-----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, GTUd6rudRBJY6y0+8oTfxkR8jklzLJWMe/cfmgSwwnMv46S7KwU6BUu/VftQgWb7 IeP2NxSITB4ye8OYFbAlpg== 0000950144-99-009067.txt : 19990723 0000950144-99-009067.hdr.sgml : 19990723 ACCESSION NUMBER: 0000950144-99-009067 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 7 FILED AS OF DATE: 19990722 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: S-1/A SEC ACT: SEC FILE NUMBER: 333-79929 FILM NUMBER: 99668816 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 S-1/A 1 INNOTRAC CORPORATION 1 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 22, 1999 REGISTRATION NO. 333-79929 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------------ PRE-EFFECTIVE AMENDMENT NO. 2 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------------ INNOTRAC CORPORATION (Exact name of Registrant as specified in its charter) GEORGIA 7389 58-1592285 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
6655 SUGARLOAF PARKWAY DULUTH, GEORGIA 30097 (678) 584-4000 (Address, including zip code, and telephone number including area code, of registrant's principal executive offices) SCOTT D. DORFMAN CHIEF EXECUTIVE OFFICER 6655 SUGARLOAF PARKWAY DULUTH, GEORGIA 30097 (678) 584-4000 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: DAVID A. STOCKTON, ESQ. PATRICIA A. WILSON, ESQ. JAN M. DAVIDSON, ESQ. TROUTMAN SANDERS LLP KILPATRICK STOCKTON LLP 5200 NATIONSBANK PLAZA 1100 PEACHTREE STREET, N.E., SUITE 2800 600 PEACHTREE STREET, N.E. ATLANTA, GEORGIA 30309 ATLANTA, GEORGIA 30308 (404) 815-6500 (404) 885-3000 (404) 815-6555 (FAX) (404) 885-3900 (FAX)
------------------------------ APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this form are being offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [ ] If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act of 1933, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434 under the Securities Act of 1933, check the following box. [ ] ------------------------------ THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON A DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON A DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. INNOTRAC AND THE SELLING SHAREHOLDERS MAY NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED. SUBJECT TO COMPLETION, DATED JULY 22, 1999 PRELIMINARY PROSPECTUS 2,500,000 SHARES (INNOTRAC LOGO) INNOTRAC CORPORATION COMMON STOCK ------------------------------ This is a public offering of 2,500,000 shares of common stock of Innotrac Corporation. We are selling 2,100,000 shares and the selling shareholders named in this prospectus are selling 400,000 shares. We will not receive any of the proceeds from the sale of shares by the selling shareholders. Our common stock is traded on the Nasdaq National Market under the symbol "INOC." On July 21, 1999, the last reported sale price for our common stock was $24.75 per share. SEE "RISK FACTORS" BEGINNING ON PAGE 5 TO READ ABOUT CERTAIN RISKS THAT YOU SHOULD CONSIDER BEFORE BUYING SHARES OF OUR COMMON STOCK. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------------
PER SHARE TOTAL -------- -------- Public offering price....................................... $ $ Underwriting discount....................................... $ $ Proceeds, before expenses, to us............................ $ $ Proceeds, before expenses, to the selling shareholders...... $ $
------------------------------ The underwriters may, under certain circumstances, purchase up to an additional 275,000 shares from the selling shareholders and 100,000 shares from us at the public offering price less the underwriting discount. The underwriters are severally underwriting the shares being offered in this prospectus. The underwriters expect to deliver the shares against payment in New York, New York on , 1999. ------------------------------ BEAR, STEARNS & CO. INC. THE ROBINSON-HUMPHREY COMPANY J.C. BRADFORD & CO. The date of this prospectus is , 1999. 3 [FLOWCHART AND CAPTIONS] [The graphic on this page is a flow chart depicting the four core competencies provided by Innotrac Corporation. At the top left of the page, under the caption, "clients," is a graphic containing the corporate logos for Ameritech, Southwestern Bell, Siemens, NAPA, The Home Depot, Bell Atlantic, Pacific Bell, TCI, BellSouth and US West. The flow chart moves to a picture of an individual providing an overhead presentation to a group of business people next to the caption "CONSULTATIVE SERVICES." The following bullet points are beneath this caption: Channel Management, Marketing Strategy, Product Strategy, Customized Billing Options, Promotions and Forecasting. The next picture in the flow chart is of two individuals working at a computer terminal in a computer room above the caption "TECHNOLOGY SERVICES." The following bullet points are beneath this caption: EDI, IVR, Database Management and Internet Services. The next picture in the flow chart is the Innotrac Corporation logo, which is in the center of the page. The next picture in the flow chart is of an individual working in a distribution center. Above the picture is the caption "DISTRIBUTION SERVICES," with the following bullet points beneath this caption: Product Ownership, Fulfillment, Purchasing Management, and Inventory Management. The next picture in the flow chart is of a customer support call center next to the caption "CUSTOMER SUPPORT SERVICES." Beneath this caption are the following bullet points: Call Center, Technical Support, Returns Management and Re-Ships and Refunds. The last picture in the flow chart is of a customer on her telephone ordering a product underneath the caption "end users."] 4 PROSPECTUS SUMMARY This summary contains basic information about us and the offering. Because it is a summary, it does not contain all the information that you should consider before investing. You should read the entire prospectus carefully, including the section entitled "Risk Factors" and our financial statements and the related notes to those statements included in this prospectus. Except as otherwise required by the context, references in this prospectus to "we," "our" and "us" refer to Innotrac Corporation, or, where appropriate, to Innotrac and the affiliated companies with which it conducted business prior to its May 1998 initial public offering. Unless otherwise specified, all information in this prospectus assumes no exercise of the underwriters' over-allotment option. INNOTRAC CORPORATION Innotrac provides customized, technology-based marketing support and distribution services to large corporations that outsource these functions. We target companies that have (1) a large customer base, (2) numerous and/or geographically diverse subsidiary or affiliate operations, (3) extensive marketing needs or (4) complex point-of-distribution requirements. Our comprehensive services enable our clients to manage their sales channels efficiently. Since 1994, we have focused on the telecommunications industry because of its high growth characteristics and increasing marketing needs. During that time, the majority of our growth has come from sales and distribution services related to Caller ID equipment. We believe we have created an outsourcing model that utilizes our core competencies, which include: - consultative services - channel management, marketing and product strategy - customized and flexible billing options - promotions - sales and marketing information and forecasting - technology services - electronic data interface, or EDI, integration - interactive voice response, or IVR - database management - distribution services - product ownership, consignment and warehousing - fulfillment - purchasing management - inventory management - end user customer support services - inbound call center services and technical support - returns and refunds processing In order to perform these functions in-house, a company may be required to develop expensive, labor-intensive infrastructures, which may divert its resources and management's focus from its principal business. By assuming responsibility for these tasks, we strive to create a "one stop approach" to improve the quality of the non-core operations of our clients and to reduce their operating costs. Approximately 97% of our 1998 revenues and 98% of our revenues for the three months ended March 31, 1999 came from sales of Caller ID equipment and related services to BellSouth Telecommunications, Inc., Pacific Bell, Southwestern Bell Telephone Co. and US West Communications Services, Inc. and their customers. Caller ID equipment includes corded and cordless telephones with built-in Caller ID and stand-alone devices. We believe that the flexibility of our services allows us to attract clients in many industries. We have provided literature and point-of-sale distribution for a number of years to companies including Home Depot U.S.A., Inc., Siemens Energy & Automation Inc. and National Automotive Parts Association, or NAPA. In 1999, we began to sell and distribute cable modems to customers of Tele-Communications, 1 5 Inc., or TCI. In addition, we intend to apply our existing core competencies to help businesses distribute their products through the internet. We are pursuing relationships with companies that offer various e-commerce solutions but do not have our distribution and end user support capabilities. For example, we recently entered into a relationship with IBM to make our distribution and call center services available to certain IBM e-commerce customers. STRATEGY Our strategy is to take advantage of trends towards outsourcing marketing support and distribution services by utilizing our comprehensive services, reputation for quality service and strong client relationships. The key elements of our strategy are to: - maximize marketing support and product distribution services to our existing telecommunications clients, - grow our telecommunications client base, - expand customer distribution channels through e-commerce, - build long-term client relationships and - continue our investment in technology. RECENT DEVELOPMENTS Based on preliminary information, Innotrac's net revenues increased 58.2% to $57.5 million for the three months ended June 30, 1999 compared to $36.3 million for the three months ended June 30, 1998. Because of our new business model, gross margins decreased to 16.0% of net revenues from 27.0% of net revenues. Under the new model, we bill our largest telecommunications clients directly for products we sell to their customers, which reduces our credit risk. Our net income increased 25.8% to $3.3 million, or $0.36 per diluted share, for the three months ended June 30, 1999 from $2.6 million, or $0.33 per diluted share, for the prior comparable period. Our net revenues for the six months ended June 30, 1999 increased 111.9% to $124.8 million compared to $58.9 million for the six months ended June 30, 1998. Gross margins decreased to 14.3% of net revenues from 27.1% of net revenues. Innotrac's net income increased 64.2% to $6.6 million, or $0.72 per diluted share, for the six months ended June 30, 1999 from $4.0 million, or $0.54 per diluted share, for the prior comparable period. For the three months ended June 30, 1999, the total number of Caller ID units distributed increased 114.3% to 1.4 million units compared to 672,000 units for the three months ended June 30, 1998. Sales of Caller ID units increased 65.5% for the three months ended June 30, 1999 as compared to the prior comparable period, and accounted for 59.5% of the total Caller ID units distributed during the period. The number of units distributed under promotional giveaway programs -- for which we receive a fee -- increased 278.2% for the three months ended June 30, 1999 as compared to the prior comparable period, and accounted for the remaining 40.5% of Caller ID units distributed. For the six months ended June 30, 1999, 3.7 million Caller ID units were distributed, an increase of 149.1% from the 1.5 million units distributed during the six months ended June 30, 1998. Caller ID unit sales increased 138.0% and distributions for a fee increased 161.9% for the six months ended June 30, 1999 from the prior comparable period. Sales represented 51.1% of total volume and fee-based distributions represented 48.9% of total Caller ID units distributed during the six months ended June 30, 1999. ------------------------------ We were incorporated in Georgia on August 8, 1984, and our initial public offering was conducted on May 6, 1998. In conjunction with that offering, eight affiliated companies were consolidated into Innotrac. Our principal executive offices are located at 6655 Sugarloaf Parkway, Duluth, Georgia 30097. Our telephone number is (678) 584-4000. ------------------------------ This prospectus contains trademarks and names of persons other than Innotrac, which are the property of their respective owners. 2 6 THE OFFERING Common stock offered: by us............................ 2,100,000 shares by the selling shareholders...... 400,000 shares Common stock to be outstanding after the offering.......................... 11,109,995 shares(1) Use of proceeds....................... - repayment of bank borrowings, - establishment of a new call center, - upgrade of computer and network hardware and - general corporate purposes, including working capital needs. See "Use of Proceeds." Nasdaq National Market symbol......... INOC - --------------- (1) Excludes 472,150 shares of common stock issuable upon exercise of stock options outstanding under our Stock Option and Incentive Award Plan as of July 21, 1999. Options for 90,001 shares are currently exercisable. 3 7 SUMMARY FINANCIAL DATA The following table sets forth Innotrac's summary financial data. Except for "Other Data," the following data was derived from our consolidated financial statements and accompanying notes, some of which are included in this prospectus. "Pro forma net income" and "Pro forma net income per share" reflect the results of Innotrac and formerly affiliated companies as if they had been one corporation taxable at the corporate level for all periods presented.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------- ------------------ 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS EXCEPT SHARE DATA; 1994 AND THREE MONTHS DATA UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues, net............................. $17,380 $44,886 $71,297 $87,978 $139,673 $22,565 $67,320 Cost of revenues.......................... 11,274 30,658 55,519 67,986 108,785 16,412 58,717 ------- ------- ------- ------- -------- ------- ------- Gross profit.............................. 6,106 14,228 15,778 19,992 30,888 6,153 8,603 ------- ------- ------- ------- -------- ------- ------- Operating expenses: Selling, general and administrative expenses.............................. 2,289 6,510 10,391 12,572 15,642 3,428 2,440 Depreciation and amortization........... 214 293 429 631 943 138 379 ------- ------- ------- ------- -------- ------- ------- Total operating expenses................ 2,503 6,803 10,820 13,203 16,585 3,566 2,819 ------- ------- ------- ------- -------- ------- ------- Operating income.......................... 3,603 7,425 4,958 6,789 14,303 2,587 5,784 ------- ------- ------- ------- -------- ------- ------- Other (income) expense: Interest expense........................ 622 1,090 1,457 1,788 956 315 373 Other................................... 67 (73) 94 118 35 6 (20) ------- ------- ------- ------- -------- ------- ------- Total other expense..................... 689 1,017 1,551 1,906 991 321 353 ------- ------- ------- ------- -------- ------- ------- Income before income taxes................ 2,914 6,408 3,407 4,883 13,312 2,266 5,431 Income tax (provision) benefit............ (356) (793) (212) 77 (3,743) 61 (2,145) ------- ------- ------- ------- -------- ------- ------- Net income................................ $ 2,558 $ 5,615 $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286 ======= ======= ======= ======= ======== ======= ======= Pro forma net income...................... $ 1,573 $ 3,941 $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286 ======= ======= ======= ======= ======== ======= ======= Pro forma net income per share: Basic................................... $ 0.24 $ 0.61 $ 0.32 $ 0.46 $ 1.01 $ 0.21 $ 0.37 Diluted................................. 0.24 0.61 0.32 0.46 1.00 0.21 0.36 Weighted average common shares outstanding: Basic................................... 6,500 6,500 6,500 6,500 8,096 6,500 9,000 Diluted................................. 6,500 6,500 6,500 6,500 8,155 6,500 9,127 OTHER DATA: Total telecommunications products shipped................................. 261 550 1,650 1,758 2,858 800 2,227
AS OF MARCH 31, 1999 ---------------------- AS AS OF DECEMBER 31, ADJUSTED --------------------------------------------------- FOR THIS 1994 1995 1996 1997 1998 HISTORICAL OFFERING ----------- ------- ------- ------- ------- ---------- -------- (IN THOUSANDS; 1994 AND MARCH 31 DATA UNAUDITED) BALANCE SHEET DATA: Working capital............................... $ 1,237 $ (616) $(1,042) $ 1,521 $26,853 $30,380 $78,996 Property and equipment, net................... 5,059 9,099 10,939 7,609 7,463 7,224 7,224 Total assets.................................. 13,548 30,414 49,037 32,497 73,992 105,166 122,163 Total debt.................................... 5,874 8,642 22,580 13,187 15,811 31,694 75 Shareholders' equity.......................... 1,624 3,195 4,540 4,827 34,294 37,580 86,196
4 8 RISK FACTORS You should carefully consider the following risk factors before investing in our common stock. The risks and uncertainties described below are not the only ones we face. The risks set forth below are in addition to risks that apply to most businesses, which could also seriously harm the business of Innotrac. If any of these risks actually occur, our business, financial condition or results of operations could be materially adversely affected. This could cause the trading price of our common stock to decline, and you could lose all or part of your investment. WE RELY ON A SMALL NUMBER OF CLIENTS. IF WE LOSE ONE OR MORE OF OUR LARGEST CLIENTS, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Innotrac focuses on developing long-term relationships with large corporations. In recent years, this focus has been on telecommunications companies. A relatively small number of our clients account for a significant portion of our revenues. Our three largest clients, BellSouth, Pacific Bell, and Southwestern Bell, accounted for an aggregate of approximately 87%, 93%, 95% and 94% of net revenues for 1996, 1997, 1998 and the three months ended March 31, 1999. BellSouth accounted for approximately 82%, 85%, 59% and 35% of net revenues for those same periods. If we lose one or more of our largest clients, then our business, results of operations and financial condition could be materially adversely affected. If one of these clients is lost, we cannot assure you that we will be able to replace that client with others that generate comparable revenues or profits. WE DO NOT HAVE WRITTEN CONTRACTS WITH SOME OF OUR CLIENTS, INCLUDING SOME OF OUR MAJOR TELECOMMUNICATIONS CLIENTS. EVEN OUR WRITTEN CONTRACTS GENERALLY DO NOT GUARANTEE SPECIFIC VOLUME LEVELS AND CAN USUALLY BE TERMINATED ON LITTLE NOTICE. We do not have written agreements with some of our major telecommunications clients. Some of our written agreements with telecommunications companies have expired, including the contract with US West. We currently provide services to those and other clients pursuant to oral agreements. These agreements can be terminated by either party at any time. If these agreements are terminated, our financial condition and results of operations could be materially adversely affected. We are negotiating new written agreements with US West and some of our other clients. We cannot assure you, however, that we will be able to obtain those agreements on favorable terms, or at all. We have written agreements with other telecommunications clients, including BellSouth. Those agreements are generally terminable for cause. Some agreements provide for termination without cause on short notice. Our agreement with BellSouth, which does not expire until September 2003, may be terminated by BellSouth for any reason after March 15, 2000 upon 120 days notice. BellSouth commits to a minimum monthly Caller ID sales volume in its agreement with us. However, most of our agreements do not assure specific volume or revenue levels. In addition, our contracts generally do not provide that we will be the client's exclusive service provider. IF THE MARKET FOR TELECOMMUNICATIONS PRODUCTS OR SERVICES CHANGES, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our success depends upon our ability to distribute advanced telecommunications equipment. We cannot assure you that we will be able to continue to distribute state-of-the-art telecommunications equipment. Our business, results of operations and financial condition could be materially adversely affected if: - the telecommunications products we distribute, and the related services offered by our clients, do not gain or sustain marketplace acceptance, - our telecommunications clients fail to adequately promote these products and services or - our telecommunications clients lose market share. 5 9 Currently, we rely heavily upon the distribution of Caller ID equipment to the end user customers of our telecommunications clients for our revenues. We also depend upon these clients to promote Caller ID service. We plan our operations partly based on estimates of "market penetration," which represents the percentage of customers with telephone lines capable of receiving Caller ID service that actually subscribe for the service. Our business, results of operations and financial condition could be materially adversely affected if: - actual Caller ID market penetration rates are lower than estimated, - market saturation is reached or - new technologies replace Caller ID. WE ASSUME RISKS ASSOCIATED WITH BUYING, WAREHOUSING AND SELLING OR RENTING PRODUCTS TO CUSTOMERS, AND OUR BUSINESS COULD BE ADVERSELY AFFECTED IF WE MISMANAGE THESE RISKS. We purchase Caller ID equipment and other telecommunications products from third party vendors in connection with some of our distribution services. Consequently, we assume the risks of inventory obsolescence, damage to units, product returns and theft. If we cannot manage these risks, we may not be able to resell the products we buy at a profit, or even recover their cost, and our business, results of operations and financial condition could be materially adversely affected. Our inventory risk could increase in the future because our e-commerce strategy contemplates our owning products offered by e-commerce clients. Moreover, inventory risks may be greater for products we may distribute via e-commerce than for products we currently distribute. THE NEW TELECOMMUNICATIONS PRODUCTS WE ARE DISTRIBUTING MAY NOT ACHIEVE MARKET SUCCESS AND MAY COMPETE WITH PRODUCTS WE ALREADY DISTRIBUTE FOR OTHER CLIENTS. We have begun to or are seeking to distribute orders for other telecommunications products. These include cable modems and digital subscriber line, or DSL, modems. Both products are relatively new technologies that facilitate high-speed data transmission over the internet. We cannot assure you that these products or other new products will achieve widespread acceptance or market penetration. There is also a risk that competing technologies will replace these products. The sale and distribution of these new products are closely related to our established Caller ID equipment distribution services. However, we cannot assure you that we will successfully integrate these new distribution programs with our existing business. Some of the products we distribute compete with each other. Many of these technologies and services are offered by our current telecommunications clients. Potential competing services and technologies include telephone company-related wireline technologies like traditional analog modems and integrated services digital network modems. We cannot assure you that we will be able to obtain, or retain, distribution service business from telecommunications companies with competing products and technologies. IF OUR NEW E-COMMERCE INITIATIVE FAILS, OUR BUSINESS COULD BE NEGATIVELY IMPACTED. We are seeking to expand the range of distribution channels we offer by developing the ability to sell services and products via the internet (electronic, or e-commerce). We have very little experience in selling products online. The success of this new initiative depends upon, among other things, our ability to: - recruit, hire and retain qualified personnel to assist in this new service, - integrate our new e-commerce service into our existing marketing support services, - develop relationships with clients who can cost effectively offer products that are popular with internet shoppers and - finance growth of our e-commerce service during its developmental stage. Even if we successfully address these risks, we cannot assure you that our new e-commerce initiative will succeed. Our e-commerce services, when fully developed, may not be attractive to existing or new clients. If demand for them does arise, they may not be quickly profitable, if at all. Because e-commerce is a new business for us, we cannot predict the products or clients that may use our e-commerce business or 6 10 the other services we may offer. We may be affected by the pace at which customers change their online shopping habits or preferences. If our e-commerce initiative fails, our business, financial condition or results of operations could be materially adversely affected, particularly if significant financing costs are not recouped. The decision to implement our e-commerce solutions presents a potential e-commerce client with significant enterprise-wide implications and involves a substantial commitment of its management's attention. Sales cycles for our e-commerce services, therefore, could be longer than for our traditional marketing support business as a result of lengthy client evaluation and approval processes over which we have little or no control. Unpredictable sales cycles in the developmental phase of our e-commerce business could hamper timely evaluation of its success or failure. Unpredictable sales cycles could also contribute to significant fluctuations in our operating results on a quarterly basis. OUR NEW E-COMMERCE BUSINESS WILL DEPEND ON CONTINUED GROWTH IN THE USE AND COMMERCIAL VIABILITY OF THE INTERNET. IF THE INTERNET FAILS TO CONTINUE TO GROW, OUR E-COMMERCE BUSINESS MAY NOT SUCCEED, AND OUR BUSINESS MAY BE HARMED. Commercial use of the internet is relatively new. Internet and e-commerce usage may be inhibited for a number of reasons, including: - increased government regulation, - insufficient availability, reliability or capacity of telecommunications services, - security and authentication concerns, - difficulty of access and - inconsistent service quality. If the internet develops as a commercial medium more slowly than we expect, it will adversely affect our e-commerce business. Alternatively, if internet and e-commerce usage grows too quickly, the internet may not be able to support this growth or its performance and reliability may decline. If internet outages or delays occur frequently in the future, web usage -- including usage of our clients' e-commerce web sites -- could grow more slowly or decline. IF WE ARE NOT ABLE TO CONTINUE OR MANAGE OUR GROWTH, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Our operations have grown significantly in recent years. Our business, results of operations and financial condition could be materially adversely affected if we cannot effectively manage our growth. Our continued success depends upon our ability to: - initiate, develop and maintain existing and new client relationships, - respond to competitive developments, - continue to develop our sales infrastructure, - attract, train, motivate and retain management and other personnel and - maintain the high quality of our services. We expect that our continued rapid growth will significantly strain our management, operations, employees and resources. We cannot assure you that we will be able to: - maintain or accelerate our current growth, - effectively manage our expanding operations or - achieve planned growth on a timely or profitable basis. IF THE TREND TOWARD OUTSOURCING DOES NOT CONTINUE, OUR BUSINESS WILL BE ADVERSELY AFFECTED. We believe there has recently been a significant increase in businesses outsourcing services not directly related to their principal business activities. Our business, results of operations and financial condition could be materially adversely affected if the outsourcing trend declines or reverses, or if corporations bring previously outsourced functions back in-house. Particularly during general economic downturns, businesses may bring in-house previously outsourced functions in order to avoid or delay layoffs. 7 11 IF WE ARE NOT ABLE TO RETAIN OR EMPLOY QUALIFIED EMPLOYEES, INCLUDING KEY EXECUTIVES, OUR EMPLOYMENT-RELATED COSTS MAY RISE AND OUR RESULTS OF OPERATIONS COULD SUFFER. We may not be able to retain or employ qualified managers. We depend in large part on the abilities and continuing efforts of our executive officers and senior management. Our business and prospects could be materially adversely affected if (1) current officers and managers do not continue in their key roles and we cannot attract and retain qualified replacements or (2) we cannot attract and retain additional qualified personnel to sustain growth. We do not have employment agreements with our executive officers. We cannot assure you that we will be able to retain them. We only maintain key man life insurance on Scott D. Dorfman, in the amount of $3.5 million. In order to support growth, we must effectively recruit, develop and retain additional qualified management personnel. We cannot assure you that in the future we will be able to recruit and retain additional qualified managers. We may not be able to retain or employ other qualified employees. Our success depends largely on our ability to recruit, hire, train and retain qualified employees. If we cannot do so, our business, results of operations or financial condition could be materially adversely affected. Our industry is very labor-intensive and has experienced high personnel turnover. If our employee turnover rate increases significantly, our recruiting and training costs could rise and our operating effectiveness and productivity could decline. New clients or new large-scale marketing support programs may require accelerated recruiting, hiring and training. We cannot assure you that we will be able to continue to hire, train and retain sufficient qualified personnel to adequately staff new marketing support programs. Some of our operations, particularly our technical support and customer service, require specially trained personnel. In addition, the unemployment rate in the geographic area where our facilities are located is relatively low. Our need for specially trained personnel and low unemployment rates may make it more difficult and costly to hire and retain qualified personnel. Currently, we are not a party to any collective bargaining agreements. None of our employees is unionized. Although we consider our relationship with our employees to be good, there have been occasional unionization initiatives at Innotrac, particularly among our call center personnel. If our employees were to join unions, we could incur increased wages, employee benefits and employment-related administrative costs. We could also experience an increased risk of work stoppages. A significant portion of our operating expenses relates to labor costs. Therefore, an increase in wages or employee benefits could materially adversely affect our business, results of operations or financial condition. IF OUR SYSTEMS OR EQUIPMENT FAIL OR IF OUR FACILITIES ARE DAMAGED, OUR BUSINESS COULD BE INTERRUPTED. LIKEWISE, IF OUR CLIENTS OR SHIPPERS EXPERIENCE INTERRUPTIONS IN THEIR OPERATIONS, OUR BUSINESS COULD BE ADVERSELY AFFECTED. Innotrac's operations are dependent upon its ability to protect its distribution facilities, call center, computer and telecommunications equipment and software systems against damage and failures. If our business is interrupted either from accidents or the intentional acts of others, our results of operations or financial condition could be materially adversely affected. Damage or failures could result from fire, power loss, equipment malfunctions, system failures related to the Year 2000 problem, natural disasters and other causes. Because we currently have only one call center and one distribution facility, we cannot rely on backup facilities in the event of widespread damage or failures at these locations. Our property and business interruption insurance may not adequately compensate us for these losses. Our clients' businesses may also be harmed from any system or equipment failures we experience. In that event, our relationship with these clients may deteriorate, we may lose these clients, our ability to attract new clients may be negatively affected and we could be exposed to liability. The risks from any system failures we suffer to any e-commerce clients whose web sites we host on our servers may be more 8 12 acute than those our traditional clients face. Consequently, business interruptions may pose a greater risk to our e-commerce business. Interruptions could also result from the intentional acts of others, like "hackers." If our systems are penetrated by computer hackers, or if computer viruses infect our systems, our computers could fail, or proprietary information could be misappropriated. Moreover, as we develop our e-commerce business, web sites we host for clients could be subject to these same risks. If our clients suffer similar interruptions in their operations, for any of the reasons discussed above or for others, our business could also be negatively affected. Our telecommunications clients' computer systems, for instance, interface with our own. If they suffer interruptions in their systems, the link to our systems could be severed and sales of telecommunications equipment could be slowed or stopped. We also rely on third-party carriers including United Parcel Service of America, Inc. and Federal Express Corporation to ship products from our distribution facility to purchasers. If our shippers experience interruptions -- from labor strikes, for example -- our ability to distribute products could be impaired. COMPETITION MAY HURT OUR BUSINESS. We operate in highly competitive markets and expect this environment to persist and intensify in the future. Because our marketing support services comprise marketing and product consultation, sales channel management, distribution and back-end support, including our call center operations, we have many competitors who offer one or more of these services. Our competitors include: - in-house marketing support operations of our current and potential clients, - other firms offering specific services, like fulfillment and call center operations, and - large marketing support services firms. In addition, our new e-commerce business is in a relatively new and highly competitive industry. Our potential competitors could be located anywhere in the world. They range in size and sophistication from the smallest niche companies, and even individuals, to large corporations. A number of our competitors have developed or may develop financial and other resources greater than ours. Additional competitors with greater name recognition and resources may enter our markets. Our existing or potential clients' in-house operations are also significant competitors. Our performance and growth could be negatively impacted if: - existing clients decide to provide, in-house, services they currently outsource, - potential clients retain or increase their in-house capabilities or - existing clients consolidate their outsourced services with other companies. In addition, competitive pressures from current or future competitors could result in significant price erosion, which could in turn materially adversely affect our business, financial condition and results of operations. For more information about our competition, see "Business -- Competition." IF WE ARE NOT ABLE TO KEEP PACE WITH CHANGING TECHNOLOGY, OUR BUSINESS WILL BE MATERIALLY ADVERSELY AFFECTED. Our success depends significantly upon our ability to: - enhance existing services, - develop applications to focus on our clients' needs and - introduce new services and products to respond to technological developments. If we fail to maintain our technological capabilities or respond effectively to technological changes, our business, results of operations and financial condition could be materially adversely affected. We cannot assure you that we will select, invest in and develop new and enhanced technology on a timely basis in the future in order to meet our clients' needs and maintain competitiveness. We provide details about our technology in "Business -- Technology." 9 13 OUR SOFTWARE CONVERSION MAY NOT BE SUCCESSFUL OR IT MAY BE DELAYED, WHICH COULD NEGATIVELY AFFECT OUR BUSINESS. Our business is substantially dependent on our computer and telecommunications equipment and software systems. We are upgrading some of our computer hardware and software and converting some other existing programs to our new software system. If we cannot successfully convert these programs, our business, results of operations and financial condition could be materially adversely affected. We have experienced delays and difficulties in converting our software. We cannot assure you that we can effectively or efficiently convert our programs to the new system. OUR QUARTERLY RESULTS MAY FLUCTUATE, WHICH MAY CAUSE SIGNIFICANT SWINGS IN THE MARKET PRICE FOR OUR COMMON STOCK. Our operating results may fluctuate in the future based on many factors. These factors include, among other things: - changes in the telecommunications industry, - changes in the marketing support services industry, - changes in the timing and level of client-specific marketing programs, including the timing and nature of promotions, - unpredictable sales cycles for our e-commerce business, - increased competition and - changes in customer purchasing patterns for products we distribute. Due to these and any unforeseen factors, it is possible that in some future quarter our operating results may be below the expectations of public market analysts and investors. If that variance occurs, our common stock price would likely decline materially. In view of our recent significant growth, we believe that period-to-period comparisons of our financial results are not necessarily meaningful or indicative of future performance. BECAUSE PROFIT MARGINS HAVE NARROWED, OUR PROFITS MAY FLUCTUATE MORE IN THE FUTURE THAN THEY HAVE IN THE PAST. Our gross profit as a percentage of our gross revenues has declined recently from historical levels, primarily because we are now billing our largest telecommunications clients directly for products sold to their customers, or end users, rather than billing their customers directly for the products. Because we do not currently assume the credit risk of these clients' customers, we charge lower unit prices for the products we distribute, resulting in lower gross profit margins on these products. We expect these lower gross profit margins to continue under our direct client billing model. With a narrowed gross profit margin, we must rely on increased gross revenues to maintain or increase our net profit. We also expect that our operating profits in the future will be more sensitive to decreases in revenues and increases in operating costs than in the past. We will have less capacity to absorb increased operating expenses and still maintain profitability. Our gross profit as a percentage of gross revenues for the three months ended March 31, 1999 was 13% compared to 27% for the three months ended March 31, 1998. That percentage was 22%, 23% and 22% for the years ended December 31, 1998, 1997 and 1996. Declining per-unit prices for the products we distribute also contribute to narrowing gross margins. As competition and other factors force prices down for Caller ID and other telecommunications equipment, there is a risk that our cost of products sold will not decline at the same rate. For further information about our results of operations, see "Management's Discussion and Analysis of Financial Condition and Results of Operations." 10 14 WE MAY LOSE REVENUE OR INCUR ADDITIONAL COSTS BECAUSE OF THE YEAR 2000 ISSUE. Our efforts to address the Year 2000 issue may not be adequate. The efficient operation of our business depends in part on our computer software programs and operating systems. If these programs and systems are not Year 2000 compliant and suffer failures from their inability to recognize dates after December 31, 1999, our business, financial condition or results of operations could be materially adversely affected. These programs and systems are used in: - inventory management, - sales, - financial reporting, - pricing, - shipping and - administrative functions. We believe that our information technology, or IT, systems, and other non-IT systems are either Year 2000 compliant or substantially compliant. We could experience business interruptions and systems failures that could materially adversely affect our business if (1) any of these remedial efforts fail to eliminate Year 2000 problems in our IT and non-IT systems or (2) we fail to identify all systems that require attention. If unforeseen failures do occur, emergency remediation expenses could also have a material adverse effect on our business, results of operations or financial condition. We anticipate completing testing of our Year 2000 efforts in September 1999. We cannot assure you, however, that our Year 2000 efforts will be completed before December 31, 1999. We also cannot assure you that these efforts, if completed, will successfully remediate all Year 2000 problems. Our suppliers, clients, financial institutions and others may not adequately address the Year 2000 issue. We also depend on the efficient operation of the computer systems of suppliers, clients, financial institutions and others which interface with our systems. Because third-party systems or software may not be Year 2000 compliant, we may incur unanticipated expenses to remedy any problems caused by failures. These problems could in turn materially adversely affect our business, results of operations and financial condition. We are obtaining documentation from third parties concerning their Year 2000 compliance programs and the possibility of any Year 2000-related interface difficulties that may affect us. To date, no significant concerns have been identified. We are developing contingency plans to address potential Year 2000 failures of these entities. However, Year 2000-related operating problems or expenses may arise in connection with our systems' interface with the computer systems and software of our suppliers, clients, financial institutions and others. OUR BUSINESS IS SUBJECT TO GOVERNMENT REGULATION, WHICH MAY LIMIT OUR ACTIVITIES OR INCREASE OUR COSTS. In connection with any outbound telemarketing services that we may provide, we must comply with federal and state regulations. These include the Federal Communications Commission's rules under the Federal Telephone Consumer Protection Act of 1991 and the Federal Trade Commission's regulations under the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994, both of which govern telephone solicitation. If we initiate outbound telemarketing services, these rules and regulations would apply to that portion of our business. Furthermore, there may be additional federal and state legislation or changes in regulatory implementation. These changes could include interpretations under the Telecommunications Act of 1996 restricting the ability of telecommunications companies to use consumer proprietary network information, or CPNI. New legislation or regulatory implementation in the future may significantly increase compliance costs or limit our activities, our clients' activities or the activities of companies to which we outsource 11 15 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. Our new e-commerce business may be subject to many of the same laws and regulations. It is uncertain how these existing laws and regulations will be applied to our e-commerce business, if at all. There is a risk that unfavorable interpretations or applications of these existing laws, or the implementation of new laws and regulations specifically addressing e-commerce, particularly with respect to privacy issues, could impede our e-commerce business. If unfavorable federal or state legislation or regulations affecting Caller ID service, e-commerce or other technology or products we sell or distribute are adopted, our business, financial condition and results of operations could be materially adversely affected. See "Business -- Government Regulation" for further information about government regulation of our business. SCOTT D. DORFMAN WILL CONTINUE TO CONTROL INNOTRAC AFTER THIS OFFERING. HE MAY MAKE DECISIONS WITH WHICH YOU WILL NOT AGREE. Because he will own approximately half of the outstanding shares of common stock after this offering, Scott D. Dorfman, who is our Chairman, President and Chief Executive Officer, will likely control the composition of our board of directors. Consequently, he will substantially influence our business, policies and affairs. This voting concentration may have the effect of discouraging, delaying or preventing a change in control of Innotrac, even one that you believe is beneficial to you as a shareholder. Following the offering, Mr. Dorfman will beneficially own approximately 52% of the outstanding common stock or slightly less than 50% if the underwriters' over-allotment option is exercised in full. See "Principal and Selling Shareholders" for information on the ownership of Innotrac's common stock. WE WILL USE A PORTION OF THE NET PROCEEDS FROM THIS OFFERING FOR GENERAL CORPORATE PURPOSES. WE MAY USE THESE PROCEEDS IN WAYS WITH WHICH YOU DISAGREE. We intend to use a portion of the net proceeds of this offering for unspecified general corporate purposes, including working capital needs. Our management will have significant discretion in the use of these funds, and you may disagree with the way these funds are spent. We cannot assure you that proceeds dedicated to general corporate purposes will be invested to yield a significant return, or any return at all. SOME PROVISIONS OF OUR ARTICLES OF INCORPORATION AND BYLAWS AND OUR RIGHTS AGREEMENT MAY DISCOURAGE TAKEOVERS THAT YOU BELIEVE ARE IN YOUR INTEREST. Innotrac's articles of incorporation and bylaws contain some provisions that may delay, discourage or prevent an attempted acquisition or change in control of Innotrac. The articles and bylaws establish: - a board of directors classified into three classes of directors with the directors of each class having staggered, three-year terms, - the board's authority to issue series of preferred stock with special powers, preferences and rights, - the board's authority to consider constituencies other than the shareholders -- including employees, customers and the community -- in making decisions, including decisions regarding control of Innotrac, - removal of directors only for cause and - noncumulative voting for directors. In addition, we have adopted a rights agreement with Reliance Trust Company as agent for the shareholders. The rights agreement provides that holders of common stock will be entitled to purchase Innotrac preferred stock with special voting, distribution and liquidation rights, or acquire shares of Innotrac common stock, if a third party acquires beneficial ownership of 15% or more of the common stock. In certain circumstances, shareholders are also entitled to purchase the stock of (1) a company 12 16 issuing shares in exchange for Innotrac shares in a merger or tender offer or (2) a company acquiring most of Innotrac's assets. These provisions of our articles of incorporation and bylaws and the rights agreement could discourage tender offers or other transactions that might otherwise result in your receiving a premium over the market price for your common stock. See "Description of Capital Stock" for more information about our articles of incorporation, bylaws and rights agreement. THE MARKET PRICE OF OUR COMMON STOCK HAS BEEN VOLATILE AND MAY CONTINUE TO BE VOLATILE AFTER THE OFFERING, AND THE VALUE OF YOUR INVESTMENT MAY DECLINE. The market price of our common stock has been volatile in the past and may continue to be volatile after the offering. This volatility may cause precipitous drops in the price of our common stock on the Nasdaq National Market. These drops may cause your investment in our common stock to lose significant value. The market price is affected by: - variations in Innotrac's quarterly operating results, - changes in financial estimates by securities analysts, - changes in general conditions in the economy or the financial markets, - other developments affecting Innotrac, its industry, clients or competitors and - the operating and stock price performance of companies that investors deem comparable to Innotrac. This volatility has had a significant effect on the market prices of securities issued by many companies for reasons unrelated to their operating performance. Therefore, we cannot predict the market price for our common stock after the offering. FUTURE SALES OF OUR COMMON STOCK COULD ADVERSELY AFFECT ITS MARKET PRICE. After the offering is completed, we will have approximately 11.1 million shares of common stock outstanding. Of these shares, approximately 5.0 million shares, including the 2.5 million shares offered by this prospectus, or approximately 5.4 million shares if the underwriters' over-allotment option is exercised in full, will be freely tradable unless held by affiliates of Innotrac, as defined under the Securities Act of 1933. All of the remaining shares are "restricted securities" as that term is defined by Rule 144 under the Securities Act and will be eligible for sale in compliance with Rule 144. We have agreed, along with the selling shareholders and our executive officers and directors, for a period of 90 days after the date of this prospectus, not to sell or otherwise dispose of any of our shares of common stock without the prior written consent of Bear, Stearns & Co. Inc. Consequently, approximately 6.2 million shares of common stock, including 90,001 shares subject to currently exercisable options, or approximately 5.9 million shares if the over-allotment option is exercised in full, will become eligible for sale by the selling shareholders and our executive officers and directors in the public market when the lock-up period expires on October , 1999, subject to the limitations of Rule 144. In addition, we have filed a registration statement on Form S-8 registering for public sale 800,000 shares allocated to our Stock Option and Incentive Award Plan. During the 90-day lock-up period, we may (1) issue shares of common stock upon the exercise of currently outstanding options under this plan and (2) grant options under this plan that do not vest and are not exercisable during the lock-up period. Following the offering and the lock-up period, sales of substantial amounts of common stock in the public market, pursuant to Rule 144 or otherwise, or even the potential of sales, could adversely affect the prevailing market price of the common stock. Our ability to raise additional capital through equity issuances could also be impaired. For information about the ability of certain shareholders to sell their shares, see "Shares Eligible for Future Sale." 13 17 WE DO NOT PLAN TO PAY DIVIDENDS ON OUR COMMON STOCK. We presently intend to retain our earnings to finance our growth and expansion and for general corporate purposes. Consequently, we do not plan to pay any cash dividends to our shareholders in the foreseeable future. In addition, our revolving credit facility contains limitations on the payment of cash dividends and other distributions of assets. COMPLETING AND INTEGRATING ACQUISITIONS MAY BE DIFFICULT. WE MAY NOT BE ABLE TO COMPLETE THEM SUCCESSFULLY, AND WE MAY NEED ADDITIONAL FINANCING TO DO SO. We have never acquired another company. In the future, however, we may pursue acquisitions of companies whose businesses extend or complement ours. We cannot, however, assure you that we will be able to successfully acquire suitable target companies on favorable terms or integrate these companies with our existing business, particularly in light of our inexperience with acquisitions. If we complete an acquisition, we cannot assure you that the acquisition will enhance our business, results of operations or financial condition in the future. We could use a portion of our capital resources and proceeds from this public offering for acquisitions. We may require additional debt or equity financing for future acquisitions. Additional financing, however, may not be available on favorable terms, or at all. FORWARD-LOOKING STATEMENTS ARE NOT GUARANTEES We have made forward-looking statements in this prospectus. These statements are subject to risks and uncertainties, and there can be no guarantees that these statements will prove to be correct. Forward-looking statements include assumptions as to how we may perform in the future. When we use words like "seek," "strive," "believe," "expect," "anticipate," "predict," "potential," "continue," "will," "may," "could," "intend," "plan" and "estimate" or similar expressions, we are making forward-looking statements. For those statements we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. You should understand that the following important factors, in addition to those discussed elsewhere in this prospectus, could affect our future results and could cause those results to differ materially from those expressed in our forward-looking statements. These factors include: - our reliance on a small number of clients, - trends in the market for our products and services, - risks of buying, warehousing and selling or renting products to our customers, - trends in the marketing support service and telecommunications industries, - trends in e-commerce, - whether we can continue and manage growth, - changes in the trend toward outsourcing, - increased competition, - effects of changes in profit margins, - the unknown effects of possible system failures and rapid changes in technology, - estimated increases in Caller ID penetration in various parts of the United States, - trends in government regulation and - payment of dividends. We have based these statements on our current expectations about future events. Although we believe that the expectations reflected in our forward-looking statements are reasonable, we cannot guarantee you that these expectations actually will be achieved. We are under no duty to update any of the forward-looking statements after the date of this prospectus to conform those statements to actual results. In evaluating these statements, you should consider various factors, including the risks outlined in the section entitled "Risk Factors," beginning on page 5. You should also consider the cautionary statements contained in the reports we have filed with the Securities and Exchange Commission. These factors may cause our actual results to differ materially from any forward-looking statements. 14 18 USE OF PROCEEDS Innotrac is offering for sale 2,100,000 shares of common stock by this prospectus. Our net proceeds from the sale of these shares are estimated to be approximately $48.6 million, assuming an offering price of $24.75 per share, the last reported sale price of our common stock on the Nasdaq National Market on July 21, 1999, and after deducting the underwriting discount and estimated offering expenses. If the underwriters exercise their option to purchase an additional 100,000 shares from us to cover over-allotments, our estimated net proceeds will be approximately $51.0 million. We will not receive any proceeds from the sale of 400,000 shares of common stock by the selling shareholders or any proceeds resulting from the underwriters' exercise of their option to purchase an additional 275,000 shares from the selling shareholders to cover over-allotments. We expect to use our net proceeds for the following purposes: - repayment of borrowings under our line of credit facility with a bank, - the establishment of a new call center, including equipment and leasehold improvements, - upgrading our computer and network hardware and - general corporate purposes, including working capital. Our indebtedness under our line of credit bears interest, at our option, at (1) our lender's base rate or (2) a rate equal to the London interbank rate, or LIBOR, subject to adjustment in certain circumstances at the lender's option, plus a variable number of basis points, from 100 to 200, determined by our ratio of indebtedness to tangible net worth. As of March 31, 1999, the interest rate on our indebtedness was 5.94%. If we do not prepay it, our indebtedness matures in June 2002. We may from time to time consider possible acquisitions of related businesses and the use of net proceeds from this offering to finance those acquisitions. We do not have any present agreements or commitments for, and are not presently engaged in active negotiations with respect to, any particular acquisition prospects. Pending application of the net proceeds as described above, we will invest the net proceeds in short-term, interest-bearing investment grade or government securities. DIVIDEND POLICY We have never paid cash dividends on our common stock. We currently intend to retain our earnings to finance the expansion of our business and do not anticipate paying cash dividends in the foreseeable future. Any future determination regarding cash dividend payments will be made by our board of directors and depends upon the following factors: - earnings, - capital requirements, - our financial condition, - restrictions in financing agreements and - other factors deemed relevant by the board of directors. Dividend payments are restricted by our revolving credit facility. If we are not in default on our credit facility, we can pay dividends of up to 40% of our net income in any fiscal period. 15 19 PRICE RANGE OF COMMON STOCK Our common stock began trading on the Nasdaq National Market under the symbol "INOC" on May 7, 1998. Prior to that time, there was no trading market for our common stock. The following table sets forth for the periods indicated the high and low sales prices of our common stock on the Nasdaq National Market.
