AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 16, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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INNOTRAC CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
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GEORGIA 7389 58-1592285
(State or other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Identification Number)
incorporation or Classification Code
organization) Number)
1828 MECA WAY
NORCROSS, GEORGIA 30093
(770) 717-2000
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
SCOTT D. DORFMAN
CHIEF EXECUTIVE OFFICER
1828 MECA WAY
NORCROSS, GEORGIA 30093
(770) 717-2000
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
---------------
COPIES TO:
DAVID A. STOCKTON, ESQ. GLENN W. STURM, ESQ.
KILPATRICK STOCKTON LLP NELSON MULLINS RILEY & SCARBOROUGH,
1100 PEACHTREE STREET, N.E., SUITE L.L.P.
2800 999 PEACHTREE STREET, N.E., SUITE
ATLANTA, GEORGIA 30309 1400
(404) 815-6500 ATLANTA, GEORGIA 30309
(404) 815-6555 (FAX) (404) 817-6000
---------------(404) 817-6050 (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. [_]
CALCULATION OF REGISTRATION FEE
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PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PRICE PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
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Common Stock, $0.10 par
value per share....... 2,875,000 shares $14.00 $40,250,000 $11,873.75
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(1) Includes 375,000 shares subject to the exercise of the Underwriters' over-
allotment option.
(2) Estimated solely for the purpose of calculating the registration fee.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH 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 SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED DECEMBER 16, 1997
PROSPECTUS
2,500,000 SHARES
[LOGO]
INNOTRAC CORPORATION
COMMON STOCK
All of the shares of common stock (the "Common Stock") offered hereby are
being sold by Innotrac Corporation (the "Company"). Prior to this offering (the
"Offering"), there has been no public market for the Common Stock. It is
currently anticipated that the initial public offering price of the Common
Stock will be between $12.00 and $14.00 per share. See "Underwriting" for
information relating to the factors to be considered in determining the initial
public offering price. The Company has filed an application for the Common
Stock to be approved for quotation on The Nasdaq Stock Market's National Market
("Nasdaq National Market") under the symbol "INOC."
SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-----------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CON-
TRARY IS A CRIMINAL OFFENSE.
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PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share.................................... $ $ $
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Total(3)..................................... $ $ $
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(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be
$750,000.00.
(3) The Company has granted the Underwriters a 30-day over-allotment option to
purchase up to 375,000 additional shares of Common Stock on the same terms
and conditions as set forth above. If all such shares are purchased by the
Underwriters, the total Price to Public will be $ , the total
Underwriting Discount will be $ and the total Proceeds to Company will
be $ . See "Underwriting."
-----------
The shares of Common Stock are offered subject to receipt and acceptance by
the Underwriters, to prior sale and to the Underwriters' right to reject any
order in whole or in part, and to withdraw, cancel or modify the offer without
notice. It is expected that certificates for the shares of Common Stock will be
available for delivery on or about , 1998.
-----------
J.C.Bradford&Co. Wheat First Butcher Singer
, 1998
[inside front cover graphics]
GRAPHIC: The Company's name with stylized design.
SUPPORTING
TEXT: In the last decade, quality customer relationships have become an
important determinant of long-term success.
At Innotrac, the future looks bright.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK.
SUCH TRANSACTIONS MAY INCLUDE OVER-ALLOTMENT, STABILIZING, THE PURCHASE OF
COMMON STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
2
GATE
- ----
TITLE: Marketing Support Services
GRAPHIC: Fibre optic cable bundle
SUPPORTING
TEXT: ADVANCED TECHNOLOGY
Investments in advanced technology, including sophisticated computer
integration, telephone systems and software, deliver fast, easy
access to service and information.
GRAPHIC: Account services team meeting
SUPPORTING
TEXT: MARKETING AND MANAGEMENT SUPPORT SERVICES
Account services team operates as an extension of the client's
internal marketing department.
GRAPHIC: Customer service representative talking on telephone
SUPPORTING
TEXT: ORDER PROCESSING AND CUSTOMER SERVICE
Representatives are trained to understand each client's products,
services and technology. From the moment they answer the phone with
the client's greeting, they operate as a seamless extension of the
client company.
GRAPHIC: View of the company's call center
SUPPORTING
TEXT: TELESERVICES
Advanced technology, combined with personal service in multiple
languages, means that making inquiries, placing orders, or getting
technical support is both efficient and professional for our client's
customers.
GRAPHIC: View of company's warehouse
SUPPORTING
TEXT: INVENTORY MANAGEMENT SERVICES
Automated inventory management tracks client materials to assure
accurate stock counts and provide the client with detailed management
information.
GRAPHIC: Example of products distributed by the company
SUPPORTING
TEXT: PRODUCT PARTNERSHIPS
Innotrac works in partnership with clients by purchasing
inventory and products that support its clients' services
and programs.
GRAPHIC: View of company's shipping department
SUPPORTING
TEXT: DISTRIBUTION AND FULFILLMENT
Dedicated account teams assure that each client's orders are entered,
picked, packed and shipped efficiently and accurately.
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. Prior to the Offering, the business of Innotrac was conducted
through the Company and eight affiliated companies (the "Affiliated Companies")
as an integrated business unit. Simultaneously with, and as a condition to, the
Offering, each of the Affiliated Companies will be either merged or
consolidated with the Company (the "Consolidation"). See "The Consolidation."
All share numbers in this Prospectus reflect a 70.58823-for-one stock split
effected on December 12, 1997. Unless the context otherwise requires, all
references herein to the "Company" or "Innotrac" shall mean Innotrac
Corporation and the Affiliated Companies taken as a whole, and assume that the
Consolidation has been consummated. Unless otherwise indicated, the information
in this Prospectus does not give effect to the Underwriters' over-allotment
option.
THE COMPANY
Innotrac is a full-service provider of customized, technology-based marketing
support services primarily to large corporations. The Company's marketing
support services include product and literature distribution, computerized
inventory and database management and customer-initiated ("inbound")
teleservices. With the goal of providing turnkey marketing support solutions,
Innotrac works with its clients on a consultative basis to create customized
programs through which it can most efficiently match its service offerings with
its clients' needs. Innotrac's flexible marketing support solutions range from
small, specialty projects to larger integrated fulfillment, teleservicing and
database tracking programs. The Company has a broad range of clients including
BellSouth Telecommunications, Inc. ("BellSouth"), Home Depot U.S.A., Inc.
("Home Depot"), National Automotive Parts Association ("NAPA"), Pacific Bell
("Pacific Bell"), Siemens Energy & Automation Inc. ("Siemens E&A"), Turner
Broadcasting System, Inc. and US West Communications Services, Inc. ("US
West").
Since its formation in 1984, the Company has expanded its business and
facilities to offer distribution and management services and inbound
teleservices in response to the needs of clients in a variety of industries and
to capitalize on market opportunities. In 1987, the Company began providing
marketing support services to BellSouth. In 1991, these services were expanded
to include fulfillment services related to Caller ID telecommunications
equipment. This program provides for Innotrac to (i) sell or rent to BellSouth
customers Caller ID hardware, phone sets and other equipment (branded with
BellSouth's logo), (ii) ship ("fulfill") customers' orders, (iii) track
inventory levels and sales and marketing data regarding such items and (iv)
maintain teleservicing operations to handle customer service and technical
support for Caller ID units and other products. In conjunction with this
program, in 1993 Innotrac pioneered a billing option (the "billing options
program") to allow customers to pay for the equipment through their phone
bills, on an interest free installment basis. The addition of the billing
options program was well received in the marketplace, and, as a result, the
fulfillment services for BellSouth have been the primary force behind the
Company's rapid sales growth. Innotrac has continued to capitalize on its
fulfillment expertise in the telecommunications sector, as evidenced by its
additional contractual arrangements with Pacific Bell and US West.
The Company has positioned itself to capitalize on the trend towards
outsourcing of marketing support services. The revenues generated from its
telecommunications marketing support programs have enabled the Company to
develop the infrastructure necessary to offer additional and more advanced
services to its customers. The Company believes it will achieve future growth
by targeting large companies in a variety of industries with numerous and/or
geographically diverse subsidiary or affiliate operations, extensive marketing
needs or complex point-of-distribution requirements.
Companies are increasingly focusing on their primary businesses and turning
to outside service companies to perform marketing support functions. By
outsourcing these functions, companies seek to (i) replace fixed warehouse,
information technology and labor costs with variable costs, (ii) improve their
reaction to business
3
cycles, (iii) improve customer service and technical support, (iv) manage
capacity to meet fluctuations in demand for products and customer service, (v)
create economies of scale by sharing the costs of advanced telecommunications
and fulfillment systems, and (vi) reduce working capital needs. As the trend
toward outsourcing continues, the Company believes that businesses will
increasingly seek to reduce the number of vendors they utilize and may prefer
single-source providers of integrated, customized marketing support services.
The Company believes that its "one-stop" approach, combined with its use of
advanced technology, provides a competitive advantage in attracting and
retaining clients on a long-term basis.
BUSINESS STRATEGY
The Company's strategy is to take advantage of market trends towards
outsourcing by leveraging its core expertise, reputation for quality and timely
service and strong client relationships. The following are the key elements of
this strategy:
LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand
its customer base in the telecommunications industry by leveraging the
expertise it has developed and the results it has achieved through long-
standing relationships with several clients in the industry. The Company is
also seeking to expand the level of services provided to existing
telecommunications clients.
BROADEN CUSTOMER BASE BY DEVELOPING SALES INFRASTRUCTURE. The Company has
experienced rapid revenue growth since 1993 without a significant sales
infrastructure. The Company intends to use a portion of the net proceeds of the
Offering to develop a national sales force for its services, to form
relationships with independent sales agencies and to develop sales and
marketing materials to highlight the wide array of services offered by the
Company. By developing this infrastructure, the Company intends to broaden its
customer base and diversify its sources of revenues.
CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a
commitment to the use of advanced technology and intends to continue to upgrade
and enhance its computer hardware and software applications to enable it to
continue to provide flexible and powerful services to its clients. The Company
believes that the use of advanced technology provides a competitive advantage
and results in greater capacity and reduced labor costs. The Company also
believes that continued technological advances, particularly those utilizing
the Internet, will provide new opportunities for the Company to tailor its
services to meet each client's needs. The Company intends to address the labor-
intensive nature of fulfillment services by developing more efficient automated
systems that distribute literature via electronic media directly to the
customer. The Company also plans to expand its Internet-related capabilities
for (i) automated inventory management, (ii) access to order and database
information and (iii) virtual warehousing of literature so that such materials
no longer need to be maintained in physical form in the Company's warehouses.
EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored,
value-added solutions that achieve each client's intended marketing results.
The Company devotes considerable resources to assessing and understanding a
client's industry, products, services, processes and culture, then works with
the client to design programs to reduce the costs and investment required to
deliver the client's marketing support programs. The Company believes that this
consultative partnership approach encourages long-term client relationships, as
evidenced by the fact that the Company has serviced its 10 largest clients for
an average of six years and its five oldest clients for an average of 11 years.
The Company believes that this approach also creates substantial opportunities
to expand relationships with existing clients by cross-selling the full range
of its services.
SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take advantage
of the fragmented nature of the marketing support services industry by
selectively acquiring complementary companies that extend its presence into new
geographic markets or industries, expand its client base, add new product or
service applications or provide substantial operating synergies. The Company
believes that there are a variety of such potential acquisition opportunities.
4
THE OFFERING
Common Stock offered by the
Company..................... 2,500,000 shares
Common Stock to be
outstanding after the 9,000,000 shares(1)
Offering....................
Use of Proceeds.............
To pay certain distributions in connection with
the Consolidation, repay certain indebtedness
of the Company, including indebtedness to a
shareholder, and for general corporate
purposes, including for working capital and
potential acquisitions. See "Use of Proceeds"
and "Certain Transactions."
Proposed Nasdaq National
Market symbol............... INOC
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(1) Excludes 383,000 shares of Common Stock issuable upon exercise of stock
options outstanding under the Company's Stock Option and Incentive Award
Plan (the "Stock Option Plan"). See "Management."
