lease is executed) in or about the Lease Premises or the Building or Common Areas including, without limitation, hazardous substances in the ground water or soil, not placed or permitted to be placed in the Leased Premises or the Building by Tenant, its agents, employees contractors or invitees; (24) charitable, political or other voluntary contributions; (25) costs for sculpture, paintings or other objects of art; (26) costs (including attorneys' fees and costs of settlement judgments and payments) arising from claims, disputes or potential disputes, litigation or arbitrations pertaining to Landlord or the Building; (27) costs associated with the operation of the business of the partnership or entity that constitutes Landlord as the same are distinguished from the costs of operation of the Building, including partnership accounting and legal matters, costs of selling, syndicating, financing, mortgaging or hypothecating any of Landlord's interest in the Building; (28) costs of any "tap fees" or any sewer or water connection fees for the benefit of any particular tenant in the Building; (29) entertainment, dining or travel expenses for any purpose; (30) expenses for gifts provided to any entity, including, but not limited to, Tenant, other tenants, employees, vendors, contractors, prospective tenants and agents; (31) any "finders fees", brokerage commissions, job placement costs or job advertisement costs; (32) costs of any "tenant relations" parties, events or promotions not consented to by an authorized representative of Tenant in writing as long as none of Tenant's employees attend; (33) "in-house" legal and accounting fees; or Exhibit C Page 2 of 3 (34) fees and assessments imposed by any covenants or owners' association, but only to the extent such fees and assessments are otherwise excluded hereunder. Exhibit C Page 3 of 3 EXHIBIT D RULES AND REGULATIONS 1. The sidewalks, entrances, driveways and roadways serving and adjacent to the Leased Premises shall not be obstructed or used for any purpose other than ingress and egress. Landlord shall control the Common Areas. 2. No awnings or other projections shall be attached to the outside walls of the Building. No curtains, blinds, shades or screens shall be attached to or hung in, or used in connection with, any window or door of the Leased Premises other than Landlord standard window coverings without Landlord's prior written approval. All electric ceiling fixtures hung in offices or spaces along the perimeter of the Building must be fluorescent, of a quality, type, design and tube color approved by Landlord. Neither the interior nor the exterior of any windows shall be coated or otherwise sunscreened without written consent of Landlord. 3. No sign, advertisement, notice or handbill shall be exhibited, distributed, painted or affixed by any tenant on, about or from any part of the Leased Premises, the Building or in the Common Areas including the parking area without the prior written consent of Landlord. In the event of the violation of the foregoing by any tenant, Landlord may remove or stop same without any liability, and may charge the expense incurred in such removal or stopping to tenant. 4. The sinks and toilets and other plumbing fixtures shall not be used for any purpose other than those for which they were constructed, and no sweepings, rubbish, rags, or other substances shall be thrown therein. All damages resulting from any misuse of the fixtures shall be borne by the tenant who, or whose subtenants, assignees or any of their servants, employees, agents, visitors or licensees shall have caused the same. 5. No boring, cutting or stringing of wires or laying of any floor coverings shall be permitted, except with the prior written consent of the Landlord and as the Landlord may direct. Landlord shall direct electricians as to where and how telephone or data cabling are to be introduced. The location of telephones, call boxes and other office equipment affixed to the Leased Premises shall be subject to the approval of Landlord. 6. No bicycles, vehicles, birds or animals of any kind (except seeing eye dogs) shall be brought into or kept in or about the Leased Premises, and no cooking shall be done or permitted by any tenant on the Leased Premises, except microwave cooking, and the preparation of coffee, tea, hot chocolate and similar items for tenants and their employees. No tenant shall cause or permit any unusual or objectionable odors to be produced in or permeate from the Leased Premises. 7. The Leased Premises shall not be used for manufacturing, unless such use conforms to the zoning applicable to the area, and the Landlord provides written consent. No tenant shall occupy or permit any portion of the Leased Premises to be occupied as an office for the manufacture or sale of liquor, narcotics, or tobacco in any form, or as a medical office, or as a barber or manicure shop, or a dance, exercise or music studio, or any type of school or daycare or copy, photographic or print shop or an employment bureau without me express written consent of Landlord. The Leased Premises shall not be used for lodging or sleeping or for any immoral or illegal purpose. 