HIGH LOW ------- ------- 1998 Second Quarter (beginning May 7).......................... $13.250 $ 8.875 Third Quarter............................................. $13.500 $ 6.750 Fourth Quarter............................................ $24.375 $ 5.750 1999 First Quarter............................................. $19.000 $10.000 Second Quarter............................................ $21.000 $12.500 Third Quarter (through July 21)........................... $26.750 $19.250
The market price for our common stock is volatile and fluctuates in response to a wide variety of factors. See "Risk Factors -- The market price of our common stock has been volatile and may continue to be volatile after the offering, and the value of your investment may decline." The approximate number of holders of record of our common stock as of July 20, 1999 was 31. The approximate number of beneficial holders of our common stock as of March 26, 1999 was 1,550. 16 20 CAPITALIZATION The following table sets forth, as of March 31, 1999, - Innotrac's actual cash and cash equivalents and capitalization and - Innotrac's pro forma cash and cash equivalents and capitalization as adjusted to reflect the application of the net proceeds from this offering at an assumed public offering price of $24.75 per share. You should read the data set forth below in conjunction with the more detailed information found in "Use of Proceeds," "Selected Financial Data," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and accompanying notes and the other financial data included elsewhere in this prospectus.
MARCH 31, 1999 --------------------- ACTUAL AS ADJUSTED ------- ----------- (IN THOUSANDS EXCEPT SHARE DATA; UNAUDITED) Cash and cash equivalents................................... $ 274 $17,271 ======= ======= Debt: Line of credit facility................................... 31,619 -- Long-term debt(1)......................................... 75 75 ------- ------- Total debt........................................ 31,694 75 ------- ------- Shareholders' equity: Preferred stock, $0.10 par value; 10,000,000 shares authorized; none issued and outstanding................ -- -- Common stock, $0.10 par value; 50,000,000 shares authorized; 8,999,995 shares issued and outstanding actual; 11,099,995 shares issued and outstanding, as adjusted(2)............................................ 900 1,110 Additional paid-in capital(2)............................. 24,838 73,244 Retained earnings......................................... 11,842 11,842 ------- ------- Total shareholders' equity........................ 37,580 86,196 ------- ------- Total capitalization....................... $69,274 $86,271 ======= =======
- --------------- (1) Includes current portion of related indebtedness. (2) Excludes 472,150 shares of common stock reserved for issuance pursuant to stock options granted under our Stock Option and Incentive Award Plan as of July 21, 1999. Options for 90,001 shares are currently exercisable. For a description of the Plan, see Note 10 of notes to consolidated financial statements. 17 21 SELECTED FINANCIAL DATA The following table sets forth selected financial data for Innotrac. The selected historical statement of operations data for each of the years ended December 31, 1995, 1996, 1997 and 1998 and the selected historical balance sheet data as of December 31, 1995, 1996, 1997 and 1998 have been derived from Innotrac's consolidated financial statements, some of which are included in this prospectus. These consolidated financial statements and notes have been audited by Arthur Andersen LLP, independent public accountants. The selected historical statement of operations data for the year ended December 31, 1994 and the three months ended March 31, 1998 and 1999 and the selected historical balance sheet data as of December 31, 1994, March 31, 1998 and March 31, 1999 have been derived from our unaudited consolidated financial statements. In the opinion of management, the unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the data for those periods. Operating results for interim periods are not necessarily indicative of results for the full fiscal year. You should read the selected historical financial data in conjunction with "Use of Proceeds," "Management's Discussion and Analysis of Financial Condition and Results of Operations," the consolidated financial statements and accompanying notes and other financial data included elsewhere in this prospectus. "Pro forma net income" and "Pro forma net income per share" reflect the results of Innotrac and formerly affiliated companies as if they had been one corporation taxable at the corporate level for all periods presented.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ----------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS EXCEPT SHARE DATA; 1994 AND THREE MONTHS DATA UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues, net................ $17,380 $44,886 $71,297 $87,978 $139,673 $22,565 $67,320 Cost of revenues............. 11,274 30,658 55,519 67,986 108,785 16,412 58,717 ------- ------- ------- ------- -------- ------- ------- Gross profit................. 6,106 14,228 15,778 19,992 30,888 6,153 8,603 ------- ------- ------- ------- -------- ------- ------- Operating expenses: Selling, general and administrative expenses................ 2,289 6,510 10,391 12,572 15,642 3,428 2,440 Depreciation and amortization............ 214 293 429 631 943 138 379 ------- ------- ------- ------- -------- ------- ------- Total operating expenses... 2,503 6,803 10,820 13,203 16,585 3,566 2,819 ------- ------- ------- ------- -------- ------- ------- Operating income............. 3,603 7,425 4,958 6,789 14,303 2,587 5,784 ------- ------- ------- ------- -------- ------- ------- Other (income) expense: Interest expense........... 622 1,090 1,457 1,788 956 315 373 Other...................... 67 (73) 94 118 35 6 (20) ------- ------- ------- ------- -------- ------- ------- Total other expense........ 689 1,017 1,551 1,906 991 321 353 ------- ------- ------- ------- -------- ------- ------- Income before income taxes... 2,914 6,408 3,407 4,883 13,312 2,266 5,431 Income tax (provision) benefit.................... (356) (793) (212) 77 (3,743) 61 (2,145) ------- ------- ------- ------- -------- ------- ------- Net income................... $ 2,558 $ 5,615 $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286 ======= ======= ======= ======= ======== ======= ======= Pro forma net income......... $ 1,573 $ 3,941 $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286 ======= ======= ======= ======= ======== ======= =======
18 22
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------------------------------- ----------------- 1994 1995 1996 1997 1998 1998 1999 ----------- ------- ------- ------- -------- ------- ------- (IN THOUSANDS EXCEPT SHARE DATA; 1994 AND THREE MONTHS DATA UNAUDITED) Pro forma net income per share: Basic...................... $ 0.24 $ 0.61 $ 0.32 $ 0.46 $ 1.01 $ 0.21 $ 0.37 Diluted.................... 0.24 0.61 0.32 0.46 1.00 0.21 0.36 Weighted average common shares outstanding: Basic...................... 6,500 6,500 6,500 6,500 8,096 6,500 9,000 Diluted.................... 6,500 6,500 6,500 6,500 8,155 6,500 9,127 OTHER DATA: Total telecommunications products shipped........... 261 550 1,650 1,758 2,858 800 2,227
AS OF DECEMBER 31, AS OF MARCH 31, ----------------------------------------------- ------------------ 1994 1995 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- ------- -------- (IN THOUSANDS; 1994 AND MARCH 31 DATA UNAUDITED) BALANCE SHEET DATA: Working capital................ $ 1,237 $ (616) $(1,042) $ 1,521 $26,853 $ 2,174 $ 30,380 Property and equipment, net.... 5,059 9,099 10,939 7,609 7,463 7,931 7,224 Total assets................... 13,548 30,414 49,037 32,497 73,992 38,993 105,166 Total debt..................... 5,874 8,642 22,580 13,187 15,811 13,385 31,694 Shareholders' equity........... 1,624 3,195 4,540 4,827 34,294 5,967 37,580
19 23 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of Innotrac's results of operations and financial condition should be read in conjunction with the consolidated financial statements and accompanying notes included elsewhere in this prospectus. This discussion may contain certain forward-looking statements that are beyond our control. Actual results may differ materially from those expressed or implied by these forward-looking statements. Factors that could cause actual results to differ include, but are not limited to, those discussed under "Risk Factors" beginning on page 5. OVERVIEW Innotrac provides customized, technology-based marketing support and distribution services to large corporations that outsource these functions. Since 1994, we have focused on the telecommunications industry because of its high growth characteristics and increasing marketing needs. We provide marketing support services and distribution of Caller ID units, Caller ID telephones and other telecommunications products to BellSouth, Pacific Bell, Southwestern Bell and US West and their customers. Recently, we began providing services to customers of Ameritech Services Inc., Cincinnati Bell Inc. and Bell Atlantic Corporation. In 1991, we initiated a fulfillment program to sell or rent Caller ID stand-alone devices to BellSouth customers. Customers paid us for these products by check or credit card. In 1993, we began billing the charges on BellSouth customers' telephone bills in interest-free installments. As part of that program, we acquired Caller ID and other telecommunications equipment from third party manufacturers, while assuming collections risk on customer payments. In November 1998, we entered into a new contract with BellSouth pursuant to which we continue to provide Caller ID hardware and other equipment, including corded and cordless telephones with built-in Caller ID, to BellSouth customers. We now bill BellSouth, rather than BellSouth customers, for these products. Upon receipt of an order, we ship the product, track inventory levels and sales and marketing data and maintain call center operations to handle customer service and technical support. From time to time, rather than acquiring units and selling or leasing them to BellSouth customers, we distribute, for a fee, Caller ID hardware that BellSouth has purchased from various third-party manufacturers. Under our programs with Southwestern Bell and Pacific Bell, like our new contract with BellSouth, we bill the respective telecommunications clients directly for the telecommunications units that are sold to their end users. The clients are then responsible for billing and collecting from their customers. As a result of this change in our payment model, unit prices and our gross margin are lower than historical levels. We generally experience lower bad debt expenses, which are included in selling, general and administrative expenses, because telecommunications clients, rather than their end user customers, pay us for the equipment. These lower expenses substantially offset the decline in gross margin. The change in our payment model has had little effect on our operating margin to date. We have experienced significant growth in revenue in recent years. This growth stems primarily from growth in Caller ID market penetration and Innotrac's consultative selling with respect to product-based marketing support services. According to industry sources, market penetration of Caller ID services in the United States as of December 31, 1998 was approximately 30% and is expected to reach approximately 75% by 2007. BellSouth indicates that through the end of first quarter 1999 its Caller ID penetration was 38%. We believe that opportunities exist, for example, in the market areas served by Pacific Bell, where market penetration for Caller ID lags behind the national average because regulatory issues delayed the release of Caller ID. Caller ID equipment sales may eventually level off as the Caller ID market matures. We believe that by distributing other telecommunications products for existing customers, growing our telecommunications company client base and expanding customer distribution channels through e-commerce, we will be able to offset any eventual maturity in our Caller ID business. 20 24 The following table sets forth the percentage of total net revenues derived from services provided to each of the following clients for the years ended December 31, 1996, 1997 and 1998 and the three months ended March 31, 1998 and 1999. Percentages may not sum due to rounding.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------- ---------------- 1996 1997 1998 1998 1999 ----- ----- ----- ----- ----- BellSouth........................................... 82% 85% 59% 70% 35% Southwestern Bell................................... -- -- 11 -- 31 Pacific Bell........................................ 5 8 25 23 28 US West............................................. 2 2 2 2 4 -- -- -- -- -- Total..................................... 90% 95% 97% 95% 98% == == == == ==
Net revenues from services rendered to BellSouth for the three months ended March 31, 1998 compared to the three months ended March 31, 1999 increased 48%. The decline in revenues from BellSouth customers as a percentage of total revenues for the three months ended March 31, 1999 results from the diversification of our client base. Revenues are recognized on the accrual basis as services are provided to customers or as units are shipped (including installment sales). Revenues are reduced for estimated product returns and allowances, which are based on our historical experience. The largest component of our expenses is our cost of revenues, which includes: - the product costs of telecommunications equipment, - depreciation on Caller ID rental equipment, - the costs of labor associated with marketing support services for a particular client, - telecommunications services costs, - information technology support, - materials and freight charges and - directly allocable facilities costs. Most of these costs are variable in nature. A second component of our expenses includes selling, general and administrative, or SG&A, expenses. This expense item is comprised of (1) financial, human resources, administrative and marketing functions that are not allocable to specific client services and (2) bad debt expense. Bad debt expense represents a provision for installments and rentals that will be deemed uncollectible based on Innotrac's historical experience, as well as billing adjustments from telecommunications providers. SG&A expenses tend to be fixed in nature, with the exception of bad debt expense, which is related to revenues. RECENT DEVELOPMENTS Based on preliminary information, Innotrac's net revenues increased 58.2% to $57.5 million for the three months ended June 30, 1999 compared to $36.3 million for the three months ended June 30, 1998. Because of our new business model, gross margins decreased to 16.0% of net revenues from 27.0% of net revenues. Our net income increased 25.8% to $3.3 million, or $0.36 per diluted share, for the three months ended June 30, 1999 from $2.6 million, or $0.33 per diluted share, for the prior comparable period. Our net revenues for the six months ended June 30, 1999 increased 111.9% to $124.8 million compared to $58.9 million for the six months ended June 30, 1998. Gross margins decreased to 14.3% of net revenues from 27.1% of net revenues. Innotrac's net income increased 64.2% to $6.6 million, or $0.72 per diluted share, for the six months ended June 30, 1999 from $4.0 million, or $0.54 per diluted share, for the prior comparable period. 21 25 For the three months ended June 30, 1999, the total number of Caller ID units distributed increased 114.3% to 1.4 million units compared to 672,000 units for the three months ended June 30, 1998. Sales of Caller ID units increased 65.5% for the three months ended June 30, 1999 as compared to the prior comparable period, and accounted for 59.5% of the total Caller ID units distributed during the period. The number of units distributed under promotional giveaway programs -- for which we receive a fee -- increased 278.2% for the three months ended June 30, 1999 as compared to the prior comparable period, and accounted for the remaining 40.5% of Caller ID units distributed. For the six months ended June 30, 1999, 3.7 million Caller ID units were distributed, an increase of 149.1% from the 1.5 million units distributed during the six months ended June 30, 1998. Caller ID unit sales increased 138.0% and distributions for a fee increased 161.9% for the six months ended June 30, 1999 from the prior comparable period. Sales represented 51.1% of total volume and fee-based distributions represented 48.9% of total Caller ID units distributed during the six months ended June 30, 1999. RESULTS OF OPERATIONS The following table sets forth summary operating data, expressed as a percentage of revenues, for the years ended December 31, 1996, 1997 and 1998 and the three-month periods ended March 31, 1998 and 1999. Operating results for any period are not necessarily indicative of results for any future period. The rounded percentages below are calculated using the detailed information contained in the consolidated financial statements and accompanying notes included in this prospectus.
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ------------------------ ---------------- 1996 1997 1998 1998 1999 ------ ------ ------ ------ ------ Cost of revenues..................................... 77.9% 77.3% 77.9% 72.7% 87.2% Gross profit......................................... 22.1 22.7 22.1 27.3 12.8 Selling, general and administrative expenses......... 14.6 14.3 11.2 15.2 3.6 Operating income..................................... 7.0 7.7 10.2 11.5 8.6 Interest expense..................................... 2.0 2.0 0.7 1.4 0.5 Income before income taxes........................... 4.8 5.6 9.5 10.0 8.1
Three Months Ended March 31, 1999 Compared to Three Months Ended March 31, 1998 Revenues. Innotrac's net revenues increased 198.3% to $67.3 million for the three months ended March 31, 1999 from $22.6 million for the three months ended March 31, 1998. Revenues increased primarily due to (1) a 171.4% increase in Caller ID units distributed to 2.2 million units and (2) an increase in the percentage of units sold to 46.9% of total unit volume versus 33.8% for the three months ended March 31, 1998. This was partially offset by a decrease in average per unit prices of Caller ID units. Our reserve for returns and allowances increased slightly in terms of dollars, but decreased as a percentage of revenues. The reserve was $2.1 million (3.2% of net revenues) for the three months ended March 31, 1999 compared to $2.0 million (8.7% of net revenues) for the three months ended March 31, 1998. Cost of Revenues. Innotrac's cost of revenues increased 257.8% to $58.7 million for the three months ended March 31, 1999 compared to $16.4 million for the three months ended March 31, 1998. Cost of revenues increased primarily due to an increase in cost of equipment associated with the increase in units we sold. Gross Profit. For the three months ended March 31, 1999, Innotrac's gross profit increased 39.8% to $8.6 million as compared to $6.2 million for the three months ended March 31, 1998. The increase in gross profit was due primarily to the increase in revenue. Gross margins decreased to 12.8% of revenues from 27.3% of revenues. Gross margins declined for several reasons. First, for strategic reasons, we conducted a promotional program that resulted in $11.0 million in revenues and $11.0 million in cost of sales. Innotrac chose to conduct the program in order to strengthen its relationship with a client. In addition, gross margins were impacted by the broadening of our client base and the shift to the direct 22 26 client billing model. For these clients we were able to charge lower unit prices and, as a result, we experienced lower gross margins. This decline was substantially offset by lower bad debt expenses, which are included in selling, general and administrative expenses. Selling, General and Administrative Expenses. SG&A expenses for the three months ended March 31, 1999 decreased 28.8% to $2.4 million, or 3.6% of revenues, compared to $3.4 million, or 15.2% of revenues, for the three months ended March 31, 1998. Our bad debt expense was $417,000 (0.6% of net revenues) for the three months ended March 31, 1999 as compared to $1.7 million (7.6% of net revenues) for the three months ended March 31, 1998. The decrease in bad debt expense was due primarily to the shift to the direct client billing model. The increase in other SG&A expenses was due to increased sales and marketing efforts and increased administrative costs to support our growth. Income Taxes. Our effective tax rates for the three months ended March 31, 1999 and 1998 were 39.5% and (2.6)%, respectively. The effective tax rates were lower than statutory rates for the three months ended March 31, 1998 due to the amount of income attributable to the pass-through entities involved in the combination of Innotrac and related pass-through entities (the "Consolidation") at the same time as consummation of our initial public offering in May 1998. For more information concerning the Consolidation, see Note 1 of notes to consolidated financial statements. We expect our effective tax rate in future periods to approximate the level for the three months ended March 31, 1999. Year Ended December 31, 1998 Compared to Year Ended December 31, 1997 Revenues. Innotrac's net revenues increased 58.8% to $139.7 million for the year ended December 31, 1998 from $88.0 million for the year ended December 31, 1997. The increase in revenues during 1998 was primarily due to a 61.3% increase in Caller ID units sold in 1998. During 1998, we distributed 2.9 million units as we increased our percentage of units sold (as opposed to distributed for a fee) to 62.3% of total unit volume. During 1997, we distributed 1.8 million units, or 56.9% of total unit volume. The 1998 increase was partially offset by a decrease in average per unit prices of Caller ID units. Our reserve for returns and allowances increased to $11.1 million (7.9% of net revenues) for the year ended December 31, 1998 from $6.3 million (7.2% of net revenues) for the year ended December 31, 1997. Cost of Revenues. Our cost of revenues increased 60.0% to $108.8 million for the year ended December 31, 1998 compared to $68.0 million for the year ended December 31, 1997. This increase was primarily due to an increase in cost of equipment associated with the increase in units we sold as described above. This increase was partially offset by a $1.3 million decrease from 1997 in rental equipment losses to $3.2 million and a $1.6 million write-down on Caller ID equipment in the year ended December 31, 1997. The write-down resulted from obsolescence problems related to the delayed start-up of the Pacific Bell Caller ID program because of California regulatory issues. Gross Profit. For the year ended December 31, 1998, our gross profit increased 54.5% to $30.9 million, or 22.1% of revenues, as compared to $20.0 million, or 22.7% of revenues, for the year ended December 31, 1997. The increase in gross profit was primarily due to the increase in revenues. The decrease in gross margin was due primarily to the increasing percentage of business derived from Southwestern Bell and Pacific Bell, clients for which Innotrac does not assume the bad debt risk, as described above. We were therefore able to charge lower unit prices to Southwestern Bell and Pacific Bell. As a result, we experienced lower gross margins. This was substantially offset by lower bad debt expenses. During the fourth quarter of 1998, BellSouth sales were converted to a similar program. Selling, General and Administrative Expenses. SG&A expenses for the year ended December 31, 1998 were $15.6 million, or 11.2% of revenues, compared to $12.6 million, or 14.3% of revenues, for the year ended December 31, 1997. Our bad debt expense, most of which was associated with sales of Caller ID and other telecommunications equipment to BellSouth and Pacific Bell customers, was $8.2 million (5.9% of net revenue) for the year ended December 31, 1998 as compared to $7.8 million (8.8% of net revenue) for the year ended December 31, 1997. The decrease in bad debt expense as a percentage of revenue was primarily due to the new direct client billing model in which the client assumes the bad debt risk of its customers in exchange for a lower sales price. Other SG&A expenses increased over the prior 23 27 year due to increased sales and marketing efforts, increased insurance and benefits expenses and administrative costs to support our growth. Interest Expense. Interest expense decreased to $1.0 million for the year ended December 31, 1998 from $1.8 million for the year ended December 31, 1997. The decrease is primarily due to repayment of a note payable from a bank and a subordinated note payable to a shareholder from the proceeds received from our May 1998 initial public offering and lower bank borrowings under our line of credit from the previous year end. Income Taxes. Our effective tax rates for the years ended December 31, 1998 and 1997 were 28.1% and (1.6)%, respectively. The change from 1997 to 1998 was primarily the result of a lower level of income attributable to certain pass-through entities prior to the Consolidation. Year Ended December 31, 1997 Compared to Year Ended December 31, 1996 Revenues. Our net revenues increased 23.4% to $88.0 million for the year ended December 31, 1997 from $71.3 million for the year ended December 31, 1996, primarily due to increased sales of Caller ID units to BellSouth and Pacific Bell customers. The growth was partially offset by a decrease in net revenues during the year ended December 31, 1997 resulting from the conclusion of a distribution program performed in connection with the 1996 Olympic Games and an increase in our reserve for returns and allowances to $6.3 million (7.2% of net revenues) for the year ended December 31, 1997 from $3.5 million (4.9% of net revenues) for the year ended December 31, 1996. In addition, our sales to Pacific Bell customers during 1997 and 1996 were less than expected due to regulatory issues that delayed the rollout of Caller ID services by Pacific Bell and a low level of promotion of Caller ID services by Pacific Bell. See "Business -- Government Regulation." Cost of Revenues. Our cost of revenues increased 22.5% to $68.0 million for the year ended December 31, 1997 compared to $55.5 million for the year ended December 31, 1996. This increase was due to increased revenue volume, including a $1.9 million increase from 1996 in rental equipment losses to $4.5 million, and a $1.6 million write-down on Caller ID equipment purchased for the start-up of the Pacific Bell program. That equipment could not be sold above its cost due to Pacific Bell's regulatory delays that resulted in product obsolescence issues. The increase in cost of revenues was also associated with the establishment of our Duluth, Georgia call center. Gross Profit. For the year ended December 31, 1997, our gross profit increased 26.6% to $20.0 million, or 22.7% of revenues, as compared to $15.8 million, or 22.1% of revenues, for the year ended December 31, 1996. The increase in gross margin was due to increased sales along with the impact of a price increase for Caller ID units with enhanced features. This was partially offset by the $1.6 million inventory write-down and the costs associated with the Duluth call center, along with the impact of introductory promotional prices on certain Caller ID units, which were lower than regular prices. Selling, General and Administrative Expenses. SG&A expenses for the year ended December 31, 1997 were $12.6 million, or 14.3% of revenues, compared to $10.4 million, or 14.6% of revenues, for the year ended December 31, 1996. The decrease in SG&A expenses as a percentage of revenues was due to improved economies of scale. This was slightly offset by an increase in our bad debt expense, most of which was associated with sales of Caller ID and other telecommunications equipment to BellSouth and Pacific Bell customers. Bad debt expense was $7.8 million (8.8% of net revenues) for the year ended December 31, 1997 as compared to $5.8 million (8.1% of net revenues) for the year ended December 31, 1996. The increase in bad debt expense and the allowance for doubtful accounts (inclusive of the reserve for returns and allowances) (22.1% of gross accounts receivable) was primarily due to our higher revenue volume and higher Caller ID market penetration. We believe that increased Caller ID market penetration results in an increase in sales of Caller ID units to consumers having higher credit risks. We believe that higher credit risk customers result in larger write-offs for nonpayment due to increased chargebacks by telecommunications companies to suppliers of nonregulated services when customers do not pay for these services. 24 28 Interest Expense. Interest expense increased to $1.8 million for the year ended December 31, 1997 from $1.5 million for the year ended December 31, 1996. The increase was primarily due to increased borrowings under our line of credit to fund working capital, consisting primarily of accounts receivable and inventory necessary to support increases in revenues. This increase was slightly offset by lower interest on our subordinated debt in 1997 compared to 1996 due to a repayment of this debt by Innotrac in September 1996. Income Taxes. Our effective tax rates for the years ended December 31, 1997 and 1996 were (1.6%) and 6.2%, respectively. The change from 1996 to 1997 was primarily the result of a higher level of income attributable to certain pass-through entities prior to the Consolidation. LIQUIDITY AND CAPITAL RESOURCES We fund our operations and capital expenditures primarily through cash flow from operations and borrowings from banks. We had cash and cash equivalents of approximately $274,000, $3.4 million and $554,000 at March 31, 1999, December 31, 1998 and December 31, 1997, respectively. We maintain a $40.0 million revolving line of credit with a bank, maturing in June 2002, which was increased from $35.0 million in April 1999. Borrowings under the line of credit bear interest at our option at the bank's base rate, as adjusted from time to time, or LIBOR, subject to adjustment in certain circumstances at the lender's option, plus up to 200 basis points. At March 31, 1999, our interest rate was 5.94%. In May 1998, we repaid a term loan with a bank that would have matured in July 1999 and bore interest at 8.95% per annum. We also repaid a subordinated note payable to a shareholder, which would have matured in April 1999 and bore interest at a particular bank's prime rate, as adjusted from time to time, plus 8.0% per annum. Both were repaid with proceeds received from our May 1998 initial public offering. At March 31, 1999, $31.6 million was outstanding under our line of credit. In June 1999, we entered into a lease for a new call center and distribution facility. As a result of that lease, rental expense will increase approximately $550,000 a year through 2004. During the three months ended March 31, 1999, we used $18.1 million in cash flow from operating activities compared to the generation of $2.3 million in the same period in 1998. We used $9.1 million in cash flow from operating activities during the year ended December 31, 1998, compared to the generation of $18.9 million and $88,000 in cash flow from operating activities for the years ended December 31, 1997 and 1996, respectively. The decrease in cash flow from operating activities in the three months ended March 31, 1999 and the year ended December 31, 1998 as compared to the comparable prior periods was due to higher working capital requirements resulting from increases in accounts receivable (principally installment receivables and receivables from Pacific Bell, Southwestern Bell and BellSouth) and inventory due to increased sales volume. The increase in cash flow from operating activities in 1997 was due to lower working capital requirements resulting from decreased accounts receivable due to shorter installment periods and reduced inventory. The shorter installment periods were due to the change in length of installment sales from generally one year to four to six months. The inventory reduction was due to the utilization of inventory purchased in 1996 as part of the build-up for the rollout of the Pacific Bell program, which was delayed for regulatory reasons. During the three months ended March 31, 1999, net cash used in investing activities was $880,000 as compared to $1.8 million in the same period of 1998. This decrease was primarily due to a decrease in the number of purchases of Caller ID units for rent plus reductions in the level of expenditures associated with Innotrac's computer and software additions to handle growth in business. During the years ended December 31, 1998, 1997 and 1996, net cash used in investing activities was $5.7 million, $6.9 million and $8.0 million, respectively. The decrease in 1998 was primarily due to a decrease in the number of purchases of Caller ID units for rent. This was partially offset by expenditures associated with our software upgrade, the purchase of new furniture and equipment for our new corporate headquarters and distribution facility and the expansion of our Duluth call center to service new clients. The decrease in 1997 was primarily due to a decrease in the number of purchases of telecommunications equipment for rent. 25 29 During the three months ended March 31, 1999, net cash provided by financing activities was $15.9 million compared to $453,000 used in financing activities in the same period in 1998. This increase was primarily due to increased borrowings on our line of credit. The increased borrowings supported working capital requirements resulting from increases in accounts receivable due to the increased sales volume during the first three months of 1999 as compared to the same period in 1998. During the year ended December 31, 1998, the net cash provided by financing activities was $17.7 million compared to $13.4 million used in financing activities in the same period in 1997. During the year ended December 31, 1996, the net cash provided by financing activities was $9.8 million. During the year ended December 31, 1998, we received $26.7 million in the initial public offering completed on May 11, 1998, net of fees and expenses associated with the initial public offering. We used a portion of the proceeds to repay $4.6 million of long-term debt, $7.5 million in distributions of undistributed earnings to shareholders of affiliated flow-through entities that were consolidated with Innotrac in connection with the initial public offering, and reduced our borrowings under the line of credit by $13.8 million. After the initial public offering, we made periodic borrowings against the line of credit to fund short term working capital needs, resulting in a net increase in borrowings on the line of credit of $7.2 million for the year ended December 31, 1998. The use of cash for financing activities for the year ended December 31, 1997 reflects repayments under the line of credit and term loan. We estimate that our cash and financing needs through 1999 will be met by cash flows from operations and our line of credit facility, as well as from the proceeds of this offering if it is consummated. However, any increase in our growth rate, shortfalls in anticipated revenues, increases in anticipated expenses or significant acquisitions could have a material adverse effect on our liquidity and capital resources. These events would require us to raise additional capital from public or private equity or debt sources in order to finance operating losses, anticipated growth and contemplated capital expenditures. If these sources of financing are insufficient or unavailable we will be required to modify our growth and operating plans in accordance with the extent of available funding. There can be no assurance that we will be able to raise any capital on acceptable terms or at all. YEAR 2000 COMPLIANCE The efficient operation of our business is dependent in part on our computer software programs and operating systems. These programs and systems are used in inventory management, pricing, sales, shipping and financial reporting, as well as in various administrative functions. Management believes that our information technology, or IT, systems, and other non-IT systems are either Year 2000 compliant or substantially compliant. The cost of the upgrades is expected to be approximately $120,000, approximately $70,000 of which has been incurred through April 1999. We do not anticipate additional material expenditures for Year 2000 compliance issues. Our Year 2000 compliance efforts for both IT and non-IT systems include three major phases: (1) inventory all systems, assess whether there are any Year 2000 issues and develop a compliance plan for all systems; (2) remediate any Year 2000 problems and (3) test systems subsequent to remediation. The chart below shows the estimated completion status of each of these phases expressed as a percentage of completion as of March 31, 1999:
PHASE: I II III - ------ --- --- --- IT Systems........................................... 97% 75% 50% Non-IT Systems....................................... 100% 95% 95%
The assessment phase is complete and the remediation phase is substantially complete, and testing will continue into the third quarter of 1999. We are in the process of obtaining documentation from our suppliers, clients, financial institutions and others as to the status of their Year 2000 compliance programs and the possibility of any interface 26 30 difficulties relating to Year 2000 compliance that may affect us. To date, no significant concerns have been identified; however, there is a risk that Year 2000-related operating problems or expenses will arise with our computer systems and software or in connection with our interface with the computer systems and software of our suppliers, clients, financial institutions and others. Because these third-party systems or software may not be Year 2000 compliant, we are in the process of developing contingency plans to address Year 2000 failures of these entities with which we interface. Our contingency plans are being developed to address issues like: (1) the inability to receive customer order information electronically from our major clients and (2) the inability of one or more of the manufacturers of the Caller ID products we sell to produce products due to that company's Year 2000 failure. If the first scenario were to happen, we would be required to receive and enter this information manually into our order processing system, which could increase our labor costs. If the second scenario were to occur, we would be required to find alternate vendors and potentially incur additional costs to do so. We could be required to incur unanticipated expenses to remedy any problems, which could have a material adverse effect on our business, results of operations and financial condition. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS We believe our exposure to market risks is immaterial. We hold no market risk sensitive instruments for trading purposes. At present, we do not employ any derivative financial instruments, other financial instruments or derivative commodity instruments to hedge any market risks and we do not currently plan to employ them in the future. To the extent that we have borrowings outstanding under our credit facility, we have market risk relating to the amounts of our borrowings because interest rates under the credit facility are variable. Our exposure is immaterial due to the short-term nature of these borrowings. RECENT ACCOUNTING PRONOUNCEMENTS The Financial Accounting Standards Board has issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which must be adopted by the year 2000. This statement establishes accounting and reporting standards for derivative instruments -- including certain derivative instruments embedded in other contracts -- and for hedging activities. Adoption of this statement is not expected to have a material impact on our financial statements. In March 1998, the American Institute of Certified Public Accountants issued a new Statement of Position, Accounting for the Costs of Computer Software Developed or Obtained for Internal Use. This statement requires capitalization of certain costs of internal-use software. Innotrac adopted this statement in January 1999, and it did not have a material impact on the financial statements. \ 27 31 BUSINESS Innotrac provides customized, technology-based marketing support and distribution services to large corporations that outsource these functions. We target companies that have (1) a large customer base, (2) numerous and/or geographically diverse subsidiary or affiliate operations, (3) extensive marketing needs or (4) complex point-of-distribution requirements. Our integrated services provide clients a more efficient and comprehensive means of delivering products and information to their end user customers. We enable our clients to manage their sales channels efficiently by utilizing our core competencies, which include: - consultative services - channel management, marketing and product strategy - customized and flexible billing options - promotions - sales and marketing information and forecasting - technology services - electronic data interface, or EDI, integration - interactive voice response, or IVR - database management - distribution services - product ownership, consignment and warehousing - fulfillment - purchasing management - inventory management - end user customer support services - inbound call center services and technical support - returns and refunds processing Since 1994, we have focused on the telecommunications industry because of its high growth characteristics and increasing marketing needs. The majority of our growth during this time period has come from sales and services related to telecommunications products, specifically Caller ID equipment, including corded and cordless telephones with built-in Caller ID and stand-alone devices. Approximately 97% of our 1998 revenues and 98% of our revenues for the three months ended March 31, 1999 came from sales to BellSouth, Pacific Bell, Southwestern Bell and US West and their customers. We intend to apply our existing core competencies to help our clients sell their products through the internet. We expect our e-commerce solution to provide our clients with an additional distribution channel for offering their products and services to their end user customers. We believe that our "one stop shop" approach appeals to large corporations that seek to reduce the expense and management of outsourcing to numerous service providers. In order to perform marketing support and distribution functions in-house, a company may be required to develop expensive, labor intensive infrastructures, which may divert its resources and management's focus from its principal business. By assuming responsibility for these tasks, we strive to improve the quality of the non-core operations of our clients and to reduce their operating costs. We believe that the flexibility of our services allows us to attract clients in many industries. We have provided technical literature and point-of-sale distribution for a number of years to companies in other industries, including Home Depot, Siemens and NAPA. In 1999, we began to sell and distribute cable modems to customers of TCI. 28 32 STRATEGY Our strategy is to take advantage of trends towards outsourcing marketing support and distribution services by utilizing our comprehensive services, reputation for quality service and strong client relationships. We believe that there are meaningful opportunities to grow our business with existing clients and other large corporations increasingly seeking outsourcing solutions. The following are key elements of this strategy. - MAXIMIZE MARKETING SUPPORT AND PRODUCT DISTRIBUTION SERVICES TO EXISTING TELECOMMUNICATIONS CLIENTS. We integrate ourselves into our telecommunications clients' distribution channels so that we can help them increase the sales of their products and services. We provide marketing support services and distribution of Caller ID units, Caller ID telephones and other telecommunications equipment for BellSouth, Pacific Bell, Southwestern Bell and US West. According to industry sources, market penetration of Caller ID services in the U.S. as of December 31, 1998 was approximately 30% and is expected to reach approximately 75% by 2007. Management believes that there are significant growth opportunities to provide Caller ID related products as the market penetration of Caller ID increases. We expect other opportunities to arise as consumer demand grows for advanced telecommunications products to support network services, including DSL, e-mail, web-based technology, voice mail and call waiting. We believe that we are well situated to market the next generation of telecommunications products these clients provide to their customers. - GROW TELECOMMUNICATIONS CLIENT BASE. We intend to expand our client base in the telecommunications area by utilizing the industry expertise we have developed to date. We believe we are well positioned to build relationships with other clients in this industry, including independent local exchange carriers and cable companies, by capitalizing on our long-standing relationships with several leading clients in the telecommunications industry. In pursuit of this strategy, we have recently begun to provide services to Bell Atlantic, Ameritech, Cincinnati Bell and TCI. - EXPAND CUSTOMER DISTRIBUTION CHANNELS THROUGH E-COMMERCE. We believe that our marketing support and distribution services can be applied to telecommunications companies and other businesses seeking to enter e-commerce by outsourcing product distribution. When we focused on the telecommunications business, we hired experienced industry personnel to provide consultative support for various accounts. Likewise, in the e-commerce area we have hired the personnel to help our clients sell their products through the internet. We recently launched e-commerce distribution services for one client and are soliciting other e-commerce distribution clients. Our strategy is to develop relationships with companies that offer e-commerce solutions such as web development, systems integration and similar services. Our goal is to complement these companies' services with our distribution and end user support capabilities. For example, we recently entered into a relationship with IBM to make our distribution and call center support services available to certain IBM e-commerce customers. Under this arrangement, IBM, at its option, will provide information about our services to its e-commerce customers and will identify these customers to us. As we apply our core competencies to the e-commerce channel, we intend to become a "one-stop" distributor for manufacturers and large corporations planning to use the internet as an additional sales channel. Our goal is to offer solutions to product distribution via the internet that will encompass: - internet marketing and product strategy consultation, - web concept and design, - product ownership or consignment and warehousing of products, - inventory and sales reporting, - end user fulfillment, - online order tracking, - online secure payment processing, - e-mail verification of orders, - complete end user customer support, - returns and refund processing and - technical support. 