RISK FACTORS
In addition to the other information contained in this Prospectus,
prospective investors should consider carefully a number of factors that could
affect the Company's business, results of operations and financial condition.
See "Risk Factors" beginning on page 8 for a discussion of such factors.
----------------
The Company's principal executive offices are located at 1828 Meca Way,
Norcross, Georgia, where its telephone number is (770) 717-2000.
5
SUMMARY FINANCIAL DATA
The summary historical and pro forma financial data set forth below should be
read in conjunction with "The Consolidation," "Use of Proceeds," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the financial statements and notes thereto and the
other financial data contained elsewhere in this Prospectus. The pro forma
statement of operations data for the nine months ended September 30, 1997 and
the pro forma balance sheet data at September 30, 1997 give effect to the
Consolidation and the Offering as well as the use of the net proceeds of the
Offering, as if the transactions had occurred at January 1, 1997 (for the
statement of operations) and September 30, 1997 (for the balance sheet). The
pro forma financial information does not purport to represent what the
Company's consolidated results of operations would have been if these
transactions had in fact occurred on these dates, nor does it purport to
indicate the future consolidated financial position or consolidated results of
future operations of the Company. The pro forma adjustments are based on
currently available information and certain assumptions that management
believes to be reasonable.
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------------
PRO FORMA
CONSOLIDATED
AS ADJUSTED
1993 1994 1995 1996 1996 1997 1997(1)
------ ------- ------- ------- ---------- ---------- ---------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
Revenues, net........... $5,586 $17,380 $44,886 $71,297 $ 53,231 $ 67,314 $ 67,314
Cost of revenues........ 3,495 11,274 30,658 55,520 39,232 51,800 51,800
------ ------- ------- ------- ---------- ---------- ----------
Gross profit............ 2,091 6,106 14,228 15,777 13,999 15,514 15,514
------ ------- ------- ------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative
expenses.............. 1,538 2,289 6,510 10,391 8,007 9,072 9,072
Depreciation and
amortization.......... 157 214 293 429 231 454 454
------ ------- ------- ------- ---------- ---------- ----------
Total operating
expenses.............. 1,695 2,503 6,803 10,820 8,238 9,526 9,526
------ ------- ------- ------- ---------- ---------- ----------
Operating income........ 396 3,603 7,425 4,957 5,761 5,988 5,988
------ ------- ------- ------- ---------- ---------- ----------
Other (income) expense:
Interest expense....... 123 622 1,090 1,456 955 1,422 5
Other.................. (6) 67 (73) 94 2 (2) (2)
------ ------- ------- ------- ---------- ---------- ----------
Total other expense.... 117 689 1,017 1,550 957 1,420 3
------ ------- ------- ------- ---------- ---------- ----------
Income before income
taxes.................. 279 2,914 6,408 3,407 4,804 4,568 5,985
Income tax provision.... (30) (356) (793) (211) (472) (75) (2,392)
------ ------- ------- ------- ---------- ---------- ----------
Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,332 $ 4,493 $ 3,593
====== ======= ======= ======= ========== ========== ==========
Weighted average
shares................. 9,103(2)
Net income per share.... $ 0.39(3)
==========
6
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1997
------------------------------- -------------------------
PRO FORMA
CONSOLIDATED
1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4)
------ ------- ------- ------- ---------- --------------
Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,593 $23,842
Property and equipment,
net.................... 1,465 5,059 9,099 10,939 8,249 8,249
Total assets............ 3,457 13,548 30,414 49,037 36,387 47,524
Long term obligations... 708 4,278 4,729 4,779 4,157 453
Shareholders'
equity(5).............. 409 1,624 3,195 4,540 4,921 31,264
- --------
(1) Pro forma adjustments include (i) the elimination of interest expense
related to the line of credit, the term loan and subordinated debt
borrowings assumed to be repaid with the proceeds of the Offering, (ii) an
income tax provision to reflect the pro forma tax effects as if the Company
were taxed as a C corporation and (iii) the tax effect of the interest
expense adjustment.
(2) Adjusted to reflect the Consolidation, the Offering (assuming the shares
were outstanding for the entire period) and the exercise of all options
outstanding under the Stock Option Plan (using the "treasury stock" method
and assuming the shares were outstanding for the entire period).
(3) Excludes the dividend accretion on redeemable capital stock of a subsidiary
of approximately $64,000, or $(0.01) per share.
(4) Assumes an increase to working capital equal to the aggregate estimated net
proceeds less repayment of borrowings under the line of credit facility,
the term loan, the subordinated debt, and the redeemable capital stock of a
subsidiary. Reflects the recording of deferred tax assets and liabilities
associated with the change in tax status to a C corporation of certain of
the entities that are parties to the Consolidation and distribution of $6.4
million of undistributed earnings of certain of the entities that are
parties to the Consolidation. See "The Consolidation" and "Use of
Proceeds."
(5) Includes capital stock, partners' capital, members' deficit and retained
earnings.
7
RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk. In addition to the other information in this Prospectus, the
following risk factors should be considered carefully in evaluating an
investment in the Common Stock offered hereby.
This Prospectus contains certain forward-looking statements (as such term is
defined in the Securities Act of 1933, as amended (the "Securities Act"))
concerning the Company's operations, performance and financial condition,
including, in particular, the likelihood of the Company's success in developing
and expanding its business. These statements are based upon a number of
assumptions and estimates which are inherently subject to significant
uncertainties, many of which are beyond the control of the Company. Actual
results may differ materially from those expressed or implied by such forward-
looking statements. Factors that could cause actual results to differ
materially include, but are not limited to, those set forth below.
RELIANCE ON A SMALL NUMBER OF MAJOR CLIENTS
As a result of the Company's focus on developing long-term relationships with
large corporations, a significant portion of the Company's revenues are derived
from a relatively small number of clients. The Company's three largest clients,
BellSouth, Pacific Bell and US West, accounted for an aggregate of 90% of the
Company's 1996 revenues and an aggregate of 95% of such revenues for the first
nine months of 1997, of which BellSouth accounted for 82% and 87%,
respectively. Although the Company has written agreements with all of its
telecommunications clients, they generally are terminable upon certain events
after the giving of notice and failure to cure and the lapse of 30 to 90 days.
In addition, the Company's agreement with BellSouth may be terminated for any
reason upon two years' notice. Moreover, the Company's contracts do not assure
the Company a specific level of revenues and they generally do not designate
the Company as the client's exclusive service provider. Further, the Company
does not have written agreements with many clients. There can be no assurance
that the Company will be able to retain any of its largest clients, or that the
Company will be able to replace such clients with others that generate a
comparable amount of revenues or profits. Further, except in the product-based
marketing support and fulfillment services it performs for BellSouth and
Pacific Bell, the Company does not believe that it is the sole or primary
source for most of the services rendered to its clients. The loss of one or
more of its largest clients could have a material adverse effect on the
Company's business, results of operations and financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview" and "Business--General."
RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES
In connection with certain of its fulfillment services, the Company purchases
Caller ID and other telecommunications equipment from third party vendors and,
therefore, assumes the risks of inventory obsolescence, damage to leased units,
theft and creditworthiness of purchasers. The ability of the Company to receive
payment for sales or rentals of such equipment is dependent on the transmittal
of correct customer invoices and remittance on a timely basis by BellSouth and
Pacific Bell. If the Company is unable to manage these risks, it could have a
material adverse effect on the Company's business, results of operations and
financial condition. The credit risk assumed by the Company is particularly
significant because of the large number of customers, each of which owes a
relatively small amount. The Company's allowance for bad debt was approximately
$5.6 million at September 30, 1997. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and "Business--General."
RELIANCE ON TELECOMMUNICATIONS INDUSTRY
Caller ID is a relatively recent offering by telecommunications companies and
there can be no assurance that it will gain or sustain wide acceptance in the
marketplace. In addition, the provision of Caller ID services by
telecommunications companies is regulated at both the federal and state level.
Such regulations may have the effect of delaying the offering or market
acceptance of Caller ID service in a market of one of the Company's clients.
See "Business--Government Regulation."
8
The Company is also dependent on the level of resources (financial and
otherwise) expended by its clients to promote Caller ID service. There can be
no assurance that the Company's telecommunications clients will sufficiently
promote, or continue to promote, Caller ID service in their areas.
Furthermore, there can be no assurance that the Company's telecommunications
clients will achieve their estimated "market penetration" (the percentage of
consumer telephone lines capable of receiving Caller ID services that actually
receive such services) goals, upon which the Company, in part, plans its
operations. In addition, at some time in the future, peak market penetration
for Caller ID service may be achieved by the Company's clients or Caller ID
service or equipment may be replaced by a different service or hardware. The
occurrence of any of these factors could have a material adverse effect on the
Company's business, results of operations and financial condition.
ABILITY TO CONTINUE AND MANAGE GROWTH
Innotrac has recently experienced significant growth in its operations. The
Company's success will depend upon its ability to initiate, develop and
maintain existing and new client relationships; respond to competitive
developments; develop its sales infrastructure; attract, train, motivate and
retain management and other personnel; and maintain the high quality of its
services. In addition, the Company recently entered into a long-term lease for
a new facility, which will increase lease expenses by approximately $400,000
per year. The Company's continued rapid growth can be expected to place a
significant strain on the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to maintain
or accelerate its current growth, effectively manage its expanding operations
or achieve planned growth on a timely or profitable basis. If the Company is
unable to manage its growth effectively, its business, results of operations
and financial condition could be materially adversely affected. See
"Business."
IMPACT OF TREND TOWARD OUTSOURCING
The Company believes that outsourcing by businesses of an increasing number
of services not directly related to their core competencies has increased
significantly in the past several years. There can be no assurance that this
trend will continue or not be reversed or that corporations will not decide to
bring previously outsourced functions in-house. Particularly during general
economic downturns, continued outsourcing of services could result in layoffs
of employees, and businesses may bring in-house previously outsourced
functions to avoid or delay layoffs of employees. An adverse development with
respect to the trend toward outsourcing could have a material adverse effect
on the business, results of operations and financial condition of the Company.
See "Business--Strategy."
DEPENDENCE ON LABOR FORCE
The Company's success is largely dependent on its ability to recruit, hire,
train and retain qualified employees. The Company's industry is very labor-
intensive and has experienced high personnel turnover. A significant increase
in the Company's employee turnover rate could increase the Company's
recruiting and training costs and decrease operating effectiveness and
productivity. Also, the addition of significant new clients or the
implementation of new large-scale marketing support programs may require the
Company to recruit, hire and train qualified personnel at an accelerated rate.
Some of the Company's operations, particularly its technical support and
customer service, require specially trained personnel. There can be no
assurance that the Company will be able to continue to hire, train and retain
sufficient qualified personnel to adequately staff new marketing support
programs. Because a significant portion of the Company's operating expenses
are related to labor costs, an increase in wages, costs of employee benefits
or employment taxes could have a material adverse effect on the Company's
business, results of operations or financial condition. In addition, the
Company's facilities are located in an area with a relatively low unemployment
rate, potentially making it more difficult and costly to hire and train
qualified personnel. The inability of the Company to recruit, hire, train and
retain qualified employees could have a material adverse effect on the
Company's business, results of operations or financial condition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Overview."
RISKS OF BUSINESS INTERRUPTION; NEW FACILITY
The Company's operations are dependent upon its ability to protect its
distribution facilities, call center, computer and telecommunications
equipment and software systems against damage from fire, power loss,
9
telecommunications interruption or failure, natural disaster and other similar
events. In the third quarter of 1998, the Company expects to move its
corporate offices and four distribution facilities into a new facility. In the
event the Company experiences a temporary or permanent interruption of its
business, through casualty, operating malfunction, as a result of the move or
otherwise, the Company's business, results of operations or financial
condition could be materially adversely affected. The Company's property and
business interruption insurance may not adequately compensate the Company for
all losses that it may incur.