8. No tenant shall make, or permit to be made any unseemly, excessive or disturbing noises or disturb or interfere with occupants of this or neighboring buildings or premises or those having business with them, whether by the use of any musical instrument, radio, phonograph, unusual noise, or in any other way. No tenant shall throw anything out of doors, windows or down the passageways. 9. No tenant, subtenant or assignee nor any of its servants, employees, agents, visitors or licensees, shall at any time bring or keep upon the Leased Premises any flammable, combustible or explosive fluid, chemical or substance or firearm. 10. No additional locks or bolts of any kind shall be placed upon any of the doors or windows by any tenant, nor shall any changes be made to existing locks or the mechanism thereof. Each tenant must upon the termination of his tenancy, restore to the Landlord all keys of doors, offices, and toilet rooms, either furnished to, or otherwise procured by, such tenant and in the event of the loss of keys so furnished, such tenant shall pay to the Landlord the cost of replacing the same or of changing the lock or locks opened by such lost key if Landlord shall deem it necessary to make such changes. Exhibit D Page 1 of 2 11. No tenant shall overload the floors of the Leased Premises. All damage to the floor, structure or foundation of the Building due to improper positioning or storage items or materials shall be repaired by Landlord at the sole cost and expense of tenant, who shall reimburse Landlord immediately therefor upon demand. 12. Each tenant shall be responsible for all persons entering the Building at tenant's invitation, express or implied. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion from the Building of any person. In case of an invasion, mob riot, public excitement or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right without any abatement of rent to require all persons to vacate the Building and to prevent access to the Building during the continuance of the same for the safety of the tenants and the protection of the Building and the property in the Building. 13. Canvassing, soliciting and peddling in the Building are prohibited, and each tenant shall report and otherwise cooperate to prevent the same. 14. All equipment of any electrical or mechanical nature shall be placed by tenant in the Leased Premises in settings that will, to the maximum extent possible, absorb or prevent any vibration, noise and annoyance. 15. There shall not be used in any space, either by any tenant or others, any hand trucks except those equipped with rubber tires and rubber side guards. 16. The scheduling of tenant move-ins shall be before or after normal business hours and on weekends, subject to the reasonable discretion of Landlord. 17. The Building is a smoke-free Building. Smoking is strictly prohibited within the Building. Smoking shall only be allowed in areas designated as a smoking area by Landlord. Tenant and its employees, representatives, contractors or invitees shall not smoke within the Building or throw cigar or cigarette butts or other substances or litter of any kind in or about the Building, except in receptacles for that purpose. Landlord may, at its sole discretion, impose a charge against monthly rent of $50.00 per violation by tenant or any of its employees, representatives, contractors or invitees, of this smoking policy. 18. Tenants will insure that all doors are securely locked, and water faucets, electric lights and electric machinery are turned off before leaving the Building. 19. Tenant, its employees, customers, invitees and guests shall, when using the parking facilities in and around the Building, observe and obey all signs regarding fire lanes and no-parking and driving speed zones and designated handicapped and visitor spaces, and when parking always park between the designated lines. Landlord reserves the right to tow away, at the expense of the owner, any vehicle which is improperly parked or parked in a no-parking zone or in a designated handicapped area, and any vehicle which is left in any parking lot in violation of the foregoing regulation. All vehicles shall be parked at the sole risk of the owner, and Landlord assumes no responsibility for any damage to or loss of vehicles. 20. Tenant shall be responsible for and cause the proper disposal of medical waste, including hypodermic needles, created by its employees. 21. No outside storage is permitted including without limitation the storage of trucks and other vehicles. 22. No tenant shall be allowed to conduct an auction from the Leased Premises without the prior written consent of Landlord. It is Landlord's desire to maintain in the Building and Common Areas the highest standard of dignity and good taste consistent with comfort and convenience for tenants. Any action or condition not meeting this high standard should be reported directly to Landlord. The Landlord reserves the right to make such other and further rules and regulations as in its judgment may from time to time be necessary for the safety, care and cleanliness of the Building and Common Areas, and for the preservation of good order therein. Exhibit D Page 2 of 2 (FLOOR PLAN) Exhibit E Page 1 of 1 EXHIBIT F MAINTENANCE SPECIFICATIONS Suggested HVAC Contractors: PACKAGED UNIT