29 33 - BUILD LONG-TERM CLIENT RELATIONSHIPS. By assessing a client's industry, products, services, processes and culture, we strive to develop solutions that reduce the costs and investment required to deliver that client's marketing support programs. Our services are designed to be an extension of our clients' marketing and distribution efforts. We believe that this consultative partnership, combined with extensive integration between our processes and systems and those of our clients and our complete range of services, cultivates long-term client relationships. We believe that this approach also creates substantial opportunities to expand relationships with existing clients by cross-selling the full range of our services. For example, we have provided services to NAPA since 1994, Home Depot since 1993 and Siemens and BellSouth since 1987 and have, in each case, expanded the scope of services provided to these clients. - CONTINUE INVESTMENT IN TECHNOLOGY. Historically, we have maintained a commitment to the use of technology. We intend to continue to upgrade and enhance our computer hardware and software applications. We expect that these investments in our technology will permit us to continue to provide high quality, flexible and powerful services to our clients. This commitment has enabled us to provide value-added services like flexible end user billing for telecommunications products. We are also able to establish automated interfaces between our system and clients' systems. For example, we recently developed a method to allow a client that did not have EDI links to transmit its product order files to us using a customized internet web page to simulate an EDI transmission. For other clients, we establish EDI links to allow them to deliver information to us. Likewise, we transmit billing information for our telecommunication clients' customers' phone bills by EDI. We believe that our use of technology to connect clients to us provides a competitive advantage and results in closer client relationships and reduced labor costs. We also believe that continued technological advances, particularly those utilizing the internet, will provide new opportunities for us to customize our services further. We intend to use part of the proceeds of this offering to continue to upgrade our computer and network hardware. MARKETING SUPPORT SERVICES We design customized, technology-based marketing support solutions for our clients. We act as an extension of our clients in reaching their end user customers. Our full range of services are described below and can be offered to clients who sell products and services through the traditional sales channels or the e-commerce channel. CONSULTATIVE SERVICES We offer consultative services to our clients regarding their sales, marketing and distribution channels, which include: Channel Management, Marketing and Product Strategy. We strive to create strategic relationships with our clients. We assist our clients in managing their sales channels by assigning a client services team to each client to understand the client's operations, customer service processes, culture, requirements and goals. We are often in the field to train our clients' sales staffs and promote product sales. To the extent requested by a client, we will assist in formulating its marketing strategy and address product forecasting, pricing, sourcing and promotional opportunities. We also consult with clients about the products they sell to their customers. In addition, we seek new revenue sources for our clients and address process and product improvements. For clients who seek e-commerce solutions, we can provide internet marketing and product strategy. We believe our value-added channel management and strategy services integrate us into our clients' sales channels and increase our value to our clients. Customized and Flexible Billing Options. We believe that one of the key services we offer is convenient payment options for end users to pay for products. For example, we offer our clients product billing solutions, like the billing option program we pioneered for BellSouth in 1993 in which customers could pay for Caller ID equipment and telephones through interest-free installments on their phone bill. We can implement payment alternatives for clients, like billing in installments on credit cards. As part of our e-commerce strategy, we offer universal payment processing software in conjunction with shopping cart 30 34 software for sales through the e-commerce channel. We design the payment method to fit the needs of our client, its customers and the distribution channel. Promotions. We design and manage targeted promotional activities for our clients. We consult with clients to determine which products to promote and how to increase sales through coupons, rebate and other programs. We work with our clients to determine how much rebate or discount will be given to the end user and the manner in which an end user can access a program. Once established, we implement and manage the promotion, providing such services as creative design, verification, database management, results tracking, check printing and disbursement and the program's back-end customer support. Sales and Marketing Information and Forecasting. As a supplement to our services, we provide sales reports and inventory analysis, program results and detailed order processing information. We have developed flexible technologies and reporting procedures that convert raw data gathered during the course of a marketing support program into useful, customized reports. These reports provide a basis for our client's responses to customer needs and inquiries. For example, information obtained during a customer telephone call is captured by our database marketing and management systems and is then incorporated into customized reports. We use this information to help our clients prepare and update forecasted sales information. These reports also are used by us and our clients to monitor performance of various marketing programs. On-line functions allow clients to monitor their programs in real-time to obtain comprehensive trend analyses and modify program parameters as necessary. We provide clients with customized reports via computer-to-computer transmission, disk, magnetic tape and the internet. We also provide cost-center based accounting reports for clients who utilize our services for subsidiary and intra-company fulfillment transactions. TECHNOLOGY SERVICES Our technology helps us provide marketing support services to our clients. We provide the following technology-based services: Electronic Data Interface Integration. We use EDI to link our systems to our clients' systems, which permits the automatic exchange of information. Our telecommunications clients generally transmit sales orders for Caller ID equipment and other products to us via EDI. We can also provide sales, billing and individual customer order status updates to our clients through EDI links. The open architecture of our systems facilitates adapting our EDI capabilities to new clients and new marketing programs. We also develop methods to allow clients without EDI capabilities to transmit their order files to us through other methods. Interactive Voice Response. In many cases, our call center services are offered through IVR systems. These menu driven systems allow customers to route their calls by selecting from several offerings. Our IVR systems include text to speech capabilities, which allow the IVR systems to "read" specific, real-time data from the client's databases and convert it into speech based on cues from a caller. These systems generally reduce personnel and physical plant expenses associated with a call center while expanding the operating capabilities of the center. Technical support is also integrated into our IVR systems, so that an end user can obtain answers to technical questions, from an automated system rather than a call center representative, regarding the products they purchased. Database Management. We can manage client databases independently or in conjunction with other marketing support programs. Independent database management begins with the client providing the information to establish the database or our obtaining the data from information generated through a client's web site. We then customize and manage this data to provide client reports. In addition, our integrated marketing support programs generate information about customers, demographics, recurring technical problems and other useful marketing data. We are then able to create customized databases that evolve with our ongoing marketing support and customer service programs. This data is a source of valuable information as we evaluate ongoing programs and plan and design future programs with our clients. 31 35 DISTRIBUTION SERVICES Effective distribution of our clients' products and services is another of our core competencies and has been a key component in our revenue growth. Our capabilities in this area are described below. Product Ownership, Consignment and Warehousing. As a part of our comprehensive approach, we often acquire products that our clients offer and warehouse them in our distribution facility. At a client's option, we can also hold its inventory on consignment, in which case we distribute consigned client products to the client's end user customers for a per-unit fee. We believe that our flexibility in product ownership models gives us a competitive advantage in maintaining and building client relationships. Fulfillment. We are committed to offering our clients' products and services to their customers on a timely and accurate basis. Our personnel process, pack and ship product orders and requests for promotional, technical and educational literature, signage and point of sale materials for clients. We use several custom-designed semi-automated packaging and labeling lines to pack and ship products. By utilizing this technology, we are able to reduce labor costs and provide more timely shipments to our clients' customers. We streamline and customize the distribution procedures for each client based upon the product request and the tracking, reporting and inventory controls necessary to implement that client's marketing support program. Purchasing Management. We place orders for products we distribute with vendors selected by us or our clients. Our purchasing management services include assisting a client in negotiating product pricing with the vendor, as well as forecasting product quantities required for normal business programs or promotions. By managing the timing of purchases, we are better able to control the inventory risk that we incur when we own the products our clients offer, while providing a value-added service to our clients. Inventory Management. An integral part of our marketing support services is the on-line monitoring and control of a client's inventory. We provide automated inventory management to assure real-time stock counts of a client's products, literature, signage and other items. These inventory systems enable us to provide management information to maintain consistent and timely reorder levels and supply capabilities and also enable the client to assess quickly 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 dial-up. 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. END USER CUSTOMER SUPPORT SERVICES Our fourth core competency relates to support services we provide to our clients' customers. We believe this is critical to a comprehensive marketing solution. These customer support services are described below. Inbound Call Center Services and Technical Support. Our call center representatives resolve questions regarding shipping, billing and technical support as well as a variety of other questions. From time to time they may sell advanced equipment and extended warranties to customers who call us. Inquiries generally relate to a customer's purchase of a product or a customer's need for ongoing assistance. These end users dial a support number printed on the product or in the documentation accompanying the product. To handle the call properly, Innotrac's automated call distributor identifies each inbound call by the toll-free number dialed and immediately routes the call to the IVR system or an Innotrac representative. The IVR system attempts to resolve support issues by guiding the customer through a series of interactive questions. If IVR automatic resolution cannot solve the problem, the call is routed to one of our service representatives who is specially trained in the applicable client's business and products. Our call center representatives can enter customer information into our call-tracking system, listen to a question and quickly access a proprietary network database using a graphical interface to answer a customer's question. A senior representative is available to provide additional assistance for complex or 32 36 unique customer questions. Customer requests are generally resolved with a single call, whether answered by a trained representative or our automated systems. As additional product information becomes available over the course of a marketing program, we promptly integrate this information into our database to ensure that IVR and representatives' answers are based upon the latest product information. Returns and Refunds Processing. The representatives respond to customer calls about product returns and refunds and obtain information about customer service problems. They facilitate a customer's return of a product by providing a bar-coded label to the customer for return of a product. When the returned item is processed and entered into our system, it automatically triggers a pre-set action for reshipment of a product or refund to the customer. TECHNOLOGY Our use of technology enables us to design and deliver services for each client's marketing support needs. Our information technology group, or IT Group, has developed our database marketing support and management systems, which utilize a UNIX-based open architecture comprised of multiple networked computers and anchored by two Hewlett-Packard HP9000 K460 multiprocessing systems. We are in the process of deploying an Oracle-based enterprise resource planning software system, which features a fourth generation language technology that will allow for quick and efficient changes to programs, systems and reports. This system will standardize our computer services and allow for even greater flexibility and capacity. The open architecture of our computer system permits us to seamlessly interact with many different types of client systems. The 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 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 storage facilities. Our call center utilizes a sophisticated Rockwell Spectrum Automatic Call Distributor, or ACD, switch to handle call management functions. This ACD system has the capacity to handle 2,400 call center representatives simultaneously, and is currently supporting over 450 representatives simultaneously. Additionally, the ACD system is integrated with software designed to enable management to automatically staff and supervise the call center based on call length and call volume data compiled by the ACD system. PERSONNEL AND TRAINING Our success in recruiting, hiring and training large numbers of skilled employees and obtaining large numbers of hourly employees during peak periods for distribution and call center operations is critical to our ability to provide high quality marketing support services. Call center representatives and fulfillment personnel receive feedback on their performance on a regular basis and, as appropriate, are recognized for superior performance or given additional training. To maintain good employee relations and to minimize employee turnover, we offer competitive pay, hire primarily full-time employees who are eligible to receive a full range of employee benefits, and provide employees with clear, visible career paths. As of April 30, 1999, we had 838 employees, of which approximately 98% were full-time and 2% were part-time. Management believes that the demographics surrounding our facilities and our reputation, stability, compensation and benefit plans should allow us to continue to attract and retain qualified employees. 33 37 Currently, we are not a party to any collective bargaining agreements. None of our employees is unionized. Although we consider our relationship with our employees to be good, we have experienced occasional unionization initiatives, particularly among our call center personnel. COMPETITION In tailoring services to client needs, we compete on the basis of quality, reliability of service, efficiency, technical superiority, speed, flexibility and price. We compete with many companies, some of which have greater resources than us, with respect to various portions of our business. Those companies include fulfillment businesses, call center operations, database management firms, web developers and e-commerce service providers. We believe that our comprehensive and integrated services differentiate us from many of those competitors. We continuously explore new outsourcing service opportunities, typically in circumstances where clients are experiencing inefficiencies in non-core areas of their businesses and management believes we can develop a superior outsourced solution on a cost-effective basis. We primarily compete with the in-house operations of our current and potential clients and also compete with certain companies that provide similar services on an outsourced basis, many of whom have greater resources than Innotrac. GOVERNMENT REGULATION The Caller ID services offered by our telecommunications clients are subject to various federal and state regulations. The legality of Caller ID has been challenged in cases decided under the Electronic Communications Privacy Act, or the ECPA, and several state statutes. In March 1994, a Federal Communications Commission, or FCC, report preempted certain state regulation of interstate calling party number parameter, or CPN, based services, the technology underlying Caller ID. This report requires certain common carriers to transmit CPN and its associated privacy indicator (which allows telephone callers to block the display of their phone numbers on Caller ID display units) on an interstate call to connecting carriers without charge (the "Free Passage" rule). In connection with this report, the Department of Justice issued a memorandum which concluded that the installation or use of interstate Caller ID service is not prohibited by any federal wiretap statute and that, in general, the FCC has authority to preempt state laws that the FCC finds would hinder federal communications policy on Caller ID services. Court decisions since the FCC issued its March 1994 report have consistently held that Caller ID does not violate any state or federal wiretap statute. In May 1995, the FCC narrowed its March 1994 preemption of state public utilities blocking regulations by permitting subscribers to choose per-line blocking or per-call blocking on interstate calls, provided that all carriers were required to adopt a uniform method of overriding blocking on any particular call. At the same time, the FCC specifically preempted a California Public Utilities Commission, or CPUC, per-line blocking default policy, which required that all emergency service organizations and subscribers with nonpublished numbers, who failed to communicate their choice between per-call blocking and per-line blocking, be served with a per-line blocking. The FCC's revised rules and regulations also require carriers to explain to their subscribers that their telephone numbers may be transmitted to the called party and that there is a privacy mechanism (i.e., the "blocking" feature) available on interstate calls, and explain how the mechanism can be activated. The CPUC, seeking to protect the caller's privacy, has ruled that a carrier can offer Caller ID or transmit CPN to interconnecting carriers only upon CPUC approval of its customer notification and education plan. The CPUC has approved the education plan of Pacific Bell, whose Caller ID market includes California. The Telecommunications Act of 1996 introduced restrictions on telecommunications carriers' usage of customer proprietary network information, or CPNI. CPNI includes information that is personal to customers, including where, when and to whom a customer places a call, as well as the types of telecommunications services to which the customer subscribes and the extent these services are used. The FCC interprets the CPNI restrictions to permit telecommunications carriers, including BellSouth, Pacific Bell and US West, to use CPNI without customer approval to market services that are related to the 34 38 customer's existing service relationship with his or her carrier. Before carriers may use CPNI to market services outside a customer's existing service relationships, the carrier must obtain express customer permission. Because we are dependent upon the efforts of our clients to promote and market their equipment and services, laws and regulations inhibiting those clients' ability to market these equipment and services to their existing customers could have a material adverse effect on our business, results of operations and financial condition. Telephone sales practices are regulated at both the federal and state level. These regulations primarily relate to outbound teleservices, which we currently outsource to another company. Outbound teleservices are regulated by the rules of the FCC under the Federal Telephone Consumer Protection Act of 1991, the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act of 1994 and various state regulations regarding telephone solicitations. We believe that we are in compliance with these federal statutes and the FCC rules thereunder and the various state regulations and that we would operate in compliance with those rules and regulations if we were to engage in outbound teleservice operations in the future. Our new e-commerce business may be subject to many of the same laws and regulations. It is uncertain how some of these existing laws and regulations will be applied to our e-commerce business, if at all. Unfavorable interpretations or applications of these laws in the e-commerce context, particularly with respect to privacy issues, could impede our e-commerce business. New laws and regulations specifically addressing e-commerce could also affect us. We work closely with our clients, companies to which we outsource outbound teleservices and their respective advisors to ensure that we and our client are in compliance with these regulations. We cannot predict whether the status of the regulation of Caller ID services or e-commerce will change and what effect, if any, this change would have on us or our industry. INTELLECTUAL PROPERTY We have used the service mark "Innotrac" since 1985. We have obtained Georgia state registrations and have filed applications for federal and European Community registration of this service mark and other marks used by us in our business. The "innotrac.com" domain name has been a registered domain name since 1995. Due to the possible use of identical or phonetically similar service marks by other companies in different businesses, there can be no assurance that the United States Patent and Trademark Office will grant our registration of our service mark "Innotrac" or the other marks we are seeking to register, or that our service marks will not be challenged by other users. Our operations frequently incorporate proprietary and confidential information. In accordance with industry practice, we rely upon a combination of contract provisions and trade secret laws to protect the proprietary technology we use and to deter misappropriation of our proprietary rights and trade secrets. PROPERTIES Our headquarters and distribution facilities are located in 250,000 square feet of leased space in Duluth, Georgia. Our corporate offices occupy 50,000 square feet of this facility and the remaining 200,000 square feet is distribution space. This site also includes approximately 3.5 acres that will be available for Innotrac's expansion requirements. The lease for our Duluth facility commenced in October 1998 and has a term of 10 years with two five year renewal options. The lease provides for an option to purchase the facility at the end of the first five years of the term or at the end of the first 10 years of the term. We have not yet determined whether to exercise this purchase option. We provide teleservices through our call center located in Duluth, Georgia. We currently lease the center on a month-to-month basis and are in the process of negotiating a new lease agreement. The call center is currently configured with approximately 460 workstations and has room to expand to approximately 700 workstations. It currently operates from 8:00 a.m. until midnight Monday through Friday and from 9:00 a.m. to 6:00 p.m. on Saturday. 35 39 In June 1999, we entered into a lease for a new facility in Pueblo, Colorado with an initial term of five years with two five year renewal options. The facility provides approximately 87,000 square feet of floor space. We plan to use approximately 45,000 square feet for a second call center, which will include quality assurance, administrative, training and management space. The call center will eventually support about 350 workstations. We anticipate opening the new call center in the third quarter of 1999. The remaining 42,000 square feet is available for future development as distribution space. LEGAL PROCEEDINGS We are not a party to any material legal proceeding. We are, from time to time, a party to litigation arising in the normal course of our business. Management believes that none of these actions, individually or in the aggregate, will have a material adverse effect on our financial position or results of operations. 36 40 MANAGEMENT EXECUTIVE OFFICERS AND DIRECTORS Our executive officers and directors are as follows:
DIRECTOR NAME AGE POSITION TERM EXPIRES - ---- --- -------- ------------ Scott D. Dorfman(1)(3)............. 41 President, Chief Executive Officer, 2001 and Chairman of the Board David L. Ellin(1).................. 40 Senior Vice President, Chief 2001 Operating Officer, and Director Larry C. Hanger.................... 44 Senior Vice President -- Business 2002 Development and Director John H. Nichols, III............... 45 Senior Vice President, Chief -- Financial Officer and Secretary Don L. Colter, Jr.................. 38 Vice President -- Operations -- Stephen J. Walden.................. 55 Vice President -- Electronic -- Commerce Will Hendrick...................... 42 Vice -- President -- Telecommunications Bruce V. Benator(1)(2)............. 41 Director 2002 Martin J. Blank(2)(3).............. 52 Director 2000 William H. Scott, III(2)(3)........ 52 Director 2000
- --------------- (1) Member of executive committee (2) Member of audit committee (3) Member of compensation committee Mr. Dorfman founded Innotrac and has served as President, Chief Executive Officer and Chairman of the Board since its inception in 1984. Prior to founding Innotrac, Mr. Dorfman was employed by Paymaster Checkwriter Company, Inc., an equipment distributor. At Paymaster, Mr. Dorfman gained experience in distribution, tracking and inventory control by developing and managing Paymaster's mail order catalog. Mr. Ellin joined us in 1986 and has served as Senior Vice President and Chief Operating Officer since November 1997 and as a director since December 1997. He served as Vice President from 1988 to November 1997. From 1984 to 1986, Mr. Ellin was employed by the Atlanta branch of WHERE Magazine, where he managed the sales and production departments. From 1980 to 1984, Mr. Ellin was employed by Paymaster, where he was responsible for Paymaster's sales and collections. Mr. Hanger joined Innotrac in 1994 and has served as Vice President -- Business Development since November 1997 and as a director since December 1997. He was promoted to Senior Vice President in April 1999. He served as Innotrac's Department Manager of Business Development from 1994 to November 1997, and was responsible for the management of the telecommunication equipment marketing and service business. From 1979 to 1994, Mr. Hanger served as Project Manager -- Third Party Marketing at BellSouth, 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. Nichols joined Innotrac in November 1997 as Vice President and Chief Financial Officer. He was appointed Secretary in July 1998 and was promoted to Senior Vice President in April 1999. From 1993 until November 1997 he served as Vice President and Chief Financial Officer for Storehouse, Inc., a furniture retailer. From 1982 until 1993, Mr. Nichols was employed by Contel Corporation and GTE Corporation in various senior financial management positions in both the telephone and cellular telephone business units. Mr. Nichols is a certified public accountant. 37 41 Mr. Colter joined Innotrac in 1995 and has served as Vice President -- Operations since November 1997. He served as Innotrac's Chief Financial Officer from 1995 to November 1997. Prior to joining Innotrac, from 1993 to 1995, Mr. Colter was the corporate controller of Gay & Taylor/Thomas Howell Group, an international insurance adjusting company. From 1991 to 1993, Mr. Colter was corporate controller of Outdoor West, Inc., an outdoor advertising company. Mr. Colter is a certified public accountant and has over 15 years of experience in the financial and accounting industry. Mr. Walden joined Innotrac in January 1999 as Vice President -- Electronic Commerce. From 1998 to 1999, he served as Senior Vice President for Internet Strategy at Premiere Technologies, Inc. responsible for managing a new, internet-based product line integrating telephony services with internet technology. Prior to that, from 1996 to 1998, he was Vice President of Content and Commerce for BellSouth.net, a BellSouth subsidiary. Mr. Walden was President of Walden Associates, a media and technology consulting group, from 1995 to 1996. From 1988 to 1995, he held positions with Prodigy Services Company. Earlier in his career, he was employed with Grey Advertising, Warner Amex Cable Communications, Time Inc.'s Manhattan Cable TV, and Home Box Office. Mr. Hendrick joined Innotrac in April 1999 as Vice President -- Telecommunications. Prior to joining Innotrac, from November 1997 to February 1999 he served as Vice President and General Manager for the former telecommunications division of InteliData Technologies Corp., which designed and distributed consumer telephone products. He also served as Vice President -- Sales at InteliData and its predecessor from August 1995 to November 1997. He held the position of Senior Director -- Product Management with BellSouth from January 1993 to July 1995, and has also served as Director -- Product Development for that company. Mr. Hendrick has 20 years experience in the telecommunications industry. Mr. Benator is the Managing Partner of Williams Benator & Libby, LLP, certified public accountants, and has been a director since December 1997. He has been affiliated with the firm since 1984 and is the firm's Director of Accounting and Auditing Services. From 1979 to 1984, Mr. Benator was employed by Ernst & Young, LLP. Mr. Blank has been a director since December 1997 and is a co-founder of Automobile Protection Corporation, or APCO, a publicly held corporation engaged in the marketing of extended vehicle service contracts and warranty programs. Mr. Blank has served as Secretary and Director of APCO since its inception in 1984 and as Chairman of the Board and Chief Operating Officer since 1988. Mr. Blank's experiences prior to co-founding APCO include the practice of law and the representation of and financial management for professional athletes. Mr. Blank is admitted to the bar in the States of Georgia and California. Mr. Scott has been a director since December 1997 and has served as President and Chief Operating Officer of ITC Holding Company, Inc., the parent company of ITC Service Company, since 1991. He has been a director of ITC Holding Company since 1989, and served as its Executive Vice President from 1989 to 1991. Mr. Scott is a director of nFront, Inc., a software and outsourcing company providing internet banking solutions to small and mid-sized banks; Powertel, Inc., a wireless telecommunications services company operating in the southeastern United States; KNOLOGY Holdings, Inc., a broadband telecommunications services company currently operating in Alabama, Florida, Georgia and South Carolina; ITC DeltaCom, Inc., a full service telecommunications provider to business customers in the southeastern United States; and MindSpring Enterprises, Inc., an internet service provider. MEETINGS AND COMMITTEES OF THE BOARD The board of directors meets on a regular basis to supervise, review, and direct Innotrac's business and affairs. The board of directors has established an executive committee, an audit committee and a compensation committee to which it has assigned certain responsibilities in connection with the governance and management of our affairs. We have no standing nominating committee or other committee performing similar functions. 38 42 Executive Committee. The executive committee, pursuant to authority delegated by the board, from time to time considers certain matters in lieu of convening a meeting of the full board, subject to any restrictions in applicable law related to the delegation of certain powers to a committee of the board. Messrs. Dorfman, Ellin and Benator comprise the members of the executive committee. Audit Committee. The audit committee recommends the appointment of independent public accountants, reviews the scope of audits proposed by the independent public accountants, reviews internal audit reports on various aspects of corporate operations and periodically consults with the independent public accountants on matters relating to internal financial controls and procedures. Messrs. Benator, Blank and Scott comprise the members of the audit committee. Compensation Committee. The compensation committee is responsible for the review and approval of compensation of employees above a certain salary level, the review of management recommendations relating to incentive compensation plans, the administration of Innotrac's stock option and senior executive compensation plans, the review of compensation of directors and consultation with management and the board on senior executive continuity and organizational matters. Messrs. Dorfman, Blank and Scott comprise the members of the compensation committee. EXECUTIVE COMPENSATION The following table sets forth the total compensation paid or accrued by Innotrac for services rendered during the fiscal years ended December 31, 1998 and 1997, to or for Innotrac's chief executive officer and each of its four other most highly compensated executive officers (the "Named Executive Officers"). The total amount of perquisites, personal benefits and other annual compensation paid to the Named Executive Officers do not in any case exceed the lesser of $50,000 or ten percent of an officer's total salary and bonus. None of the executive officers has an employment agreement with Innotrac. SUMMARY COMPENSATION TABLE
LONG-TERM COMPENSATION ------------ ANNUAL COMPENSATION SECURITIES FISCAL ------------------- UNDERLYING ALL OTHER NAME AND PRINCIPAL POSITION(S) YEAR SALARY BONUS OPTIONS(#) COMPENSATION - ------------------------------ ------ -------- -------- ------------ ------------ Scott D. Dorfman,.......................... 1998 $356,855 $250,000 -- $26,218(1) President, Chairman of the Board and 1997 226,179 25,000 -- 9,526 Chief Executive Officer David L. Ellin............................. 1998 145,000 87,000 -- 10,241(2) Senior Vice President and Chief Operating 1997 137,692 70,000 155,000 -- Officer Larry C. Hanger............................ 1998 100,000 100,000 -- 500(2) Senior Vice President 1997 89,343 35,000 25,000 -- John H. Nichols, III....................... 1998 125,000 75,000 -- 1,502(2) Senior Vice President, Chief Financial 1997 10,576 4,807 20,000 -- Officer and Secretary(3) Don L. Colter.............................. 1998 92,606 46,300 -- 3,457(2) Vice President 1997 78,832 40,000 25,000 --
- --------------- (1) Includes (a) Innotrac's matching contribution to deferred compensation plan in the approximate amount of $24,232 and (b) the full dollar amount of premiums, $1,986, paid by Innotrac with respect to split-dollar life insurance on the life of Mr. Dorfman. (2) Represents Innotrac's matching contribution to deferred compensation plan. (3) Mr. Nichols's employment by Innotrac commenced November 1997. 39 43 Innotrac did not grant any options to its Named Executive Officers during fiscal 1998, nor were any company-granted options exercised by any Named Executive Officers. The following table sets forth the year-end value of unexercised options held by the Named Executive Officers. FISCAL YEAR-END OPTION VALUES
NO. OF SECURITIES UNDERLYING VALUE OF UNEXERCISED UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS FISCAL YEAR END AT FISCAL YEAR END(1) --------------------------- --------------------------- EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ----------- ------------- ----------- ------------- Scott D. Dorfman,............................... -- -- -- -- President, Chairman of the Board and Chief Executive Officer David L. Ellin.................................. 55,000 100,000(2) $456,325 $902,500 Senior Vice President and Chief Operating Officer Larry C. Hanger................................. -- 25,000(2) -- 225,625 Senior Vice President John H. Nichols, III............................ -- 20,000(2) -- 180,500 Senior Vice President, Chief Financial Officer and Secretary Don L. Colter................................... -- 25,000(2) -- 225,625 Vice President
- --------------- (1) As required by the rules of the Securities and Exchange Commission, the value of unexercised in-the-money options is calculated based on the closing sale price of Innotrac's common stock on the Nasdaq National Market as of the last business day of its fiscal year, December 31, 1998, which was $18.125 per share. (2) The option becomes exercisable with respect to 50% of the underlying shares on November 24, 1999; with respect to an additional 25% of the underlying shares on November 24, 2000; and with respect to the remaining 25% of the underlying shares on November 24, 2001. DIRECTORS' COMPENSATION We pay our outside directors an annual fee of $10,000, and additional fees of $250 and $100, respectively, for each board meeting and committee meeting attended. We also reimburse all directors for their travel and other expenses incurred in connection with attending board or committee meetings. We intend to grant additional options for 5,000 shares annually to each of our outside directors, on the day we hold our annual meeting of shareholders. The exercise price will be the closing price of our common stock reported on the Nasdaq National Market on the date of grant. One-third of the options will be immediately exercisable, the next third will vest on the first anniversary of the date of grant, and the last third, on the second anniversary. On May 11, 1999, we granted options for 5,000 shares -- 1,667 of which are presently exercisable -- to each of Messrs. Benator, Blank and Scott under this plan. These options are exercisable at $17.688 per share. In addition, on May 6, 1998 we granted each of Messrs. Benator, Blank and Scott, and Mr. Campbell B. Lanier, III, a former director, immediately exercisable options to purchase 10,000 shares of common stock at an exercise price of $12. COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION Messrs. Dorfman, Blank and Scott comprised the members of the compensation committee during fiscal 1998. While Mr. Dorfman is our President and Chief Executive Officer, neither Mr. Blank nor Mr. Scott is a current officer or former officer of Innotrac. We have entered into some transactions with Mr. Dorfman as described in "Related Party Transactions." 40 44 PRINCIPAL AND SELLING SHAREHOLDERS The following table sets forth information concerning the beneficial ownership of common stock, which is the only class of voting stock of Innotrac, by: - each person known to Innotrac to beneficially own more than 5% of the common stock, - each director and Named Executive Officer, - all of Innotrac's directors and executive officers as a group and - the selling shareholders. Unless otherwise indicated below, at July 21, 1999, the persons named below had sole voting and investment power with respect to all shares of the common stock shown as beneficially owned by them:
PERCENTAGE BENEFICIALLY OWNED NUMBER OF SHARES -------------------------------------- BENEFICIAL OWNER BENEFICIALLY OWNED(1) PRIOR TO OFFERING AFTER OFFERING(2) - ---------------- --------------------- ----------------- ----------------- Scott D. Dorfman................. 6,074,162(3)(4) 67.4% 52.0%(5) SAFECO Corporation............... 917,600(6)(7) 10.2 8.3 SAFECO Asset Management Company........................ 808,100(6)(8) 9.0 7.3 SAFECO Common Stock Trust........ 676,000(6)(9) 7.5 6.1 ITC Service Company.............. 383,333 4.3 2.6(10) David L. Ellin................... 87,500(11) 1.0 * John H. Nichols, III............. 2,000 * * Don L. Colter.................... 1,000 * * Bruce V. Benator................. 11,667(12) * * Martin J. Blank.................. 13,667(12) * * William H. Scott, III............ 398,000(12)(13) 4.4 2.7(14) All directors and executive officers as a group (10 persons)....................... 6,587,996 72.4% 55.2%(15)
- --------------- * Denotes less than 1% (1) For purposes of this table, a person or group of persons is deemed to have "beneficial ownership" of any shares that the person or group has the right to acquire within 60 days or with respect to which the person has or shares voting or investment power. For purposes of computing the percentages of outstanding shares held by each person or group of persons, shares which the person or group has the right to acquire within 60 days after such date are deemed to be outstanding for purposes of computing the percentage for the person or group but are not deemed to be outstanding for the purpose of computing the percentage of any other person or group. As of July 21, 1999, there were 9,009,995 shares of common stock outstanding. (2) Assumes no exercise of the over-allotment options Innotrac and the selling shareholders have granted to the underwriters. (3) Mr. Dorfman's address is 6655 Sugarloaf Parkway, Duluth, Georgia 30097. (4) Includes an aggregate of 148,033 shares owned by Mr. Dorfman's wife individually, as custodian for the benefit of his children and through trusts for the benefit of Mr. Dorfman's children. (5) If the over-allotment option is exercised in full, Mr. Dorfman will own 49.7% of the outstanding shares of common stock. (6) Information given at February 11, 1999. (7) The address of SAFECO Corporation ("SAFECO") is SAFECO Plaza, Seattle, Washington 98185. According to a joint Schedule 13G filed February 11, 1999, SAFECO is the parent holding company of SAFECO Asset Management Company ("SAFECO AMC") and disclaims beneficial ownership of the reported shares, which include the shares reported by SAFECO AMC and SAFECO Common Stock Trust ("SAFECO CST"). The reported shares are beneficially owned by (a) registered investment companies for which SAFECO AMC serves as investment adviser and (b) employee benefit plans for which SAFECO serves as plan sponsor. (8) The address of SAFECO AMC is 601 Union Street, Suite 2500, Seattle, Washington 98101. SAFECO AMC is an investment adviser and disclaims beneficial ownership of the reported shares, which are beneficially owned by registered investment companies for which SAFECO AMC serves as investment adviser, and include the shares reported by SAFECO CST. (9) The address of SAFECO CST is 10865 Willows Road NE, Redmond, Washington 98052. SAFECO CST is an investment company for which SAFECO AMC serves as investment adviser. (10) If the over-allotment option is exercised in full, ITC Service Company will own 1.9% of the outstanding shares of common stock. (11) Includes 55,000 shares subject to presently exercisable stock options. (12) Includes 11,667 shares subject to presently exercisable stock options. 41 45 (13) Includes 383,333 shares owned of record by ITC Service Company, with respect to which Mr. Scott is an officer and director. Mr. Scott disclaims beneficial ownership of these shares. (14) If the over-allotment option is exercised in full, Mr. Scott may be deemed to beneficially own 2.0% of the outstanding shares of common stock. (15) If the over-allotment option is exercised in full, the directors and executive officers as a group may be deemed to beneficially own 52.3% of the outstanding shares of common stock. Scott D. Dorfman is the founder, Chairman of the Board, President and Chief Executive Officer of Innotrac. He is one of the selling shareholders in this offering. Mr. Dorfman is offering 300,000 of his shares of common stock and has granted the underwriters an option to purchase 200,000 shares at the public offering price to cover any over-allotments. Mr. Dorfman will beneficially own 5,774,162 shares of Innotrac's common stock after the offering or 5,574,162 shares if the over-allotment option is exercised in full. ITC Service Company, or ITC, is the other selling shareholder in this offering. Mr. Scott, one of our directors, is also a director and officer of ITC. ITC is offering 100,000 shares of common stock and has granted the underwriters an option to purchase 75,000 shares at the public offering price to cover over-allotments. ITC will beneficially own 283,333 shares after the offering, or 208,333 shares if the over-allotment option is exercised in full. Both Mr. Dorfman and ITC have engaged in some transactions with us. See "Related Party Transactions" for a description of these matters. We will not receive any of the proceeds of any sales of the shares by the selling shareholders. We will bear substantially all expenses of the offering. 42 46 RELATED PARTY TRANSACTIONS FORMATION AND CONSOLIDATION RELATED MATTERS Scott D. Dorfman, our President, Chairman of the Board and Chief Executive Officer and one of the selling shareholders in this offering, guaranteed our obligations under our previous credit facility with a bank, which consisted of a $25 million revolving line of credit and a $2 million term loan. He also guaranteed a subordinated note in the principal amount of $3.5 million which bore interest at the prime rate plus 8.0% per annum payable to ITC, the other selling shareholder in this offering. The bank guarantee terminated upon the completion of our initial public offering in May 1998 and the subordinated note was repaid with a portion of the proceeds from the initial public offering. In connection with the Consolidation, Mr. Dorfman, together with his children, and ITC received distributions of $7.1 million and $400,000, respectively, from certain pass-through entities that were parties to the Consolidation. The distributions represented a portion of these entities' accumulated earnings. In addition, each of the entities reimbursed Mr. Dorfman and ITC for estimated tax payments with respect to their earnings for 1997 and 1998. Mr. Scott, who has been an Innotrac director since December 1997, and Mr. Campbell B. Lanier, III, an Innotrac director from December 1997 until May 1999, are officers and directors of ITC. They are also officers, directors and principal shareholders of ITC Holding Company, the parent company of ITC. As a result of the Consolidation, and as consideration for their respective interests in the affiliated entities that were parties to the Consolidation, immediately after the Consolidation shares of Innotrac common stock were owned as follows: Mr. Dorfman -- 6,116,662 shares (including 148,033 shares owned individually by his wife, as custodian for the children and through trusts for the benefit of his children and taking into account some subsequent dispositions) and ITC -- 383,333 shares. In February 1998, we redeemed for approximately $390,000 from Arnold Dorfman, the father of Scott D. Dorfman, all of his shares in one of the entities that was a party to the Consolidation. In December 1998, we redeemed for approximately $590,000 from Arnold Dorfman all of his shares in a second affiliated entity that was a party to the Consolidation. We lease a single engine aircraft from a company wholly-owned by Scott D. Dorfman pursuant to a three-year lease that provides for annual rent of $72,000. We are responsible for maintenance, insurance, taxes, fuel and other expenses associated with the aircraft. During 1997, we paid $145,914 in fees to Williams Benator & Libby, LLP, certified public accountants, for accounting and consulting services. In 1998, we paid them $94,000 in fees. Bruce V. Benator, one of our directors, is Managing Partner of Williams Benator & Libby, LLP. POLICY RESPECTING RELATED PARTY TRANSACTIONS On December 11, 1997, the board of directors adopted a policy that any transactions between Innotrac and any of its officers, directors, or principal shareholders or affiliates must be on terms no less favorable than those that could be obtained from unaffiliated parties in comparable situations and must be approved by the audit committee of the board of directors. 43 47 SHARES ELIGIBLE FOR FUTURE SALE Sales of a substantial number of shares of our common stock in the public market, or the perception that such sales could occur, could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of equity securities. Upon completion of this offering, we will have 11,109,995 shares of common stock outstanding (11,209,995 shares if the underwriters' over-allotment option is exercised in full). Of these shares, approximately 5 million shares (including the 2.5 million sold in this offering), or 5.4 million shares if the underwriters' over-allotment option is exercised in full, will be freely tradable without restrictions or further registration under the Securities Act, unless held by "affiliates" of Innotrac as that term is defined in Rule 144 under the Securities Act. Any shares sold to affiliates may not be sold without registration under the Securities Act, or an applicable exemption such as Rule 144. The outstanding shares of common stock that will not be freely tradeable after this offering (estimated to be 6.1 million shares, or 5.8 million shares if the underwriters' over-allotment option is fully exercised) were issued and sold by Innotrac in private transactions in reliance upon the exemption from registration contained in Section 4(2) of the Securities Act and are restricted securities under Rule 144. These shares may not be sold unless they are registered under the Securities Act or are sold pursuant to an applicable exemption from registration, including the exemption pursuant to Rule 144. In general, under Rule 144 as currently in effect, a person who has beneficially owned any of our restricted shares for at least one year would be entitled to sell in broker's transactions or to market makers within any three-month period a number of shares that does not exceed (1) the greater of one percent of the then outstanding shares of our common stock (estimated to be about 111,000 shares after completion of this offering) or (2) the average weekly trading volume of our common stock on the Nasdaq National Market during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC. Sales under Rule 144 are also subject to certain manner of sale restrictions and notice requirements and to the availability of current public information concerning Innotrac. A person (or persons whose shares are aggregated) who is not an affiliate of Innotrac at any time during the 90 days preceding a sale, and who has beneficially owned shares for at least two years, would be entitled to sell those shares under Rule 144(k) without regard to the availability of current public information, volume limitations, manner of sale provisions, or notice requirements. The above is a summary of Rule 144 and is not intended to be a complete description thereof. We have agreed that we will not, for a period of 90 days after the date of this prospectus, without the prior written consent of Bear, Stearns & Co. Inc., issue, sell, offer or agree to sell, grant any option to purchase, or otherwise dispose of any shares of our common stock or any securities convertible, exchangeable or exercisable for such shares, except that, during the 90-day lock-up period, we may (1) issue common stock pursuant to the exercise of currently outstanding stock options under our Stock Option and Incentive Award Plan and (2) grant options under this plan that do not vest and are not exercisable during the lock-up period. The selling shareholders and our executive officers and directors have agreed that they will not, for a period of 90 days after the date of this prospectus, without the prior written consent of Bear, Stearns & Co. Inc., issue, sell, offer or agree to sell, grant any option to purchase, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934 or otherwise dispose of any shares of our common stock or any securities convertible, exchangeable or exercisable for such shares. Upon completion of this 90-day period, the shares owned by the selling shareholders and our executive officers and directors will become eligible for immediate public resale, subject to the limitations of Rule 144. We have filed a registration statement on Form S-8 under the Securities Act to register a total of 800,000 shares of common stock issuable under the Innotrac Corporation Stock Option and Award Incentive Plan. Shares issued upon the exercise of stock options or other rights thereunder will be eligible for resale in the public market without restriction, subject to Rule 144 limitations applicable to affiliates of Innotrac. Options for 472,150 shares of common stock are outstanding, 90,001 of which are currently exercisable. 