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW SOFTWARE
The Company's business is highly dependent on its computer and
telecommunications equipment and software systems. The Company intends to use
a portion of the net proceeds of the Offering to upgrade certain computer
hardware and software, and, as a result, will convert certain existing
programs to the new system. There can be no assurance that the Company can
effectively or efficiently convert its programs to the new system. In
addition, the Company's failure to maintain its technological capabilities or
to respond effectively to technological changes could have a material adverse
effect on the Company's business, results of operations and financial
condition. The Company's future success also will be highly dependent upon its
ability to enhance existing services and develop applications to focus on its
clients' needs and introduce new services and products to respond to changing
technological developments. There can be no assurance that the Company can
select, invest in and develop new and enhanced technology on a timely basis in
the future in order to meet clients' needs and to maintain its own
competitiveness, and the Company's failure to do so could have a material
adverse effect on the Company's business, results of operations and financial
condition. See "Business--Technology."
COMPETITION
The markets in which the Company competes are highly competitive. The
Company expects competition to persist and intensify in the future. The
Company's competitors include the in-house operations of the Company's current
and potential clients, small firms offering specific services and large
marketing support services firms. A number of competitors have or may develop
financial and other resources greater than those of the Company. There can be
no assurance that additional competitors with greater name recognition and
resources than the Company will not enter the Company's markets. Because the
in-house operations of the Company's existing or potential clients are
significant competitors of the Company, the Company's performance and growth
could be negatively impacted if its existing clients decide to provide, in-
house, services that currently are outsourced or if potential clients retain
or increase their in-house capabilities. Further, a decision by a large client
to consolidate its outsourced services with a company other than Innotrac
would have a material adverse effect on the Company. In addition, competitive
pressures from current or future competitors could result in significant price
erosion, which could have a material adverse effect upon the Company's
business, financial condition and results of operations. See "Business--
Competition."
FLUCTUATIONS IN OPERATING RESULTS; FLUCTUATIONS IN QUARTERLY RESULTS
The Company's operating results have fluctuated in the past and will
fluctuate in the future based on many factors. These factors include, among
other things, fluctuations in the general economy, increased competition,
changes in operating expenses, expenses related to acquisitions and the
potential adverse effect of acquisitions. Due to these and any unforeseen
factors, it is likely that in some future quarter the Company's operating
results will be below the expectations of public market analysts and
investors. In such an event, the price of the Common Stock would likely be
materially adversely affected. In view of the Company's recent significant
growth, the Company believes that period-to-period comparisons of its
financial results are not necessarily meaningful and should not be relied upon
as an indication of future performance. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in large part on the abilities and
continuing efforts of its executive officers and senior management. In order
to support its growth the Company will be required to effectively recruit,
develop and retain additional qualified management personnel. There can be no
assurance that the
10
Company will be able to (i) retain the services of its executive officers and
key management, with whom the Company has no employment agreements or (ii)
recruit, develop and retain additional qualified management personnel. The
business and prospects of the Company could be materially adversely affected
if these persons do not continue in their key roles and the Company is unable
to attract and retain qualified replacements. See "Management."
COMPLIANCE WITH GOVERNMENT REGULATION
Because the Company's current teleservicing business consists primarily of
responding to inbound telephone calls, as opposed to outbound calls, it is not
highly regulated. However, in connection with the limited amount of outbound
telemarketing services that it provides, the Company is required to comply
with 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 the Company expands its
outbound telemarketing services, such rules and regulations would apply to a
larger percentage of the Company's business. Furthermore, there may be
additional federal and state legislation, or changes in regulatory
implementation, that limit the activity of the Company or its clients in the
future or significantly increase the costs of compliance. Additionally, the
Company could be responsible for its failure to comply with regulations
applicable to its clients. The adoption of unfavorable federal or state
legislation or regulations affecting Caller ID service could have a material
adverse effect upon the Company's business, financial condition and results of
operations. See "--Risks Associated with Product-Based Marketing Support
Services" and "Business--Government Regulation."
CONTROL BY MANAGEMENT; USE OF PROCEEDS TO BENEFIT MANAGEMENT
Following the Offering, Scott D. Dorfman, the Company's Chairman, President
and Chief Executive Officer, will beneficially own approximately 68% of the
outstanding Common Stock (approximately 66% if the Underwriters' over-
allotment option is exercised in full). See "Principal Shareholders." As a
result, Mr. Dorfman would control the Company's Board of Directors and,
therefore, the business, policies and affairs of the Company. Such voting
concentration may also have the effect of discouraging, delaying or preventing
a change in control of the Company. A portion of the net proceeds of the
Offering will be used to make distributions to Mr. Dorfman, his children and a
shareholder of the Company of accumulated earnings of two of the entities that
are parties to the Consolidation and an amount to pay taxes on the 1997 and
1998 earnings of certain Affiliated Companies, to repay certain indebtedness
to a shareholder of the Company and to repay certain indebtedness which is
guaranteed by Mr. Dorfman. See "Use of Proceeds" and "Certain Transactions."
DIFFICULTIES OF COMPLETING AND INTEGRATING ACQUISITIONS
One component of the Company's strategy is to pursue strategic acquisitions
of companies that have services, products, technologies, industry
specializations or geographic coverage that extend or complement the Company's
existing business. There can be no assurance that the Company will be able to
successfully identify, acquire on favorable terms or integrate such companies.
If any acquisition is completed, there can be no assurance that such
acquisition will enhance the Company's business, results of operations or
financial condition. The Company may in the future face increased competition
for acquisition candidates, which may inhibit the Company's ability to
consummate suitable acquisitions on terms favorable to the Company. A portion
of the Company's capital resources and proceeds of this Offering could be used
for acquisitions. The Company may require additional debt or equity financing
for future acquisitions, which financing may not be available on terms
favorable to the Company, if at all. See "Use of Proceeds" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources."
CERTAIN ANTI-TAKEOVER PROVISIONS
Certain provisions of the Company's Articles of Incorporation and Bylaws may
make a change in control of the Company more difficult to effect, even if a
change in control were in the shareholders' interests. Provisions in the
Company's Articles of Incorporation allow the Board to determine the terms of
preferred stock that may
11
be issued by the Company without approval of the holders of the Common Stock.
The ability of the Company to issue preferred stock in such manner could
enable the Board to prevent changes in management and control of the Company.
The Articles also provide for three classes of directors as nearly equal in
size as possible. Each class holds office until the third annual meeting
following election except that the initial terms expire in 1998, 1999 and
2000. This provision may have an anti-takeover effect because a third party
would be unable to acquire immediate control of the entire Board. In addition,
the Company's Board of Directors has adopted a Rights Agreement (as defined
herein) pursuant to which holders of Common Stock will be entitled to purchase
a fraction of a share of the Company's Series A Participating Cumulative
Preferred Stock if a third party acquires beneficial ownership of 15% or more
of the Common Stock and will be entitled to purchase the stock of a Principal
Party (as defined in the Rights Agreement) at a discount upon the occurrence
of certain triggering events. These provisions of the Company's Articles of
Incorporation, Bylaws and the Rights Agreement could have the effect of
discouraging tender offers or other transactions that would result in
shareholders receiving a premium over the market price for the Common Stock.
See "Description of Capital Stock."
ABSENCE OF PRIOR PUBLIC MARKET; VOLATILITY OF MARKET PRICE
Prior to the Offering, there has been no public market for the Common Stock.
There can be no assurance that an active trading market will develop or
continue after the Offering or that the market price of the Common Stock will
not decline below the initial public offering price. The initial public
offering price of the Common Stock has been determined by negotiation between
the Company, J.C. Bradford & Co. and Wheat, First Securities, Inc. as
representatives (the "Representatives") of the several underwriters (the
"Underwriters"), and may bear no relationship to the market price for the
Common Stock after the Offering. See "Underwriting."
From time to time after the Offering, there may be significant volatility in
the market price of the Common Stock. Quarterly operating results of the
Company, changes in earnings estimates by analysts, changes in general
conditions in the economy or the financial markets, or other developments
affecting the Company or its industry or competitors could cause the market
price of the Common Stock to fluctuate substantially. In addition, recently
the stock market has experienced extreme price and volume fluctuations. 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, the Company cannot predict the market price for the Common Stock
subsequent to the Offering.
IMMEDIATE AND SUBSTANTIAL DILUTION
Purchasers of Common Stock in the Offering will experience an immediate and
substantial dilution of $9.53 per share in the net tangible book value of
their shares of Common Stock immediately following the Offering. Current
shareholders will receive a material increase in the book value of their
shares. If the Company issues additional Common Stock in the future, including
shares that may be issued in connection with acquisitions, purchasers of
Common Stock in the Offering may experience further dilution in net tangible
book value per share of the Common Stock. See "Dilution."
SHARES ELIGIBLE FOR FUTURE SALE
Sales of a substantial number of shares of Common Stock in the public market
following the Offering could adversely affect the market price for the Common
Stock. Upon consummation of the Offering, the Company will have a total of
9,000,000 shares of Common Stock outstanding (9,375,000 if the Underwriters'
over-allotment option is exercised in full). Of these shares, the 2,500,000
shares offered hereby (2,875,000 if the Underwriters' over-allotment option is
exercised in full) will be freely tradable without restrictions under the
Securities Act. All of the remaining shares are "restricted securities" as
that term is defined by Rule 144 promulgated under the Securities Act and will
be eligible for sale in compliance with Rule 144 volume and other
requirements. The number of outstanding shares of Common Stock available for
sale in the public market will be limited by lock-up agreements under which
the Company, its officers, directors and shareholders have agreed not to sell
or otherwise dispose of any of their shares for a period of 180 days after the
date of this Prospectus without the prior written consent of J.C. Bradford &
Co., on behalf of the Underwriters, and applicable restrictions under the
Securities Act. The Company intends to register for issuance or resale the
800,000 shares
12
of Common Stock reserved for issuance under the Stock Option Plan on a
registration statement on Form S-8. Following the Offering, sales of
substantial amounts of Common Stock in the public market, pursuant to Rule 144
or otherwise, or even the potential of such sales, could adversely affect the
prevailing market price of the Common Stock or impair the Company's ability to
raise additional capital through equity issuances. See "Management--Stock
Option Plan," "Shares Eligible for Future Sale" and "Underwriting."
POLICY TO PAY NO DIVIDENDS
The Company presently intends to retain its earnings to finance its growth
and expansion and for general corporate purposes. Consequently, it does not
anticipate paying any cash dividends in the foreseeable future. In addition,
the Company's financing agreements contain limitations on the payment of cash
dividends and other distributions of assets. See "Dividend Policy."
13
THE CONSOLIDATION
Prior to the Offering, the business of the Company, a C corporation for tax
purposes, was conducted through the Company and the Affiliated Companies,
including three corporations that had elected S corporation tax status, one
limited partnership, two limited liability companies and three C corporations.
The Consolidation will be effected simultaneously with, and as a condition to,
the Offering. Ninety percent or more of the equity of each of the Affiliated
Companies was owned by Scott D. Dorfman, the Chairman, President and Chief
Executive Officer of the Company, his family and affiliated entities. In
connection with the Consolidation, two of the affiliated entities that are
parties to the Consolidation will make certain distributions to their
principals, Mr. Dorfman, his children and ITC Service Company ("ITC"), a
shareholder of the Company, reflecting a portion of accumulated earnings and
an amount equal to the estimated tax payments to be made by such principals
with respect to such entities' estimated income for 1997 and 1998. See "Use of
Proceeds," "Certain Transactions" and Note 10 of the financial statements.
The Company was incorporated in Georgia on August 19, 1984 under the name
Video Catalog Operations, Inc. On September 5, 1985, the name was changed to
Innotrac Corporation.
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 2,500,000 shares of
Common Stock offered hereby at an assumed initial public offering price of
$13.00 per share are estimated to be approximately $29.5 million
(approximately $34.1 million if the Underwriters' over-allotment option is
exercised in full) after deduction of the underwriting discount and estimated
Offering expenses payable by the Company.