J F M A M J J A S O N D --- --- --- --- --- --- --- --- --- --- --- --- Check and lubricate motor X X X X Inspect blower wheel X X X X Check air filters, replace if required X X X X Inspect and tighten electrical connections X X X X Inspect contactors and motor starters X X X Inspect evaporator coil X X Check condensate pan and drain X X Inspect condenser coil, clean once annually X X Check refrigerant charge X X Check and record suction and head pressure X Check and record superheat X Check and record sub-cooling X Check and record temperature drop across evaporator X Check and record condenser fan amp rating and draw X Pull and clean burners X Inspect heat exchanger X X Sequence heat, check operation X X Check operation of ventor fan X X Inspect flue X X Check operation of flame safety X Check operation and limit controls X Make recommendations of any required repairs X X X X
Exhibit F Page 1 of 2 EXHIBIT F
INDIRECT FIRED MAKE-UP AIR UNITS J F M A M J J A S O N D - -------------------------------- --- --- --- --- --- --- --- --- --- --- --- --- Inspect blower wheel X X X X Check and adjust blower belt, replace annually X X X X Inspect and tighten electrical connections X X X X Inspect contactor and motor starters X X X X Check all control electrical connections X X X X Check damper linkages X X X X Pull and clean burner X Check operation of flame safety X X Check operaton and lubricate ventor fan if applicable X X Check and clean pilot X X Check gas pressure X Check operation and limit controls X Check flue X X Check heat exchangers X X Make recommendations of required repairs X X X X
NOTE: - - IF UNIT HAS AIR FILTERS THEY SHOULD BE REPLACED AT LEAST QUARTERLY. - - IF UNIT HAS WASHABLE OUTSIDE AIR FILTERS THEY SHOULD BE CLEANED AT LEAST ONE TIME PER YEAR. Exhibit F Page 2 of 2 EX-21.1 10 g00505exv21w1.txt EX-21.1 LIST OF SUBSIDIARIES EXHIBIT 21.1 LIST OF SUBSIDIARIES - - None. EX-23.1 11 g00505exv23w1.txt EX-23.1 CONSENT OF BDO SEIDMAN, LLP EXHIBIT 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors Innotrac Corporation We consent to incorporation by reference in Registration Statement Nos. 333-66045 and 333-54970 on Form S-8 of our report dated March 28, 2006, relating to the consolidated financial statements of Innotrac Corporation and subsidiaries appearing in the Company's Annual Report on Form 10-K for the year ended December 31, 2005. /s/ BDO Seidman, LLP Atlanta, Georgia March 28, 2006 EX-23.2 12 g00505exv23w2.txt EX-23.2 CONSENT OF DELOITTE & TOUCHE LLP EXHIBIT 23.2 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in this Registration Statements Nos. 333-66045 and 333-54970 on Form S-8 of our report relating to the 2003 consolidated financial statements of Innotrac Corporation dated March 30, 2004, appearing in the Annual Report on Form 10-K of Innotrac Corporation for the year ended December 31, 2005. /s/ DELOITTE & TOUCHE LLP Atlanta, Georgia March 31, 2006 EX-31.1 13 g00505exv31w1.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 annual report on Form 10-K 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: March 31, 2006 /s/ Scott D. Dorfman ---------------------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board (Principal Executive Officer) EX-31.2 14 g00505exv31w2.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 annual report on Form 10-K 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: March 31, 2006 /s/ Christine A. Herren ---------------------------------------- Christine A. Herren Senior Director and Controller (Principal Financial Officer and Principal Accounting Officer) EX-32.1 15 g00505exv32w1.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 Annual Report on Form 10-K of the Company for the year ended December 31, 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: March 31, 2006 /s/ Scott D. Dorfman ---------------------------------------- Scott D. Dorfman President, Chief Executive Officer and Chairman of the Board EX-32.2 16 g00505exv32w2.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 Annual Report on Form 10-K of the Company for the year ended December 31 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: March 31, 2006 /s/ Christine A. Herren ---------------------------------------- Christine A. Herren Senior Director and Controller (Principal Financial Officer and Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----