44 48 No prediction can be made as to the effect, if any, that sales of common stock by existing shareholders in reliance upon Rule 144 or otherwise will have on the market price prevailing from time to time. Nevertheless, sales of substantial amounts of common stock in the public market, or the perception that such sales could occur, could adversely affect the prevailing market price. These sales may also make it more difficult for us to sell equity securities or equity-related securities in the future at a time and price that we deem appropriate. 45 49 DESCRIPTION OF CAPITAL STOCK Innotrac's authorized capital stock consists of 50,000,000 shares of common stock, $0.10 par value per share, and 10,000,000 shares of preferred stock, $0.10 par value per share, having the rights and privileges as the board of directors may from time to time determine. Immediately prior to this offering, 9,009,995 shares of common stock and no shares of preferred stock were issued and outstanding. The following summary of our capital stock does not purport to be complete. It is qualified in its entirety by reference to Innotrac's amended and restated articles of incorporation, its amended and restated bylaws and the rights agreement between Innotrac and Reliance Trust Company as rights agent, filed as exhibits to the registration statement of which this prospectus forms a part, and the applicable provisions of the Georgia Business Corporation Code. COMMON STOCK Holders of common stock are entitled to one vote per share on any issue submitted to a vote of the shareholders and do not have cumulative voting rights in the election of directors. Accordingly, the holders of a majority of the outstanding shares of common stock voting in an election of directors can elect all of the directors then standing for election, if they choose to do so. All shares of common stock are entitled to share equally in any dividends Innotrac's board of directors may, in its discretion, declare out of sources legally available therefor. See "Dividend Policy." If Innotrac dissolves, liquidates or winds up, holders of common stock are entitled to receive on a ratable basis all of our assets available for distribution, in cash or in kind, after payment or provision for payment of all of our debts and liabilities and any preferential amount due to holders of preferred stock. Holders of common shares do not have preemptive or other subscription rights, conversion or redemption rights, or any rights to share in any sinking fund. All currently outstanding common stock shares are, and the shares offered hereby (when sold in the manner contemplated by this prospectus) will be, fully paid and nonassessable. PREFERRED STOCK Our articles of incorporation authorize the board of directors, from time to time, to issue shares of preferred stock in one or more series. They may establish the number of shares to be included in any such series, and may fix the designations, powers, preferences and rights (including voting rights) of the shares of each such series and any qualifications, limitations, or restrictions on preferred shares. No shareholder authorization is required for the issuance of these shares of preferred stock unless imposed by then applicable law. Shares of preferred stock may be issued for any general corporate purposes, including acquisitions. The board of directors may issue one or more series of preferred stock with rights more favorable with regard to voting, dividends and liquidation than the rights of holders of common stock. Issuance of a series of preferred stock also could be used for the purpose of preventing a hostile takeover of Innotrac, even if the takeover is considered to be desirable by the holders of the common stock. Issuance of a series of preferred stock could otherwise adversely affect the voting power of the holders of common stock, and could serve to perpetuate the board of directors' control of Innotrac under certain circumstances. Other than the issuance of the series of preferred stock previously authorized by the board of directors in connection with the shareholder rights plan described below, Innotrac has no current plans that would result in the issuance of any shares of preferred stock. CERTAIN ANTI-TAKEOVER PROVISIONS OF INNOTRAC'S ARTICLES OF INCORPORATION AND BYLAWS Staggered Board of Directors; Removal; Filling Vacancies. The articles of incorporation provide that the board of directors will consist of between five and eleven directors. The board currently consists of six directors, three of whom are not Innotrac employees. The board of directors is divided into three classes of directors serving staggered three-year terms. The classification of directors makes it more difficult for shareholders to change the composition of the board of directors. Innotrac believes, however, that the longer time required to elect a majority of a classified board of directors will help to ensure the continuity and stability of Innotrac's management and policies. The classification provisions could also have the effect 46 50 of discouraging a third party from accumulating large blocks of Innotrac's stock or attempting to obtain control of Innotrac, even though such an attempt might be beneficial to Innotrac and its shareholders. Accordingly, shareholders could be deprived of certain opportunities to sell their shares of common stock at a higher price than might otherwise be the case. The shareholders will be entitled to vote on the election or removal of directors, with each share entitled to one vote. The bylaws generally provide that, unless the board of directors otherwise determines, any vacancies will be filled by the affirmative vote of a majority of the remaining directors, even if less than a quorum. A director may be removed only with cause by the vote of the holders of a majority of the shares entitled to vote for the election of directors at a meeting of the shareholders called for the purpose of removing such director. A vacancy resulting from an increase in the number of directors may be filled by action of the board of directors. Shareholder Rights Plan. On December 11, 1997, our board of directors declared a dividend of one preferred share purchase right for each share of Innotrac common stock. Each share purchase right entitles the registered holder to purchase from Innotrac one one-hundredth (1/100) of a share of Innotrac Series A Participating Cumulative Preferred Stock, par value $0.10 per share, at a price of $60.00 per one one-hundredth of a Series A preferred share. The exercise price and the number of Series A preferred shares issuable upon exercise are subject to adjustments from time to time to prevent dilution. The share purchase rights are not exercisable until the earlier to occur of (1) 10 days following a public announcement that a person or group of affiliated or associated persons (an "Acquiring Person") have acquired beneficial ownership of 15% or more of the outstanding common stock or (2) 10 business days following the commencement of, or announcement of an intention to make, a tender offer or exchange offer the consummation of which would result in the beneficial ownership by a person or group of 15% or more of the outstanding shares of common stock. In the event that Innotrac is acquired in a merger or other business combination transaction or 50% or more of its consolidated assets or earning power is sold after a person or group has become an Acquiring Person, proper provision will be made so that each holder of a share purchase right, other than share purchase rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive, upon the exercise thereof at the then current exercise price of the share purchase right, that number of shares of common stock of the acquiring company which at the time of such transaction will have a market value of two times the exercise price of the share purchase right. In the event that any person or group of affiliated or associated persons becomes an Acquiring Person, proper provision shall be made so that each holder of a share purchase right, other than share purchase rights beneficially owned by the Acquiring Person (which will thereafter be void), will thereafter have the right to receive upon exercise, without payment of the exercise price, that number of shares of Innotrac common stock having a market value of the exercise price of the share purchase right. Series A preferred shares purchasable upon exercise of the share purchase rights will not be redeemable. Each Series A preferred share will be entitled to a minimum preferential quarterly dividend payment of $1.00 per share but will be entitled to an aggregate dividend of 100 times the dividend declared per share of common stock. In the event Innotrac liquidates, the holders of the Series A preferred shares will be entitled to a minimum preferential liquidation payment of $100.00 per share but will be entitled to an aggregate payment of 100 times the payment made per share of common stock. Each Series A preferred share will have 100 votes, voting together with the shares of common stock. Finally, in the event of any merger, consolidation or other transaction in which shares of common stock are exchanged, each Series A preferred share will be entitled to receive 100 times the amount received per share of common stock. These rights are protected by customary antidilution provisions. Prior to the date the share purchase rights are exercisable, the share purchase rights may not be detached or transferred separately from the common stock. The share purchase rights will expire on January 1, 2008, unless that expiration date is extended or unless the share purchase rights are earlier redeemed or exchanged by Innotrac, in each case, as described below. At any time prior to the acquisition by a person or group of affiliated or associated persons of beneficial ownership of 15% or more of the outstanding common stock, Innotrac's board of directors may redeem the share purchase rights in whole, 47 51 but not in part, at a price of $0.001 per share purchase right. Immediately upon any redemption of the share purchase rights, the right to exercise the share purchase rights will terminate and the only right of the holders of share purchase rights will be to receive the redemption price. A more detailed description and terms of the share purchase rights are set forth in a rights agreement between Innotrac and Reliance Trust Company as rights agent. This rights agreement could have the effect of discouraging tender offers or other transactions that might otherwise result in Innotrac shareholders receiving a premium over the market price for their common stock. Ability to Consider Other Constituencies. The articles of incorporation permit the board of directors, in determining what is believed to be in the best interest of Innotrac, to consider the interests of its employees, customers, suppliers and creditors, the communities in which offices or other establishments of Innotrac are located and all other factors the directors may consider pertinent, in addition to considering the effects of any actions on Innotrac and its shareholders. Pursuant to this provision, the board of directors may consider numerous judgmental or subjective factors affecting a proposal, including certain non-financial matters. On the basis of these considerations, the board may oppose a business combination or other transaction which, viewed exclusively from a financial perspective, might be attractive to some, or even a majority, of our shareholders. INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS Our bylaws provide for indemnification of directors to the fullest extent permitted by Georgia law. The articles of incorporation, to the extent permitted by Georgia law, eliminate or limit the personal liability of directors to Innotrac and its shareholders for monetary damages for certain breaches of fiduciary duty and the duty of care. Such indemnification may be available for liabilities arising in connection with this offering. To the extent that limitation of liability or indemnification for liabilities under the Securities Act may be permitted to directors, officers or persons controlling Innotrac under the foregoing provisions, Innotrac has been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. Our bylaws also allow us to indemnify our officers, employees, agents and other persons to the fullest extent permitted by Georgia law. Our bylaws obligate us, under certain circumstances, to advance expenses to our directors and officers in defending an action, suit or proceeding for which indemnification may be sought. We have entered into indemnification agreements with our directors and executive officers. Our bylaws also provide that we have the power to purchase and maintain insurance on behalf of any person who is or was one of our directors, officers, employees or agents against any liability asserted against that person or incurred by that person in these capacities, where we would have the power to indemnify that person against these liabilities under Georgia law. We can also indemnify someone serving in one of these capacities for us who is or was serving as a director, officer, trustee, general partner, employee or agent of one of our subsidiaries or, at our request, of any other organization, against these liabilities. We maintain insurance on behalf of all of our directors and executive officers. OTHER MATTERS Innotrac's common stock has traded on the Nasdaq National Market under the symbol "INOC" since May 7, 1998. The transfer agent and registrar for Innotrac's common stock is Reliance Trust Company, Atlanta, Georgia. 48 52 UNDERWRITING Innotrac, the selling shareholders and the underwriters for the offering named below, for whom Bear, Stearns & Co. Inc., The Robinson-Humphrey Company, LLC and J.C. Bradford & Co. are acting as representatives, have entered into an underwriting agreement with respect to the shares being offered. Subject to certain conditions set forth in the underwriting agreement, each underwriter has severally agreed to purchase the number of shares indicated in the following table:
UNDERWRITERS NUMBER OF SHARES - ------------ ---------------- Bear, Stearns & Co. Inc..................................... The Robinson-Humphrey Company, LLC.......................... J.C. Bradford & Co.......................................... --------- Total............................................. 2,500,000 =========
If the underwriters sell more than the total number set forth in the table above, they have an option to buy up to an additional (1) 275,000 shares from the selling shareholders and (2) 100,000 shares from Innotrac to cover such sales. They may exercise that option, in whole or in part, at any time within 30 days after the date of this prospectus. If any shares are purchased pursuant to this option, the underwriters will purchase the shares in approximately the same proportion as set forth in the table above. The offering of the shares is made for delivery when, as and if accepted by the underwriters and subject to prior sale and to withdrawal, cancellation or modification of the offering without notice. The underwriters reserve the right to reject an order for the purchase of shares in whole or in part. The following table shows the per share and total underwriting discounts and commissions to be paid to the underwriters by Innotrac and the selling shareholders. These amounts are shown assuming both no exercise and full exercise of the underwriters' option to purchase additional shares from the selling shareholders and Innotrac.
PAID BY THE SELLING PAID BY INNOTRAC SHAREHOLDERS --------------------------- --------------------------- NO EXERCISE FULL EXERCISE NO EXERCISE FULL EXERCISE ----------- ------------- ----------- ------------- Per share................................ $ $ $ $ Total.......................... $ $ $ $
Shares the underwriters sell to the public will initially be offered at the public offering price on the cover of this prospectus. Any shares the underwriters sell to securities dealers may be sold at a discount of up to $ per share from the public offering price. Any securities dealers the underwriters sell to may resell those shares to certain other brokers or dealers at a discount of up to $ per share from the public offering price. The selling shareholders and our executive officers and directors have agreed, for a period of 90 days after the date of this prospectus, not to issue, sell, offer or agree to sell, grant any option to purchase, pledge, make any short sale, establish an open "put equivalent position" within the meaning of Rule 16a-1(h) under the Securities Exchange Act or otherwise dispose of any shares of Innotrac common stock or any securities convertible, exchangeable or exercisable for such shares without the prior written consent of Bear, Stearns & Co. Inc. Innotrac has entered into a similar agreement, except that, during the 90-day lock-up period, we may (1) issue common stock pursuant to the exercise of currently outstanding stock options under our Stock Option and Incentive Award Plan and (2) grant options under this plan that do not vest and are not exercisable during the lock-up period. In connection with the offering, the underwriters may purchase and sell shares of common stock in the open market. These transactions may include short sales, stabilizing transactions and purchases to cover positions created by short sales. Short sales involve the underwriters selling a greater number of shares than they are required to purchase in the offering. Stabilizing transactions consist of certain bids or 49 53 purchases made to prevent or retard a decline in the market price of the common stock while the offering is in progress. The underwriters also may impose a penalty bid. This occurs when a particular underwriter repays to the underwriters a portion of the underwriting discount received by it because the underwriters' representatives have repurchased shares sold by or for the account of the penalized underwriter in stabilizing or short covering transactions. These activities may stabilize, maintain or otherwise affect the market price of the common stock. As a result, the price of the common stock may be higher than the price that otherwise might exist in the open market. If these activities are commenced, the underwriters may discontinue them at any time. These transactions may be effected on the Nasdaq National Market, in the over-the-counter market or otherwise. In connection with this offering, certain underwriters and selling group members (if any) who are qualified market-makers on the Nasdaq National Market may engage in passive market making transactions in the common stock on the Nasdaq National Market. Any market-making activities will be conducted in accordance with Rule 103 of Regulation M under the Securities Exchange Act and will occur on the business day prior to the pricing of the offering before the commencement of offers or sales of the common stock. Passive market-makers must comply with applicable volume and price limitations and must be identified as passive market-makers. In general, a passive market-maker must display its bid at a price not in excess of the highest independent bid for the security. If all independent bids are lowered below the passive market-makers' bid, however, the passive market-maker must lower its bid when certain purchase limits are exceeded. Innotrac estimates that its share of the total expenses of the offering, excluding underwriting discounts and commissions, will be approximately $500,000. Innotrac and the selling shareholders have agreed to indemnify the underwriters against certain liabilities, including liabilities under the federal securities laws, or to contribute to payments which the underwriters are required to make as a result of such liabilities. 50 54 LEGAL MATTERS Some legal matters with respect to the validity of the shares of common stock offered hereby will be passed upon for Innotrac by Kilpatrick Stockton LLP, Atlanta, Georgia. Some legal matters in connection with this offering will be passed upon for the underwriters by Troutman Sanders LLP, Atlanta, Georgia. EXPERTS Innotrac's financial statements and schedules at December 31, 1996, 1997 and 1998, included in this prospectus and elsewhere in the registration statement have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon such reports and upon the authority of said firms as experts in accounting and auditing. ADDITIONAL INFORMATION This prospectus is part of a registration statement on Form S-1 Innotrac has filed with the SEC covering the shares of common stock Innotrac and the selling shareholders are offering. We file annual, quarterly, and current reports, proxy statements, and other information with the SEC. You may read and copy any materials we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. For information on the operation of the Public Reference Room, call the SEC at 1-800-SEC-0330. You can also obtain reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC from the SEC's internet site. The address of that site is http://www.sec.gov. 51 55 [THIS PAGE INTENTIONALLY LEFT BLANK] 56 INDEX TO THE FINANCIAL STATEMENTS OF INNOTRAC CORPORATION CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Public Accountants.................... F-2 Consolidated Balance Sheets as of December 31, 1997 and 1998 and March 31, 1999 (Unaudited)............................ F-3 Consolidated Statements of Operations for the Years Ended December 31, 1996, 1997 and 1998 and the Three Months Ended March 31, 1998 and 1999 (Unaudited)................. F-4 Consolidated Statements of Partners', Members' and Shareholders' Equity for the Years Ended December 31, 1996, 1997 and 1998....................................... F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 1996, 1997 and 1998 and the Three Months Ended March 31, 1998 and 1999 (Unaudited)................. F-6 Notes to Consolidated Financial Statements.................. F-7
F-1 57 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Innotrac Corporation: We have audited the accompanying consolidated balance sheet of INNOTRAC CORPORATION (a Georgia corporation) as of December 31, 1998 and the combined balance sheet of INNOTRAC CORPORATION, IELC, INC. (a Georgia corporation), RENTEL #1, INC. (a Georgia corporation), SELLTEL #1, INC. (a Georgia corporation), HOMETEL SYSTEMS, INC. (a Georgia corporation), HOMETEL PROVIDERS, INC. (a Georgia corporation), RENTEL #2, LLC (a Georgia limited liability company), SELLTEL #2, LLC (a Georgia limited liability company) and HOMETEL PROVIDERS PARTNERS, L.P. (a Georgia limited partnership) (collectively referred to as the "Companies") as of December 31, 1997 and the related combined statements of operations, partners', members' and shareholders' equity and cash flows for the years ended December 31, 1996, 1997 and 1998. These combined financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Innotrac Corporation as of December 31, 1998 and the financial position of Innotrac Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. as of December 31, 1997 and the results of their operations and their cash flows for the years ended December 31, 1996, 1997 and 1998 in conformity with generally accepted accounting principles. Arthur Andersen LLP Atlanta, Georgia January 31, 1999 F-2 58 INNOTRAC CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, -------------------- MARCH 31, 1997 1998 1999 ------- ---------- ----------- (UNAUDITED) (IN THOUSANDS) ASSETS Current assets: Cash and cash equivalents................................. $ 554 $ 3,379 $ 274 Accounts receivable, net (Note 3)......................... 20,081 44,354 73,013 Inventories............................................... 2,936 14,381 19,834 Deferred tax assets (Note 6).............................. 386 2,866 2,845 Prepaid expenses and other current assets................. 373 1,436 1,871 ------- ------- -------- Total current assets.............................. 24,330 66,416 97,837 ------- ------- -------- Property and equipment: Rental equipment.......................................... 10,433 6,891 6,289 Computer, machinery and transportation equipment.......... 1,558 1,390 1,614 Furniture, fixtures and leasehold improvements............ 720 4,949 5,547 ------- ------- -------- 12,711 13,230 13,450 Less accumulated depreciation and amortization............ 5,102 5,767 6,226 ------- ------- -------- 7,609 7,463 7,224 ------- ------- -------- Other assets, net........................................... 558 113 105 ------- ------- -------- Total assets...................................... $32,497 $73,992 $105,166 ======= ======= ======== LIABILITIES AND PARTNERS', MEMBERS', AND SHAREHOLDERS' EQUITY Current liabilities: Current portion of long-term debt (Note 4)................ $ 738 $ 68 $ 68 Line of credit (Note 4)................................... 8,545 15,736 31,619 Accounts payable.......................................... 4,766 9,387 23,265 Distributions payable (Note 2)............................ 1,007 70 70 Accrued expenses.......................................... 7,435 12,336 10,813 Other..................................................... 318 1,966 1,622 ------- ------- -------- Total current liabilities......................... 22,809 39,563 67,457 ------- ------- -------- Noncurrent liabilities: Subordinated debt (Note 4)................................ 3,500 -- -- Long-term debt (Note 4)................................... 404 7 7 Deferred tax liabilities (Note 6)......................... 40 106 88 Other..................................................... -- 22 34 ------- ------- -------- Total noncurrent liabilities...................... 3,944 135 129 ------- ------- -------- Total liabilities................................. 26,753 39,698 67,586 ------- ------- -------- Commitments and contingencies (Note 5)...................... Redeemable capital stock (Note 7)........................... 917 -- -- ------- ------- -------- Partners', members' and shareholders' equity (Note 8): Partners' capital......................................... 1,759 -- -- Members' deficit.......................................... (490) -- -- Common stock.............................................. 5 900 900 Additional paid-in capital................................ 14 24,838 24,838 Retained earnings......................................... 3,539 8,556 11,842 ------- ------- -------- Total partners', members' and shareholders' equity.......................................... 4,827 34,294 37,580 ------- ------- -------- Total liabilities and partners', members' and shareholders' equity............................ $32,497 $73,992 $105,166 ======= ======= ========
The accompanying notes are an integral part of these consolidated statements. F-3 59 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ---------------------------- ----------------- 1996 1997 1998 1998 1999 ------- ------- -------- ------- ------- (UNAUDITED) (IN THOUSANDS EXCEPT PER SHARE DATA) Revenues, net................................... $71,297 $87,978 $139,673 $22,565 $67,320 Cost of revenues................................ 55,519 67,986 108,785 16,412 58,717 ------- ------- -------- ------- ------- Gross profit.......................... 15,778 19,992 30,888 6,153 8,603 ------- ------- -------- ------- ------- Operating expenses: Selling, general and administrative expenses................................... 10,391 12,572 15,642 3,428 2,440 Depreciation and amortization................. 429 631 943 138 379 ------- ------- -------- ------- ------- Total operating expenses.............. 10,820 13,203 16,585 3,566 2,819 ------- ------- -------- ------- ------- Operating income................................ 4,958 6,789 14,303 2,587 5,784 ------- ------- -------- ------- ------- Other (income) expense: Interest expense.............................. 1,457 1,788 956 315 373 Other......................................... 94 118 35 6 (20) ------- ------- -------- ------- ------- Total other expense................... 1,551 1,906 991 321 353 ------- ------- -------- ------- ------- Income before income taxes...................... 3,407 4,883 13,312 2,266 5,431 Income tax (provision) benefit.................. (212) 77 (3,743) 61 (2,145) ------- ------- -------- ------- ------- Net income............................ $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286 ======= ======= ======== ======= ======= Unaudited pro forma data: Pro forma net income.......................... $ 2,095 $ 3,003 $ 8,186 $ 1,371 $ 3,286 ======= ======= ======== ======= ======= Pro forma net income per share -- basic....... $ 0.32 $ 0.46 $ 1.01 $ 0.21 $ 0.37 ======= ======= ======== ======= ======= Pro forma net income per share -- diluted..... $ 0.32 $ 0.46 $ 1.00 $ 0.21 $ 0.36 ======= ======= ======== ======= ======= Weighted average common shares outstanding Basic......................................... 6,500 6,500 8,096 6,500 9,000 Diluted....................................... 6,500 6,500 8,155 6,500 9,127
The accompanying notes are an integral part of these consolidated statements. F-4 60 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED CAPITAL DEFICIT STOCK CAPITAL EARNINGS TOTAL --------- -------- ------ ------- -------- ------- (IN THOUSANDS) BALANCE, DECEMBER 31, 1995............... $ 1,108 $ -- $ 5 $ 14 $ 2,068 $ 3,195 Member contributions..................... -- 2 -- -- -- 2 Net income............................... 1,323 (39) -- -- 1,911 3,195 Distributions to shareholders, members and partners........................... (529) (235) -- -- (977) (1,741) Accreted dividends on redeemable capital stock.................................. -- -- -- -- (111) (111) ------- ----- ---- ------- ------- ------- BALANCE, DECEMBER 31, 1996............... 1,902 (272) 5 14 2,891 4,540 Net income (loss)........................ 3,541 (233) -- -- 1,652 4,960 Distributions to shareholders, members and partners........................... (3,684) 15 -- -- (917) (4,586) Accreted dividends on redeemable capital stock.................................. -- -- -- -- (87) (87) ------- ----- ---- ------- ------- ------- BALANCE, DECEMBER 31, 1997............... 1,759 (490) 5 14 3,539 4,827 Distributions to shareholders, members and partners........................... (4,836) (209) -- -- (4,747) (9,792) Merger of companies...................... (461) 288 645 (1,667) 1,195 -- Record deferred taxes associated with merger................................. -- -- -- -- 3,016 3,016 Proceeds from sale of common stock, net.................................... -- -- 250 26,491 -- 26,741 Net income (loss)........................ 3,538 411 -- -- 5,620 9,569 Accreted dividends on redeemable capital stock.................................. -- -- -- -- (67) (67) ------- ----- ---- ------- ------- ------- BALANCE, DECEMBER 31, 1998............... $ -- $ -- $900 $24,838 $ 8,556 $34,294 ======= ===== ==== ======= ======= =======
The accompanying notes are an integral part of these consolidated statements. F-5 61 INNOTRAC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS YEAR ENDED DECEMBER 31, ENDED MARCH 31, ----------------------------- ------------------ 1996 1997 1998 1998 1999 ------- -------- -------- ------- -------- (UNAUDITED) (IN THOUSANDS) Cash flows from operating activities: Net income.................................. $ 3,195 $ 4,960 $ 9,569 $ 2,327 $ 3,286 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization............ 429 631 943 138 379 Depreciation -- rental equipment......... 3,005 3,711 2,900 829 536 Loss on disposal of rental equipment..... 2,538 4,479 2,158 542 220 Subordinated debt accretion.............. 164 -- -- -- -- Deferred income taxes.................... (107) (537) 602 33 3 Decrease (increase) in accounts receivable............................. (6,753) 5,379 (24,273) (5,966) (28,659) Decrease (increase) in inventories....... (7,683) 7,085 (11,445) (378) (5,453) Decrease in prepaid expenses and other assets................................. (327) (485) (734) 128 (443) (Decrease) increase in accounts payable................................ 3,611 (8,960) 4,621 4,362 13,878 (Decrease) increase in accrued expenses............................... 2,016 2,619 6,571 284 (1,855) Other.................................... (468) (369) (1,670) -- -- ------- -------- -------- ------- -------- Net cash provided by (used in) operating activities.............. 88 18,882 (9,088) 2,299 (18,108) ------- -------- -------- ------- -------- Cash flows from investing activities: Accrued equipment purchases................. (272) (1,595) -- -- -- Purchases of property and equipment......... (7,700) (5,342) (5,739) (1,807) (880) ------- -------- -------- ------- -------- Net cash used in investing activities........................ (7,972) (6,937) (5,739) (1,807) (880) ------- -------- -------- ------- -------- Cash flows from financing activities: Net (repayments) borrowings under lines of credit................................... 13,169 (8,685) 7,191 370 15,883 Proceeds from long-term debt................ 2,096 -- -- -- -- Repayment of long-term debt................. (328) (702) (1,067) (172) -- Repayment of subordinated debt.............. (1,000) -- (3,500) -- -- Loan commitment fees........................ (200) (125) -- -- -- Proceeds from members' contributions........ 2 -- -- -- -- Proceeds from initial public offering, net...................................... -- -- 26,741 -- -- Redemption of redeemable capital stock...... -- -- (984) (388) -- Distributions to shareholders, members and partners................................. (3,890) (3,884) (10,729) (263) -- ------- -------- -------- ------- -------- Net cash (used in) provided by financing activities.............. 9,849 (13,396) 17,652 (453) 15,883 ------- -------- -------- ------- -------- Net increase (decrease) in cash and cash equivalents................................. 1,965 (1,451) 2,825 39 (3,105) Cash and cash equivalents, beginning of period...................................... 40 2,005 554 554 3,379 ------- -------- -------- ------- -------- Cash and cash equivalents, end of period...... $ 2,005 $ 554 $ 3,379 $ 593 $ 274 ======= ======== ======== ======= ======== Supplemental cash flow disclosures: Cash paid for interest...................... $ 1,207 $ 1,788 $ 1,006 $ 366 $ 325 ======= ======== ======== ======= ======== Cash paid for income taxes, net of refunds received................................. $ 892 $ 86 $ 1,493 $ 380 $ 2,486 ======= ======== ======== ======= ======== Non cash transactions: Accreted dividends on redeemable capital stock.................................... $ 111 $ 87 $ 67 $ 17 $ -- ======= ======== ======== ======= ========
The accompanying notes are an integral part of these consolidated statements. F-6 62 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. ORGANIZATION Innotrac Corporation ("Innotrac" or the "Company") is a full service provider of customized technology based marketing support services. The majority of the Company's operation is directly related to the sale and distribution of caller identification display devices (Caller ID units). Prior to May 6, 1998, Innotrac operated as eight separate affiliates: Innotrac, IELC, Inc., RenTel #1, Inc. ("RenTel"), SellTel #1, Inc. ("SellTel"), HomeTel Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and HomeTel Providers Partners, L.P. ("Providers L.P.") (collectively referred to herein as the "Companies"). The Companies were all owned 100% by one shareholder or his immediate family except for RenTel, SellTel, and Providers L.P. (which each had a 10% minority interest owned by one party). The minority interests of RenTel and SellTel were owned by a related party of the shareholder. On May 6, 1998, Innotrac consolidated these eight entities (the "Consolidation"), effective simultaneously with, and as a condition to, the Company's initial public offering (the "Offering") of 2.5 million shares, at an initial public offering price of $12.00 per share (See Footnote 8). For accounting purposes, Providers L.P. was deemed to be the acquiring entity and its balance sheet carried over at historical cost. Since the other entities that were parties to the Consolidation were wholly-owned by either the majority shareholder of Providers L.P. or his direct relatives, those entities were considered to be under common control, and the balance sheets of such entities also carried over at historical cost. 2. SIGNIFICANT ACCOUNTING POLICIES Principles of Combination and Consolidation Prior to the Consolidation, the accompanying combined financial statements include the accounts of the Companies and were prepared on the accrual basis of accounting. Significant intercompany accounts and transactions have been eliminated in the combination. Combined financial statements were presented since the Companies have similar ownership and interrelated activities. The financial information included herein may not necessarily reflect the financial position, results of operations, or cash flows of the Companies in the future or what the financial position, results of operations, or cash flows of the Companies would have been if they were combined as a separate, stand-alone company during the periods presented. Subsequent to the Consolidation, the accompanying financial statements include the consolidated accounts of Innotrac. Significant intercompany accounts and transactions have been eliminated in the consolidation. Quarterly Information The accompanying condensed financial statements have been prepared without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted pursuant to such rules and regulations; however, management believes that the disclosures herein are adequate to make the information presented not misleading. In the opinion of management, the accompanying condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the Company's financial position as of March 31, 1999 and the results of operations and cash flows for the three months ended March 31, 1998 and 1999. The results of operations for the three months ended March 31, 1998 and 1999 are not necessarily indicative of the operating results for the full years. F-7 63 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Pro Forma Net Income and Net Income per Share In conjunction with the Consolidation, HomeTel Providers, Inc., Providers LP, RenTel #1, RenTel #2, and SellTel #2 lost their non C corporation status for tax purposes. Accordingly, the pro forma income taxes reflect income taxes at statutory rates applied to pro forma earnings. In addition, the pro forma earnings per share reflect the Consolidation as if it had occurred at the beginning of each period presented. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles 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. Sources of Supplies In accordance with their agreements with certain telecommunications companies, the Companies primarily use three providers for the supply of telecommunications equipment. However, if these vendors were unable to meet the Companies' needs, management believes that other sources for this equipment exist on commensurate terms and that operating results would not be adversely affected. Concentration of Revenues Revenues earned under the Companies' agreement with a major telecommunications company to sell and rent certain telecommunications equipment to the customers of this company accounted for approximately 82%, 85% and 59% of total revenues for the years ended December 31, 1996, 1997 and 1998, respectively. If this agreement were terminated, it could have a material adverse affect on the future operating results and liquidity of the Companies (Note 5). Cash and Cash Equivalents The Companies consider all short-term, highly liquid investments with an original maturity of three months or less to be cash equivalents. Inventories Inventories, consisting primarily of telecommunications equipment, are stated at the lower of cost or market, with cost determined by the first-in, first-out method. 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............................................ 3-4 years Computers................................................... 3 years Machinery and transportation 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. F-8 64 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Rental equipment is written off at its net book value when it is no longer generating revenues or is not returned by the customer. Provisions are made for estimated equipment losses that have not yet been reported. Equipment rental losses were approximately $2,538,000, $4,479,000 and $2,158,000 for the years ended December 31, 1996, 1997 and 1998 respectively, and are included in "Cost of revenues" in the accompanying statements of operations. Long-Lived Assets The Companies periodically review the values assigned to long-lived assets such as property and equipment to determine if any impairments are other than temporary. Management believes that the long-lived assets on the accompanying balance sheets are appropriately valued. Stock-based Compensation Plans The Company accounts for its stock-based compensation plans under Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). The Company has adopted the disclosure option of Statement of Financial Accounting Standards No. 123, "Accounting for Stock- based Compensation" ("SFAS 123"). SFAS 123 requires that companies which do not choose to account for stock-based compensation as prescribed by this statement shall disclose the pro forma effects on earnings and earnings per share as if SFAS 123 had been adopted. Additionally, certain other disclosures are required with respect to stock compensation and the assumptions used to determine the pro forma effects of SFAS 123. Income Taxes Innotrac, as a C corporation, utilizes the liability method of accounting for income taxes. Under the liability method, deferred taxes are determined based on the difference between the financial and tax bases of assets and liabilities using enacted tax rates in effect in the years in which the differences are expected to reverse. Prior to the Consolidation, the shareholders of certain affiliated companies had elected to have the Companies treated as S corporations. The Internal Revenue Code of 1986, as amended (the "Code") and certain applicable state statutes provide that the income and expenses of an S corporation are not taxable separately to the corporation but rather accrue directly to the shareholders. In addition, other entities were limited liability companies which are not subject to federal and state income taxes. Accordingly, no provisions for federal and certain state income taxes related to these entities have been made in the accompanying financial statements. Prior to the Consolidation, it was the policy of management to pay and accrue distributions primarily for income taxes that are required to be paid by the shareholders, members and partners due to the flow through of income of these entities. During the years ended December 31, 1996, 1997 and 1998, distributions of approximately $1,741,000, $4,586,000 and $2,292,000, respectively, were recorded, of which approximately $1,007,000 and $70,000 were accrued and unpaid as of December 31, 1997 and 1998, respectively. Additionally, in conjunction with the Consolidation (Note 1), the Company distributed $7,500,000 of the undistributed earnings of approximately $9,000,000 to the owners of certain pass-thru entities. Revenue Recognition Revenues are recognized on the accrual basis as services are provided to customers or as units are shipped or rentals are provided. Revenues are reduced for an estimate of product returns and allowances (Note 3). F-9 65 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments The carrying values of the Company's financial instruments approximate their fair values. Advertising Costs The Company expenses all advertising costs as incurred. Recent Accounting Pronouncements In 1998, the Company was subject to the provisions of Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" and No. 131 ("SFAS 131"), "Disclosures about Segments of an Enterprise and Related Information". These statements had no impact on the Company's financial statements as it has no comprehensive income elements other than distributions to owners and returns on equity and its financial statements reflect how the "key operating decisions maker" views the business. The Company will continue to review these statements over time to determine if any additional disclosures are necessary based on evolving circumstances. 3. ACCOUNTS RECEIVABLE The Companies' accounts receivable include amounts that are billed in installments over a five to seven month period. Accounts receivable were composed of the following at December 31, 1997 and 1998:
1997 1998 ------- ------- (IN THOUSANDS) Billed receivables.......................................... $15,812 $32,081 Unbilled installment receivables............................ 9,976 17,208 ------- ------- Total receivables................................. 25,788 49,289 Less allowances............................................. (5,707) (4,935) ------- ------- $20,081 $44,354 ======= =======
Management believes that the allowances for doubtful accounts and returns reduce the gross accounts receivable to net amounts that will be collected. F-10 66 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 4. FINANCING OBLIGATIONS Financing obligations as of December 31, 1997 and 1998 consisted of the following:
1997 1998 ------- ------- (IN THOUSANDS) Borrowings under revolving credit agreement (up to $25,000,000); the revolving advances owing by any one borrower cannot exceed an amount equal to the sum of 80% of the eligible accounts receivable plus 70% of the eligible installment receivables); interest payable monthly at rates equal to the prime rate (8.5% and 7.75% at December 31, 1997 and 1998, respectively), or at the Company's option, LIBOR plus a margin (6.75% at December 31, 1998), expires on November 15, 1999, secured by all assets of the Company..................................... $ 8,545 $15,736 Subordinated note payable to the limited partner of Providers, L.P., due April 1999; interest payable monthly at a variable rate of prime plus 8% (16.5% as of December 31, 1997) and a fixed rate of 14% as of December 31, 1996; secured by accounts receivable, inventories, rental equipment and the personal guarantee of the sole shareholder of the general partner of Providers, L.P.; subordinated to the line of credit; note was paid in full in May 1998............................................... 3,500 -- Note payable, due in monthly installments of principal of $55,556, plus interest at 8.95%, through July 1999; secured by accounts receivable, inventories, equipment and the personal guarantee of Innotrac's sole shareholder; note was paid in full in May 1998......................... 1,056 -- Other....................................................... 86 75 ------- ------- 13,187 15,811 Current portion............................................. 9,283 15,804 ------- ------- $ 3,904 $ 7 ======= =======
Scheduled maturities of financing obligations are as follows:
(IN THOUSANDS) 1999........................................................ 15,804 2000........................................................ 7 ------- Total............................................. $15,811 =======
The weighted average interest rate on the revolving line of credit agreement was 8.6% and 7.6% for the years ending December 31, 1997 and 1998, respectively. The revolving line of credit agreement and the term note contain various restrictive financial and change of ownership control covenants. The Companies were in compliance with all covenants as of December 31, 1998. In January 1999, the revolving credit agreement was increased to $35,000,000 and the expiration date extended to May 1, 2000. Subsequent to March 31, 1999, the revolving credit agreement was increased from $35,000,000 to $40,000,000 and the expiration date extended to June 1, 2002. F-11 67 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) 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 and accrues the differences each month between the amount expensed and the amount actually paid. Aggregate future minimum lease payments under noncancellable operating leases with original periods in excess of one year as of December 31, 1998 are as follows:
(IN THOUSANDS) 1999........................................................ $1,433 2000........................................................ 904 2001........................................................ 903 2002........................................................ 903 2003........................................................ 924 Thereafter.................................................. 4,818 ------ Total minimum lease payments...................... $9,885 ======
Rent expense under all operating leases totaled approximately $770,000, $1,121,000 and $1,231,000 during the years ended December 31, 1996, 1997 and 1998, respectively. Marketing Support Agreement The Company has an agreement, which expires in September 2003, with a major telecommunications company to sell and rent certain telecommunications equipment to the customers of this company. The telecommunications company has agreed to provide billing, collection and referral services for the Companies. This agreement can be terminated (a) after March 15, 2000 by the telecommunications company without cause upon 120 days notice or (b) by the telecommunications company for cause upon 10 days notice; however, in the event of termination, the telecommunications company must continue to provide billing and collections services for existing customers for four years after the termination of the agreements. Legal Proceedings The Company is subject to legal proceedings and claims that arise in the ordinary course of business. There are no material pending legal proceedings to which the Company is a party. 6. INCOME TAXES Details of the income tax (provision) benefit for the years ended December 31, 1996, 1997 and 1998 are as follows:
1996 1997 1998 ----- ----- ------- (IN THOUSANDS) Current..................................................... $(319) $(460) $(3,141) Deferred.................................................... 107 537 (602) ----- ----- ------- $(212) $ 77 $(3,743) ===== ===== =======
F-12 68 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) Deferred income taxes reflect the net effect of the temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of the Companies' deferred tax assets and liabilities as of December 31, 1997 and 1998 are as follows:
1997 1998 ----- ------ (IN THOUSANDS) Noncurrent deferred tax (liabilities) assets: Property, plant, equipment basis differences.............. $ 43 $ (114) Conversion from cash to accrual taxpayer method -- long term................................................... (83) -- Other..................................................... -- 8 ----- ------ (40) (106) ----- ------ Current deferred tax assets (liabilities): Reserves for uncollectable accounts....................... 524 2,372 Reserve for returns and equipment losses.................. 0 526 Conversion from cash to accrual taxpayer method -- current...................................... (143) (36) Other..................................................... 5 4 ----- ------ 386 2,866 ----- ------ Net deferred tax asset............................ $ 346 $2,760 ===== ======