The Company intends to use approximately $6.4 million of the net proceeds of
the Offering to distribute a portion of the earnings of two of the entities
that are parties to the Consolidation to the equity holders thereof, including
Mr. Dorfman, his children and ITC. In addition, the Company intends to repay
indebtedness with certain of the net proceeds of the Offering as follows: (i)
approximately $14.0 million to repay indebtedness under its line of credit
facility, (ii) approximately $1.0 million to repay a term loan and (iii) $3.5
million to repay indebtedness to ITC. Such indebtedness currently bears
interest per annum at rates equal to (i) at the Company's option, LIBOR plus
225 basis points (8.25%) or the lender's prime rate (8.5%), (ii) 8.95% per
annum and (iii) the prime rate plus 8.0% (16.5%), respectively, and, if not
repaid, will mature in November, July and April 1999, respectively. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources." Approximately $390,000 of such
indebtedness under the line of credit will be incurred to fund the redemption
of the equity interests of Mr. Dorfman's father in one of the entities that is
a party to the Consolidation.
The remainder of the net proceeds is expected to be used for general
corporate purposes, including (i) approximately $1.0 million to develop the
Company's sales infrastructure, which entails hiring new sales personnel,
forming relationships with independent sales organizations and developing
sales and marketing materials, (ii) approximately $1.0 million to upgrade the
Company's computer software, (iii) approximately $500,000 to purchase computer
hardware for the Company's call center, (iv) approximately $1.5 million for
equipment and fixtures for the Company's new distribution facility and
corporate headquarters expected to be completed in the third quarter of 1998,
and (v) for general working capital needs. The Company may from time to time
consider possible acquisitions of related businesses and the use of net
proceeds from the Offering to finance such acquisitions. The Company does not
have any present agreements or commitments for, and is not presently engaged
in active negotiations with respect to, any particular prospects.
Pending application of the net proceeds as described above, the Company will
invest the net proceeds in short-term, interest-bearing investment grade or
government securities.
14
DIVIDEND POLICY
Innotrac has never paid any cash dividends on its Common Stock. The Company
currently intends to retain its future earnings, if any, to finance the
growth, development, and expansion of the Company's business and, accordingly,
does not currently intend to declare or pay any dividends on the Common Stock
for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be subject to the discretion of the Company's Board of
Directors and will depend upon the future earnings, results of operations,
financial condition and capital requirements of the Company, among other
factors. In addition, the Company's financing agreements contain limitations
on the payment of cash dividends and other distributions of assets. See "The
Consolidation" for a description of distributions to equity holders, including
shareholders of the Company, made by affiliated companies that are parties to
the Consolidation.
DILUTION
At September 30, 1997, after giving effect to the Consolidation as if it had
occurred at such date, the pro forma combined net tangible book value of the
Company would have been $5.0 million, or $0.76 per share. Net tangible book
value per share represents the amount of the Company's shareholders' equity
less intangible assets, divided by the number of shares of Common Stock
outstanding. Dilution per share to new investors represents the difference
between the price per share of Common Stock in the Offering and the pro forma
net tangible book value per share of Common Stock immediately after completion
of the Offering. After giving effect to the Consolidation and the sale of the
2,500,000 shares of Common Stock offered hereby at an assumed initial public
offering price of $13.00 per share and after deducting the underwriting
discount and estimated Offering expenses payable by the Company, the pro forma
combined net tangible book value of the Company would have been $31.3 million,
or $3.47 per share. This represents an immediate increase in pro forma net
tangible book value of $2.71 per share to existing shareholders and an
immediate dilution in net tangible book value of $9.53 per share to new
investors purchasing the shares of Common Stock in the Offering. The following
table illustrates this per share dilution:
Assumed initial public offering price per share............... $13.00
Pro forma net tangible book value before the Offering......... $0.76
Increase in net tangible book value per share attributable to
new investors................................................ 2.71
-----
Pro forma net tangible book value after the Offering.......... 3.47
------
Dilution per share to new investors........................... $ 9.53
======
The following table sets forth, on a pro forma basis to give effect to the
Consolidation as of September 30, 1997, the number of shares of Common Stock
purchased from the Company, the total consideration paid to the Company and
the average price per share paid by existing shareholders and the new
investors, assuming the sale of 2,500,000 shares of Common Stock at an assumed
initial public offering price of $13.00 per share.
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
----------------- ------------------- PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- ---------
Existing shareholders(1)....... 6,500,000 72% $ 22,000 0% $ 0.00
New investors.................. 2,500,000 28 32,500,000 100 $13.00
--------- --- ----------- ---
Total........................ 9,000,000 100% $32,522,000 100%
========= === =========== ===
- --------
(1) Does not include 383,000 shares of Common Stock reserved for issuance
pursuant to stock options granted under the Company's Stock Option Plan.
15
CAPITALIZATION
The following table sets forth, as of September 30, 1997, (i) the actual
combined capitalization of the Company and (ii) the pro forma consolidated
capitalization of the Company giving effect to the Consolidation and to the
application of the net proceeds from the Offering at an anticipated initial
public offering price of $13.00 per share. The data set forth below should be
read in conjunction with "The Consolidation," "Use of Proceeds," "Selected
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations," the financial statements and notes thereto and the
other financial data included elsewhere in this Prospectus.
SEPTEMBER 30, 1997
---------------------
PRO FORMA
CONSOLIDATED
ACTUAL AS ADJUSTED
------- ------------
(IN THOUSANDS)
Indebtedness:
Line-of-credit facility................................ $10,446 --
Long term debt(1)...................................... 1,292 $ 70
Subordinated debt...................................... 3,500 --
Redeemable capital stock .............................. 894 504(2)
------- -------
Total indebtedness................................... 16,132 574
------- -------
Shareholders' equity:
Partners' capital...................................... 1,577 --
Members' deficit....................................... (999) --
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, 6,500,000 shares issued and outstanding,
9,000,000 shares issued and outstanding as
adjusted(3)........................................... 5 900
Additional paid-in capital(3).......................... 14 25,375
Retained earnings...................................... 4,324 4,989
------- -------
Total shareholders' equity........................... 4,921 31,264
------- -------
Total capitalization............................... $21,053 $31,838
======= =======
- --------
(1) Includes current portion of related indebtedness.
(2) Represents redeemable capital stock of a subsidiary to be repurchased in
the fourth quarter of 1998. See "Certain Transactions."
(3) Excludes 383,000 shares of Common Stock reserved for issuance pursuant to
stock options granted under the Stock Option Plan.
16
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company. The
selected historical statements of operations data for each of the years ended
December 31, 1995 and 1996, the nine months ended September 30, 1997 and the
selected historical balance sheet data for the periods then ended have been
derived from the combined financial statements that have been audited by
Arthur Andersen LLP, independent public accountants. The selected historical
statement of operations data for the nine months ended September 30, 1996 have
been derived from the Company's unaudited combined financial statements and
include, in the opinion of management, all adjustments (consisting only of
normal recurring adjustments) necessary to present fairly the data for such
periods. Operating results for interim periods are not necessarily indicative
of results for the full fiscal year. The pro forma statement of operations
data for the nine months ended September 30, 1997 and the pro forma balance
sheet data at September 30, 1997 give effect to the Consolidation and the
Offering as well as the use of the net proceeds from the Offering as if the
transactions had occurred at January 1, 1997 (for the statement of operations)
and September 30, 1997 (for the balance sheet). The pro forma financial
information does not purport to represent what the Company's consolidated
results of operations would have been if these transactions had in fact
occurred on these dates, nor does it purport to indicate the future
consolidated financial position or consolidated results of future operations
of the Company. The pro forma adjustments are based on currently available
information and certain assumptions that management believes to be reasonable.
The selected financial data should be read in conjunction with "The
Consolidation," "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the financial statements and
notes thereto and other financial data included elsewhere in this Prospectus.
17
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
--------------------------------- ---------------------------------------
PRO FORMA
CONSOLIDATED
AS ADJUSTED
1993 1994 1995 1996 1996 1997 1997(1)
------ ------- ------- ------- ---------- ---------- ---------------
(IN THOUSANDS EXCEPT PER SHARE DATA)
------------------------------------
Revenues, net........... $5,586 $17,380 $44,886 $71,297 $ 53,231 $ 67,314 $ 67,314
Cost of revenues........ 3,495 11,274 30,658 55,520 39,232 51,800 51,800
------ ------- ------- ------- ---------- ---------- ----------
Gross profit............ 2,091 6,106 14,228 15,777 13,999 15,514 15,514
------ ------- ------- ------- ---------- ---------- ----------
Operating expenses:
Selling, general and
administrative
expenses.............. 1,538 2,289 6,510 10,391 8,007 9,072 9,072
Depreciation and
amortization.......... 157 214 293 429 231 454 454
------ ------- ------- ------- ---------- ---------- ----------
Total operating
expenses.............. 1,695 2,503 6,803 10,820 8,238 9,526 9,526
------ ------- ------- ------- ---------- ---------- ----------
Operating income........ 396 3,603 7,425 4,957 5,761 5,988 5,988
------ ------- ------- ------- ---------- ---------- ----------
Other (income) expense:
Interest expense....... 123 622 1,090 1,456 955 1,422 5
Other.................. (6) 67 (73) 94 2 (2) (2)
------ ------- ------- ------- ---------- ---------- ----------
Total other expense.... 117 689 1,017 1,550 957 1,420 3
------ ------- ------- ------- ---------- ---------- ----------
Income before income
taxes.................. 279 2,914 6,408 3,407 4,804 4,568 5,985
Income tax provision.... (30) (356) (793) (211) (472) (75) (2,392)
------ ------- ------- ------- ---------- ---------- ----------
Net income.............. $ 249 $ 2,558 $ 5,615 $ 3,196 $ 4,332 $ 4,493 $ 3,593
====== ======= ======= ======= ========== ========== ==========
Weighted average
shares................. 9,103(2)
Net income per share.... $ 0.39(3)
==========
AS OF DECEMBER 31, AS OF SEPTEMBER 30, 1997
------------------------------- -------------------------
PRO FORMA
CONSOLIDATED
1993 1994 1995 1996 HISTORICAL AS ADJUSTED(4)
------ ------- ------- ------- ---------- --------------
Working capital......... $ 132 $ 1,237 $ (616) $(1,042) $ 1,593 $23,842
Property and equipment,
net.................... 1,465 5,059 9,099 10,939 8,249 8,249
Total assets............ 3,457 13,548 30,414 49,037 36,387 47,524
Long-term obligations... 708 4,278 4,729 4,779 4,157 453
Shareholders'
equity(5).............. 409 1,624 3,195 4,540 4,921 31,264
- --------
(1) Pro forma adjustments include (i) the elimination of interest expense on
the line of credit, the term loan and subordinated debt borrowings assumed
to be repaid with the proceeds of the Offering, (ii) an income tax
provision to reflect the pro forma tax effects as if the Company were
taxed as a C corporation and (iii) the tax effect of the interest expense
adjustment.
(2) Adjusted to reflect the Consolidation, the Offering (assuming the shares
were outstanding for the entire period) and the exercise of all options
outstanding under the Stock Option Plan (using the "treasury stock" method
and assuming the shares were outstanding for the entire period).
(3) Excludes the dividend accretion on redeemable capital stock of a
subsidiary of approximately $64,000, or $(0.01) per share.
(4) Assumes an increase to working capital equal to the aggregate estimated
net proceeds less repayment of borrowings under the line-of-credit
facility, the term loan the subordinated debt and the redeemable capital
stock of a subsidiary. Reflects the recording of deferred tax assets and
liabilities associated with the change in tax status to a C corporation of
certain of the entities as a result of the Consolidation, and distribution
of $6.4 million of a portion of undistributed earnings of certain of the
entities that are parties to the Consolidation. See "The Consolidation"
and "Use of Proceeds."
(5) Includes capital stock, partners' capital, members' deficit and retained
earnings.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion should be read in conjunction with the financial
statements and notes thereto included elsewhere in this Prospectus.