Innotrac converted from the cash basis to the accrual basis for income tax purposes effective August 1995, with the accumulated difference to be added back to taxable income over a four-year period. Effective with the Consolidation, the Company converted all of its entities that were non-C-corporations status for income tax reporting purposes to C-corporation status and recorded a one-time benefit of approximately $3 million related to certain temporary differences at these entities. A reconciliation of the income tax (benefit) provision computed at statutory rates to the income tax provision for the years ended December 31, 1996, 1997 and 1998 is as follows:
1996 1997 1998 ----- ----- ----- Federal statutory rate...................................... 34.0% 34.0% 35.0% Increase (reduction) in taxes resulting from: State income taxes, net of federal benefit................ 3.6 1.4 6.0 Income taxable directly to shareholders, partners and members (Note 2)....................................... (31.8) (37.9) (13.3) Other....................................................... 0.4 0.9 0.5 ----- ----- ----- 6.2% (1.6)% 28.2% ===== ===== =====
7. REDEEMABLE CAPITAL STOCK In September 1993, the Company obtained $1,000,000 of financing from a related party in the form of subordinated debt, in two entities that were involved in the Consolidation. The subordinated debt required monthly payments of interest, with principal maturing at 36 months. The subordinated debt was repaid in full in September 1996. Additionally, the related party received callable common stock representing 10% of the common stock of these entities. The terms of the callable common stock provided each of these entities the option to call the common stock at predetermined amounts on or before September 30, 1998 beginning in September, 1996. If the Company did not call the common stock F-13 69 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) interests, the Company was obligated to issue the related party an additional 10% common stock interest to redeem the common stock. Due to the related party nature of the transaction, the Company accounted for the callable common stock as redeemable equity. The Company allocated the capital raised between "Subordinated Debt" and "Redeemable Capital Stock" on the accompanying balance sheets at the respective fair market values based on discounted cash flow analyses (approximately $500,000 each to "Subordinated Debt" and "Redeemable Capital Stock") and then accreted to their redemption values over 36 months using the effective interest rate method (an approximate 30% return on both the subordinated debt and the callable common stock). The portion of the accretion attributable to Subordinated Debt is reflected as interest expense in the accompanying statements of operations. For the equity portion, the Companies have accreted through the recording of dividends to the estimated redemption amounts at each balance sheet date and reflected such redemption amounts as "Redeemable Capital Stock" on the accompanying balance sheets. These dividends represent a 16% effective rate through September 1996 (the first trigger date as defined) and 10% thereafter. In conjunction with the Offering (see Note 1), the Company redeemed the shares of one entity in February 1998 for $390,000 and the shares of the other entity for $594,000 in December 1998. 8. SHAREHOLDERS' EQUITY Innotrac has authorized 50,000,000 shares of common stock, $0.10 par value, and 10,000,000 shares of Preferred Stock, $0.10 par value. On December 12, 1997, Innotrac effected a 70.58823-for-1 stock split resulting in 1,080,000 shares outstanding. Additionally, in exchange for their previous ownership interests, 5,420,000 shares of $0.10 par value common stock were issued to the remaining entity owners pari-passu based on their relative value to the consolidated group except for the minority stockholder of one of the affiliated entities, whose ownership interests was repurchased as scheduled in the fourth quarter of 1998. After the Consolidation, there were an aggregate of 6,500,000 shares outstanding. As discussed in Note 1, on May 6, 1998 the Company completed an initial public offering of 2.5 million shares at a price of $12.00 per share for net proceeds of approximately $26,741,000. As of December 31, 1998, there were 9,000,000 shares of common stock outstanding. 9. EMPLOYEE RETIREMENT PLAN Employees of Innotrac may participate in an employee retirement defined contribution plan. The plan covers all employees of the participating entities who have at least one year of service (six months if hired before January 1, 1997) and are 18 years of age or older. Participants may elect to defer up to 15% of compensation up to a maximum amount determined annually pursuant to IRS regulations. Innotrac has elected to provide matching employer contributions equal to 15% of contributions for less than five years of service, 25% of contributions for five to nine years of service, and 35% of contributions for over nine years of service. Total matching contributions made to the plan and charged to expense by Innotrac for the years ended December 31, 1996, 1997 and 1998 were not material. 10. STOCK BASED COMPENSATION In November 1997, the Company adopted a stock option plan (the "Stock Option Plan") to provide key employees, officers, directors, contractors, and consultants an opportunity to own common stock of the Company and to provide incentives for such persons to promote the financial success of the Company. Awards under the Stock Option Plan may be structured in a variety of ways, including as "incentive stock options" as defined in Section 422 of the Internal Revenue Code, as amended, non-qualified stock options, restricted stock awards, and stock appreciation rights ("SARs"). Incentive stock options may be granted only to full-time employees (including officers) of the Company and its subsidiaries. Non-qualified options, restricted stock awards, SARs, and other permitted forms of awards may be granted to any person F-14 70 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) employed by or performing services for the Company, including directors, contractors, and consultants. The Stock Option Plan provides for the issuance of options to purchase up to an aggregate of 800,000 shares of common stock. 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 Stock Option Plan. As of December 31, 1998, stock options to purchase an aggregate of 343,000 shares at $9.10 per share of common stock had been granted under the Stock Option Plan. 55,000 of these options vested immediately at the date of grant; the remaining options vest 50%, 25% and 25% at two, three and four years, respectively, after the grant date and expire 10 years from the grant date. At December 31, 1998, 323,475 options were outstanding with a weighted average contractual life of 8.9 years. 55,000 options were exercisable at December 31, 1998 at $9.10 per share. Additionally, the Company granted stock options to purchase an aggregate of 40,000 shares on the effective date of the Offering to four non-employee members of the Board of Directors at $12 (the initial public offering price) which vested immediately upon grant. 40,000 options were exercisable at December 31, 1998 at $12.00 per share. A summary of the status of the Company's Stock Option Plan and other options at December 31, 1998 is as follows:
SHARES WEIGHTED AVERAGE PRICE ------ ---------------------- (IN THOUSANDS) Outstanding at December 31, 1996........................... -- $0.00 Granted.................................................... 343 9.10 --- Outstanding at December 31, 1997........................... 343 9.10 Granted.................................................... 40 12.00 Forfeited.................................................. (20) 9.10 --- Outstanding at December 31, 1998........................... 363 9.42 ===
The remaining weighted average contractual life of the options outstanding at December 31, 1998 is 8.9 years and the weighted average price of the 95,000 exercisable options at December 31, 1998 is $10.32. The total value of options granted during 1997 and 1998 was computed as approximately $2,172,000 and $3,013,000 which would be amortized on a pro forma basis over the vesting period of the options. Had compensation cost for stock options been determined under SFAS No. 123, the Company's net income and net income per share would have been the following pro forma amounts:
YEAR ENDED DECEMBER 31, ----------------------- 1997 1998 ---- ---- Net income Pro forma Pro forma................................................. $3,003 $8,186 Pro forma adjusted for the Impact of SFAS 123............. $2,686 $7,402 Diluted net income per share Pro forma................................................. $ 0.46 $ 1.00 Pro forma adjusted for the Impact of SFAS 123............. $ 0.41 $ 0.91
F-15 71 INNOTRAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED) The Company has elected to account for its option plans under APB 25; however, 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 123 using the following weighted average assumptions:
1997 1998 --------- --------- Risk-free interest rate..................................... 5.17% 5.17% Expected dividend yield..................................... 0% 0% Expected lives.............................................. 2.7 Years 2.7 Years Expected volatility......................................... 106.0% 86.0%
F-16 72 - ------------------------------------------------------ - ------------------------------------------------------ Prospective investors may rely only on the information contained in this prospectus. Neither Innotrac, the selling shareholders nor any underwriter has authorized anyone to provide prospective investors with different or additional information. This prospectus is not an offer to sell nor is it seeking an offer to buy these securities in any jurisdiction where the offer or sale is not permitted. The information contained in this prospectus is correct only as of the date of this prospectus, regardless of the time of the delivery of this prospectus or any sale of these securities. No action is being taken in any jurisdiction outside the United States to permit a public offering of the common stock or possession or distribution of this prospectus in any such jurisdiction. Persons who come into possession of this prospectus in jurisdictions outside the United States and Canada are required to inform themselves about and to observe the restrictions of that jurisdiction related to this offering and the distribution of this prospectus. --------------------------------- TABLE OF CONTENTS ---------------------------------
PAGE ---- Prospectus Summary................. 1 Risk Factors....................... 5 Forward-Looking Statements Are Not Guarantees....................... 14 Use of Proceeds.................... 15 Dividend Policy.................... 15 Price Range of Common Stock........ 16 Capitalization..................... 17 Selected Financial Data............ 18 Management's Discussion and Analysis of Financial Condition and Results of Operations........ 20 Business........................... 28 Management......................... 37 Principal and Selling Shareholders..................... 41 Related Party Transactions......... 43 Shares Eligible for Future Sale.... 44 Description of Capital Stock....... 46 Underwriting....................... 49 Legal Matters...................... 51 Experts............................ 51 Additional Information............. 51 Index to Financial Statements...... F-1
- ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ - ------------------------------------------------------ 2,500,000 SHARES (INNOTRAC LOGO) INNOTRAC CORPORATION COMMON STOCK ------------------------------------------ PRELIMINARY PROSPECTUS ------------------------------------------ BEAR, STEARNS & CO. INC. THE ROBINSON-HUMPHREY COMPANY J.C. BRADFORD & CO. , 1999 - ------------------------------------------------------ - ------------------------------------------------------ 73 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION Set forth below is an estimate of the approximate amount of the fees and expenses (other than the underwriting discounts) payable by the Registrant in connection with the issuance and distribution of the shares of common stock in this offering. Securities and Exchange Commission Registration Fee......... $ 14,037 NASD Filing Fees............................................ 5,568 Nasdaq National Market Filing Fees.......................... 17,500 Blue Sky Fees and Expenses.................................. 5,000 Printing Expenses........................................... 100,000 Legal Fees and Expenses..................................... 125,000 Accounting Fees and Expenses................................ 75,000 Miscellaneous............................................... 157,895 -------- Total............................................. $500,000 ========
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS The Registrant's Amended and Restated Articles of Incorporation provide that a director shall not be personally liable to the Registrant or its shareholders for monetary damages for breach of the duty of care or any other duty owed to the Registrant as a director to the fullest extent permitted by Georgia law. Under such law, corporations cannot limit the liability of a director (a) for any appropriation, in violation of his duties, of any business opportunity of the Registrant; (b) for acts or omissions which involve intentional misconduct or a knowing violation of law; (c) for unlawful corporate distributions or (d) for any transactions from which the director receives an improper benefit. Under Article VII of the Registrant's Amended and Restated Bylaws, the Registrant is required to indemnify its directors and officers to the fullest extent permitted by Georgia law. The Georgia Business Corporation Code provides that a corporation may indemnify its directors, officers and agents against judgments, fines, penalties, amounts paid in settlement and expenses, including attorneys' fees, resulting from various types of legal actions or proceedings if the actions of the party being indemnified meet the standards of conduct specified therein. Determinations concerning whether the applicable standard of conduct has been met with respect to directors can be made by (a) a majority of the disinterested directors; (b) a majority of a committee of disinterested directors; (c) independent legal counsel or (d) an affirmative vote of a majority of shares held by the disinterested stockholders. No indemnification may be made to or on behalf of a corporate director (i) in connection with a proceeding by or in right of the Registrant, except for reasonable expenses incurred in connection with the proceeding if it is determined that the director's conduct met the applicable standard (ii) in connection with any other proceeding in which said person was adjudged liable on the basis that personal benefit was improperly received by him. The Registrant has entered into Indemnification Agreements with certain of its directors and officers (the "Indemnified Parties"). Under the terms of the Indemnification Agreements, the Registrant is required to indemnify the Indemnified Parties against certain liabilities arising out of their service for the Registrant. The Indemnification Agreements require the Registrant (i) to indemnify each Indemnified Party to the fullest extent permitted by law; and (ii) to advance certain expenses incurred by an Indemnified Party. The Indemnification Agreements provide limitations on the Indemnified Party's rights to indemnification in certain circumstances. II-1 74 The Registrant's directors and officers are insured against losses arising from any claim against them as such for wrongful acts or omissions, subject to certain limitations. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES On May 6, 1998, the following persons or entities were issued the following number of shares of common stock of the Registrant in consideration of each person's or entity's equity interests in one of the eight companies that were consolidated into Innotrac in connection with its initial public offering. Such shares were issued in a private placement made pursuant to Section 4(2) of the Securities Act of 1933. The Registrant has not issued any other shares since May 1996.
NAME NUMBER OF SHARES - ---- ---------------- Scott D. Dorfman............................................ 4,971,964 ITC Service Company......................................... 383,333 Susan Mary Trotochaud....................................... 415 Custodianship for Bradley H. Dorfman........................ 21,428 Custodianship for Brent M. Dorfman.......................... 21,428 Custodianship for Jesse E. Dorfman.......................... 21,428
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 1.1 -- Form of Underwriting Agreement between the Representatives of the Several Underwriters, the Registrant, Scott D. Dorfman and ITC Service Company 3.1 -- Amended and Restated Articles of Incorporation of the Registrant, as amended (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 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 -- Rights Agreement between Company and Reliance Trust Company as Rights Agent, dated as of December 31, 1997 (incorporated by reference to Exhibit 4.2 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) 5.1 -- Opinion of Kilpatrick Stockton LLP 10.1 -- Acquisition Agreement by and among the Registrant, SellTel #1, Inc., RenTel #1, Inc., IELC, Inc., HomeTel Systems, Inc., HomeTel Providers Inc., RenTel #2, L.L.C., SellTel #2, L.L.C., HomeTel Providers Partners, L.P., ITC Service Company, Scott D. Dorfman, Susan Mary Trotochaud, as Custodian For Bradley H. Dorfman, Brent M. Dorfman and Jesse E. Dorfman, and Susan Mary Trotochaud, dated December 15, 1997 (incorporated by reference to Exhibit 10.1 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) 10.2 (a) -- Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997)+
II-2 75
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- (b) -- Amendment No. 1 to Stock Option and Incentive Award Plan (incorporated by reference to Exhibit 10.2(b) to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998)+ 10.3 -- Amended and Restated Loan and Security Agreement by and among the Registrant, HomeTel Systems Inc., IELC, Inc., RenTel #1, Inc., RenTel #2, L.L.C., SellTel #1, Inc., SellTel #2, L.L.C., HomeTel Providers Partners, L.P. and SouthTrust Bank, N.A., dated December 5, 1997 (incorporated by reference to Exhibit 10.3 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) 10.4 -- Purchase Agreement for Services between BellSouth Telecommunications, Inc. and the Registrant, effective November 1, 1998 (incorporated by reference to Exhibit 10.4 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.5 (a) -- Form of Indemnification Agreements entered into as of December 11, 1997, by and between the Registrant and each of Messrs. Scott D. Dorfman, David L. Ellin, Larry C. Hanger, Donald L. Colter, Jr., John H. Nichols III, Bruce V. Benator, Martin J. Blank, Campbell B. Lanier, III and William H. Scott, III (incorporated by reference to Exhibit 10.5 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997)+ (b) -- Form of Indemnification Agreements by and between the Registrant and each of Stephen J. Walden and Will Hendrick**+ 10.6 -- Lease, dated June 16, 1999, between Lockheed Martin Corporation and the Registrant** 10.7 -- Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the Registrant (incorporated by reference to Exhibit 10.7 to the Registrant's Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on December 16, 1997) 10.8 (a) -- Lease, dated December 8, 1997, by and between Weeks Development Partnership and the Registrant (incorporated by reference to Exhibit 10.8 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998) (b) -- First Amendment to Lease Agreement, dated May 8, 1998, by and between Weeks Development Partnership and the Registrant** 10.9 -- Split Dollar Life Insurance Agreement, dated July 10, 1997, by and between the Registrant, Bruce V. Benator, as Trustee of The Scott David Dorfman Family Trust #2, and Scott David Dorfman (incorporated by reference to Exhibit 10.9 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998)+ 10.10 -- Innotrac Corporation Deferred Compensation Plan, effective as of October 16, 1997 (incorporated by reference to Exhibit 10.10 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998)+ 10.11 -- Grantor Trust Agreement dated October 16, 1997, by and between the Registrant and Wachovia Bank, N.A. (incorporated by reference to Exhibit 10.11 to the Registrant's Amendment No. 1 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 11, 1998)+
II-3 76
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 10.12 -- Shareholders' Agreement by and among SellTel #1, Inc., Arnold Dorfman, Scott Dorfman and the Registrant, dated February 13, 1998 (incorporated by reference to Exhibit 10.12 to the Registrant's Amendment No. 2 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 23, 1998) 10.13 -- Stock Redemption Agreement by and among RenTel #1, Inc., Scott Dorfman and Arnold Dorfman, dated December 15, 1997 (incorporated by reference to Exhibit 10.13 to the Registrant's Amendment No. 2 to Registration Statement on Form S-1 (Commission File No. 333-42373), filed with the Commission on February 23, 1998) 10.14 (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. 000-23741), 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** 10.15 -- 1999 Senior Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.15 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999)+ 10.16 -- Aircraft Lease by and between SD Holdings, Inc. and the Registrant, dated February 19, 1998 (incorporated by reference to Exhibit 10.16 to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1998 (Commission File No. 000-23741), filed with the Commission on March 26, 1999) 10.17 (a) -- Contract by and between Market Reps, Inc. and the Registrant, dated June 26, 1998 (b) -- Letter Amendment to Contract by and between Market Reps, Inc. and the Registrant, dated August 10, 1998 23.1 -- Consent of Kilpatrick Stockton LLP (included in Exhibit 5.1) 23.2 -- Consent of Arthur Andersen LLP 24.1 -- Power of Attorney (included on signature page)**
- --------------- ** Previously filed. + Management contract or compensatory plan or arrangement required to be filed as an exhibit. (b) Financial Statement Schedules Report of Independent Public Accountants as to Schedules Schedule II -- Valuation and Qualifying Accounts ITEM 17. UNDERTAKINGS The undersigned Registrant hereby undertakes to provide the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the Underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such II-4 77 indemnification by it is against public policy as expressed in the Securities Act, and will be governed by the final adjudication of such issue. The undersigned Registrant hereby undertakes that: (1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of Prospectus filed as part of this Registration Statement in reliance upon Rule 430A and contained in a form of Prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of Prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-5 78 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 2 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of Duluth, State of Georgia, on the 21st day of July 1999. INNOTRAC CORPORATION By: /s/ Scott D. Dorfman ------------------------------------ Scott D. Dorfman Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 2 to the Registration Statement has been signed by the following persons on the 21st day of July 1999, in the capacities indicated.
SIGNATURE POSITION --------- -------- * Chairman, President and Chief Executive - ----------------------------------------------------- Officer (Principal Executive Officer) Scott D. Dorfman /s/ David L. Ellin Senior Vice President and Chief Operating - ----------------------------------------------------- Officer and Director David L. Ellin * Senior Vice President-Business Development and - ----------------------------------------------------- Director Larry C. Hanger * Senior Vice President, Secretary, and Chief - ----------------------------------------------------- Financial Officer (Principal Financial and John H. Nichols, III Accounting Officer) * Director - ----------------------------------------------------- Bruce V. Benator * Director - ----------------------------------------------------- Martin J. Blank * Director - ----------------------------------------------------- William H. Scott, III *By: /s/ David L. Ellin ----------------------------------------------- as attorney-in-fact
II-6 79 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULES We have audited in accordance with generally accepted auditing standards, the financial statements of INNOTRAC CORPORATION included in this Registration Statement and have issued our report thereon dated January 31, 1999. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedule listed in the index is the responsibility of the Company's management and is presented for purposes of complying with the Securities and Exchange Commission's rules and is not part of the basic financial statements. This schedule has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly states in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Atlanta, Georgia January 31, 1999 II-7 80 INNOTRAC CORPORATION SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
BALANCE AT CHARGED TO BALANCE AT BEGINNING CHARGED TO OTHER END OF DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS PERIOD ----------- ---------- ---------- ---------- ---------- ---------- (IN THOUSANDS) Provision for uncollectible accounts Year ended December 31, 1998................................... $5,058 $ 8,245 $ -- $ (8,797) $4,506 1997................................... 4,141 7,750 -- (6,833) 5,058 1996................................... 2,552 5,841 -- (4,252) 4,141 Provisions for returns and allowances Year ended December 31, 1998................................... 649 11,104 -- (10,722) 1,031 1997................................... 101 6,327 -- (5,779) 649 1996................................... -- 3,536 -- (3,435) 101
S-1 81 EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION OF EXHIBITS - ------- ----------------------- 1.1 -- Form of Underwriting, Agreement between the Representatives of the Several Underwriters the Registrant, Scott D. Dorfman and ITC Service Company 3.2 -- Amended and Restated By-laws of the Registrant 5.1 -- Opinion of Kilpatrick Stockton LLP 10.17 (a) -- Contract by and between Market Reps, Inc. and the Registrant, dated June 26, 1998 (b) -- Letter Amendment to Contract by and between Market Reps, Inc. and the Registrant, dated August 10, 1998 23.1 -- Consent of Kilpatrick Stockton LLP (included in Exhibit 5.1) 23.2 -- Consent of Arthur Andersen LLP
EX-1.1 2 FORM OF UNDERWRITING AGREEMENT 1 2,500,000 Common Shares INNOTRAC CORPORATION UNDERWRITING AGREEMENT JULY ___, 1999 BEAR, STEARNS & CO. INC. THE ROBINSON-HUMPHREY COMPANY, LLC J.C. BRADFORD & CO. as Representatives of the several Underwriters named in Schedule I attached hereto c/o Bear, Stearns & Co. Inc. 245 Park Avenue New York, N.Y. 10167 Ladies and Gentlemen: Innotrac Corporation, a corporation organized and existing under the laws of the State of Georgia (the "Company"), and the selling shareholders listed on Schedule II hereto (the "Selling Shareholders"), severally propose, subject to the terms and conditions stated herein, to issue and sell to the several underwriters named in Schedule I hereto (the "Underwriters") an aggregate of 2,500,000 shares (the "Firm Shares") of its common stock, par value $.10 per share (the "Common Stock"). The Firm Shares consist of 2,100,000 shares to be issued and sold by the Company and 400,000 shares to be sold by the Selling Shareholders. The Company and the Selling Shareholders also propose, for the sole purpose of covering over-allotments in connection with the sale of the Firm Shares, at the option of the Underwriters and subject to the terms and conditions stated herein, to sell up to an additional 375,000 shares (the "Additional Shares") of Common Stock. The Firm Shares and any Additional Shares purchased by the Underwriters are 2 referred to herein as the "Shares." The Shares are more fully described in the Registration Statement referred to below. 1. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with, the Underwriters that: (a) The Company has filed with the Securities and Exchange Commission (the "Commission") a registration statement, and amendments thereto, on Form S-1 (No. 333-79929), for the registration of the Shares under the Securities Act of 1933, as amended (the "Act"). Such registration statement, including the prospectus, financial statements and schedules, exhibits and all other documents filed as a part thereof, as amended at the time of effectiveness of the registration statement, including any information deemed to be a part thereof as of the time of effectiveness pursuant to paragraph (b) of Rule 430A or Rule 434 of the Rules and Regulations of the Commission under the Act (the "Regulations"), is herein called the "Registration Statement," and the prospectus, in the form first filed with the Commission pursuant to Rule 424(b) of the Regulations, or filed as part of the Registration Statement at the time of effectiveness if no Rule 424(b) or Rule 434 filing is required, is herein called the "Prospectus." The term "preliminary prospectus" as used herein means a preliminary prospectus as described in Rule 430 of the Regulations. (b) At the time of the effectiveness of the Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any supplement to or amendment of the Prospectus is filed with the Commission and at the Closing Date and the Additional Closing Date, if any (as hereinafter respectively defined), the Registration Statement and the Prospectus and any amendments thereof and supplements thereto complied or will comply in all material respects with the applicable provisions of the Act and the Regulations and do not or will not contain an untrue statement of a material fact and do not or will not omit to state any material fact required to be stated therein or necessary in order to make the statements therein (i) in the case of the Registration Statement, not misleading and (ii) in the case of the Prospectus, in light of the circumstances under which they were made, not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Shares or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, such preliminary prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Act and the Regulations and did not contain an untrue statement of a material fact and did not omit to -2- 3 state any material fact required to be stated therein or necessary in order to make the statements therein in light of the circumstances under which they were made not misleading. No representation and warranty is made in this subsection (b), however, with respect to any information contained in or omitted from the Registration Statement or the Prospectus or any related preliminary prospectus or any amendment thereof or supplement thereto in reliance upon and in conformity with information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives as herein stated expressly for use in connection with the preparation thereof. If Rule 434 is used, the Company will comply with the requirements of Rule 434. (c) Arthur Andersen LLP, who have certified the financial statements and supporting schedules included in the Registration Statement, are independent public accountants as required by the Act and the Regulations. (d) Subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, except as disclosed in the Registration Statement and the Prospectus, there has been no material adverse change or any development involving a prospective material adverse change in the business, prospects, properties, operations, condition (financial or other) or results of operations of the Company, whether or not arising from transactions in the ordinary course of business (the effect of each such change or development being referred to as a "Material Adverse Effect"), and since the date of the latest balance sheet presented in the Registration Statement and the Prospectus, the Company has not incurred or undertaken any liabilities or obligations, direct or contingent, which are material to the Company, except for liabilities or obligations which are disclosed in the Registration Statement and the Prospectus. (e) This Agreement and the transactions contemplated herein have been duly and validly authorized by the Company and this Agreement has been duly and validly executed and delivered by the Company. (f) The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby do not (i) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, any agreement, instrument, franchise, license or permit to which the Company is a party or by which it or its properties or assets may be bound or (ii) violate or conflict with any provision of the articles of incorporation or bylaws of the Company, or (iii) violate or conflict with any judgment, decree, order, statute, rule or -3- 4 regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its properties or assets except, as to clauses (i) and (iii) above, for such conflicts, violations, breaches, defaults, liens, charges or encumbrances which, singly or in the aggregate, would not have a Material Adverse Effect. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or its properties or assets is required for the execution, delivery and performance of this Agreement or the consummation of the transactions contemplated hereby by the Company, including the issuance, sale and delivery of the Shares to be issued, sold and delivered by the Company hereunder, except the registration under the Act of the Shares and such consents, approvals, authorizations, orders, registrations, filings, qualifications, licenses and permits as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters. (g) All of the outstanding shares of Common Stock are duly and validly authorized and issued, fully paid and nonassessable and were not issued and are not now in violation of or subject to any preemptive rights. The Shares, when issued, delivered and sold in accordance with this Agreement, will be duly and validly issued and outstanding, fully paid and nonassessable, and will not have been issued in violation of or be subject to any preemptive rights. The Company had, at March 31, 1999, an authorized and outstanding capitalization as set forth in the Registration Statement and the Prospectus. The Common Stock, the Firm Shares and the Additional Shares conform in all material respects to the descriptions thereof contained in the Registration Statement and the Prospectus. All offers and sales of securities of the Company have been at all relevant times duly registered under or exempt from the registration requirements of the Act and were duly registered under or exempt from the registration requirements of all applicable state securities or Blue Sky laws. Except as set forth in the Prospectus and except for options issued under the Company's stock option plan, the Company does not have outstanding, and at the Closing Date and, if later, the Additional Closing Date, will not have outstanding, any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or any contracts or commitments to issue or sell any shares of Common Stock or any such warrants, convertible securities or obligations. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (h) The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the State of Georgia. The Company is -4- 5 duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not, in the aggregate, have a Material Adverse Effect. The Company has all requisite power and authority, and all necessary consents, approvals, authorizations, orders, registrations, qualifications, licenses and permits of and from all public, regulatory or governmental agencies and bodies, necessary to own, lease and operate its properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus, except as would not result in a Material Adverse Effect, and no such consent, approval, authorization, order, registration, qualification, license or permit contains a material restriction not adequately disclosed in the Registration Statement and the Prospectus. The Company has not received any written notice of any proceedings relating to the revocation or modification of any such consent, approval, authorization, order, registration, qualification, license or permit which, singly or in the aggregate, if the subject of an unfavorable decision, would have a Material Adverse Effect. (i) Except as described in the Prospectus, there is no litigation or governmental proceeding to which the Company is a party or to which any property of the Company is subject or which is pending or, to the knowledge of the Company, threatened against the Company which might have a Material Adverse Effect or which is required to be disclosed in the Registration Statement and the Prospectus. (j) The Company maintains a system of internal accounting controls sufficient to assure that: (i) all material transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of the Company's consolidated financial statements in conformity in all material respects with generally accepted accounting principles consistently applied and to maintain accountability for assets; and (iii) assets are properly accounted for and safeguarded against errors or loss from unauthorized use. Neither the Company, nor, to the knowledge of the Company, any employee or agent of the Company, has made any payment of funds of the Company or received or retained any funds in violation of any law, rule or regulation, the receipt or payment of which could have a Material Adverse Effect. (k) There are no outstanding loans, advances (except normal advances for business expenses in the ordinary course of business) or guarantees of indebtedness by the Company to or for the benefit of any of the officers or directors of the Company (who are listed on Schedule III hereto) or any of the members of the families of any of them, except as disclosed in the Registration Statement and the Prospectus. -5- 6 (l) Neither the Company nor any of its officers or directors (who are listed on Schedule III hereto) has taken, nor will the Company or, to the Company's knowledge, any of its officers or directors (who are listed on Schedule III hereto), take, directly or indirectly, any action designed to cause or result in, or which constitutes or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (m) The financial statements, including the notes thereto, and supporting schedules included in the Registration Statement and the Prospectus present fairly the financial position of the Company as of the dates indicated and the results of its operations for the periods specified; except as otherwise stated in the Registration Statement, said financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis; and the supporting schedules included in the Registration Statement present fairly the information required to be stated therein; and, except as disclosed therein, the pro forma financial information included in the Registration Statement and the Prospectus has been prepared in accordance with the Commission's rules and guidelines with respect to pro forma financial statements, and the assumptions used in the preparation thereof are, in the Company's opinion, reasonable. The selected financial data for the Company set forth in the Prospectus have been prepared on a basis consistent with the financial statements of the Company. No other financial statements of the Company or any other entity are required by the Act or the Rules and Regulations to be included in the Registration Statement or the Prospectus. (n) The Company has good and marketable title to all properties and assets described in the Registration Statement and Prospectus as owned by it, free and clear of all liens, charges, encumbrances or restrictions, except such as are described in the Prospectus or are not material to the business of the Company. The Company has valid, subsisting and enforceable leases for the properties described in the Prospectus as leased by it (the "Leased Properties") subject only to the rights of any mortgagee, lienholder, or other person or entity which has an interest in the Leased Properties that is or may become superior to the interest of the Company or the landlord of such Leased Properties. The Company has no notice or knowledge of any material claim of any sort which has been, or may be, asserted by anyone adverse to the Company's rights as lessee or sublessee under any lease or sublease described above, or affecting or questioning the Company's rights to the continued possession of the leased or subleased premises under any such lease or sublease in conflict with the terms thereof. The Company owns or leases all such properties as are necessary to its operations as now conducted. -6- 7 (o) The Company maintains insurance with insurers of recognized financial responsibility against such losses and risks and in such amounts as management believes is appropriate to the business of the Company and all such policies are in full force and effect. The Company has no reason to believe that it will not be able to renew its existing insurance coverage as and when such coverage expires or to obtain similar coverage from similar insurers as may be necessary to continue its business at a cost that would not have a Material Adverse Effect. (p) Except as described in the Registration Statement and the Prospectus, there is no factual basis for any action, suit or other proceeding involving the Company or any of its material assets for any failure of the Company to comply with any requirements of federal, state or local regulation relating to air, water, solid waste management, hazardous or toxic substances, or the protection of health or the environment. To the best of the Company's knowledge, there has not been a release of any "hazardous substances in a reportable quantity," as those terms are defined in the Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. 9601 et seq. ("CERCLA"), by the Company on or at properties leased by the Company. The Company has not received notice or request of information under Section 104 of CERCLA or comparable state laws regarding an investigation evaluating whether any remedial action is needed to respond to a release or threatened release of any hazardous substance at properties leased by the Company. (q) All documents or contracts required to be filed as exhibits to the Registration Statement to which the Company is a party have been filed as exhibits to the Registration Statement and have been duly authorized, executed and delivered by the Company, constitute valid and binding agreements of the Company and are enforceable against the Company in accordance with the terms thereof, except where the lack of authorization, execution, delivery or enforceability of any such contract would not have a Material Adverse Effect. (r) Except as described in the Prospectus, no holder of securities of the Company has any rights to the registration of securities of the Company because of the filing of the Registration Statement or otherwise in connection with the sale of the Shares contemplated hereby. (s) The Company is not, and upon consummation of the transactions contemplated hereby will not be, subject to registration as an "investment company" under the Investment Company Act of 1940, as amended. -7- 8 (t) No labor dispute with the employees of the Company exists or, to the Company's knowledge, is threatened or imminent that would have a Material Adverse Effect. (u) The Company owns or possesses, or can acquire on reasonable terms, all material trademarks, service marks, trade names, licenses, copyrights and proprietary or other confidential information currently employed by it in connection with its business, and the Company has not received any notice of infringement of any asserted rights of any third party with respect to the foregoing which, singly or in the aggregate, if the subject of an unfavorable decision, would have a Material Adverse Effect. (v) The Company has filed all foreign, federal, state and local tax returns that are required to be filed or has requested extensions thereof (except in any case in which the failure so to file would not have a Material Adverse Effect) and has paid all taxes required to be paid by it and any other assessment, fine or penalty levied against it, to the extent that any of the foregoing is due and payable, except for any such assessment, fine or penalty that is currently being contested in good faith or as described in or contemplated by the Prospectus, and except in any case in which the failure so to pay would not have a Material Adverse Effect. (w) The Company owns no shares of stock or any other equity securities of any corporation and has no subsidiaries as defined by Regulation S-X. The Company has no equity interest in any firm, partnership, association or other entity, except as described in or contemplated by the Prospectus. (x) No event has occurred that will, with notice or the passage of time or both, (i) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to any agreement, instrument, franchise, license or permit to which the Company is a party or by which the Company or its properties may be bound, except for such conflicts, breaches or defaults which would not have a Material Adverse Effect or (ii) conflict with any provision of the articles of incorporation or bylaws of the Company or (iii) conflict with or violate any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or any of its properties or assets, except for such conflicts or violations which would not have a Material Adverse Effect. -8- 9 (y) The Shares have been approved for listing on the National Association of Securities Dealers Automated Quotation National Market System (the "Nasdaq National Market"). (z) The description of the Company's Year 2000 readiness set forth under the heading "Year 2000 Compliance" in the "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Prospectus is accurate and complete in all material respects. (aa) Each certificate signed by any officer of the Company and delivered to the Representatives or counsel for the Underwriters shall be deemed to be a representation and warranty by the Company, and not by such officer in an individual capacity, to each Underwriter as to the matters covered thereby. 1A. Representations and Warranties of the Selling Shareholders. Each Selling Shareholder, severally and not jointly, represents and warrants to the Underwriters that: (a) At the date hereof, such Selling Shareholder has, and at the time of delivery thereof hereunder, such Selling Shareholder will have (i) sole legal and beneficial ownership of the Shares to be sold by such Selling Shareholder hereunder, free and clear of any claims, liens, encumbrances or security interests and (ii) full legal right, power and authority to sell, transfer and deliver the Shares to be sold by such Selling Shareholder to the Underwriters hereunder and to make the representations, warranties and agreements made by such Selling Shareholder herein. Upon delivery of and payment for the Shares to be sold by the Selling Shareholder hereunder, such Selling Shareholder will deliver sole legal and beneficial ownership thereof, free and clear of any claims, liens, encumbrances or security interests. (b) On the Closing Date and on the Additional Closing Date, if any, all stock transfer and other taxes (other than income taxes) which are required to be paid in connection with the sale and transfer of the Shares to be sold by such Selling Shareholder to the several Underwriters hereunder will have been fully paid or provided for and all laws imposing such taxes will have been complied with in all material respects. (c) The execution, delivery, and performance of this Agreement and the Custody Agreement (as hereinafter defined) and the consummation of the transactions contemplated hereby and thereby do not and will not, with notice or the passage of time or both, (i) conflict with or result in a breach of any of the terms and provisions of, or constitute a default (or an event which with notice or lapse of time, or both, would constitute a default) under, or result in the creation or imposition -9- 10 of any lien, charge or encumbrance upon any property or assets of such Selling Shareholder pursuant to, any agreement, instrument, franchise, license or permit to which such Selling Shareholder is a party or by which such Selling Shareholder's properties or assets may be bound or (ii) violate or conflict with any provision of the articles of incorporation or bylaws of such Selling Shareholder, as applicable, or any judgment, decree, order, statute, rule or regulation of any court or any public, governmental or regulatory agency or body having jurisdiction over such Selling Shareholder or any of such properties or assets. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental or regulatory agency or body having jurisdiction over such Selling Shareholder or any of such properties or assets is required for the execution, delivery and performance of this Agreement or the Custody Agreement by such Selling Shareholder or the consummation of the transactions contemplated hereby and thereby, including the sale and delivery of the Shares to be sold and delivered by such Selling Shareholder hereunder, except the registration under the Act of the Shares and such consents, approvals, authorizations, orders, registrations, filings, qualifications, licenses and permits as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters. (d) The sale of the Shares proposed to be sold by the Selling Shareholder is not prompted by such Selling Shareholder's knowledge of any material nonpublic information regarding the Company. (e) At the time of the effectiveness of the Registration Statement or the effectiveness of any post-effective amendment to the Registration Statement, when the Prospectus is first filed with the Commission pursuant to Rule 424(b) or Rule 434 of the Regulations, when any supplement to or amendment of the Prospectus is filed with the Commission and at the Closing Date and the Additional Closing Date, if any, all information with respect to such Selling Shareholder contained in the Registration Statement and the Prospectus and any amendments thereof and supplements thereto in reliance upon and in conformity with information relating to such Selling Shareholder furnished to the Company by or on behalf of such Selling Shareholder expressly for use therein complied or will comply in all material respects with the applicable provisions of the Act and the Regulations. The Registration Statement and the Prospectus and any amendments thereof and supplements thereto contain and will contain all statements with respect to such Selling Shareholder required to be stated therein in accordance with the Act and the Regulations, and do not or will not contain an untrue statement of a material fact and do not or will not omit to state any material fact regarding such Selling Shareholder required to be stated therein or necessary in order to make the statements therein (i) in the case of the Registration Statement, not misleading and (ii) in the case of -10- 11 the Prospectus, in light of the circumstances under which they were made, not misleading. When any related preliminary prospectus was first filed with the Commission (whether filed as part of the registration statement for the registration of the Shares or any amendment thereto or pursuant to Rule 424(a) of the Regulations) and when any amendment thereof or supplement thereto was first filed with the Commission, all information with respect to such Selling Shareholder contained in such preliminary prospectus and any amendments thereof and supplements thereto complied in all material respects with the applicable provisions of the Act and the Regulations and did not contain an untrue statement of a material fact regarding such Selling Shareholder and did not omit to state any material fact regarding such Selling Shareholder required to be stated therein or necessary in order to make the statements therein in light of the circumstances under which they were made not misleading. (f) Other than as permitted by the Act and the Regulations, such Selling Shareholder has not distributed and will not distribute any preliminary prospectus, the Prospectus or any other offering material in connection with the offering or sale of the Shares. Such Selling Shareholder has not taken and will not take, directly or indirectly, any action designed to cause or result in, or which constitutes or which might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (g) Such Selling Shareholder has full right, power and authority to enter into this Agreement and the Custody Agreement. All authorizations and consents necessary for the execution and delivery by such Selling Shareholder of this Agreement and the Custody Agreement and the performance of the transactions contemplated hereby and thereby have been obtained. Each of this Agreement and the Custody Agreement has been duly authorized, executed and delivered by or on behalf of such Selling Shareholder and constitutes a valid and binding agreement of such Selling Shareholder and is enforceable against such Selling Shareholder in accordance with its terms, except, in the case of enforceability, as limited by applicable bankruptcy, insolvency, reorganization, moratorium or other laws now or hereafter in effect relating to the availability of remedies and by general principles of equity and except as rights to indemnity and contribution may be limited by federal or state securities laws or the public policy underlying such laws. (h) Each Selling Shareholder has duly executed and delivered in the form heretofore furnished to the Representatives a custody agreement ("Custody Agreement") with Reliance Trust Company, Atlanta, Georgia as the custodian ("Custodian"). -11- 12 (i) Each certificate signed by such Selling Shareholder and delivered to the Representatives or counsel for the Underwriters shall be deemed to be a representation and warranty by such Selling Shareholder to each Underwriter as to the matters covered thereby. 2. Purchase, Sale and Delivery of the Shares. (a) On the basis of the representations, warranties, covenants and agreements herein contained, but subject to the terms and conditions herein set forth, the Company agrees to sell to the Underwriters 2,100,000 Firm Shares, each Selling Shareholder agrees to sell to the Underwriters the number of Firm Shares set forth opposite such Selling Shareholder's name in Schedule II hereto, and the Underwriters, severally and not jointly, agree to purchase from the Company and each of the Selling Shareholders, at a purchase price per share of $__________, the number of Firm Shares set forth opposite the respective names of the Underwriters in Schedule I hereto plus any additional number of Shares which such Underwriter may become obligated to purchase pursuant to the provisions of Section 9 hereof. (b) Payment of the purchase price for, and delivery of certificates for, the Firm Shares shall be made at the offices of Troutman Sanders LLP ("Underwriters' Counsel"), Atlanta, Georgia, or at such other place as shall be agreed upon by the Representatives and the Company, at 10:00 A.M. on the third or fourth business day (as permitted under Rule 15c6-1 under the Securities Exchange Act of 1934, as amended (the "Exchange Act") (unless postponed in accordance with the provisions of Section 9 hereof) following the date of the effectiveness of the Registration Statement (or, if the Company has elected to rely upon Rule 430A of the Regulations, the third or fourth business day (as permitted under Rule 15c6-1 under the Exchange Act) after the determination of the initial public offering price of the Shares), or such other time not later than ten business days after such date as shall be agreed upon by the Representatives and the Company (such time and date of payment and delivery being herein called the "Closing Date"). Payment shall be made to the Company and each of the Selling Shareholders by wire transfer in same day funds, against delivery to the Representatives for the respective accounts of the Underwriters of certificates for the Firm Shares to be purchased by them. Certificates for the Firm Shares shall be registered in such name or names and in such authorized denominations as the -12- 13 Representatives may request in writing at least two full business days prior to the Closing Date. The Company and each of the Selling Shareholders will permit the Representatives to examine and package such certificates for delivery at least one full business day prior to the Closing Date. (c) In addition, the Company hereby grants to the Underwriters the option to purchase up to 100,000 Additional Shares, and each of the Selling Shareholders hereby grants to the Underwriters the option to purchase up to the number of Additional Shares set forth opposite such Selling Shareholder's name in Schedule II hereto, at the same purchase price per share to be paid by the Underwriters to the Company and the Selling Shareholders for the Firm Shares as set forth in this Section 2, for the sole purpose of covering over-allotments in the sale of Firm Shares by the Underwriters. This option may be exercised at any time, in whole or in part, on or before the thirtieth day following the date of the Prospectus, by written notice by the Representatives to the Company. Such notice shall set forth the aggregate number of Additional Shares as to which the option is being exercised and the date and time, as reasonably determined by the Representatives, when the Additional Shares are to be delivered (such date and time being herein sometimes referred to as the "Additional Closing Date"); provided, however, that the Additional Closing Date shall not be earlier than the Closing Date or earlier than the second full business day after the date on which the option shall have been exercised nor later than the eighth full business day after the date on which the option shall have been exercised (unless such time and date are postponed in accordance with the provisions of Section 9 hereof). Certificates for the Additional Shares shall be registered in such name or names and in such authorized denominations as the Representatives may request in writing at least two full business days prior to the Additional Closing Date. The Company and each of the Selling Shareholders will permit the Representatives to examine and package such certificates for delivery at least one full business day prior to the Additional Closing Date. The number of Additional Shares to be sold to each Underwriter shall be the number which bears the same ratio to the aggregate number of Additional Shares being purchased as the number of Firm Shares set forth opposite the name of such Underwriter in Schedule I hereto (or such number increased as set forth in Section 9 hereof) bears to 2,500,000, subject, however, to such adjustments to eliminate any fractional shares as the Representatives in their sole discretion shall make. Payment for the Additional Shares shall be made by wire transfer in same day funds, at the offices of Underwriters' Counsel, or such other location as may be mutually acceptable, upon delivery of the certificates for the Additional Shares to the Representatives for the respective accounts of the Underwriters. -13- 14 3. Offering. Upon the authorization by the Representatives of the release of the Firm Shares, the Underwriters propose to offer the Shares for sale to the public upon the terms set forth in the Prospectus. 4. Covenants of the Company and the Selling Shareholders. The Company and the Selling Shareholders, severally and not jointly, covenant and agree with the Underwriters that: (a) If the Registration Statement has not yet been declared effective, the Company will use its best efforts to cause the Registration Statement and any amendments thereto to become effective as promptly as possible, and if Rule 430A is used or the filing of the Prospectus is otherwise required under Rule 424(b) or Rule 434, the Company will file the Prospectus (properly completed if Rule 430A has been used) pursuant to Rule 424(b) or Rule 434 within the prescribed time period and will provide evidence satisfactory to the Representatives of such timely filing. If the Company elects to rely on Rule 434, the Company will prepare and file a term sheet that complies with the requirements of Rule 434. The Company will notify the Representatives immediately (and, if requested by the Representatives, will confirm such notice in writing) (i) when the Registration Statement and any amendments thereto become effective, (ii) of any request by the Commission for any amendment of or supplement to the Registration Statement or the Prospectus or for any additional information, (iii) of the mailing or the delivery to the Commission for filing of any amendment of or supplement to the Registration Statement or the Prospectus, (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereto or of the initiation, or the threatening, of any proceedings therefor, (v) of the receipt of any comments from the Commission, and (vi) of the receipt by the Company of any notification with respect to the suspension of the qualification of the Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for that purpose. If the Commission shall propose or enter a stop order at any time, the Company will make every reasonable effort to prevent the issuance of any such stop order and, if issued, to obtain the lifting of such order as soon as possible. The Company will not file any amendment to the Registration Statement or any amendment of or supplement to the Prospectus (including the prospectus required to be filed pursuant to Rule 424(b) or Rule 434) that differs from the prospectus on file at the time of the effectiveness of the Registration Statement before or after the effective date of the Registration Statement to which the Representatives shall reasonably object in writing after being timely furnished in advance a copy thereof. -14- 15 (b) If at any time when a prospectus relating to the Shares is required to be delivered under the Act any event shall have occurred as a result of which the Prospectus as then amended or supplemented would, in the judgment of the Underwriters or the Company, include an untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading, or if it shall be necessary at any time to amend or supplement the Prospectus or Registration Statement to comply with the Act or the Regulations, the Company will notify the Representatives promptly and prepare and file with the Commission an appropriate amendment or supplement (in form and substance satisfactory to the Representatives) which will correct such statement or omission and will use its best efforts to have any amendment to the Registration Statement declared effective as soon as possible. (c) The Company will promptly deliver to the Representatives three signed copies of the Registration Statement, including exhibits, and all amendments thereto, and the Company will promptly deliver to each of the Underwriters such number of copies of any preliminary prospectus, the Prospectus, the Registration Statement, and all amendments of and supplements to such documents, if any, as the Representatives may reasonably request. (d) The Company will endeavor in good faith, in cooperation with the Representatives, at or prior to the time of effectiveness of the Registration Statement, to qualify the Shares for offering and sale under the securities laws relating to the offering or sale of the Shares of such jurisdictions as the Representatives may designate and to maintain such qualification in effect for so long as required for the distribution thereof; except that in no event shall the Company be obligated in connection therewith to qualify as a foreign corporation or to execute a general consent to service of process. (e) The Company will make generally available (within the meaning of Section 11(a) of the Act) to its security holders and to the Representatives as soon as practicable, but not later than 45 days after the end of its fiscal quarter in which the first anniversary date of the effective date of the Registration Statement occurs, an earning statement (in form complying with the provisions of Rule 158 of the Regulations) covering a period of at least twelve consecutive months beginning after the effective date of the Registration Statement. (f) During the period of 90 days from the date of the Prospectus, the Company and the Selling Shareholders will not, without the prior written consent of Bear, Stearns & Co. Inc. issue, sell, offer or agree to sell, grant any option for the sale of, or otherwise dispose of, directly or indirectly, any Common Stock (or any securities -15- 16 convertible into, exercisable for or exchangeable for Common Stock), and the Company will obtain the undertaking of each of its officers, directors, and such shareholders as have been heretofore designated by the Representatives and listed on Schedule III hereto not to engage in any of the aforementioned transactions on their own behalf, other than the Company's and the Selling Shareholders' sale of Shares hereunder, and (i) the issuance of Common Stock by the Company upon the exercise of options granted pursuant to the Company's Stock Option and Incentive Award Plan (the "Plan") that are outstanding as of the date of this Underwriting Agreement; (ii) the grant by the Company of stock options pursuant to the Plan, consistent with past practices, so long as such stock options do not vest and are not exercisable during the aforementioned period of 90 days; and (iii) bona fide gifts made in accordance with and subject to the further provisions of Section 6(h) hereof. (g) During a period of three years from the effective date of the Registration Statement, the Company will furnish to the Representatives copies of (i) all reports to its shareholders; and (ii) all reports, financial statements and proxy or information statements filed by the Company with the Commission or any national securities exchange. (h) The Company will apply the proceeds from the sale of the Shares as set forth under "Use of Proceeds" in the Prospectus. (i) The Company will use its best efforts to cause the Shares to be listed for inclusion in the Nasdaq National Market. (j) Neither the Company, nor any of its officers or directors, nor the Selling Shareholders, will take, directly or indirectly, any action designed to cause or result in, or which constitutes or might reasonably be expected to constitute, the stabilization or manipulation of the price of the shares of Common Stock to facilitate the sale or resale of the Shares. (k) The Company, during the period when the Prospectus is required to be delivered under the Act or the Exchange Act, will file all documents required to be filed with the Commission pursuant to Sections 13, 14 or 15 of the Exchange Act within the time periods required by the Exchange Act and the rules and regulations thereunder. (l) As promptly as practicable after the Selling Shareholders are advised thereof, the Selling Shareholders will advise the Representatives and, if requested by the Representatives, confirm such advice in writing, (i) of receipt by the Selling Shareholders, or by any representative of the Selling Shareholders, of any communication from the Commission relating to the Registration Statement, the Prospectus or any -16- 17 preliminary prospectus, or any notice or order from the Commission relating to the Company or the Selling Shareholders in connection with the transactions contemplated hereby and (ii) of the happening of any event, at any time prior to the date on which the distribution of the Shares as contemplated herein and in the Prospectus has been completed, that in the judgment of the Selling Shareholders makes any statement made in the Registration Statement untrue or that requires the making of any changes in the Registration Statement or the Prospectus in order to make the statements therein, in light of the circumstances in which they were made, not misleading. (m) The Selling Shareholders will deliver to the Underwriters prior to or on the Closing Date properly completed and executed United States Treasury Department Forms W-9 (or other applicable form or statement specified by the Treasury Department regulations in lieu thereof). 5. Payment of Expenses. Whether or not the transactions contemplated in this Agreement are consummated or this Agreement is terminated, the Company hereby agrees to pay all costs and expenses incident to the performance of the obligations of the Company and the Selling Shareholders hereunder, including those in connection with (i) preparing, printing, duplicating, filing and distributing the Registration Statement, as originally filed and all amendments thereof (including all exhibits thereto), any preliminary prospectus, the Prospectus and any amendments or supplements thereto (including, without limitation, fees and expenses of the Company's and the Selling Shareholders' accountants and counsel), reasonable expenses associated with the underwriting documents (including this Agreement, the Agreement Among Underwriters, and the Selling Agreement and all other documents related to the public offering of the Shares (including those supplied to the Underwriters in quantities as hereinabove stated), (ii) the issuance, transfer and delivery of the Shares to the Underwriters, including any transfer or other taxes payable thereon, (iii) the qualification of the Shares under state or foreign securities or Blue Sky laws, including the costs of printing and mailing a "Blue Sky Survey" and the reasonable fees of counsel for the Underwriters and such counsel's disbursements in relation thereto, (iv) listing of the Shares on the Nasdaq Stock Market's National Market, (v) filing fees of the Commission and the National Association of Securities Dealers, Inc., (vi) the cost of printing certificates representing the Shares, and (vii) the cost and charges of any transfer agent or registrar. 6. Conditions of Underwriters' Obligations. The obligations of the Underwriters to purchase and pay for the Firm Shares and the Additional Shares, as provided herein, shall be subject to the accuracy of the representations and warranties of the Company and the Selling Shareholders herein contained, as of the date hereof and as of the Closing Date (for purposes of this Section 6, "Closing Date" shall refer to the Closing Date for the Firm Shares and any Additional Closing Date, if different, for the Additional Shares), to the absence from any -17- 18 certificates, opinions, written statements or letters furnished to the Representatives or to Underwriters' Counsel pursuant to this Section 6 of any misstatement or omission, to the performance by the Company and the Selling Shareholders of their respective obligations hereunder, and to the following additional conditions: (a) The Registration Statement shall have become effective and all necessary foreign regulatory or stock exchange approval shall have been received not later than 5:30 P.M., New York time, on the date of this Agreement, or at such later time and date as shall have been consented to in writing by the Representatives; if the Company shall have elected to rely upon Rule 430A or Rule 434 of the Regulations, the Prospectus shall have been filed with the Commission in a timely fashion in accordance with Section 4(a) hereof; and, at or prior to the Closing Date no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof shall have been issued and no proceedings therefor shall have been initiated or threatened by the Commission. (b) At the Closing Date the Representatives shall have received the opinion of Kilpatrick Stockton LLP, counsel for the Company and for Scott D. Dorfman (a Selling Shareholder listed on Schedule II hereto), dated the Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) The Company has been duly incorporated and is an existing corporation in good standing under the laws of the State of Georgia. The Company is duly qualified and in good standing as a foreign corporation in each jurisdiction in which the character or location of its properties (owned, leased or licensed) or the nature or conduct of its business makes such qualification necessary, except for those failures to be so qualified or in good standing which will not in the aggregate have a Material Adverse Effect on the Company. The Company has all requisite corporate authority to own, lease and license its respective properties and conduct its business as now being conducted and as described in the Registration Statement and the Prospectus. (ii) The authorized capital stock of the Company is as set forth in the Registration Statement and the Prospectus under the caption "Capitalization." All of the outstanding shares of Common Stock are duly and validly authorized and validly issued, fully paid and nonassessable and were not issued in violation of, or subject to, any preemptive rights arising by operation of law or under the Company's articles of incorporation or bylaws or, to such counsel's knowledge, any other contractual or similar rights. The Shares to be delivered on the Closing -18- 19 Date have been duly and validly authorized and, when issued and delivered by the Company or the Selling Shareholders in accordance with this Agreement, will be validly issued, fully paid and nonassessable and will not have been issued in violation of, or subject to, any preemptive rights arising by operation of law or under the Company's articles of incorporation or bylaws or, to such counsel's knowledge, any other contractual or similar rights. The Common Stock, the Firm Shares and the Additional Shares conform to the description thereof contained in the Registration Statement and the Prospectus. (iii) The Common Stock currently outstanding is listed, and the Shares to be sold under this Agreement to the Underwriters are duly authorized for listing, on the Nasdaq National Market. (iv) Execution, delivery and performance by the Company of this Agreement have been duly authorized by all necessary corporate action on behalf of the Company, and such counsel shall confirm to the Underwriters that the Agreement has been duly executed and delivered on behalf of the Company. (v) There is no litigation or governmental or other action, suit, proceeding or investigation before any court or before or by any regulatory or governmental agency or body pending or threatened against, or involving the properties or business of, the Company which is required to be disclosed in the Registration Statement and the Prospectus which is not so disclosed therein (it being understood that such opinion is limited to those matters handled on behalf of the Company by such counsel and those matters identified and listed on an officer's certificate provided to such counsel and furnished with the opinion of such counsel). (vi) The execution, delivery, and performance of this Agreement and the consummation of the transactions contemplated hereby by the Company (i) do not and will not, with notice or the passage of time or both, conflict with or result in the breach of any of the terms and provisions of, constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to any agreement, instrument, franchise, license or permit (known to such counsel) to which the Company is a party or by which it or any of its properties or assets may be subject and (ii) do not and will not, with notice or the passage of time or both, violate or conflict with (A) any provision of the articles of incorporation or bylaws of the Company, (B) any of the Company's existing obligations under any judgment, -19- 20 decree or order of any court or any governmental or regulatory agency or body having jurisdiction over the Company or any of its properties or assets, or (C) any statute, rule, regulation or other law which is known to such counsel to be applicable to the Company where (as to clauses (B) and (C)) such violation would reasonably be expected to have a material adverse effect on the validity, performance or enforceability of any of the terms of this Agreement applicable to the Company. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any public, governmental or regulatory agency or body having jurisdiction over the Company or of any of its properties or assets is required for the execution, delivery and performance of this Agreement by the Company or the consummation of the transactions contemplated hereby, except for (1) such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters (as to which such counsel need express no opinion) and (2) such as may have been obtained under the Act and the Regulations. (vii) The Registration Statement and the Prospectus and any amendments thereof or supplements thereto (other than the financial statements and schedules and other financial data included or incorporated by reference therein, as to which no opinion need be rendered) comply as to form in all material respects with the requirements of the Act and the Regulations. (viii) Based solely on telephone conversations between such counsel and the Staff, the Registration Statement has become effective under the Act, and, to the best knowledge of such counsel, no stop order suspending the effectiveness of the Registration Statement or any post-effective amendment thereof has been issued under the Act and no proceedings therefor have been initiated or threatened by the Commission under the Act. All filings required by Rule 424(b) of the Regulations have been made. (ix) The statements made in the Registration Statement and the Prospectus under the captions "Dividend Policy," "Capitalization" and "Description of Capital Stock," to the extent that they constitute summaries of documents referred to therein or matters of law or legal conclusions, are accurate summaries in all material respects and fairly present the information disclosed therein. (x) The Company is not an "investment company" or a company "controlled" by an "investment company" within the meaning of the Investment Company Act of 1940, as amended. -20- 21 (xi) Such counsel shall confirm to the Underwriters that this Agreement and the Custody Agreement have been duly executed and delivered by Scott D. Dorfman. Each constitutes a valid and binding obligation of Scott D. Dorfman and, except for the indemnification provisions thereof, as to which such counsel need express no opinion, the Custody Agreement is enforceable against Scott D. Dorfman in accordance with its terms. (xii) The execution, delivery, and performance of this Agreement and the Custody Agreement by Scott D. Dorfman (i) do not and will not, with notice or the passage of time or both, result in a breach of any of the terms and provisions of, constitute a default (or an event which, with notice or the passage of time or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of Scott D. Dorfman pursuant to any agreement, instrument, franchise, license or permit to which Scott D. Dorfman is a party or by which any of his properties or assets may be bound, where such default or breach would reasonably be expected to have a material adverse effect on the ability of Scott D. Dorfman to perform his obligations under the Agreement or to impose any liability upon any one or more of the Underwriters and (ii) do not and will not, with notice or the passage of time or both, violate (A) any of Scott D. Dorfman's existing obligations under any judgment, decree or order of any court or any governmental or regulatory agency or body having jurisdiction over Scott D. Dorfman or any of his properties or assets, or (B) any statute, rule, regulation or other law which is known to such counsel to be applicable to Scott D. Dorfman where such violation would reasonably be expected to have a material adverse effect on the validity, performance or enforceability of any of the terms of this Agreement or the Custody Agreement applicable to Scott D. Dorfman. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any governmental or regulatory agency or body having jurisdiction over Scott D. Dorfman or any of his properties or assets is legally required for the execution, delivery and performance of this Agreement or the Custody Agreement by Scott D. Dorfman, except for (1) such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters (as to which such counsel need express no opinion), and (2) such as may be required under the Act and the Regulations. -21- 22 (xiii) Scott D. Dorfman has good and valid title to all of the Shares to be sold by him pursuant to this Agreement and owns such Shares free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever other than pursuant to the Custody Agreement and the Underwriting Agreement and other than any such restriction on transfer, lien, encumbrance, equity or claim created by an Underwriter or resulting from any actions taken by an Underwriter. Upon delivery of, and payment for, the Shares to be sold by Scott D. Dorfman pursuant to this Agreement, Scott D. Dorfman will deliver sole legal and beneficial ownership thereof, free and clear of any claims, liens, encumbrances or security interests. In rendering such opinion, such counsel may assume that the Underwriters are purchasing such Shares in good faith, for value and without notice of any defect in title of any, or adverse claims against any, of the Shares being purchased from Scott D. Dorfman. In addition, such opinion shall also contain a statement that such counsel has participated in conferences with officers and representatives of the Company, representatives of the independent public accountants for the Company and representatives of the Underwriters at which the contents of the Registration Statement and the Prospectus and related matters were discussed, and no facts have come to the attention of such counsel that cause such counsel to believe that either the Registration Statement at the time it became effective (including the information deemed to be part of the Registration Statement at the time of effectiveness pursuant to Rule 430A(b) or Rule 434, if applicable), or any amendment thereof made prior to the Closing Date as of the date of such amendment, contained an untrue statement of a material fact or omitted to state any material fact required to be stated therein or necessary to make the statements therein not misleading or that the Prospectus as of its date (or any amendment thereof or supplement thereto made prior to the Closing Date as of the date of such amendment or supplement) and as of the Closing Date contained or contains an untrue statement of a material fact or omitted or omits to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (it being understood that in each case such counsel need express no belief or opinion with respect to the financial statements, schedules and other financial data included or incorporated by reference therein). In rendering such opinion, such counsel may rely (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions (in form and substance reasonably satisfactory to Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters' Counsel, familiar with the applicable laws; and (B) as to matters of fact, to -22- 23 the extent they deem proper, on certificates of responsible officers of the Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of the Company, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel. The opinion of such counsel for the Company and for Scott D. Dorfman shall state that the opinion of any such other counsel is in form satisfactory to such counsel and, in their opinion, you and they are justified in relying thereon. (c) At the Closing Date, the Representatives shall have received the opinion of Kimberley E. Thompson, Esq., General Counsel of ITC Service Company (a Selling Shareholder listed on Schedule II hereto), dated the Closing Date, addressed to the Underwriters and in form and substance satisfactory to Underwriters' Counsel, to the effect that: (i) ITC Service Company has been duly organized and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation. ITC Service Company has the requisite corporate power and authority to enter into this Agreement and the Custody Agreement and to sell, assign, transfer, and deliver the Shares to be sold by it thereunder in the manner provided therein. (ii) Such counsel shall confirm to the Underwriters that this Agreement and the Custody Agreement have been duly authorized, executed and delivered by ITC Service Company. Each constitutes a valid and binding obligation of ITC Service Company and, except for the indemnification provisions thereof, as to which such counsel need express no opinion, the Custody Agreement is enforceable against ITC Service Company in accordance with its terms. (iii) The execution, delivery, and performance of this Agreement and the Custody Agreement by ITC Service Company (i) do not and will not, with notice or the passage of time or both, result in a breach of any of the terms and provisions of, constitute a default (or an event which, with notice or the passage of time or both, would constitute a default) under, or result in the creation or imposition of any lien, charge or encumbrance upon any property or assets of ITC Service Company pursuant to any agreement, instrument, franchise, license or permit to which ITC Service Company is a party or by which any of its properties or assets may be bound, where such default or breach would reasonably be expected to have a material adverse effect on the ability of ITC Service Company to perform its obligations under the Agreement -23- 24 or to impose any liability upon any one or more of the Underwriters and (ii) do not and will not, with notice or the passage of time or both, violate (A) any provision of the articles of incorporation or bylaws of ITC Service Company or any of ITC Service Company's existing obligations under any judgment, decree or order of any court or any governmental or regulatory agency or body having jurisdiction over ITC Service Company or any of its properties or assets, or (B) any statute, rule, regulation or other law which is known to such counsel to be applicable to ITC Service Company where such violation would reasonably be expected to have a material adverse effect on the validity, performance or enforceability of any of the terms of this Agreement or the Custody Agreement applicable to ITC Service Company. No consent, approval, authorization, order, registration, filing, qualification, license or permit of or with any court or any governmental or regulatory agency or body having jurisdiction over ITC Service Company or any of his or its properties or assets is legally required for the execution, delivery and performance of this Agreement or the Custody Agreement by ITC Service Company, except for (1) such as may be required under state securities or Blue Sky laws in connection with the purchase and distribution of the Shares by the Underwriters (as to which such counsel need express no opinion), (2) such as may be required under the Act and the Regulations, and (3) such as may be required by the NASD. (iv) ITC Service Company has good and valid title to all of the Shares to be sold by ITC Service Company pursuant to this Agreement and owns such Shares free of all restrictions on transfer, liens, encumbrances, security interests, equities and claims whatsoever other than pursuant to the Custody Agreement and the Underwriting Agreement and other than any such restriction on transfer, lien, encumbrance, equity or claim created by an Underwriter or resulting from any actions taken by an Underwriter. Upon delivery of, and payment for, the Shares to be sold by ITC Service Company pursuant to this Agreement, ITC Service Company will deliver good and valid title thereto, free and clear of any claims, liens, encumbrances or security interests. In rendering such opinion, such counsel may assume that the Underwriters are purchasing such Shares in good faith, for value and without notice of any defect in title of any, or adverse claims against any, of the Shares being purchased from ITC Service Company. In rendering such opinion, such counsel may also rely (A) as to matters involving the application of laws other than the laws of the United States and jurisdictions in which they are admitted, to the extent such counsel deems proper and to the extent specified in such opinion, if at all, upon an opinion or opinions -24- 25 (in form and substance reasonably satisfactory to Underwriters' Counsel) of other counsel reasonably acceptable to Underwriters' Counsel, familiar with the applicable laws; and (B) as to matters of fact, to the extent they deem proper, on certificates of responsible officers of ITC Service Company and certificates or other written statements of officers of departments of various jurisdictions having custody of documents respecting the corporate existence or good standing of ITC Service Company and its subsidiaries, provided that copies of any such statements or certificates shall be delivered to Underwriters' Counsel. The opinion of such counsel for ITC Service Company shall state that the opinion of any such other counsel is in form satisfactory to such counsel and, in their opinion, you and they are justified in relying thereon. (d) All proceedings taken in connection with the sale of the Firm Shares and the Additional Shares as herein contemplated shall be satisfactory in form and substance to the Representatives and to Underwriters' Counsel, and the Underwriters shall have received from said Underwriters' Counsel a favorable opinion, dated as of the Closing Date with respect to the issuance and sale of the Shares, the Registration Statement and the Prospectus and such other related matters as the Representatives may reasonably require, and the Company and the Selling Shareholders shall have furnished to Underwriters' Counsel such documents as they request for the purpose of enabling them to pass upon such matters. (e) (i) At the Closing Date, the Representatives shall have received a certificate signed on behalf of the Company by the Chief Executive Officer and Chief Financial Officer of the Company, dated the Closing Date to the effect that (A) the condition set forth in subsection (a) of this Section 6 has been satisfied, (B) as of the date hereof and as of the Closing Date the representations and warranties of the Company set forth in Section 1 hereof are accurate, (C) as of the Closing Date, the obligations of the Company to be performed hereunder on or prior thereto have been duly performed, and (D) subsequent to the respective dates as of which information is given in the Registration Statement and the Prospectus, the Company has not sustained any material loss or interference with its business or properties from fire, flood, hurricane, accident or other calamity, whether or not covered by insurance, or from any labor dispute or any legal or governmental proceeding, and there has not been any change, or any development involving a change, which had or will have a Material Adverse Effect, except in each case as described in or contemplated by the Prospectus. (ii) At the Closing Date, the Representatives shall have received a certificate of the Selling Shareholders dated the Closing Date to the effect that (i) as of the date hereof and as of the Closing Date the representations and warranties of such -25- 26 Selling Shareholders set forth in Section 1A above are accurate and (ii) as of the Closing Date, the obligations of such Selling Shareholders to be performed hereunder on or prior thereto have been duly performed. (f) At the time this Agreement is executed and at the Closing Date, the Representatives shall have received a letter from Arthur Andersen LLP, independent public accountants for the Company, dated, respectively, as of the date of this Agreement and as of the Closing Date, addressed to the Underwriters and in form and substance satisfactory to the Representatives, to the effect that: (i) they are independent certified public accountants with respect to the Company within the meaning of the Act and the Regulations and stating that the answer to Item 10 of the Registration Statement is correct insofar as it relates to them; (ii) stating that, in their opinion, the financial statements and schedules of the Company included in the Registration Statement and the Prospectus and covered by their opinion therein comply as to form in all material respects with the applicable accounting requirements of the Act and the applicable published rules and regulations of the Commission thereunder; (iii) on the basis of procedures consisting of a reading of the latest available unaudited interim consolidated financial statements of the Company, a reading of the minutes of meetings and consents of the shareholders and board of directors of the Company and the committees of such board subsequent to December 31, 1998, inquiries of officers and other employees of the Company who have responsibility for financial and accounting matters of the Company with respect to transactions and events subsequent to December 31, 1998 and other specified procedures and inquiries to a date not more than five days prior to the date of such letter, nothing has come to their attention that would cause them to believe that: (A) the unaudited consolidated financial statements and schedules of the Company presented in the Registration Statement and the Prospectus do not comply as to form in all material respects with the applicable accounting requirements of the Act, and, if applicable, the Exchange Act and the applicable published rules and regulations of the Commission thereunder or that such unaudited consolidated financial statements are not fairly presented in conformity with generally accepted accounting principles applied on a basis substantially consistent with that of the audited consolidated financial statements included in the Registration Statement and the Prospectus; (B) with respect to the period subsequent to March 31, 1999 there were, as of the date of the most recent -26- 27 available monthly consolidated financial statements of the Company, if any, and as of a specified date not more than five days prior to the date of such letter, any changes in the capital stock or other debt or indebtedness of the Company or any decrease in the total assets or shareholders' equity of the Company, in each case as compared with the amounts shown in the most recent balance sheet presented in the Registration Statement and the Prospectus, except for changes or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter; or (C) that during the period from April 1, 1999 to the date of the most recent available monthly consolidated financial statements of the Company, if any, and to a specified date not more than five days prior to the date of such letter, there was any decrease, as compared with the corresponding period in the prior fiscal year, in total revenues, or total or per share net income, except for decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter; (iv) nothing has come to their attention that would cause them to believe that the pro forma financial information included in the Registration Statement does not comply in all material respects with the applicable accounting requirements of Rule 11-02 of Regulation S-X or that the pro forma adjustments have not been properly applied to the historical amounts in the compilation of such financial information; and (v) stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings, and other financial information pertaining to the Company set forth in the Registration Statement and the Prospectus, which have been specified by the Representatives prior to the date of this Agreement, to the extent that such amounts, numbers, percentages, and information may be derived from the general accounting and financial records of the Company or from schedules furnished by the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified readings, inquiries, and other appropriate procedures specified by the Representatives set forth in such letter, and found them to be in agreement. (g) Prior to the Closing Date, the Company and the Selling Shareholders shall have furnished to the Representatives such further information, certificates and documents as the Representatives may reasonably request. -27- 28 (h) The Representatives shall have received from the Company's directors, officers and shareholders as have been heretofore designated by the Representatives and listed on Schedule III hereto an agreement to the effect that such person will not, directly or indirectly, without the Representatives' prior written consent, offer, sell, offer or agree to sell, grant any option to purchase or otherwise dispose (or announce any offer, sale, grant of an option to purchase or other disposition) of any shares of Common Stock (or any securities convertible into, exercisable for or exchangeable or exercisable for shares of Common Stock) for a period of 90 days after the date of the Prospectus, other than the Company's and the Selling Shareholders' sale of Shares hereunder and other than transfers of securities by bona fide gift, provided that any such transferee shall have agreed in writing to be bound by the restrictions set forth in such agreement and shall have certified to Bear, Stearns & Co. Inc. that such transferee has been in compliance with such restrictions from the original date of this Agreement. (i) At the Closing Date, the Shares shall have been approved for listing on the Nasdaq National Market. If any of the conditions specified in this Section 6 shall not have been fulfilled when and as required by this Agreement, or if any of the certificates, opinions, written statements or letters furnished to the Representatives or to Underwriters' Counsel pursuant to this Section 6 shall not be in all material respects reasonably satisfactory in form and substance to the Representatives and to Underwriters' Counsel, all obligations of the Underwriters hereunder may be canceled by the Representatives at, or at any time prior to, the Closing Date and the obligations of the Underwriters to purchase the Additional Shares may be canceled by the Representatives at, or at any time prior to, the Additional Closing Date. Notice of such cancellation shall be given to the Company and the Selling Shareholders in writing, or by telephone, telex or telegraph, confirmed in writing. 