OVERVIEW
Since its formation in 1984, the Company has expanded its business and
facilities to offer distribution and management services, and inbound
teleservices in response to the needs of clients in a variety of industries
and to capitalize on market opportunities. In 1987, the Company began
providing marketing support services to BellSouth. In 1991, the Company
initiated a fulfillment program to sell or rent to BellSouth customers Caller
ID hardware, phone sets and other equipment, and in 1993, began billing the
charges on customers' telephone bills. As part of this program, Innotrac
acquires the Caller ID and other telecommunications equipment from third party
manufacturers, thereby assuming inventory and credit risk. Upon receipt of an
order, the Company ships the product, tracks inventory levels and sales and
marketing data and maintains teleservicing operations to handle customer
service and technical support.
To leverage its experience and infrastructure investment related to the
BellSouth marketing support program, in June 1996 the Company entered into an
agreement with Pacific Bell to sell Pacific Bell's Caller ID equipment. The
Company also provides marketing support services to US West and seeks other
telecommunication companies for whom it can provide similar marketing support
services.
The Company has experienced significant growth in revenue in recent years
primarily due to the growth in Caller ID market penetration and service
improvements by the Company with respect to product-based marketing support
services. Industry sources indicate that at the end of 1995 BellSouth's Caller
ID penetration was approximately 13%. BellSouth indicates that through the end
of October 1997 its Caller ID penetration had increased to approximately 28%.
In 1993 the Company began billing on the telephone bill and in mid-1995,
changed the method of selling BellSouth equipment from taking referrals in the
Company's call center from BellSouth representatives to having a BellSouth
representative negotiate sales on behalf of the Company and send order
information to the Company by electronic data interchange ("EDI"). This change
in process increased sales and decreased order processing time. Also, in
January 1997 the Company implemented an interactive voice response ("IVR")
system to handle some of the BellSouth customer service calls, which generally
reduced response time and lowered operating costs.
Management believes that growth in revenues from Caller ID marketing support
services will remain constant for the next several years as market penetration
increases and new Caller ID services that require enhanced equipment are
introduced. Sales are expected to level-off as penetration of the market
matures. According to industry sources, market penetration of Caller ID
services in the U.S. as of December 1, 1997 is approximately 18% and is
expected to peak at approximately 75% by 2007. Management intends to offset
the eventual maturity of its Caller ID business by diversifying its client
base and expanding the scope of marketing support services it renders to its
clients. The Company intends to use a portion of the net proceeds from the
Offering to develop a sales infrastructure to aggressively promote its
marketing support services. See "Use of Proceeds" and "Business--Business
Strategy."
The largest component of the Company's expenses is its 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,
materials and freight charges, and directly allocable facilities costs. Most
of these costs are variable in nature. A second component of the Company's
expenses includes selling, general and administrative ("SG&A") expenses. This
expense item is comprised of labor and other costs associated with marketing,
financial, information technology support, human resources and administrative
functions that are not allocable to specific client services, as well as bad
debt expense. SG&A expenses tend to be fixed in nature, with the exception of
bad debt, which is related to revenues.
19
RESULTS OF OPERATIONS
The following table sets forth summary operating data, expressed as a
percentage of revenues, for the years ended December 31, 1995 and 1996 and the
nine months ended September 30, 1996 and 1997. Operating results for any period
are not necessarily indicative of results for any future period.
The financial information provided below has been rounded in order to
simplify its presentation. However, the percentages below are calculated using
the detailed information contained in the financial statements, the notes
thereto and the other financial data included elsewhere in this Prospectus.
YEARS ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- ------------------
1995 1996 1996 1997
------ ------ -------- --------
Revenues, net............................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues.......................... 68.3 77.9 73.7 77.0
Gross profit.............................. 31.7 22.1 26.3 23.0
Selling, general and administrative
expenses................................. 14.5 14.6 15.0 13.5
Operating income.......................... 16.5 7.0 10.8 8.8
Interest expense.......................... 2.4 2.0 1.8 2.1
Income before income taxes................ 14.3% 4.8% 9.0% 6.8%
NINE MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO NINE MONTHS ENDED SEPTEMBER
30, 1996
Revenues. The Company's revenues increased 26.5% to $67.3 million for the
nine months ended September 30, 1997 from $53.2 million for the nine months
ended September 30, 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 revenues during the nine months ended September 30, 1997 compared
to the prior nine month period resulting from the conclusion of a fulfillment
program performed by the Company in connection with the 1996 Olympic Games. The
Company's sales to Pacific Bell customers have been less than expected due to
regulatory delays and a low level of promotion of Caller ID services by Pacific
Bell.
Cost of Revenues. The Company's cost of revenues increased 32.1% to $51.8
million for the nine months ended September 30, 1997 compared to $39.2 million
for the nine months ended September 30, 1996. This increase was due to
increased revenue volume and a $1.6 million write-down (2.4% of revenues) on
Caller ID equipment purchased for the start-up of the Pacific Bell program. The
increase in cost of revenues was also associated with the Company's new call
center.
Gross Profit. For the nine months ended September 30, 1997, the Company's
gross profit was $15.5 million or 23.0% of revenues as compared to $14.0
million or 26.3% of revenues for the nine months ended September 30, 1996. The
decrease in gross margin was primarily due to the $1.6 million inventory write-
down and costs associated with the new 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 nine
months ended September 30, 1997 were $9.1 million or 13.5% of revenues compared
to $8.0 million or 15.0% of revenues for the nine months ended September 30,
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 the
Company's bad debt expense, most of which was associated with sales of Caller
ID and other telecommunications equipment. Bad debt expense was $5.5 million
for the nine months ended September 30, 1997 as compared to $3.5 million for
the nine months ended September 30, 1996. The increase in bad debt expense was
primarily due to the Company's higher revenue volume and higher Caller ID
market penetration, which the Company believes results in an increase in sales
of Caller ID units to consumers having higher credit risks.
20
Interest Expense. Interest expense increased to $1.4 million for the nine
months ended September 30, 1997 from $1.0 million for the nine months ended
September 30, 1996. The increase was primarily due to increased borrowings
under the Company's 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 the
Company's subordinated debt in the 1997 period compared to the 1996 period due
to a repayment of such debt by the Company in September 1996.
Income Taxes. The Company's effective tax rates for the nine months ended
September 30, 1997 and 1996 were 1.6% and 9.8%, respectively. The change from
1996 to 1997 was primarily the result of a higher level of income attributable
to the pass-through entities involved in the Consolidation. As a result of the
Consolidation, the Company expects its effective tax rate in future periods to
increase to statutory levels. See "The Consolidation."
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues. The Company's revenues increased 58.8% to $71.3 million for the
year ended December 31, 1996 from $44.9 million for the year ended December
31, 1995, primarily due to increased sales of Caller ID units to BellSouth
customers.
Cost of Revenues. The Company's cost of revenues increased 80.8% to $55.5
million for the year ended December 31, 1996 from $30.7 million for the year
ended December 31, 1995, primarily due to increased revenue volume, as well as
costs associated with the Company's new call center, which opened in June
1996.
Gross Profit. The Company's gross profit for the year ended December 31,
1996 increased 11.2% to $15.8 million or 22.1% of revenues from $14.2 million
or 31.7% of revenues for the year ended December 31, 1995. The decrease in
gross margin was primarily due to costs associated with the call center that
opened in June 1996, along with the impact of introductory promotional prices
on certain Caller ID units sold during the last six months of 1996.
Selling, General and Administrative Expenses. SG&A expenses for the year
ended December 31, 1996 were $10.4 million or 14.5% of revenues compared to
$6.5 million or 14.6% of revenues for the year ended December 31, 1995. The
increase in the 1996 period over the 1995 period was primarily due to the
fixed costs associated with the Company's new call center and an increase in
the Company's bad debt expense. The bad debt expense, which was associated
with sales of Caller ID and other telecommunications equipment, was $5.6
million for the year ended December 31, 1996, compared to $3.0 million for the
year ended December 31, 1995. The increase in bad debt expense was primarily
due to the Company's higher revenue volume and Caller ID market penetration,
which the Company believes results in an increase in sales of Caller ID units
to consumers having higher credit risks.
Interest Expense. Interest expense increased to $1.5 million for the year
ended December 31, 1996 from $1.1 million for the year ended December 31,
1995. The increase was primarily due to additional borrowings in the 1996
period under the Company's line of credit to fund working capital, consisting
primarily of accounts receivable and inventory required to support increased
revenue. The increase was partially offset by lower interest on the Company's
subordinated debt in the 1996 period compared to the 1995 period due to a
repayment of such debt made by the Company in September 1996.
Income Taxes. The Company's effective tax rates for the years ended December
31, 1996 and 1995 were 6.2% and 12.3%, respectively. This change was primarily
the result of a higher level of income attributable to the pass-through
entities involved in the Consolidation. See "The Consolidation."
LIQUIDITY AND CAPITAL RESOURCES
Historically, the Company has funded its operations and capital expenditures
primarily through cash flow from operations and borrowings from banks and
shareholders. The Company had cash and cash equivalents of approximately
$40,000, $2.0 million and $425,000 at December 31, 1995, December 31, 1996 and
September
21
30, 1997, respectively. The Company maintains a $25.0 million revolving line of
credit with a bank, maturing in November 1999, which was increased from $18.0
million in December 1997. Borrowings under the line of credit bear interest at
the Company's option at the bank's prime rate, as adjusted from time to time,
or LIBOR plus up to 225 basis points. At September 30, 1997, the interest rate
was 8.5%. The Company also has a term loan with the same bank that matures in
July 1999 and bears interest at 8.95% per annum. In addition, the Company has a
subordinated note payable to a shareholder, which matures in April 1999 and
bears interest at a particular bank's prime rate, as adjusted from time to
time, plus 8.0% per annum. At September 30, 1997, the interest rate was 16.5%.
At December 1, 1997, approximately $9.1 million, $1.1 million and $3.5 million
were outstanding under the line of credit, the term loan and the subordinated
note, respectively. The Company anticipates that all outstanding indebtedness
under the line of credit, term loan and subordinated note will be repaid from
the net proceeds of this Offering. The Company will be able to continue to draw
on the line of credit from time to time. See "Use of Proceeds."
At September 30, 1997, the Company had entered into various operating leases
in the ordinary course of business. In December 1997, the Company entered into
an operating lease for a new distribution facility and corporate offices
expected to be ready for occupancy in the third quarter of 1998. As a result of
this lease, rental expense will increase approximately $400,000 per year
through 2008. In addition, the Company entered into an agreement with a related
party to acquire from him by the end of 1998 all of his interest in a
subsidiary of the Company and one entity involved in the Consolidation for an
aggregate of $980,000. See "Certain Transactions."
During the nine months ended September 30, 1997, the Company generated (used)
cash flow from operating activities of $11.6 million compared to ($5.8 million)
in the same period in 1996. Although the Company historically has generated
positive cash flow from operations, the negative cash flow for the nine months
ended September 30, 1996 was due to the increased working capital needed to
support the expansion of the Company's Caller ID programs, along with the
impact of the delay in the Pacific Bell Caller ID program in California, which
resulted in higher inventory levels. During the fiscal years ended December 31,
1996 and 1995, the Company generated cash flow from operating activities of
$88,000 and $6.4 million, respectively. The lower cash flow from operating
activities for the year ended December 31, 1996 was due to lower net income and
increased working capital requirements needed to support the expansion of the
Company's Caller ID programs, along with the impact of the delay in the Pacific
Bell Caller ID program.
Net cash used in investing activities was $5.0 million for the nine months
ended September 30, 1997 compared to $4.4 million for the nine months ended
September 30, 1996. This increase was primarily due to increased purchases of
telecommunications equipment. Net cash used in investing activities was $8.0
million for the year ended December 31, 1996 compared to $7.8 million for the
year ended December 31, 1995. This increase was primarily due to increased
purchases of telecommunications equipment and capital costs associated with the
build-out and opening of the Company's call center.