7. Indemnification. (a) The Company agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon: -28- 29 (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares under the Act, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any losses, liabilities, claims, damages or expenses arising out of or based upon matters covered by clause (i) and (ii) above (provided that the Company shall not be liable under this clause (iii) to the extent it is finally judicially determined in a court of competent jurisdiction that such losses, liabilities, claims, damages or expenses resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct); provided, however, that the Company will not be liable in any such case to the extent but only to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made in the Registration Statement, any preliminary prospectus or the Prospectus in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus; and provided, further, that this indemnity agreement with respect to any preliminary prospectus shall not inure to the benefit of any Underwriter from whom the person asserting any such losses, liabilities, claims, damages or expenses purchased Shares, or any person controlling such Underwriter, if a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any such amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if such is required by law, at or prior to the written confirmation of the sale of such Shares to such person and if the Prospectus (as so amended or supplemented) would have corrected the defect giving rise to such loss, liability, claim, damage or expense. This indemnity agreement will be in addition to, and shall not in any way impair or otherwise limit, any liability which the Company may otherwise have, including but not limited to liabilities under this Agreement and under applicable securities laws. -29- 30 (b) ITC Service Company, in its capacity as a Selling Shareholder, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any such claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares under the Act, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any losses, liabilities, claims, damages or expenses arising out of or based upon matters covered by clause (i) and (ii) above (provided that ITC Service Company shall not be liable under this clause (iii) to the extent it is finally judicially determined in a court of competent jurisdiction that such losses, liabilities, claims, damages or expenses resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct); provided, however, that ITC Service Company in each case will be liable only to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of ITC Service Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus; and provided -30- 31 further, however, that in no case shall ITC Service Company, in its capacity as a Selling Shareholder, be liable or responsible for indemnification pursuant to this Section 7(b) for any amount in excess of an amount equal to the net proceeds received by ITC Service Company from the sale of its Shares pursuant to this Agreement. This indemnity agreement will be in addition to, and shall not in any way impair or otherwise limit, any liability which ITC Service Company may otherwise have, including but not limited to liabilities under this Agreement and under applicable securities laws. The Underwriters acknowledge that the statements set forth under the captions "Principal and Selling Shareholders" and "Related Party Transactions" in the Prospectus constitute the only information furnished in writing to the Company by or on behalf of ITC Service Company, in its capacity as a Selling Shareholder, expressly for use in the registration statement relating to the Shares as originally filed or in any amendment thereof, any related preliminary prospectus or the Prospectus or in any amendment thereof or supplement thereto, as the case may be. (c) Scott D. Dorfman, in his capacity as a Selling Shareholder, agrees to indemnify and hold harmless each Underwriter and each person, if any, who controls any Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any such claim or litigation), joint or several, to which they or any of them may become subject under the Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon: (i) any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares under the Act, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any supplement thereto or amendment thereof, or (ii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or (iii) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to -31- 32 in any losses, liabilities, claims, damages or expenses arising out of or based upon matters covered by clause (i) and (ii) above (provided that Scott D. Dorfman shall not be liable under this clause (iii) to the extent it is finally judicially determined in a court of competent jurisdiction that such losses, liabilities, claims, damages or expenses resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its gross negligence or willful misconduct); provided, however, that Scott D. Dorfman, in his capacity as a Selling Shareholder, in each case will be liable in such capacity only to the extent that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of Scott D. Dorfman, in his capacity as a Selling Shareholder, expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus; and provided further, however, that in no case shall Scott D. Dorfman, in his capacity as a Selling Shareholder, be liable or responsible for indemnification pursuant to this Section 7(c) for any amount in excess of an amount equal to the net proceeds received by Scott D. Dorfman from the sale of his Shares pursuant to this Agreement. This indemnity agreement will be in addition to, and shall not in any way impair or otherwise limit, any liability which Scott D. Dorfman may otherwise have, including but not limited to liabilities under this Agreement and under applicable securities laws. The Underwriters acknowledge that the statements set forth under the captions "Management," "Principal and Selling Shareholders" and "Related Party Transactions" in the Prospectus constitute the only information furnished in writing to the Company by or on behalf of Scott D. Dorfman, regarding his capacity as a Selling Shareholder, expressly for use in the registration statement relating to the Shares as originally filed or in any amendment thereof, any related preliminary prospectus or the Prospectus or in any amendment thereof or supplement thereto, as the case may be. (d) Each Underwriter severally, and not jointly, agrees to indemnify and hold harmless the Company, each of the directors of the Company, each of the officers of the Company who shall have signed the Registration Statement, the Selling Shareholders and each other person, if any, who controls the Company or the Selling Shareholders within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, against any and all losses, liabilities, claims, damages and expenses whatsoever as incurred (including but not limited to attorneys' fees and any and all expenses whatsoever incurred in investigating, preparing or defending against any litigation, commenced or threatened, or any claim whatsoever, and any and all amounts paid in settlement of any such claim or litigation), joint or several, to which they or any of them may become subject under the -32- 33 Act, the Exchange Act or otherwise, insofar as such losses, liabilities, claims, damages or expenses (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of a material fact contained in the registration statement for the registration of the Shares under the Act, as originally filed or any amendment thereof, or any related preliminary prospectus or the Prospectus, or in any amendment thereof or supplement thereto, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that any such loss, liability, claim, damage or expense arises out of or is based upon any such untrue statement or alleged untrue statement or omission or alleged omission made therein in reliance upon and in conformity with written information furnished to the Company by or on behalf of any Underwriter through the Representatives expressly for use therein; provided, however, that in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder. This indemnity will be in addition to, and shall not in any way impair or otherwise limit, any liability which any Underwriter may otherwise have, including but not limited to liabilities under this Agreement and under applicable securities laws. The Company and the Selling Shareholders acknowledge that the statements set forth in the last paragraph of the cover page, and in the seventh, eighth and ninth paragraphs under the caption "Underwriting" in the Prospectus constitute the only information furnished in writing to the Company by or on behalf of any Underwriter through the Representatives expressly for use in the registration statement relating to the Shares as originally filed or in any amendment thereof, any related preliminary prospectus or the Prospectus or in any amendment thereof or supplement thereto, as the case may be. (e) Promptly after receipt by an indemnified party under subsection (a), (b), (c) or (d) above of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party under such subsection, notify each party against whom indemnification is to be sought in writing of the commencement thereof (but the failure so to notify an indemnifying party shall not relieve it from any liability which it may have under this Section 7). In case any such action is brought against any indemnified party, and it notifies an indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein, and to the extent it may elect by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel satisfactory to such indemnified party. Notwithstanding the foregoing, the indemnified party or parties shall have the right to employ its or their own counsel in any such case, but the fees and expenses of such counsel shall be at the expense of such indemnified party or parties unless (i) the employment of such counsel -33- 34 shall have been authorized in writing by one of the indemnifying parties in connection with the defense of such action, (ii) the indemnifying parties shall not have employed counsel to have charge of the defense of such action within a reasonable time after notice of commencement of the action, or (iii) such indemnified party or parties shall have reasonably concluded that there may be defenses available to it or them which are different from or additional to those available to one or all of the indemnifying parties (in which case the indemnifying parties shall not have the right to direct the defense of such action on behalf of the indemnified party or parties), in any of which events such fees and expenses shall be borne by the indemnifying parties. Anything in this subsection to the contrary notwithstanding, an indemnifying party shall not be liable for any settlement of any claim or action effected without its written consent; provided, however, that such consent was not unreasonably withheld. Notwithstanding any other provision of this Section 7(e), if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement effected without its written consent if (i) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (ii) such indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into, and (iii) such indemnifying party shall not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of each indemnified party, settle or compromise or consent to entry of any judgment in any pending or threatened claim, action or proceeding relating to the matters contemplated by this Section 7 (whether or not any indemnifying party is a party thereto), unless such settlement, compromise or consent includes an unconditional release of each indemnified party from all liability arising or that may arise out of such claim, action or proceeding. 8. Contribution. In order to provide for contribution in circumstances in which the indemnification provided for in Section 7 hereof is for any reason held to be unavailable from any indemnifying party or is insufficient to hold harmless a party indemnified thereunder, the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, shall contribute to the aggregate losses, claims, damages, liabilities and expenses of the nature contemplated by such indemnification provision (including any investigation, legal and other expenses incurred in connection with, and any amount paid in settlement of, any such action, suit or proceeding or any claims asserted, but after deducting in the case of losses, claims, damages, liabilities and expenses suffered by the Company any contribution received by the Company from persons, other than the Underwriters, who may also be liable for contribution, including persons who control the Company within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, officers of the Company who signed the Registration Statement and directors of the Company) as incurred to which the Company, one or more of the -34- 35 Selling Shareholders and one or more of the Underwriters may be subject, in such proportions as is appropriate to reflect the relative benefits received by the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, from the offering of the Shares or, if such allocation is not permitted by applicable law or indemnification is not available as a result of the indemnifying party not having received notice as provided in Section 7 hereof, in such proportion as is appropriate to reflect not only the relative benefits referred to above but also the relative fault of the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses, as well as any other relevant equitable considerations. The relative benefits received by the Company and the Selling Shareholders, on the one hand, and the Underwriters, on the other hand, shall be deemed to be in the same proportion as (x) the total proceeds from the offering (net of underwriting discounts and commissions but before deducting expenses) received by the Company and the Selling Shareholders and (y) the underwriting discounts and commissions received by the Underwriters, respectively, in each case as set forth in the table on the cover page of the Prospectus. The relative fault of the Company and the Selling Shareholders, on the one hand, and of the Underwriters, on the other hand, shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company, the Selling Shareholders or the Underwriters and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company, the Selling Shareholders and the Underwriters agree that it would not be just and equitable if contribution pursuant to this Section 8 were determined by pro rata allocation (even if the Underwriters were treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above. Notwithstanding the provisions of this Section 8, (i) in no case shall any Underwriter be liable or responsible for any amount in excess of the underwriting discount applicable to the Shares purchased by such Underwriter hereunder, and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. Notwithstanding the provisions of this Section 8 and the preceding sentence, no Underwriter shall be required to contribute any amount in excess of the amount by which the total price at which the Shares underwritten by it and distributed to the public were offered to the public exceeds the amount of any damages that such Underwriter has otherwise been required to pay by reason of such untrue or alleged untrue statement or omission or alleged omission. For purposes of this Section 8, each person, if any, who controls an Underwriter within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act shall have the same rights to contribution as such Underwriter, and each person, if any, who controls the Company or any Selling Shareholder within the meaning of Section 15 of the Act or Section 20(a) of the Exchange Act, each officer of the Company who shall have signed the Registration Statement and each director of the Company shall have the same rights to -35- 36 contribution as the Company or the Selling Shareholders, as the case may be, subject in each case to clauses (i) and (ii) of this Section 8. Any party entitled to contribution will, promptly after receipt of notice of commencement of any action, suit or proceeding against such party in respect of which a claim for contribution may be made against another party or parties, notify each party or parties from whom contribution may be sought, but the omission to so notify such party or parties shall not relieve the party or parties from whom contribution may be sought from any obligation it or they may have under this Section 8 or otherwise. No party shall be liable for contribution with respect to any action or claim settled without its consent; provided, however, that such consent was not unreasonably withheld. The liability of each Selling Shareholder under this Section 8 shall be limited to an amount equal to the total net proceeds received by the Selling Shareholder from the sale of its Shares pursuant to this Agreement. 9. Default by an Underwriter. (a) If any Underwriter or Underwriters shall default in its or their obligation to purchase Firm Shares or Additional Shares hereunder, and if the Firm Shares or Additional Shares with respect to which such default relates do not (after giving effect to arrangements, if any, made by the Representatives pursuant to subsection (b) below) exceed in the aggregate 10% of the number of Firm Shares or Additional Shares, the number of Firm Shares or Additional Shares to which the default relates shall be purchased by the non-defaulting Underwriters in proportion to the respective proportions which the numbers of Firm Shares set forth opposite their respective names in Schedule I hereto bear to the aggregate number of Firm Shares set forth opposite the names of the non-defaulting Underwriters. (b) In the event that such default relates to more than 10% of the Firm Shares or Additional Shares, as the case may be, the Representatives may in their discretion arrange for themselves or for another party or parties (including any non-defaulting Underwriter or Underwriters who so agree) to purchase such Firm Shares or Additional Shares, as the case may be, to which such default relates on the terms contained herein. In the event that within five calendar days after such a default the Representatives do not arrange for the purchase of the Firm Shares or Additional Shares, as the case may be, to which such default relates as provided in this Section 9(b), this Agreement or, in the case of a default with respect to the Additional Shares, the obligations of the Underwriters to purchase and of the Company and the Selling Shareholders to sell the Additional Shares shall thereupon terminate, without liability on the part of the Company or the Selling Shareholders with respect thereto (except in each case as provided in Section 5, 7(a), 7(b), 7(c) and 8 hereof) or the Underwriters, but nothing in this Agreement shall relieve a defaulting Underwriter or Underwriters of its or their liability, if any, to the other -36- 37 Underwriters, the Company and the Selling Shareholders for damages occasioned by its or their default hereunder. (c) In the event that the Firm Shares or Additional Shares to which the default relates are to be purchased by the non-defaulting Underwriters, or are to be purchased by another party or parties as aforesaid, the Representatives or the Company shall have the right to postpone the Closing Date or Additional Closing Date, as the case may be, for a period, not exceeding five business days, in order to effect whatever changes may thereby be made necessary in the Registration Statement or the Prospectus or in any other documents and arrangements, and the Company agrees to file promptly any amendment or supplement to the Registration Statement or the Prospectus which, in the opinion of Underwriters' Counsel, may thereby be made necessary or advisable. The term "Underwriter" as used in this Agreement shall include any party substituted under this Section 9 with like effect as if it had originally been a party to this Agreement with respect to such Firm Shares and Additional Shares. 10. Survival of Representations and Agreements. All representations and warranties, covenants and agreements of the Underwriters, the Selling Shareholders and the Company contained in this Agreement, including the agreements contained in Section 5, the indemnity agreements contained in Section 7 and the contribution agreements contained in Section 8, shall remain operative and in full force and effect regardless of any investigation made by or on behalf of any Underwriter or any controlling person thereof, by or on behalf of any Selling Shareholder, or by or on behalf of the Company, any of its officers and directors or any controlling person thereof, and shall survive delivery of and payment for the Shares to and by the Underwriters. The representations contained in Sections 1 and 1A and the agreements contained in Sections 5, 7, 8 and 11(d) hereof shall survive the termination of this Agreement, including termination pursuant to Section 9 or 11 hereof. -37- 38 11. Effective Date of Agreement; Termination. (a) This Agreement shall become effective upon the later to occur of (i) receipt by the Representatives and the Company of notification of the effectiveness of the Registration Statement or (ii) the execution of this Agreement. If the purchase price per Share has not been agreed upon prior to 5:00 P.M., New York time, on the fifth full business day after the Registration Statement shall have become effective, this Agreement shall thereupon terminate without liability to the Company, the Selling Shareholders or the Underwriters except as herein expressly provided. Until this Agreement becomes effective as aforesaid, it may be terminated by the Company by notifying the Representatives or by the Representatives notifying the Company and the Selling Shareholders. Notwithstanding the foregoing, the provisions of this Section 11 and of Sections 1, 5, 7 and 8 hereof shall at all times be in full force and effect. (b) The Representatives shall have the right to terminate this Agreement at any time prior to the Closing Date or the obligations of the Underwriters to purchase the Additional Shares at any time prior to the Additional Closing Date, as the case may be, if (A) any domestic or international event or act or occurrence has materially disrupted, or in the opinion of the Representatives will in the immediate future materially disrupt, the market for the Company's securities or securities in general; or (B) if trading in the Shares on the Nasdaq National Market shall have been suspended or materially limited; or (C) if trading on the New York or American Stock Exchanges or the Nasdaq National Market shall have been suspended, or minimum or maximum prices for trading shall have been fixed, or maximum ranges for prices for securities shall have been required, on the New York or American Stock Exchanges or the Nasdaq National Market by the New York or American Stock Exchanges or the Nasdaq Stock Market or by order of the Commission or any other governmental authority having jurisdiction; or (D) if a banking moratorium has been declared by a state or federal authority or if any new restriction materially adversely affecting the distribution of the Firm Shares or the Additional Shares, as the case may be, shall have become effective; or (E) (i) if the United States becomes engaged in hostilities or there is an escalation of hostilities involving the United States or there is a declaration of a national emergency or war by the United States or (ii) if there shall have been such change in political, financial or economic conditions, if the effect of any such event in (i) or (ii) as in the judgment of the Representatives makes it impracticable or inadvisable to proceed with the offering, sale and delivery of the Firm Shares or the Additional Shares, as the case may be, on the terms contemplated by the Prospectus. (c) Any notice of termination pursuant to this Section 11 shall be by telephone, telex, or telegraph, confirmed in writing by letter. -38- 39 (d) If this Agreement shall be terminated pursuant to any of the provisions hereof (otherwise than pursuant to (i) notification by the Representatives as provided in Section 11(a) hereof or (ii) Section 9(b) or 11(b) hereof), or if the sale of the Shares provided for herein is not consummated because any condition to the obligations of the Underwriters set forth herein is not satisfied or because of any refusal, inability or failure on the part of the Company or the Selling Shareholders to perform any agreement herein or comply with any provision hereof, the Company will, subject to demand by the Representatives, reimburse the Underwriters for all out-of-pocket expenses (including the fees and expenses of their counsel), incurred by the Underwriters in connection herewith. 12. Notices. All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and, if sent to any Underwriter, shall be mailed, delivered, or telexed, telecopied or telegraphed and confirmed in writing, to such Underwriter c/o Bear, Stearns & Co. Inc., 245 Park Avenue, New York, N.Y. 10167, Attention: Equity Syndicate; if sent to the Company or Scott D. Dorfman, shall be mailed, delivered, or telegraphed or telecopied and confirmed in writing to the Company, Innotrac Corporation, 6655 Sugarloaf Parkway, Duluth, Georgia 30097, Attention: Chief Executive Officer; and if sent to ITC Service Company, shall be mailed, delivered or telegraphed or telecopied and confirmed in writing to ITC Service Company, 1239 O.G. Skinner Drive, West Point, Georgia 31833, Attention: Kimberley E. Thompson Esq. These addresses may be changed by notice to the other parties. 13. Parties. This Agreement shall inure solely to the benefit of, and shall be binding upon, the Underwriters, the Selling Shareholder and the Company and the controlling persons, directors, officers, employees and agents referred to in Sections 7 and 8, and their respective successors and assigns, and no other person shall have or be construed to have any legal or equitable right, remedy or claim under or in respect of or by virtue of this Agreement or any provision herein contained. The term "successors and assigns" shall not include a purchaser, in its capacity as such, of Shares from any of the Underwriters. 14. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of New York, but without regard to principles of conflicts of law. 15. Miscellaneous. The Representatives represent and warrant that they have been authorized by the several Underwriters to enter into this Agreement on their behalf and to act for them in the manner provided in this Agreement. -39- 40 If the foregoing correctly sets forth the understanding among the Representatives, the Selling Shareholders and the Company, please so indicate in the space provided below for that purpose, whereupon this letter shall constitute a binding agreement among the parties hereto. Very truly yours, INNOTRAC CORPORATION By: --------------------------------- Name: ---------------------------- Title: --------------------------- ITC SERVICE COMPANY, a Selling Shareholder By: --------------------------------- Name: ---------------------------- Title: --------------------------- SCOTT D. DORFMAN, a Selling Shareholder By: --------------------------------- Scott D. Dorfman Accepted as of the date first above written: BEAR, STEARNS & CO. INC. By: Bear, Stearns & Co. Inc. By: ----------------------------------------- Name: ------------------------------ Title: ----------------------------- On behalf of themselves and the other Underwriters named in Schedule 1 hereto -40- 41 SCHEDULE I
Number of Firm Shares Name of Underwriter to be Purchased - ------------------- --------------- Bear, Stearns & Co. Inc. The Robinson-Humphrey Company, LLC J.C. Bradford & Co.
42 SCHEDULE II
Selling Shareholder Firm Shares Additional Shares - ------------------- ----------- ----------------- Scott D. Dorfman 300,000 200,000 ITC Service Company 100,000 75,000
43 SCHEDULE III (Persons subject to Lock-Up Agreements)
Name Position(s) - ---- ----------- Scott D. Dorfman Selling Shareholder, officer, director ITC Service Company Selling Shareholder David L. Ellin Officer, director Larry C. Hanger Officer, director John H. Nichols, III Officer Don L. Colter, Jr. Officer Stephen J. Walden Officer Will Hendrick Officer Bruce V. Benator Director Martin J. Blank Director William H. Scott, III Director
EX-3.2 3 AMENDED AND RESTATED BY-LAWS OF THE REGISTRANT 1 EXHIBIT 3.2 AMENDED AND RESTATED BY-LAWS OF INNNOTRAC CORPORATION ARTICLE I OFFICES SECTION 1 Registered Office. The registered office shall be in the State of Georgia, County of Gwinnett. SECTION 2 Other Offices. The corporation may also have offices at such other places both inside and outside the State of Georgia as the board of directors may from time to time determine and the business of the corporation may require or make desirable. ARTICLE II SHAREHOLDERS MEETINGS SECTION 1 Annual Meetings. The annual meeting of the shareholders of the corporation shall be held at the principal office of the corporation or at such other place inside or outside the United States as may be determined by the board of directors, on such date and at such time as may be determined by the board of directors, for the purpose of electing directors and transacting such other business as may properly be brought before the meeting. SECTION 2 Special Meetings. Special meetings of the shareholders shall be held at the principal office of the corporation or at such other place inside or outside the United States as may be designated in the notice of said meetings, upon call of the chairman of the board of directors or the president and shall be called by the president or the secretary when so directed by the board of directors or at the request in writing of shareholders owning at least 25% of the issued and outstanding capital stock of the corporation entitled to vote thereat. Any such request shall state the purposes for which the meeting is to be called. SECTION 3 Notice of Meetings. Written notice of every meeting of shareholders, stating the place, date and hour of the meetings, shall be given in a manner permitted by applicable law to each shareholder of record entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. Attendance of a shareholder at a meeting of 1 2 shareholders shall constitute a waiver of notice of such meeting and of all objections to the place or time of meeting, or the manner in which it has been called or convened, except when a shareholder attends a meeting solely for the purpose of stating, at the beginning of the meeting, any such objection to the transaction of any business. Notice need not be given to any shareholder who signs a waiver of notice, in person or by proxy, either before or after the meeting. SECTION 4 Quorum. At all meetings of shareholders, any Voting Group (as defined below) entitled to vote on a matter may take action on the matter only if a quorum of that Voting Group exists at the meeting, and if a quorum exists, the Voting Group may take action on the matter notwithstanding the absence of a quorum of any other Voting Group that may be entitled to vote separately on the matter. Unless the articles of incorporation, these by-laws or the Code provides otherwise, the presence (in person or by proxy) of shares representing a majority of votes entitled to be cast on a matter by a Voting Group shall constitute a quorum of the Voting Group with regard to that matter. Once a share is present at any meeting other than solely to object to holding the meeting or transacting business at the meeting, the share shall be deemed present for quorum purposes for the remainder of the meeting and for any adjournments of that meeting, unless a new record date for the adjourned meeting is or must be set pursuant to Article V, Section 4 of these by-laws. If a quorum is not present at any meeting of the shareholders, the holders of a majority of the shares present (in person or represented by proxy) and entitled to vote thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present or represented. At such adjourned meeting at which a quorum shall be present or represented, any business may be transacted which might have been transacted at the original meeting. SECTION 5 Voting. Unless otherwise provided by law, the articles of incorporation, or board resolutions setting forth the preferences and other rights, restrictions or limitations of any class or series of preferred stock, each outstanding share, regardless of class or series, shall be entitled to one vote on each matter voted on at a shareholders meeting, and each class or series of the corporation's shares entitled to vote generally on a matter shall for that purpose be considered a single voting group (a "Voting Group"). Unless the articles of incorporation, these by-laws, a resolution of the board of directors or applicable law require a different vote, action on a matter presented for consideration at a meeting where a quorum is present, shall be approved as follows: (a) directors shall be elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present; and (b) all other matters shall be approved if the votes cast within the applicable Voting Group favoring the action exceed the votes cast opposing the action, unless the articles of incorporation, a provision of these by-laws that has been adopted pursuant to Section 14-2-1021 of the Code (or any successor provision), or applicable law requires a greater number of affirmative votes. If either the articles of incorporation or the Code requires separate voting by two or more Voting Groups on a matter, action on that matter is taken only when voted upon by each such Voting Group separately. A shareholder may vote his shares in person or 2 3 by proxy. A shareholder may appoint a proxy to vote or otherwise act for him by signing an appointment form. An appointment of a proxy is valid for eleven months unless a shorter or longer period is expressly provided in the appointment form. SECTION 6 Consent of Shareholders. Any action required or permitted to be taken at any meeting of the shareholders may be taken without a meeting if all of the shareholders consent thereto in writing, setting forth the action so taken. Such consent shall have the same force and effect as a unanimous vote of shareholders. SECTION 7 List of Shareholders; Inspection of Records. (a) The corporation shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving their names and addresses and the number, class and series, if any, of the shares held by each. (b) Shareholders are entitled to inspect the corporate records as and to the extent provided by the Code; provided, however, that only shareholders owning more than two percent (2%) of the outstanding shares of any class of the corporation's stock shall be entitled to inspect (1) the minutes from any board, board committee or shareholders meeting (including any records of action taken thereby without a meeting); (2) the accounting records of the corporation; or (3) any record of the shareholders. ARTICLE III DIRECTORS SECTION 1 Powers. Except as otherwise provided by any legal agreement among shareholders, the property, affairs and business of the corporation shall be managed and directed by its board of directors, which may exercise all powers of the corporation and do all lawful acts and things which are not by law, by any legal agreement among shareholders, by the articles of incorporation or by these by-laws directed or required to be exercised or done by the shareholders. SECTION 2 Number, Election, and Term. The board of directors shall consist of the number and shall be elected in the manner and serve the term as set forth in the Amended and Restated Articles of Incorporation. Except as provided in this Article with respect to filling vacancies on the board, the directors shall be elected by the shareholders as provided in Article II, and each director elected shall hold office until his successor is elected and qualified or until his earlier resignation, removal from office, or death. Directors shall be natural persons who have attained the age of 21 years, but need not be residents of the State 3 4 of Georgia or shareholders of the corporation. The board, from time to time, may designate persons to act as advisory directors. 4 5 SECTION 3 Nominations. (a) If any shareholder intends to nominate or cause to be nominated any candidate for election to the board of directors (other than any candidate to be sponsored by and proposed at the instance of the management), such shareholder shall notify the president by first class registered mail sent not less than 14 nor more than 50 days before the scheduled meeting of the shareholders at which directors will be elected. However, if less than 21 days notice of the meeting is given to shareholders, such nomination shall be delivered or mailed to the president not later than the close of the seventh day following the date on which the notice of the shareholders' meeting was mailed. Such notification shall contain the following information with respect to each nominee, to the extent known to the shareholder giving such notification: (1) Name, address and principal present occupation; (2) To the knowledge of the shareholder who proposed to make such nomination, the total number of shares that may be voted for such proposed nominee; (3) The names and address of the shareholders who propose to make such nomination, and the number of shares of the corporation owned by each of such shareholders; and (4) The following additional information with respect to each nominee: age, past employment, education, beneficial ownership of shares in the corporation, past and present financial standing, criminal history (including any convictions, indictments or settlements thereof), involvement in any past or pending litigation or administrative proceedings (including threatened involvement), relationship to and agreements (whether or not in writing) with the shareholder(s) (and their relatives, subsidiaries and affiliates) intending to make such nomination, past and present relationships or dealings with the corporation or any of its subsidiaries, affiliates, directors, officers or agents, plans or ideas for managing the affairs of the corporation (including, without limitation, any termination of employees, any sales of corporate assets, any proposed merger, business combination or recapitalization involving the corporation, and any proposed dissolution or liquidation of the corporation), and all additional information relating to such person that would be required to be disclosed, or otherwise required, pursuant to Sections 13 or 14 of the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder (the "Exchange Act"), in connection with any acquisition of shares by such nominee or in connection with the solicitation of proxies by such nominee for his election as a director, regardless of the applicability of such provisions of the Exchange Act. (b) Any nominations not in accordance with the provisions of this Section may be disregarded by the chairman of the meeting, and upon instruction by the chairman, votes cast for each such nominee shall be disregarded. In the event, however, that a person should be nominated by more than one 5 6 shareholder, and if one such nomination complies with the provisions of this Section, such nomination shall be honored, and all shares voted for such nominee shall be counted. SECTION 4 Vacancies. (a) Subject to subsections 4(b) vacancies, including vacancies resulting from any increase in the number of directors and vacancies resulting from removal from office by the shareholders, may be filled only by the board of directors or by a majority of the directors then in office (if the directors remaining in office constitute less than a quorum), and a director so chosen shall hold office until the expiration of the term and until his successor is duly elected and qualified, unless sooner displaced; provided, however, that if there are no directors in office, then vacancies shall be filled through election by the shareholders. (b) If any vacant office described in subsection 4(a) was held by a director elected by a particular Voting Group, only the remaining directors elected by that Voting Group shall be entitled to fill the vacancy; provided, however, that if the vacant office was held by a director elected by a particular Voting Group and there is no remaining director elected by that Voting Group, the other remaining directors or director (elected by another Voting Group or Groups) may fill the vacancy. SECTION 5 Meetings and Notice. The board of directors of the corporation may hold meetings, both regular and special, either inside or outside the State of Georgia. Regular meetings of the board of directors may be held without notice at such time and place as shall from time to time be determined by resolution of the board. Special meetings of the board may be called by the chairman of the board or president or by any two directors upon one days notice given in a manner permitted by law. Such notice shall state a reasonable time, date and place of meeting, but the purpose need not be stated therein. A director may waive any notice required by the Code, the articles of incorporation, or these by-laws before or after the date and time of the matter to which the notice related, by a written waiver signed by the director and delivered to the corporation for inclusion in the minutes or filing with the corporate records. Attendance of a director at a meeting shall constitute a waiver of notice of such meeting and waiver of all objections to the place and time of the meeting, or the manner in which it has been called or convened except when the director states, at the beginning of the meeting, any such objection or objections to the transaction of business. SECTION 6 Quorum. At all meetings of the board of directors, a majority of directors shall constitute a quorum for the transaction of business, and the act of a majority of the directors present at any meeting at which there is a quorum shall be the act of the board, except as may be otherwise specifically provided by law, by the articles of incorporation, or by these by-laws. If a quorum shall not be present at any meeting of the board, the directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum shall be present. 6 7 SECTION 7 Conference Telephone Meeting. Unless the articles of incorporation or these by-laws otherwise provide, members of the board of directors, or any committee designated by the board, may participate in a meeting of the board or committee by means of conference telephone or similar communications equipment whereby all persons participating in the meeting can hear each other. Participation in the meeting shall constitute presence in person. SECTION 8 Consent of Directors. Unless otherwise restricted by the articles of incorporation or these by-laws, any action required or permitted to be taken at any meeting of the board of directors or of any committee thereof may be taken without a meeting, if all members of the board or committee, as the case may be, consent thereto in writing, setting forth the action so taken, and the writing or writings are filed with the minutes of the proceedings of the board or committee. Such consent shall have the same force and effect as a unanimous vote of the board. SECTION 9 Committees. The board of directors may, by resolution passed by a majority of the whole board, designate from among its members one or more committees, each committee to consist of two or more directors. The board may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of such committee. Any such committee, to the extent provided in the resolution, shall have and may exercise all of the authority of the board of directors in the management of the business and affairs of the corporation except as limited by law. Such committee or committees shall have such name or names as may be determined from time to time by resolution adopted by the board of directors. A majority of each committee may determine its action and may fix the time and places of its meetings, unless otherwise provided by the board of directors. Each committee shall keep regular minutes of its meetings and report the same to the board of directors when required. SECTION 10 Removal of Directors. At any shareholders' meeting with respect to which notice of such purpose has been given, any director may be removed from office, only for cause, by the vote of shareholders representing a majority of the issued and outstanding capital stock entitled to vote for the election of directors, provided that a director elected by a Voting Group may only be removed for cause by the vote of shareholders representing a majority of the issued and outstanding capital stock of the Voting Group that elected the particular director, and his successor may be elected at the same or any subsequent meeting of shareholders; provided that to the extent any vacancy created by such removal is not filled by such an election within 60 days after such removal, the remaining directors shall, by majority vote, fill any such vacancy. SECTION 11 Compensation of Directors. Directors shall be entitled to such reasonable compensation for their services as directors or members of any committee of the board as shall be fixed from time to time by resolution adopted by the board, and shall also be entitled 7 8 to reimbursement for any reasonable expenses incurred in attending any meeting of the board or any such committee. 8 9 ARTICLE IV OFFICERS SECTION 1 Number. The officers of the corporation shall be chosen by the board of directors and shall be a president and a treasurer. The board of directors may also choose a chairman of the board, one or more vice-presidents, a secretary, assistant secretaries and assistant treasurers. The board of directors may appoint such other officers and agents as it shall deem necessary who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the board. SECTION 2 Compensation. The salaries of all officers and agents of the corporation shall be fixed by the board of directors or a committee or officer appointed by the board. SECTION 3 Term of Office. Unless otherwise provided by resolution of the board of directors, the principal officers shall be chosen annually by the board at the first meeting of the board following the annual meeting of shareholders of the corporation, or as soon thereafter as is conveniently possible. Subordinate officers may be elected from time to time. Each officer shall serve until his successor shall have been chosen and qualified, or until his death, resignation or removal. SECTION 4 Removal. Any officer may be removed from office at any time, with or without cause, by the board of directors whenever in its judgment the best interest of the corporation will be served thereby, or if appointed at the authorization of the board of directors, by a senior officer at any time, with or without cause, whenever in the officer's judgment the best interest of the corporation will be served thereby. SECTION 5 Vacancies. Any vacancy in an office resulting from any cause may be filled by the board of directors. SECTION 6 Powers and Duties. Except as hereinafter provided, the officers of the corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers and duties as from time to time may be conferred by the board of directors. (a) Chairman of the Board. The chairman of the board (if there be one) shall preside at and serve as chairman of meetings of the stockholders and of the board of directors. The chairman of the board shall perform other duties and have other authority as may from time to time be delegated by the board of directors. (b) Chief Executive Officer. The chief executive officer shall be charged with the general and active management of the corporation, shall see that all orders and 9 10 resolutions of the board of directors are carried into effect, shall have the authority to select and appoint employees and agents of the corporation, and shall, in the absence or disability of the chairman of the board, perform the duties and exercise the powers of the chairman of the board. The chief executive officer shall also be responsible for the development, establishment, and implementation of the policy and strategic initiatives for the corporation. The chief executive officer shall perform any other duties and have any other authority as may be delegated from time to time by the board of directors, and shall be subject to the limitations fixed from time to time by the board of directors. (c) President. If there shall be no separate chief executive officer of the corporation, then the president shall be the chief executive officer of the corporation, with the duties and authority provided in Section 6 (b). The president shall otherwise be the chief operating officer of the corporation and shall, consistent with the authority otherwise conferred upon the chief executive officer in Section 6 (b), have responsibility for the conduct and general supervision of the business operations of the corporation, including without limitation responsibility for the direction, supervision, and coordination of the activities of all operating subsidiaries and other business units of the corporation. The president shall perform such other duties and have such other authority as may from time to time be delegated by the board of directors. In the absence or disability of the chief executive officer, the president shall perform the duties and exercise the powers of the chief executive officer. (d) Vice President. The vice president (if there be one) shall, in the absence or disability of the president, perform the duties and exercise the powers of the president, whether the duties and powers are specified in these by-laws or otherwise. If the corporation has more than one vice president, the one designated by the board of directors shall act in the event of the absence or disability of the president. Vice presidents shall perform any other duties and have any other authority as from time to time may be delegated by the board of directors, the chief executive officer, or the president. (e) Secretary. The secretary shall attend all meetings of the board of directors and all meetings of the shareholders and record all the proceedings of the meetings of the corporation and of the board of directors in a book to be kept for that purpose and shall perform like duties for the standing committees when required. He shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the board of directors, and shall perform such other duties as may be prescribed by the board of directors or president, under whose supervision he shall be. He shall have custody of the corporate seal of the corporation and he, or an assistant secretary, shall have authority to affix the same to any instrument requiring it and when so affixed, it may be attested by his signature or by the signature of such assistant secretary. The board of directors may give general authority to any other officer to affix the seal of the corporation and to attest the affixing by his signature. 10 11 (f) Assistant Secretary. The assistant secretary or if there be more than one, the assistant secretaries in the order determined by the board of directors (or if there be no such determination, then in the order of their election), shall, in the absence of the secretary or in the event of his inability or refusal to act, perform the duties and exercise the powers of the secretary and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. (g) Treasurer. The treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the corporation and shall deposit all moneys and other valuable effects in the name and to the credit of the corporation in such depositories as may be designated by the board of directors. He shall disburse the funds of the corporation as may be ordered by the board of directors, taking proper vouchers for such disbursements, and shall render to the president and the board of directors, at its regular meetings, or when the board of directors so requires, an account of all his transactions as treasurer and of the financial condition of the corporation. If required by the board of directors, he shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the board of directors for the faithful performance of the duties of his office and for the restoration to the corporation, in case of his death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his possession or under this control belonging to the corporation. (h) Assistant Treasurer. The assistant treasurer, or if there shall be more than one, the assistant treasurers in the order determined by the board of directors (or if there be no such determination, then in the order of their election) shall, in the absence of the treasurer or in the event of his inability or refusal to act, perform the duties and exercise the powers of the treasurer and shall perform such other duties and have such other powers as the board of directors may from time to time prescribe. SECTION 7 Signatures. The signature of any officer, employee or agent upon any document of the corporation may be made by facsimile or machine signature under such limitations and circumstances as the board of directors or any appropriate committee of the board of directors may provide from time to time. SECTION 8 Voting Securities of Corporation. Unless otherwise ordered by the board of directors, the chairman shall have full power and authority on behalf of the corporation to attend and to act and vote at any meetings of security holders of corporations in which the corporation may hold securities, and at such meetings shall possess and may exercise any and all rights and powers incident to the ownership of such securities which the corporation might have possessed and exercised if it had been present. The board of directors by resolution from time to time may confer like powers upon any other person or persons. 11 12 ARTICLE V CERTIFICATE SECTION 1 Form of Certificate. Every holder of fully-paid stock in the corporation shall be entitled to have a certificate in such form as the board of directors may from time to time prescribe. SECTION 2 Lost Certificates. The board of directors may direct that a new certificate be issued in place of any certificate theretofore issued by the corporation and alleged to have been lost, stolen or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost, stolen or destroyed. When authorizing such issue of a new certificate, the board of directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost, stolen or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or to give the corporation a bond in such sum as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost, stolen or destroyed. SECTION 3 Transfers. (a) Transfers of shares of the capital stock of the corporation shall be made only on the books of the corporation by the registered holder thereof, or by his duly authorized attorney, or with a transfer clerk or transfer agent appointed as provided in Section 5 of this Article, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes thereon. (b) The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and for all other purposes, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by law. (c) Shares of capital stock may be transferred by delivery of the certificates therefor, accompanied either by an assignment in writing on the back of the certificates or by separate written power of attorney to sell, assign and transfer the same, signed by the record holder thereof, or by his duly authorized attorney-in-fact, but no transfer shall affect the right of the corporation to pay any dividend upon the stock to the holder of record as the holder in fact thereof for all purposes, and no transfer shall be valid, except between the parties thereto, until such transfer shall have been made upon the books of the corporation as herein provided. 12 13 (d) The board may, from time to time, make such additional rules and regulations as it may deem expedient, not inconsistent with these by-laws or the articles of incorporation, concerning the issue, transfer and registration of certificates for shares of the capital stock of the corporation. SECTION 4 Record Date. In order that the corporation may determine the shareholders entitled to notice of or to vote at any meeting of shareholders or any adjournment thereof, or to express consent to corporate action in writing without a meeting, or entitled to receive payment of any dividend or other distribution or allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the board of directors may fix, in advance, a record date, which shall not be more than 70 days and, in case of a meeting of shareholders, not less than 10 days prior to the date on which the particular action requiring such determination of stockholders is to be taken. If no record date is fixed for the determination of shareholders entitled to notice of and to vote at any meeting of shareholders, the record date shall be at the close of business on the day next preceding the day on which the notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. If no record date is fixed for other purposes, the record date shall be at the close of business on the day next preceding the day on which the board of directors adopts the resolution relating thereto. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the board of directors shall fix a new record date for the adjourned meeting. SECTION 5 Transfer Agent and Registrar. The board of directors may appoint one or more transfer agents or one or more transfer clerks and one or more registrars, and may require all certificates of stock to bear the signature or signatures of any of them. ARTICLE VI GENERAL PROVISIONS SECTION 1 Distributions. Distributions upon the capital stock of the corporation, subject to the provisions of the articles of incorporation, if any, may be declared by the board of directors at any regular or special meetings, pursuant to law. Distributions may be paid in cash, in property, or in shares of the corporation's capital stock, subject to the provisions of the articles of incorporation. Before payment of any distribution, there may be set aside out of any funds of the corporation available for distributions such sum or sums as the directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing distributions, or for repairing or maintaining any property of the corporation, or for such other purpose as the directors shall think conducive to the interest 13 14 of the corporation, and the directors may modify or abolish any such reserve in the manner in which it was created. SECTION 2 Fiscal Year. The fiscal year of the corporation shall be fixed by resolution of the board of directors SECTION 3 Seal. The corporate seal shall have inscribed thereon the name of the corporation, the year of its organization and the words "Corporate Seal" and "Georgia". The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. In the event it is inconvenient to use such a seal at any time, the signature of the corporation followed by the word "Seal" enclosed in parentheses shall be deemed the seal of the corporation. ARTICLE VII INDEMNIFICATION OF DIRECTORS AND OFFICERS SECTION 1 Indemnification of Directors and Officers. Corporation shall indemnify and hold harmless any person (an "Indemnified Person") who is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action or suit by or in the right of the corporation) by reason of the fact that he is or was a director or officer of the corporation, against expenses (including, but not limited to, attorneys' fees and disbursements, court costs and expert witness fees), and against any judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation, and with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; provided, in any case, that no indemnification shall be made in respect of expenses, judgments, fines and amounts paid in settlement attributable to circumstances as to which, under applicable provisions of the Code as in effect from time to time, such indemnification may not be authorized by action of the board of directors, the shareholders or otherwise. The termination of any action, suit, or proceeding by judgment, order, settlement, conviction, or upon a plea of nolo contendere or its equivalent, is not, of itself, determinative that the director did not meet the standards of conduct set forth in this Article. SECTION 2 Indemnification of Directors and Officers for Derivative Actions. The corporation shall indemnify and hold harmless any Indemnified Person who is or was a party, or is threatened to be made a party, to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, by or in the right of the corporation, by reason of the fact that he is or was a director or officer of the 14 15 corporation, against expenses (including, but not limited to, attorneys' fees and disbursements, court costs and expert witness fees) actually and reasonably incurred by him in connection with such action, suit or proceeding, if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the corporation. No indemnification shall be made pursuant to this Section for any claim, issue or matter as to which an Indemnified Person shall have been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable to the corporation, or for amounts paid in settlement to the corporation, unless and only to the extent that the court in which such action or suit was brought or other court of competent jurisdiction shall determine upon application that such person is fairly and reasonably entitled to indemnity for such expenses which the court shall deem proper. SECTION 3 Indemnification of Employees and Agents. The board of directors shall have the power to cause the corporation to provide to any person who is or was an employee or agent of the corporation all or any part of the right to indemnification and other rights of the type provided under Sections 1, 2, 6 and 12 of this Article (subject to the conditions, limitations, obligations and other provisions specified herein), upon a resolution to that effect identifying such employee or agent (by position or name) and specifying the particular rights provided, which may be different for each employee or agent identified. Each employee or agent of the corporation so identified shall be an "Indemnified Person" for purposes of the provisions of this Article. SECTION 4 Subsidiaries and Other Organizations. The board of directors shall have the power to cause the corporation to provide to any person who is or was a director, officer, employee or agent of the corporation or who also is or was a director, officer, trustee, partner, employee or agent of a Subsidiary (as defined below), or is or was serving at the corporation's request in such a position with any other organization, all or any part of the right to indemnification and other rights of the type provided under Sections 1, 2, 6 and 12 of this Article (subject to the conditions, limitations, obligations and other provisions specified herein), with respect to service by such person in such position with a Subsidiary or other organization, upon a resolution identifying such person, the Subsidiary or other organization involved (by name or other classification), and the particular rights provided, which may be different for each person so identified. Each person so identified shall be an "Indemnified Person" for purposes of the provisions of this Article. As used in this Article, "Subsidiary" shall mean (i) another corporation, joint venture, trust, partnership or unincorporated business association more than 20% of the voting capital stock or other voting equity interest of which was, at or after the time of the circumstances giving rise to such action, suit or proceeding, owned, directly or indirectly, by the corporation; or (ii) a nonprofit corporation that receives its principal financial support from the corporation or its Subsidiaries. SECTION 5 Determination. Notwithstanding any judgment, order, settlement, conviction or plea in any action, suit or proceeding of the kind referred to in Sections 1 and 2 of this Article, an Indemnified Person shall be entitled to indemnification as provided in such 15 16 Sections 1 and 2 if a determination that such Indemnified Person is entitled to such indemnification shall be made (i) by the board of directors by a majority vote of a quorum consisting of directors who are not at the time parties to the proceeding; or (ii) if a quorum cannot be obtained under (i) above, by majority vote of a committee duly designated by the board of directors (in which designation interested directors may participate), consisting solely of two or more directors who are not at the time parties to the proceeding; (iii) in a written opinion by special legal counsel selected as required by Section 14-2-855(b)(3) of the Code or any successor provision; or (iv) by the share holders, but shares owned by or voted under the control of directors who are at the time parties to the proceeding may not be voted on the determination. To the extent that an Indemnified Person has been successful on the merits or otherwise in defense of any action, suit or proceeding of the kind referred to in Sections 1 and 2 of this Article, or in defense of any claim, issue or matter therein, he shall be indemnified against expenses (including attorneys' fees) actually and reasonably incurred by him in connection therewith. SECTION 6 Advances. Expenses (including, but not limited to, attorneys' fees and disbursements, court costs, and expert witness fees) incurred by an Indemnified Person in defending any action, suit or proceeding of the kind described in Sections 1 and 2 hereof (or in Section 4 hereof if applicable to such Indemnified Person) shall be paid by the corporation in advance of the final disposition of such action, suit or proceeding as set forth herein. The corporation shall promptly pay the amount of such expenses to the Indemnified Person, but in no event later than ten days following the Indemnified Person's delivery to the corporation of a written request for an advance pursuant to this Section, together with a reasonable accounting of such expenses; provided, however, that the Indemnified Person shall furnish the corporation a written affirmation of his good faith belief that he has met the standard of conduct set forth in the Code and a written undertaking and agreement, executed personally or on his behalf, to repay to the corporation any advances made pursuant to this Section if it shall be ultimately determined that the Indemnified Person is not entitled to be indemnified by the corporation for such amounts. The corporation shall make the advances contemplated by this Section regardless of the Indemnified Person's financial ability to make repayment. Any advances and undertakings to repay pursuant to this Section shall be unsecured and interest-free. SECTION 7 Non-Exclusivity. Subject to any applicable limitation imposed by the Code or the Articles of Incorporation, the indemnification and advancement of expenses provided by or granted pursuant to this Article shall not be exclusive of any other rights to which a person seeking indemnification or advancement of expenses may be entitled under any by-law, resolution or agreement specifically or in general terms approved or ratified by the affirmative vote of holders of a majority of the shares entitled to be cast thereon. SECTION 8 Insurance. The corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the 16 17 corporation, or who, while a director, officer, employee, or agent of the corporation, is or was serving as a director, officer, trustee, general partner, employee or agent of a Subsidiary or, at the request of the corporation, of any other organization, against any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the corporation would have the power to indemnify him against such liability under the provisions of this Article. SECTION 9 Notice. If any expenses or other amounts are paid by way of indemnification, otherwise than by court order or action by the shareholders or by an insurance carrier pursuant to insurance maintained by the corporation, the corporation shall, not later than the next annual meeting of shareholders, unless such meeting is held within three months from the date of such payment, and in any event within 15 months from the date of such payment, send by first class mail to its shareholders of record at the time entitled to vote for the election of directors a statement specifying the persons paid, the amount paid and the nature and status at the time of such payment of the litigation or threatened litigation. SECTION 10 Security. The corporation may designate certain of its assets as collateral, provide self-insurance or otherwise secure its obligations under this Article, or under any indemnification agreement or plan of indemnification adopted and entered into in accordance with the provisions of this Article, as the board of directors deems appropriate. SECTION 11 Amendment. Any amendment to this Article that limits or otherwise adversely affects the right of indemnification, advancement of expenses, or other rights of any Indemnified Person hereunder shall, as to such Indemnified Person, apply only to claims, actions, suits or proceedings based on actions, events or omissions (collectively, "Post Amendment Events") occurring after such amendment and after delivery of notice of such amendment to the Indemnified Person so affected. Any Indemnified Person shall, as to any claim, action, suit or proceeding based on actions, events or omissions occurring prior to the date of receipt of such notice, be entitled to the right of indemnification, advancement of expenses and other rights under this Article to the same extent as if such provisions had continued as part of the by-laws of the corporation without such amendment. This Section cannot be altered, amended or repealed in a manner effective as to any Indemnified Person (except as to Post Amendment Events) without the prior written consent of such Indemnified Person. SECTION 12 Agreements. In addition to the rights provided in this Article, the corporation shall have the power, upon authorization by the board of directors, to enter into an agreement or agreements providing to any person who is or was a director, officer, employee or agent of the corporation indemnification rights substantially similar to, or greater than, those provided in this Article. SECTION 13 Continuing Benefits. The indemnification and advancement of expenses provided by or granted pursuant to this Article shall, unless otherwise provided when 17 18 authorized or ratified, continue as to a person who has ceased to be a director, officer, employee or agent and shall inure to the benefit of the heirs, executors and administrators of such a person. SECTION 14 Successors. For purposes of this Article, the terms "the corporation" or "this corporation" shall include any corporation, joint venture, trust, partnership or unincorporated business association that is the successor to all or substantially all of the business or assets of this corporation, as a result of merger, consolidation, sale, liquidation or otherwise, and any such successor shall be liable to the persons indemnified under this Article on the same terms and conditions and to the same extent as this corporation. SECTION 15 Severability. Each of the sections of this Article, and each of the clauses set forth herein, shall be deemed separate and independent, and should any part of any such section or clause be declared invalid or unenforceable by any court of competent jurisdiction, such invalidity or unenforceability shall in no way render invalid or unenforceable any other part thereof or any other separate section or clause of this Article that is not declared invalid or unenforceable. SECTION 16 Additional Indemnification. In addition to the specific indemnification rights set forth herein, the corporation shall indemnify each of its directors and officers to the full extent permitted by action of the board of directors without shareholder approval under the Code or other laws of the State of Georgia as in effect from time to time. SECTION 17 Mandatory Indemnification. Except to the extent limited by the Articles of Incorporation, to the extent that a director has been successful, on the merits or otherwise, in the defense of any proceeding to which he was a party, or in defense of any claim, issue, or matter therein, because he is or was a director of the corporation, the corporation shall indemnify the director against reasonable expenses incurred by him in connection therewith. SECTION 18 Shareholder Approved Indemnification. If authorized by the Articles of Incorporation or a By-law, contract, or resolution approved or ratified by the shareholders by a majority of the votes entitled to be cast, a corporation may indemnify or obligate itself to indemnify a director made party to a proceeding including a proceeding brought by or in the right of the corporation. The corporation shall not indemnify a director under this Section 18 for any liability incurred in a proceeding in which the director is adjudged liable to the corporation or is subjected to injunctive relief in favor of the corporation: (1) for any appropriate, in violation of his duties, of any business opportunity of the corporation; (2) for acts or omissions which involve intentional misconduct or a knowing violation of law; (3) for an unlawful distribution as set out in the Code; or (4) for any transaction from which he received improper personal benefit. 18 19 ARTICLE VIII AMENDMENTS The board of directors shall have power to alter, amend or repeal the by-laws or adopt new by-laws by majority vote of all of the directors, but any by-laws adopted by the board of directors may be altered, amended or repealed and new by-laws adopted, by the shareholders by majority vote of all of the shares having voting power. 19 EX-5.1 4 OPINION OF KILPATRICK STOCKTON LLP 1 EXHIBIT 5.1 OPINION OF KILPATRICK STOCKTON LLP Innotrac Corporation 6655 Sugarloaf Parkway Duluth, Georgia 30097-4916 RE: INNOTRAC CORPORATION REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-79929) Gentlemen: At your request, we have examined the Registration Statement on Form S-1 File No. 333-79929, as amended (the "Registration Statement") filed by Innotrac Corporation (the "Company"), a Georgia corporation, with the Securities and Exchange Commission with respect to the registration under the Securities Act of 1933, as amended, of 2,875,000 shares of Common Stock, par value $0.10 per share, of the Company (the "Common Stock"), including 2,200,000 shares to be sold by the Company and 675,000 shares to be sold by the selling shareholders named in the Registration Statement (the "Selling Shareholders") to the underwriters named in the Registration Statement (the "Underwriters") for resale by them to the public. As your counsel, and in connection with the preparation of the Registration Statement, we have examined the originals or copies of such documents, corporate records, certificates of public officials and officers of the Company, and other instruments related to the authorization and issuance of the Common Stock as we deemed relevant or necessary for the opinion expressed herein. Based upon the foregoing, it is our opinion that: 1. The shares of Common Stock to be issued and sold by the Company to the Underwriters will be, upon issuance, sale and delivery in the manner and under the terms and conditions described in the Registration Statement, legally issued, fully paid and nonassessable. 2. The shares of Common Stock to be sold by the Selling Shareholders as described in the Registration Statement are legally issued, fully paid and nonassessable. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and further consent to the use of our name in the "Legal Matters" section of the Registration Statement, including the Prospectus constituting a part thereof, and any amendments thereto. Yours truly, KILPATRICK STOCKTON LLP By: /s/ Jan M. Davidson ------------------------------------ Jan M. Davidson, A Partner EX-10.17(A) 5 CONTRACT BY AND BETWEEN MARKET REPS INC 1 Exhibit 10.17(a) This Contract ("Contract") is entered into by and between Innotrac Corporation ("Innotrac"), a Georgia corporation, with offices at 1828 Meca Way, Norcross, GA 30093 and Market Reps, Inc. ("MR"), a Massachusetts corporation, with offices at 1506 Providence Highway, Norwood, MA 02062. MR is under contract to SouthWestern Bell telephone Company ("SWBT") to provide certain products and services. Innotrac will be a subcontractor to MR to provide certain services outlined herein. 1. SCOPE This Contract governs the purchase and fulfillment of orders for caller identification products and other telephone products described on Exhibit A (collectively, the "Product" or "Products") and the provisioning of the services described herein (the "Services") to MR and/or SWBT by Innotrac. Innotrac agrees to provide Products and Services in accordance with the terms, conditions, and specifications stated herein, including those contained in Appendixes A, B, C, D and E attached hereto and by this reference made a part hereof. Products purchased by SWBT customers will be provided to SWBT's customers by SWBT's sales representatives who will transmit the SWBT customer orders ("Order" or "Orders") to Innotrac via electronic data interchange ("EDI") according to the terms in Appendix C, or by facsimile transmission when EDI is not operational. Innotrac will be responsible for the provision of Products. Except as may be otherwise provided herein, this Contract does not guarantee or obligate MR or SWBT to place with Innotrac a minimum number of Orders. Innotrac shall provide Products and Services on an as ordered basis. 2. TERM OF CONTRACT This Contract will become effective June 1, 1998 and will continue until November 1, 2001 and thereafter on a month-to-month basis unless sooner terminated as provided in the termination clause. By written mutual agreement between MR and Innotrac this Contract may be extended for an additional agreed upon number of years without any increase in price. Unless otherwise agreed hereunder, all Services to be provided hereunder will cease upon termination of this Contract. 3. CUSTOMER SERVICE SUPPORT Innotrac agrees to provide after sale support to SWBT's customers which shall include but not be limited to responding to all technical, operational, warranty and post-warranty questions and problems through Innotrac's customer support center ("CSC"). Innotrac shall provide after sales support to all Products supplied by Innotrac under the terms of MR and SWBT contract RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 2 #967806 (copy attached) (the "SWBT Contract"). Innotrac shall provide a toll free telephone number for SWBT customers to call for this support. This number shall be provided in the Customer Owner Manual provided with each Product. Ongoing support via telephone will be available to SWBT's customers from Innotrac at no charge. SWBT or SWBT's customers will call 1-888-880-8504 for such support. Innotrac's hours of operation for the CSC will be 8:00 a.m. to 8:00 p.m. CST, Monday through Friday, and 8:00 a.m. to 4:00 p.m. CST, Saturday, excluding the following holidays: New Year's Day, President's Day, Memorial Day, Independence Day, Labor Day, Columbus Day, Thanksgiving Day, Friday after Thanksgiving, and Christmas Day. The customer support described herein shall be in addition to Innotrac's obligations as set forth in paragraphs 5 and 23. 4. PURCHASE OF PRODUCT (a) While this Contract is in effect (and with respect to Thomson Consumer Electronics for a period of one year thereafter), Innotrac hereby specifically warrants and represents to MR that Innotrac shall not within the SWBT Territory (defined below), without the prior written authorization of MR: (i) place SWBT customer orders for any telecommunications products with or through any vendor, manufacturer or other; or (ii) secure, purchase or otherwise acquire any materials, supplies, equipment or Products to be delivered and/or provided to SWBT customers in the SWBT Territory, including but not limited to the Products described in Appendix A hereto as it may be amended from time to time by MR and Innotrac (the "Restricted Activities"). In the event that Innotrac engages in any Restricted Activities, such shall be deemed to be a material breach of this Contract and shall entitle MR to immediately terminate this Contract without any prior notice requirement and without any right to cure on the part of Innotrac. Innotrac shall further, subsequent to such termination, be fully and completely responsible for, liable to and shall provide to MR, SWBT and/or SWBT's customers, all services and/or obligations of this Contract arising prior to the date of termination including but not limited to the indemnification or warranty provisions of this Contract, the obligation to provide Services pursuant to this Contract with respect to all Product shipped prior to such termination. (b) Notwithstanding subsection (a) above, Innotrac is hereby permitted to engage in Restricted Activities and otherwise provide fulfillment services, and Innotrac shall not be restricted or limited in any way from engaging in Restricted Activities or otherwise providing any fulfillment services to or on behalf of any person or entity outside the SWBT Territory. (c) Notwithstanding subsection (a) above, Innotrac is hereby permitted also to engage in Restricted Activities and otherwise provide fulfillment services within the SWBT Territory, and Innotrac shall not be restricted or limited in any way from engaging in Restricted Activities or otherwise providing any fulfillment services within the SWBT Territory, to or on behalf of any manufacturer, vendor, distributor, product representative or other that is working with SWBT in connection with specific telecommunications-related products (i.e., particular makes, models, serial numbers) that are not available through MR (by the expiration of the 10 day period described immediately below); provided, however, before Innotrac undertakes to engage in such activities, Innotrac shall first provide to MR written notice that Innotrac has been requested to engage in such activities and MR shall thereafter have 10 days from the date of said notice in which to make available to Innotrac and SWBT the identical products (i.e., same makes, models, serial numbers) at the same or lower cost to Innotrac and SWBT, and if MR makes available to RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 3 Innotrac and SWBT the identical products at the same of lower cost to Innotrac and SWBT and SWBT elects to use MR instead of the other manufacturer, vendor, distributor, product representative or other, then Innotrac shall engage in the Restricted Activities only through MR Innotrac agrees not to be the first party to initiate proposals that Innotrac engage in such activities. (d) MR agrees to use its best efforts to assist Innotrac in obtaining Products from manufacturers in a timely manner. If Products are not made available to Innotrac, then Innotrac shall be relieved of its duties to perform pursuant to the time schedules set forth in this Contract to the extent that Innotrac's performance is impossible or delayed. In the event that MR or manufacturers fail to deliver timely to Innotrac the quantities of Products ordered by Innotrac, then MR shall use its best efforts to locate and make available a SWBT-approved substitute product of equal or better quality and each substitute product shall be substituted for otherwise unavailable Product, but at the same or lower cost than specified in Appendix A. Innotrac shall provide all Services with respect to the substitute product. MR shall use its best efforts to assure that any MR-designated manufacturer of Products delivers the Products to Innotrac in good condition and that the Products function properly and are suited for their intended purpose. (e) While this Contract is in effect, MR shall not within the SWBT Territory, without the prior written authorization of Innotrac, either directly or indirectly: (i) sell, market, broker, distribute, represent or fulfill orders from SWBT or SWBT customers for telecommunications products without involving Innotrac as the fulfillment service provider; or (ii) authorize others to sell, market, broker, distribute, represent or fulfill orders from SWBT or SWBT customers for telecommunications products without involving Innotrac as the fulfillment service provider; or (iii) retain any person or entity other than Innotrac to perform fulfillment services. (f) MR shall work in good faith with Innotrac to forecast the volume of expected Orders and the quantities of Product needed to fulfill such Orders, and MR will use its best efforts to cause SWBT to do the same. (g) The term "SWBT Territory" shall mean the states of Texas, Missouri, Arkansas, Kansas and Oklahoma. 5. SERVICES Innotrac will provide the following Services: (a) Product Stocking, including a minimum inventory to enable Innotrac to deliver Product for thirty (30) days without reordering; (b) Order Processing; (c) Customer Service Support; RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 4 (d) In-warranty and Post-warranty support; (e) Returns and credits. 6. TERMINATION (a) Either party may terminate this Contract, without cause, only by giving the other party at least 12 months advance written notice of such termination. (b) Either party may terminate this Contract, with cause, if the other party has failed to perform any material duty required of it by this Contract after giving thirty (30) days written notice and right to cure; provided, however, that if Innotrac commences efforts to cure any breach of its obligations to perform any material duty required of it by this Contract within the thirty (30) day grace period and such breach cannot be completely cured within said thirty (30) day grace period, the cure/grace period herein shall be extended from day to day for a period of up to thirty (30) additional days so long as Innotrac pursues efforts with diligence to cure the breach. (c) This Contract shall be terminated, with or without cause, upon the termination by SWBT of the SWBT Contract. (d) Upon any termination of this Contract or the expiration of this Contract, MR shall use its best efforts to cause the manufacturer of Products to re-purchase from Innotrac all Product inventory shipped to and received by Innotrac within the prior 180 days at Innotrac's purchase price. Innotrac shall have the right to sell or otherwise dispose of all Product not re-purchased. 7. PRICES Innotrac will invoice for the Products and Services purchased hereunder as shown in Appendix A. Those prices may be amended from time to time by written agreement of MR and Innotrac. 8. TERMS OF PAYMENT MR shall cause SWBT to pay Innotrac for the Products ordered by SWBT customers and Services provided by Innotrac hereunder within thirty (30) days from the date of Innotrac's invoices. All claims for monies due to or to become due from SWBT will be subject to deductions by SWBT for any setoff or counterclaim for monies due or to become due under this Contract or otherwise from Innotrac. Notwithstanding that payment is expected to be made to Innotrac directly by SWBT, MR shall remain jointly and severally liable to Innotrac for all amounts due Innotrac pursuant to this Contract. SWBT shall have the option to receive invoices from Innotrac weekly and apply a 0.75% discount for net seven (7) days payment. SWBT will notify Innotrac in writing of its intent to exercise this option. 9. LIMITATION OF LIABILITY RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 5 Neither party shall be responsible for any delay or failure in performance due to fire, flood, explosion, war, labor dispute, embargo, government requirement, regulatory agency requirement, failure or delay in transportation, failure by manufacturers, vendors and suppliers to deliver supplies or equipment or correct information, shortage of fuel or raw materials, civil or military authority, act of god, or any other condition beyond the reasonable control of either party. IN NO EVENT SHALL EITHER PARTY, OR THEIR PRINCIPALS, PARENT CORPORATIONS, OR AFFILIATED COMPANIES, BE LIABLE FOR SPECIAL, CONSEQUENTIAL OR INDIRECT DAMAGES, REGARDLESS OF THE NATURE OF LIABILITY (I.E., CONTRACT OR TORT), INCLUDING BUT NOT LIMITED TO DAMAGES ARISING OUT OF THE TERMINATION OF ANY AGREEMENTS BETWEEN PARTIES HERETO, OR EITHER OF THEM, AND ANY THIRD PARTIES. 10. INDEMNITIES (a) MR shall indemnify and hold harmless, and cause SWBT to indemnify and hold harmless, Innotrac from and against any and all claims, demands, actions, causes of actions, losses, expenses and costs incurred by Innotrac as a result of or relating to actions of or by MR and SWBT and their respective employees, contractors and agents (not including Innotrac) which claims, demands, actions, causes of actions, losses, expenses and costs arise out of or related to contracts by MR and SWBT and their respective employees, contractors and agents.(not including Innotrac) with SWBT customers. (b) MR represents that it has, by virtue of the SWBT Contract, the right and authority to (i) utilize the Insignia (defined below), and (ii) authorize Innotrac to utilize the Insignia. In the event of any infringement or claim of infringement of any patent, trademark, copyright, trade secret or other proprietary interest arising out of or relating to the use of the Insignia or the Services, MR shall indemnify and hold harmless Innotrac from any and all actions, causes of action, demands, losses, damages, expenses or liabilities, including costs and reasonable attorneys fees, that may result by reason of any such infringement by or claim of infringement against Innotrac provided that Innotrac has complied with the provisions of the SWBT Contract relating to the manner in which the Insignia shall be handled. (c) MR shall provide Innotrac with a letter of indemnification from Thomson Consumer Electronics, in the form set forth in Appendix F, and MR shall thereafter have no liability to Innotrac arising out of or relating to any failure or delay by manufacturers of the Products to comply with their Product warranties. (d) To the extent not covered by Innotrac's insurance, MR shall indemnify and hold harmless Innotrac from and against any and all claims, losses, demands, costs, expenses, including but not limited to attorney fees expenses, actions, actions and causes of actions and other losses as may be incurred by Innotrac which claims, losses, demands, costs, expenses, including but not limited to attorney fees expenses, actions, actions or causes of actions arise out of or relate to defects in the Products. RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 6 (e) The foregoing indemnifications shall survive the termination, cancellation or expiration of this Contract. (f) Innotrac and MR shall both carry general liability and product defect insurance with coverages in the minimum amounts set forth in Appendix E. 11. MANUALS/BROCHURES Innotrac agrees to provide with each unit at no extra charge to SWBT customers the Customer Owner's Manual that is supplied by the Product manufacturer(s). 12. ORDERS SWBT will send Orders via EDI or, if EDI is not operational, then by facsimile transmission. Innotrac's hours of operation will be from 8:00 a.m. to 5:00 p.m. CST, Monday through Friday. Orders will specify (a) a description of the Product, inclusive of any numerical/alphabetical identification referenced in Appendix A, (b) the price (c) the address to which the Product is to be shipped, and (d) the name and telephone number of SWBT'S customer. Inquiries relating to SWBT'S customers' orders should be directed initially to the SWBT sales representatives. SWBT's customers will have the right to return the Product to Innotrac within thirty (30) days of receipt of the Product. Innotrac agrees to issue notification daily to SWBT, with a copy to MR, reflecting (i) the name and telephone number of SWBT'S customer, (ii) the product returned, and (iii) the reason for return. The notification will be forwarded to the address provided in the Shipping and Billing clause. Innotrac shall notify MR promptly upon learning of a lack of product to fill SWBT orders. Innotrac may not substitute a product without MR's prior written consent. 13. SHIPMENT OF ORDERS Orders received by Innotrac by 1:00 p.m. CST will be shipped by Innotrac the same day. Product will be shipped on a schedule to arrive at the destination within 3 to 5 business days. 14. SHIPPING AND BILLING Innotrac agrees to: (i) ship Orders complete to SWBT's customers. Innotrac will ship Product using the method and rate listed in Appendix A. (ii) Ship to the destination designated in the Order. RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 7 (iii) Package, mark and label the Product in a standard format as agreed to by the parties. Furnish adequate protective packaging at no additional charge. (iv) Enclose a complete shipping label with each shipment and, when more than one package is shipped, clearly identify each package as part of the same shipment. (v) Render to SWBT, and a copy to MR, monthly invoices by SWBT'S market areas in two formats: (i) duplicate paper copies containing summary billing information (quantity and type of Product shipped, date shipped, price of the Product, and transportation charge; and (ii) Basic Data Exchange Format diskette containing detailed billing information plus SWBT's customer's telephone number and name. Invoices to SWBT should be sent to: Manager-Product Management, SouthWestern Bell Telephone Company, One Bell Center, Rm. 9-R-06, St. Louis, Missouri 63101. Innotrac shall send a copy of Innotrac's monthly invoices to SWBT market areas at the addresses shown in Appendix B attached hereto. 15. F.O.B. The Products purchased hereunder will be shipped F.O.B. destination, freight prepaid and added in accordance with the requirements of the Shipping and Billing clause. Innotrac will be responsible for filing transportation claims. Innotrac will promptly notify SWBT'S designated representative in the event the Product is not delivered for whatever reason to SWBT'S customer. Innotrac shall notify MR immediately upon learning of a lack of Product to fill SWBT orders. Innotrac may not substitute a Product without written permission from MR. 16. INSIGNIA Products are expected to be delivered to Innotrac already bearing certain trademarks, trade names, insignia, symbols, or decorative designs bearing the SWBT mark or name (hereafter collectively called "Insignia") to the Products furnished hereunder. If the products are delivered without the Insignia affixed, then, upon SWBT's and MR's request, Innotrac will affix the Insignia at the cost structure set forth in Appendix A. Such Insignia will not be affixed, used or otherwise displayed on or in connection with the Product without SWBT'S and MR's prior written approval. The manner in which such Insignia will be affixed must be approved in writing by SWBT and MR Innotrac agrees to remove all Insignia from the Product rejected or not purchased by SWBT customers prior to any sale, use or disposition thereof by Innotrac to any non-SWBT affiliated end users, manufacturers, vendors, or distributors or others. Innotrac further agrees to defend, indemnify and hold SWBT and MR harmless from any claim, loss, damage or expense (including attorneys' fees and court costs) arising out of and/or relating to Innotrac's failure to do so, provided SWBT gives Innotrac sufficient notice of any claim or pending claim and allows Innotrac to defend such claim at Innotrac's sole cost and expense with counsel satisfactory to RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 8 SWBT. This clause in no way alters or modifies Innotrac's obligations under the Use of Information clause. 17. CUSTOMER PRODUCT REQUESTS Any request to Innotrac by SWBT'S customers for additional Products or Services to exchange or return will be referred by Innotrac to SWBT'S Service Center. 18. NOTICES Any notice or demand which under the terms of this Contract or otherwise must or may be given or made by Innotrac, or MR, will be in writing and given or made by facsimile, telegram or similar communication or by certified or registered mall, return receipt requested, addressed to the respective parties as shown: (a) If to Innotrac: Innotrac Corporation 1828 Meca Way Norcross, GA 30093 Attn: Larry Hanger With a copy to: David F. Cooper, Esq. Kitchens Kelley Gaynes, P.C. Building 11, Suite 900 3495 Piedmont Road Atlanta, GA 30305 (b) If to MR: Market Reps, Inc. 1506 Providence Highway, #28 Norwood, MA 02062 Attn: Chris White With a copy to: Stanley Brooks, Esq. Wellesley Law Associates 25 Walnut Street Wellesley, MA 02181 The above addresses may be changed at any time by giving thirty (30) day's prior written notice as above provided. 19. COMPLAINTS Each party hereto agrees to notify the other party in cases where one party has identified current or potential problems relating to Services or Products. Each party agrees to accept and acknowledge such notices and if a problem does exist, work with the other party on a reasonable resolution thereof. Monthly reporting of the status of such open problems or complaints will be furnished by the parties together with a proposed resolution and schedule thereon. Each party agrees to use its best efforts to resolve all complaints within thirty (30) days time period, and the parties will mutually agree on a course of action. 20. REPORTS Innotrac agrees to provide reports on a monthly basis to MR by the 5th of each month which will provide the following information: RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 9 (a) Number of defective Products returned to Innotrac, by model. (b) Details on Products not delivered (wrong address, lost product, undeliverable, refused by customer, and any other reasons). (c) Call monitoring - total calls received, dropped calls, hang-ups, average hold time, number to voice mail, number of escaped customers. (d) Customer Support Center data and other information as agreed upon by the parties or as reasonably requested by SWBT. (e) Average delivery time per Product. 21. REPAIR PROCEDURES SWBT's customers may contact Innotrac concerning any questions that may arise concerning repair, and if required, Innotrac will specify any special packing of the Product which might be necessary to provide adequate in-transit protection from transportation damage. 22. THIRD-PARTY BENEFICIARIES This Contract shall not provide any person not a party and signatory to this Contract with any remedy, claim, liability, reimbursement, cause of action or other right in excess of those expressly existing pursuant to this Contract excepting SWBT. 23. WARRANTY Innotrac and MR make no, and hereby expressly disclaim each to the other, warranties, express or implied (including any warranties regarding merchantability or fitness for a particular purpose), not expressly specified herein respecting Products and Services. SWBT's customers will be provided with a statement of limited warranty given by the manufacturer which will be provided by Innotrac with every unit. All Products are under a manufacturer's warranty for one (1) year from the date of shipment, but with respect to said manufacturer's warranty, Innotrac shall be responsible only for assisting in the provision of warranty support. Within the initial thirty (30) day warranty period, a defective or unwanted Product may be returned to Innotrac for replacement or credit as applicable with risk of in-transit loss and damage borne and transportation charges paid by Innotrac. After the initial thirty (30) day period, if a Product is defective, the customer must send the Product back to Innotrac at the customer's cost for repair or replacement only. 24. CONFIDENTIALITY Innotrac hereby acknowledges that certain confidential information and materials of SWBT may or will be disclosed and made available to Innotrac solely by virtue of the relationship created under this Contract, and solely to allow Innotrac to perform its obligations under this Contract. Innotrac agrees that all such confidential information shall be and remain the properly of SWBT, whether or not prepared in whole or in part by SWBT, and whether or not disclosed to or entrusted to the custody of Innotrac. The term "confidential information and materials" shall RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 10 mean all information belonging to, used by or in the possession of SWBT relating to its products, processes, technology, inventions, developments, business strategies, manufacturers' suppliers, pricing, current and prospective customers, marketing plans, customer lists, personal information as to same, and other information that is not generally known or obtainable, and trade secrets of every nature, kind and character; provided, however, this term shall not include information and material that is in the public domain, or information or material that is known to Innotrac by virtue of its own business activities relating to the marketing, sale and provision of telecommunications-related products, including but not limited to information relating to processes, technology, inventions, developments, business strategies, manufacturers, suppliers, pricing, current and prospective customers, marketing plans, customer lists, personal information as to same, and other information that is not generally known or obtainable, and trade secrets of every nature, kind and character. Innotrac agrees that it shall not, during the term of this Contract or hereafter, disclose, directly or indirectly, any confidential information or materials, in whole or in part, to any person or entity, for any reason whatsoever, unless previously authorized by MR and/or SWBT to do so, nor shall it use the information for any purpose other than to perform this Contract. It is expressly agreed and understood that Innotrac may make disclosures about this Contract to its professional advisors and also make disclosures about this Contract that Innotrac is obligated or feels compelled to make in an effort to increase the price or value of its shares. 25. ACCEPTANCE - ENTIRE AGREEMENT Upon acceptance, the terms contained in this Contract will constitute the entire agreement between Innotrac and MR with regard to the subject matter hereof and supersede all prior oral and written communications, agreements and understandings of Innotrac and MR. THIS CONTRACT MAY NOT BE MODIFIED EXCEPT BY A WRITTEN INSTRUMENT SIGNED ON BEHALF OF BOTH PARTIES BY THE REPRESENTATIVES WHO SIGN THIS CONTRACT OR THEIR SUCCESSORS IN TITLE AND HAVING REQUISITE AUTHORITY. If either representative is no longer employed by Innotrac/MR or has been demoted, or if the approval level no longer exists, a manager at a level equal to or exceeding the original level must execute revisions to this Contract. This Contract may be executed in one (1) or more counterparts, all of which will constitute one and the same instrument. RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. 11 IN WITNESS WHEREOF, the foregoing contract has been executed by the parties hereto, in duplicate, as of the dates set forth below. INNOTRAC CORP. MARKET REPS, INC. By: /s/ Larry Hanger By: /s/ Chris White -------------------------------- -------------------------- Larry Hanger, Its Vice-President Chris White, Its President Date: June 26, 1998 Date: June 26, 1998 RESTRICTED - PROPRIETARY INFORMATION The information contained herein is for use by authorized employees of the parties hereto only and is not for general distribution within or outside their respective companies. EX-10.17(B) 6 LETTER AMEND TO CONTRACT BETWEEN MARKET REPS INC 1 EXHIBIT 10.17 (b) [INNOTRAC LETTERHEAD] [DATE] Mr. Paul White Market Reps, Inc. 55 Robinwood Road P. O. Box 439 Onset, MA 02558 RE: Agreement between Market Reps, Inc., and Innotrac Corporation (the "Contract") Dear Paul: This letter confirms Innotrac Corporation's agreement that the Contract shall be and is hereby modified as follows: 1. Paragraph 4(a): The reference to Thomson Consumer Electronics ("Thomson") in this paragraph shall mean Thomson and its successors and/or assigns. 2. Paragraph 4(b): The reference to Thomson in this paragraph shall mean Thomson and its successors and/or assigns. By signing below, please acknowledge the agreement of Market Reps, Inc. to this modification of the Contract. I will then simply attach a copy of this letter amendment to the Contract itself. Best regards. INNOTRAC CORPORATION By: /s/ Larry Hanger ------------------------------------ Larry Hanger Its Vice-President AGREED TO: MARKET REPS, INC. By: /s/ Paul White ------------------------------------ Paul White Its CEO EX-23.2 7 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports (and to all references to our firm) included in or made a part of this registration statement. /s/ Arthur Andersen LLP Arthur Andersen LLP Atlanta, Georgia July 21, 1999 -----END PRIVACY-ENHANCED MESSAGE-----