Net cash provided from (used in) financing activities was ($8.2 million) for
the nine months ended September 30, 1997 compared to $6.7 million for the nine
months ended September 30, 1996. The use of cash for financing activities in
the 1997 period reflects repayments under the line of credit and term loan. Net
cash provided from financing activities was $9.8 million for the year ended
December 31, 1996 and $588,000 for the year ended December 31, 1995. The
increase in cash provided by financing activities for the year ended December
31, 1996 was due to increased borrowings under the line of credit to fund
increased accounts receivable and inventory, partially offset by repayments on
the term loan and subordinated debt and distributions to equity holders of
entities involved in the Consolidation.
The Company estimates that its cash and financing needs through 1998 will be
met by cash flows from operations, its line of credit facility, and the net
proceeds from the Offering. However, any increases in the Company's growth
rate, shortfalls in anticipated revenues, increases in anticipated expenses, or
significant acquisitions could have a material adverse effect on the Company's
liquidity and capital resources and would require the Company to raise
additional capital from public or private equity or debt sources in order to
finance
22
operating losses, anticipated growth and contemplated capital expenditures. If
such sources of financing are insufficient or unavailable, the Company will be
required to modify its growth and operating plans in accordance with the
extent of available funding. The Company may need to raise additional funds in
order to take advantage of unanticipated opportunities, such as acquisitions
of complementary businesses or the development of new products, or otherwise
respond to unanticipated competitive pressures. There can be no assurance that
the Company will be able to raise any such capital on terms acceptable to the
Company or at all.
RECENT ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board ("FASB") issued Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which requires companies that do not choose to
account for stock-based compensation as prescribed by the statement to
disclose the pro forma effects on earnings and earnings per share as if SFAS
123 had been adopted. The Company has chosen the disclosure method, but for
all periods presented herein the Company did not have any stock option plans.
Subsequent to September 30, 1997, the Company adopted the Stock Option Plan.
Therefore, in subsequent periods the Company will have additional disclosures
related to SFAS 123.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128, "Earnings per Share" ("SFAS 128"), which redefines how
entities compute earnings per share. SFAS 128 requires presentation of "basic
earnings per share" and "diluted earnings per share," as defined. Primary
earnings per share will be replaced by basic earnings per share which will be
computed exclusively based on the weighted average number of common shares
outstanding. This statement is effective for periods ending after December 15,
1997 and will require restatement of all prior period earnings per share data
presented. The adoption of SFAS 128 is not expected to have a material impact
on the Company's earnings per share data.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" ("SFAS 130"), which establishes
standards for reporting and presentation of comprehensive income and its
components in a full set of general purpose financial statements. This
statement is effective for periods beginning after December 15, 1997. The
adoption of SFAS 130 is not expected to have an impact on the Company's
financial statements.
In June 1997, the FASB issued Statement of Financial Accounting Standards
No. 131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"), which establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports issued to stockholders.
It also establishes standards for related disclosures about products and
services, geographic areas and major customers. This Statement is effective
for financial statements for periods beginning after December 15, 1997. The
adoption of SFAS 131 is not expected to have a material impact on the
Company's financial statements.
23
BUSINESS
GENERAL
Innotrac is a full-service provider of customized, technology-based
marketing support services primarily to large corporations. The Company's
marketing support services include product and literature distribution,
computerized inventory and database management and customer-initiated
("inbound") teleservices. With the goal of providing turnkey marketing support
solutions, Innotrac works with its clients on a consultative basis to create
customized programs through which it can most efficiently match its service
offerings with its clients' needs. Innotrac's flexible marketing support
solutions range from small, specialty projects to larger integrated
fulfillment, teleservicing and database tracking programs. The Company has a
broad range of clients including BellSouth, Home Depot, NAPA, Pacific Bell,
Siemens E&A, Turner Broadcasting System, Inc. and US West.
Since its formation in 1984, the Company has expanded its business and
facilities to offer distribution and management services and inbound
teleservices in response to the needs of clients in a variety of industries
and to capitalize on market opportunities. In 1987, the Company began
providing marketing support services to BellSouth. In 1991, these services
were expanded to include fulfillment services related to Caller ID
telecommunications equipment. This program provides for Innotrac to (i) sell
or rent to BellSouth customers Caller ID hardware, phone sets and other
equipment (branded with BellSouth's logo), (ii) ship ("fulfill") customers'
orders, (iii) track inventory levels and sales and marketing data regarding
such items and (iv) maintain teleservicing operations to handle customer
service and technical support for Caller ID units and other products. In
conjunction with this program, in 1993 Innotrac pioneered a billing option
(the "billing options program") to allow customers to pay for the equipment
through their phone bills, on an interest free installment basis. The addition
of the billing options program was well received in the marketplace, and, as a
result, the fulfillment services for BellSouth have been the primary force
behind the Company's rapid sales growth. Innotrac has continued to capitalize
on its fulfillment expertise in the telecommunications sector, as evidenced by
its additional contractual arrangements with Pacific Bell and US West.
The Company has positioned itself to capitalize on the trend towards
outsourcing of marketing support services. The revenues generated from its
telecommunications marketing support programs have enabled the Company to
develop the infrastructure necessary to offer additional and more advanced
services to its customers. The Company believes it will achieve future growth
by targeting large companies in a variety of industries with numerous and/or
geographically diverse subsidiary or affiliate operations, extensive marketing
needs or complex point-of-distribution requirements.
Companies are increasingly focusing on their primary businesses and turning
to outside service companies to perform marketing support functions. By
outsourcing these functions, companies seek to (i) replace fixed warehouse,
information technology and labor costs with variable costs, (ii) improve their
reaction to business cycles, (iii) improve customer service and technical
support, (iv) manage capacity to meet fluctuations in demand for products and
customer service, (v) create economies of scale by sharing the costs of
advanced telecommunications and fulfillment systems, and (vi) reduce working
capital needs. As the trend toward outsourcing continues, the Company believes
that businesses will increasingly seek to reduce the number of vendors they
utilize and may prefer single-source providers of integrated, customized
marketing support services. The Company believes that its "one-stop" approach,
combined with its use of advanced technology, provides a competitive advantage
in attracting and retaining clients on a long-term basis.
24
BUSINESS STRATEGY
The Company's strategy is to take advantage of market trends towards
outsourcing by leveraging its core expertise, reputation for quality and
timely service and strong client relationships. The following are the key
elements of this strategy:
LEVERAGE TELECOMMUNICATIONS INDUSTRY PLATFORM. The Company intends to expand
its customer base in the telecommunications industry by leveraging the
expertise it has developed and the results it has achieved through long-
standing relationships with several clients in the industry. The Company is
also seeking to expand the level of services provided to existing
telecommunications clients.
BROADEN CUSTOMER BASE BY DEVELOPING SALES INFRASTRUCTURE. The Company has
experienced rapid revenue growth since 1993 without a significant sales
infrastructure. The Company intends to use a portion of the net proceeds of
the Offering to develop a national sales force for its services, to form
relationships with independent sales agencies and to develop sales and
marketing materials to highlight the wide array of services offered by the
Company. By developing this infrastructure, the Company intends to broaden its
customer base and diversify its sources of revenues.
CONTINUE INVESTMENT IN TECHNOLOGY. The Company has historically maintained a
commitment to the use of advanced technology and intends to continue to
upgrade and enhance its computer hardware and software applications to enable
it to continue to provide flexible and powerful services to its clients. The
Company believes that the use of advanced technology provides a competitive
advantage and results in greater capacity and reduced labor costs. The Company
also believes that continued technological advances, particularly those
utilizing the Internet, will provide new opportunities for the Company to
tailor its services to meet each client's needs. The Company intends to
address the labor-intensive nature of fulfillment services by developing more
efficient automated systems that distribute literature via electronic media
directly to the customer. The Company also plans to expand its Internet-
related capabilities for (i) automated inventory management, (ii) access to
order and database information and (iii) virtual warehousing of literature so
that such materials no longer need to be maintained in physical form in the
Company's warehouses.
EMPHASIZE CONSULTATIVE RELATIONSHIPS. The Company seeks to craft tailored,
value-added solutions that achieve each client's intended marketing results.
The Company devotes considerable resources to assessing and understanding a
client's industry, products, services, processes and culture, then works with
the client to design programs to reduce the costs and investment required to
deliver the client's marketing support programs. The Company believes that
this consultative partnership approach encourages long-term client
relationships, as evidenced by the fact that the Company has serviced its 10
largest clients for an average of six years and its five oldest clients for an
average of 11 years. The Company believes that this approach also creates
substantial opportunities to expand relationships with existing clients by
cross-selling the full range of its services.
SELECTIVELY PURSUE COMPLEMENTARY ACQUISITIONS. The Company may take
advantage of the fragmented nature of the marketing support services industry
by selectively acquiring complementary companies that extend its presence into
new geographic markets or industries, expand its client base, add new product
or service applications or provide substantial operating synergies. The
Company believes that there are a variety of such potential acquisition
opportunities.
CLIENTS
The flexibility of its services allows the Company to attract clients in a
broad range of industries. Innotrac targets companies that have developed a
large customer base, numerous and/or geographically diverse subsidiary or
affiliate operations, extensive marketing needs, or complex point-of-
distribution requirements. Companies with these characteristics tend to need
customer support, product or literature distribution, inventory warehousing
and management, or tracking and reporting capabilities. Although a company may
elect to perform these functions in-house, it will require the development of
expensive, labor intensive infrastructures, which may divert a company's focus
from its core competencies. Outsourcing these functions to a company such as
Innotrac may result in a lower cost and higher quality level than such
companies can achieve
25
on an in-house basis. The following are some examples of the Company's clients
and the marketing support services the Company performs for them:
SIEMENS ENERGY AND AUTOMATION
Starting with the provision of marketing support services for just one
business unit in 1986, Innotrac currently provides marketing support services
for more than 20 business units of Siemens E&A. One component of these
services is the storage of technical literature, product catalogs and
brochures. Siemens E&A sales offices, dealers and distributors may order, via
telephone, fax or Innotrac's Internet gateway, various types of literature
stored in the Company's distribution facilities. Innotrac processes the order,
packs and ships the product using the least expensive carrier for the time
frame requested. Innotrac provides Siemens E&A with detailed inventory
management and charge back reports to allow Siemens E&A to allocate costs
appropriately to each business unit. Innotrac also distributes literature and
information from Siemens E&A's corporate office to its sales offices, dealers
and distributors. Siemens E&A frequently provides various other projects that
require Innotrac to assemble, collate, print and distribute information
contained in various databases maintained by Innotrac.
HOME DEPOT
Home Depot purchases in-store signage from various vendors and warehouses
the inventory in one of Innotrac's distribution facilities. For new store
openings, promotions or replacement, Home Depot orders signs from Innotrac to
ship to one or several of its stores in the United States and Canada. Innotrac
does not own the inventory, but manages it and provides cost and inventory
reports directly to Home Depot. As requested, Innotrac may assemble special
signs or products for distribution to Home Depot stores. In addition, Innotrac
provides Home Depot with cost accounting for each store's usage of signs so
that Home Depot can allocate those costs directly to the appropriate stores.
The Company invoices Home Depot monthly for order processing, consultative
account services, fulfillment and other expenses (such as freight and
supplies).
BELLSOUTH
Since 1987, the Company has provided many marketing support services for
BellSouth, including the Caller ID display unit distribution program, which
began in 1991. A transaction generally begins when a customer calls BellSouth
and speaks with one of over 4,000 BellSouth service representatives to obtain
Caller ID service. On behalf of Innotrac, the representative may offer to sell
or rent to the customer one of several models of Caller ID and telephone
products that can be paid for through the customer's phone bill, on an
interest free installment basis. If the representative makes the sale, the
order is sent via EDI to Innotrac. Occasionally, if more detailed information
is required, the customer's call is transferred directly to Innotrac. Innotrac
generally ships the order the next day and electronically submits monthly to
BellSouth the appropriate charges to be included on the customer's telephone
bill. Innotrac also provides the BellSouth customer with order status, billing
information and technical product support through its call center by IVR or
representative. Innotrac does not charge BellSouth for its services but
instead derives its fees from the difference in the price of the Caller ID
display unit charged to the customer and the wholesale cost of the product.
The Company has also been selected by BellSouth, starting in the first
quarter of 1998, to sell telephone network services such as voice mail and
upgraded Caller ID service. When one of Innotrac's thousands of daily customer
service calls for BellSouth is received, Innotrac's computer system will be
able to determine if the customer's telephone system can support the enhanced
services. If the customer and its existing system meet certain parameters, the
Innotrac representative will be prompted by the computer to offer the new
features. Innotrac will be paid by BellSouth on a per sale basis under this
program, and the program is expected to require minimal additional cost to
Innotrac.
MARKETING SUPPORT SERVICES
Innotrac designs flexible marketing support solutions that range from small,
specialty projects to large integrated fulfillment, teleservicing and database
tracking project from among the following service options:
26
DISTRIBUTION SERVICES
TRADITIONAL PRODUCT AND LITERATURE FULFILLMENT. Innotrac is committed to
making its clients' products and services available to its customers on a
timely and accurate basis. Innotrac personnel process, pack and ship from the
Company's warehouses product orders and requests for promotional, technical and
educational literature, signage and point of sale materials for clients.
Clients may order such inventory by e-mail, through customized Internet
applications, EDI, telephone or facsimile. The Company ships orders so that the
product or literature reaches the client or its customer as it is needed
("just-in-time"). Additional fulfillment services offered by the Company
include (i) customized product assembly, (ii) kit assembly, (iii) binder
collation, (iv) manifest delivery service systems, (v) shrink wrapping, (vi)
weight verification of materials and (vii) preparing, addressing, coordinating,
sorting and mailing materials. The Company streamlines and customizes the
fulfillment procedures for each client based upon the product and literature
request, and the tracking, reporting and inventory controls necessary to
implement the marketing support program.
VIRTUAL DISTRIBUTION. Innotrac can provide literature and publishing
fulfillment services through advanced delivery systems, such as fax-on-demand,
print-on-demand and virtual warehousing, which management believes will be the
industry norm in the near future. Management believes these services will speed
the delivery of important documents to a client or a client's customer at a
much lower cost than traditional literature fulfillment, and that increasing
advances in facsimile and printer technology will enable the quality of
documents provided through these services to equal or surpass current quality.
With fax-on-demand, a client or a client's customer calls a toll-free
number to reach the Company's call center. Using the IVR system, the caller
then searches for a particular publication from a menu of choices, or from a
catalog of publications already in his or her possession, and instructs the
system to deliver such publication. The desired literature or marketing
materials are then quickly faxed to the customer.
Print-on-demand solutions enable customers to cost-effectively produce and
distribute small or large volumes of a document on short notice. As part of
this service, the client supplies the Company with either an electronic file
containing the document or a hard copy of the document, in black and white or
in color, which the Company converts to an electronic file and stores in its
computer system. The client or the client's customer can then use its own
computer system or telephone to place a print order, including production
amount and distribution method and location. The Company then completes the
print and distribution process, thereby avoiding the costs of maintaining a
warehouse for storage of the documents and personnel to pick and pack the
documents for shipment.
Virtual warehousing solutions take the print-on-demand program to a more
efficient level of operation. With these services, the client provides Innotrac
with copies of its technical, educational or marketing literature for transfer
onto Innotrac's computer system. The Company then stores and organizes the
materials on a customized system designed to facilitate the client's retrieval
needs. Instead of placing orders with Innotrac to print and ship literature
requirements (as in print-on-demand), utilizing virtual warehousing, the client
can print the materials directly to its printers or its customer's printers,
thereby reducing warehousing, labor and shipping costs.
Other components of the Company's virtual distribution services include
broadcast fax and broadcast e-mail, which enable an Innotrac client to send
literature to a database of fax numbers or e-mail addresses. These services
allow a client to communicate with customers or sales personnel quickly,
efficiently and cost effectively.
MANAGEMENT SERVICES
INVENTORY MANAGEMENT. An integral part of Innotrac's marketing support
services is the on-line tracking and control of a client's inventory. The
Company provides automated inventory management to assure real-time stock
counts of a client's products, sales, educational and technical literature,
signage and other items. These inventory management systems allow Innotrac and
the client to maintain consistent and timely reorder
27
levels and supply capabilities and also allow the client to assess quickly (i)
current stock balances, (ii) year-to-date receipts, (iii) monthly and yearly
usage, (iv) reorder levels, (v) pricing information and (vi) dollar value of
inventory. The Company offers this information to the client on a real-time
basis via direct dial-up, through its Internet gateway, or through EDI.
Inventory management data is also utilized in the Company's reporting
services. See "--Management Services--Reporting." Innotrac also utilizes bar
coding equipment in its inventory management systems, which improves the
efficiency of stock management and selection.
DATABASE MANAGEMENT. Innotrac can manage a client's databases
independently or in conjunction with other marketing support programs.
Independent database management begins with the client providing Innotrac with
the information to establish the database, which the Company then customizes,
manages, uses to provide reports to the client, and updates based upon
information supplied by the client. In addition, Innotrac's integrated
marketing support programs generate information about customers, demographics,
recurring technical problems and other matters. Innotrac compiles this
information into customized databases that evolve in conjunction with its on-
going marketing support and customer service programs. This data is a source
of valuable information to Innotrac and its clients in evaluating ongoing
programs and planning and designing future programs.
REPORTING. Innotrac provides reporting to support most of its services,
such as inventory analysis, program results and detailed order processing
information. Innotrac has developed flexible technologies and reporting
procedures that effectively convert raw data gathered during the course of a
marketing support program into useful, customized reports upon which clients
and Innotrac can base strategic decisions and more effectively respond to
customer needs and inquiries. For example, information obtained during a
customer telephone call is captured by the Company's database marketing and
management systems and is then incorporated into broader reports. These
reports also are used by Innotrac to ensure high quality performance. On-line
functions allow clients to monitor their programs in real-time to obtain
comprehensive trend analyses and modify program parameters as necessary.
Innotrac provides clients with customized reports in printed form, via the
Internet, electronic mail, computer-to-computer transmission, disk and
magnetic tape. Innotrac also provides cost-center based accounting reports for
clients who utilize Innotrac's services for subsidiary and intra-company
fulfillment transactions.
LEAD MANAGEMENT. The Company offers lead management services as a means
for clients to identify, communicate with and sell their products to new
customers. For example, clients often place advertisements in magazines and
newspapers with toll-free numbers for prospective customers to call to receive
more information. Innotrac can answer these requests for information,
establish a database of prospective customers, send information,
questionnaires or surveys to the prospective customers (which helps to further
screen the prospective customer for a possible sales contact by Innotrac's
client), and, once properly screened, Innotrac can issue a sales lead to the
appropriate sales representative of the client. During this process, the
Company tracks, analyzes and provides full reporting to the client so that
modifications or alterations in the program can be made at any time.
PAYMENT PROCESSING. Innotrac manages client programs in which the Company
distributes invoices on behalf of its clients and collects, tracks and reports
for its clients amounts due to them. In addition, the Company provides
services for clients in connection with credit card, coupon and rebate
processing.
INBOUND TELESERVICES
PRODUCT ORDERS. The Company's representatives in its call center process
orders with respect to items such as Caller ID display units and phone sets,
literature, signage, point-of-purchase materials, promotional items (caps,
shirts, pens, etc.) and video and audio tapes. Inbound teleservices are
generally commenced by a toll-free call from a client's customer that is
received by the Company, identified and routed to an Innotrac service
representative, who generally answers using the client's name. Orders for
Caller ID and other telecommunication products also occur as a result of an
Innotrac service representative offering products in connection with a
customer service or technical support call. To properly handle the call,
Innotrac's automated call distributors and
28
digital switches identify each inbound call by the toll-free number dialed and
immediately route the call to an Innotrac representative trained for that
client's program and possessing the language capabilities to deal with the
customer. In some cases teleservices are offered by IVR systems, which allow
customers to route their calls by selecting from a menu of offerings, and text
to speech systems, which allow the IVR system to "read" specific, real-time
data from the client's databases and convert it into speech based on cues from
a caller. Such systems, which the Company expects increasingly to utilize in
the future, generally reduce personnel and physical plant expenses associated
with a call center and expand the operating capabilities of the center.
Whether a customer's call is answered by a representative or one of the
Company's automated systems, the customer's needs are generally resolved with
a single call. The information and results of the call are then communicated
to appropriate personnel for order or additional processing and fulfillment
or, if Innotrac does not manage the client's inventory, the Company transmits
the customer's request directly to the client. Once an order is received,
Innotrac's automated systems allow representatives to track and update the
disposition of the order at any time through receipt by the customer.
TECHNICAL SUPPORT; CUSTOMER SERVICE. Innotrac service representatives
resolve complaints, diagnose and resolve product or service problems, and
answer technical questions for its client's customers. Technical support
inquiries are generally driven by a customer's purchase of a product or by a
customer's need for ongoing assistance. Customers of Innotrac's clients dial a
support number and are either connected with a trained Innotrac representative
or an IVR system. Innotrac's service representatives receiving a call can
enter customer information into the Company's call-tracking system, listen to
a question, and quickly access a proprietary network database via computer to
answer a customer's question. The IVR system attempts to resolve support
issues by guiding the customer through a series of interactive questions. If
automatic resolution by IVR cannot solve the problem, the call can be routed
to one of Innotrac's service representatives who is specially trained in the
applicable product. A senior representative is available to provide additional
assistance for complex or unique customer questions. As additional product
information becomes available over the course of the program, the Company
promptly integrates such information into its database, thereby ensuring that
IVR and representatives' answers are based upon the latest product
information. Frequently asked questions can also be integrated into IVR
systems to bypass representatives.
DEALER LOCATOR. Dealer locator services are offered both by IVR and
customer service representatives. Customers of Innotrac's clients, such as
NAPA, call a toll-free number to locate the closest dealer, store or
distributor office. By using the customer's zip code, Innotrac's software will
search the client database and offer the customer the address, phone number
and directions to the nearest location.
TECHNOLOGY
Innotrac's use of advanced technology enables it to design and efficiently
deliver services for each client's marketing support needs. The Company's
information technology group ("IT Group") has developed the Company's database
marketing support and management systems, which utilize a UNIX-based open
architecture comprised of multiple networked computers and anchored by a
Hewlett-Packard HP9000 K420 multiprocessing system. The Company plans to
utilize a portion of the net proceeds of the Offering to install an Oracle
database system and specialized order processing and inventory management
applications software, which features a 4GL (4th Generation Language)
technology that will allow for quick and efficient changes to programs,
systems and reports. This system will standardize the Company's computer
services and allow for even greater flexibility and capacity. See "Use of
Proceeds."
The open architecture of the Company's computer system permits the Company
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, the IT Group works with the client to modify the program on an
ongoing basis. Information can also be exchanged via EDI, Internet access and
direct-dial applications. The Company believes
29
that its technology platform is and will be among the most advanced in the
industry and provides the Company with the resources to continue to offer
leading edge services to current and new clients. The Company believes that
the integrity of client information is adequately protected by its data
security system and its off-site disaster back-up storage facilities.
The Company's call center utilizes a sophisticated Rockwell Spectrum
Automatic Call Distributor ("ACD") switch to handle the Company's call
management functions. This ACD system has the capacity to handle 2,400
teleservice representatives simultaneously, and is currently supporting over
200 representatives simultaneously. Additionally, the ACD system is integrated
with software designed to enable management to automatically schedule
teleservices representatives based on call length and call volume data
compiled by the ACD system.
PERSONNEL AND TRAINING
Innotrac's success in recruiting, hiring and training large numbers of
skilled employees and obtaining large numbers of hourly employees during peak
periods for distribution and teleservice operations is critical to the
Company's ability to provide high quality marketing support services.
Teleservice 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, the Company offers competitive
pay, hires primarily full-time employees who are eligible to receive a full
range of employee benefits, and provides employees with clear, visible career
paths.
As of December 1, 1997, the Company had 535 employees, of which
approximately 85% were full-time and 15% were part-time. Management believes
that the demographics surrounding its facilities, and its reputation,
stability, compensation and benefit plans should allow the Company to continue
to attract and retain qualified employees. The Company considers its employee
relations to be good.
FACILITIES
Innotrac's headquarters are located in 63,000 square feet of leased space in
Norcross, Georgia. The Company's corporate offices occupy 20,000 square feet
of this facility and the remaining 43,000 square feet is distribution space.
The Company leases an additional 16,000 square feet of space adjacent to its
corporate offices and operates another distribution center in Norcross with
42,000 square feet of space. The Company is combining its corporate offices
and distribution facilities into a 250,000 square foot facility, which is
within two miles of its call center. Construction on this facility has
commenced, and the Company expects to move into this new facility in the third
quarter of 1998. The new site also includes approximately 3.5 acres that will
be available for the Company's expansion requirements. The Company has entered
into a lease for the new facility with a term of 10 years and two five year
renewal options. The lease provides for an option to purchase the facility
prior to occupancy, at the end of the first five years of the term or at the
end of the first 10 years of the term. The Company has not yet determined
whether to exercise such purchase option.
Innotrac provides teleservices through its call center located in Duluth,
Georgia, which opened in June 1996. The call center is currently configured
with 325 workstations and has room to expand to approximately 700
workstations. It also contains approximately 18,000 square feet of
distribution space. It currently operates from 8:00 a.m. until midnight Monday
through Friday and from 9:00 a.m. to 8:00 p.m. on Saturday.
The Company believes that its facilities, after the move to the new
corporate offices and distribution facilities, will be adequate for its needs
for the foreseeable future.
COMPETITION
Innotrac competes on the basis of quality, reliability of service,
efficiency, technical superiority, speed, flexibility and price in tailoring
services to client needs. Management believes its comprehensive and integrated
services differentiate it from many of its competitors who may only be able to
provide one or a few of the
30
services that Innotrac provides. The Company continuously explores new
outsourcing service opportunities, typically in circumstances where clients
are experiencing inefficiencies in non-core areas of their businesses and
management believes it can develop a superior outsourced solution to such
inefficiency on a cost-effective basis. The Company primarily competes with
the in-house operations of its current and potential clients and also competes
with certain companies that provide similar services on an outsourced basis,
many of whom have greater resources than the Company.
GOVERNMENT REGULATION
Telephone sales practices are regulated at both the federal and state level
and primarily relate to outbound teleservices, which Innotrac generally does
not provide. To the extent that Innotrac offers outbound teleservices, such
operations are regulated by the rules of the Federal Communications Commission
(the "FCC") under the Federal Telephone Consumer Protection Act of 1991 (the
"TCPA"), the Federal Telemarketing and Consumer Fraud and Abuse Prevention Act
of 1994 (the "TCFAPA") and various state regulations regarding telephone
solicitations. The Company believes that it is in compliance with the TCPA,
the TCFAPA and the FCC rules thereunder and the various state regulations and
that it would operate in compliance with those rules and regulations if it
were to engage in more substantial outbound teleservice operations in the
future.
The Caller ID services offered by the Company's 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 (the "ECPA") and several state statutes. In March 1994, an FCC
report preempted certain state regulation of interstate calling party number
parameter ("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 ("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 Company works closely with its clients and their advisors to ensure that
the Company and the client are in compliance with such regulations. The
Company cannot predict whether the status of the regulation of Caller ID
services will change and what effect, if any, such change would have on the
Company or its industry.
INTELLECTUAL PROPERTY
The Company has used the service mark "Innotrac" since 1985 and has filed
applications for federal registration of this service mark in multiple
classes. The "innotrac.com" domain name has been a registered
31
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 the
Company's registration of its service mark, or that such service mark will not
be challenged by other users. The Company does not believe that it owns or
utilizes any other service marks that are material to its business. The
Company's operations, however, frequently incorporate proprietary and
confidential information. In accordance with industry practice, the Company
relies upon a combination of contract provisions and trade secret laws to
protect the proprietary technology it uses and to deter misappropriation of
its proprietary rights and trade secrets.
LEGAL PROCEEDINGS
The Company may be involved from time to time in litigation arising in the
normal course of business. The Company is not a party to any current legal
proceeding.
32
MANAGEMENT
EXECUTIVE OFFICERS, DIRECTORS AND KEY EMPLOYEES
The executive officers, directors and key employees of the Company are as
follows:
DIRECTOR TERM
NAME AGE POSITION EXPIRES
---- --- -------- -------------
Executive Officers and
Directors:
Scott D. 40 President, Chief Executive Officer 2000
Dorfman(1)(3)......... and Chairman of the Board
David L. Ellin(1)...... 39 Senior Vice President, Chief 2000
Operating Officer, Secretary and
Director
Donald L. Colter, 37 Vice President--Operations
Jr. ..................
Larry C. Hanger........ 42 Vice President--Business Development 1998
and Director
John H. Nichols, III... 43 Vice President and Chief Financial
Officer
Bruce V. 40 Director 1998
Benator(1)(2).........
Martin J. Blank(2)(3).. 50 Director 1999
Campbell B. Lanier, 47 Director 1999
III(2)................
William H. Scott, 50 Director 1999
III(3)................
Key Employees:
Nancy C. Bergeron...... 46 Director of Marketing
Robert C. Covington, 41 Director of Information Technology
III...................
Robert Jackson, Jr. ... 46 Director of Fulfillment Operations
Melissa B. Ohlson...... 33 Director of Human Resources
Robert W. Seitz........ 51 Director of Client Services
J. Mark Tobin.......... 39 Director of Call Center Operations
- --------
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
Mr. Dorfman is the founder of Innotrac and has served as President, Chief
Executive Officer and Chairman of the Board of the Company since its inception
in 1984. Prior to founding the Company, Mr. Dorfman was employed by Paymaster
Checkwriter Company, Inc. ("Paymaster"), an equipment distributor, where he
developed and managed Paymaster's mail order catalog and developed proprietary
software to track and analyze marketing programs. Prior to his employment with
Paymaster, Mr. Dorfman co-founded and served as President of Features Mail
Order Catalog, where he gained experience in distribution, tracking and
inventory control.
Mr. Ellin joined Innotrac in 1986, was appointed Secretary of the Company in
December 1997 and has served as Senior Vice President and Chief Operating
Officer of the Company since November 1997. He served as the Company's 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. Colter joined Innotrac in 1995 and has served as Vice President-
Operations since November 1997. He served as the Company's Chief Financial
Officer from 1995 to November 1997. Prior to joining Innotrac, Mr. Colter was
from 1993 to 1995 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.
33
Mr. Hanger joined Innotrac in 1994, and has served as Vice President-
Business Development since November 1997. He served as the Company'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. 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.
Mr. Benator is a partner of Williams Benator and Libby, LLP, certified
public accountants. He has been affiliated with the firm since 1984 and is the
firm's Director of Accounting and Auditing Services. He has been associated
with the Company since its inception, serving as a financial advisor and its
outside accountant. 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 ("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. Lanier has been a director since December 1997 and is Chairman of the
Board and Chief Executive Officer of ITC Holding Company, Inc. ("ITC
Holding"), the parent company of ITC. He has served as a director of ITC
Holding since its inception in 1989. In addition, Mr. Lanier is an officer and
director of several ITC Holding subsidiaries. He also is a director of KNOLOGY
Holdings, Inc. ("KNOLOGY"), a broadband telecommunications services company
currently operating in Alabama, Florida and Georgia (formerly known as
CyberNet Holding, Inc.); MindSpring Enterprises, Inc., an Internet service
provider; National Vision Associates, Ltd., a full service optical retailer;
K&G Men's Center, Inc., a discount retailer of men's clothing; Vice Chairman
of the Board of AvData Systems, Inc. ("AvData"), a company providing data
communications networks; Chairman of the Board of Powertel, Inc. (formerly
InterCel, Inc.) ("Powertel"), a wireless telecommunications services company
operating in the southeastern United States, and Chairman of the Board of ITC
DeltaCom, Inc. ("ITC DeltaCom") a full service telecommunications provider to
business customers in the southeastern United States. He has served as a
Managing Director of South Atlantic Private Equity Fund IV, Limited
Partnership since 1997.
Mr. Scott has been a director since December 1997 and has served as
President and Chief Operating Officer of ITC Holding since 1991. He has been a
director of ITC Holding since 1989. From 1989 to 1991, he served as Executive
Vice President of ITC Holding. Mr. Scott is a director of Powertel, AvData,
KNOLOGY, ITC DeltaCom and MindSpring.
Ms. Bergeron joined Innotrac in April 1997 as Director of Marketing. From
1994 to 1996, Ms. Bergeron was Director of Marketing of Chemtronics, Inc., a
chemical manufacturer, and from 1992 until 1994 she served as Director of
Communications of Diversified Products, a home fitness equipment manufacturer.
Mr. Covington joined Innotrac in 1995 as Director of Information Technology.
From February 1995 to October 1995, Mr. Covington was a Technical Services
Manager at Alexander Howden North America, Inc., an insurance broker, where he
managed the company's information technology services. From 1985 to 1994,
Mr. Covington was the Director of MIS Operations at Digital Communications
Associates, Inc., a computer hardware and software manufacturer.
34
Mr. Jackson joined Innotrac in June 1997 as Director of Fulfillment
Operations. Prior to joining Innotrac, Mr. Jackson was from 1996 to 1997 a
Manufacturing Team Leader and Quality Engineer at Prestolite Wire Corporation.
From 1995 to 1996, Mr. Jackson was a Strategic Business Unit Manager at
Heatcraft Refrigeration and from 1993 to 1995 he engaged in independent
consulting with Total Quality Management. From 1976 to 1993, Mr. Jackson
served in various management roles at Digital Equipment Corporation.
Ms. Ohlson joined Innotrac in 1994 as Director of Human Resources. Prior to
joining Innotrac, Ms. Ohlson was from May to October 1994 engaged on a short-
term assignment as a human resource generalist with GEC Marconi Avionics, Inc.
From 1992 to May 1994, Ms. Ohlson was the Personnel Director at Star
Manufacturing, Inc.
Mr. Seitz joined Innotrac in December 1997 as Director of Client Services.
Prior to joining Innotrac, Mr. Seitz was from 1996 until November 1997 a
Principal and Senior Consultant at Weisser, Fitzpatrick & Greene Marketing.
From 1995 until 1996, Mr. Seitz was Manager of Market Development and
Communications at Boehringer Mannheim Corporation. From 1992 until 1995, Mr.
Seitz was a Principal and Senior Consultant at Winston, Greene Assoc. and from
1991 to 1992, he was Corporate Manager of Marketing Communications at Coulter
Corporation. Mr. Seitz also has 15 years of marketing communications
experience at Baxter Healthcare Corporation.
Mr. Tobin joined Innotrac in June 1997 as Director of Call Center
Operations. Prior to joining Innotrac, Mr. Tobin was from 1996 to April 1997
engaged in independent consulting in the telemarketing field. From 1995 to
1996, Mr. Tobin was the Call Center Director at ICT Global Enterprises, Inc.,
a telemarketing company. From 1985 to 1995, Mr. Tobin served as Area Manager-
Financial Management at SBC Communications, a telecommunications company.
EXECUTIVE COMPENSATION
The following table sets forth certain information regarding the annual
compensation for services in all capacities to the Company for the year ended
December 31, 1996 with respect to the Company's Chairman, President and Chief
Executive Officer and each of the Company's two other executive officers who
earned more than $100,000 in salary and bonus during such fiscal year (the
"Named Executive Officers"):
ANNUAL COMPENSATION
--------------------
NAME AND PRINCIPAL POSITION SALARY BONUS
--------------------------- ---------- ---------
Scott D. Dorfman....................................... $ 196,977 --
Chairman, President and Chief Executive Officer
David L. Ellin......................................... 136,849 $ 50,000
Senior Vice President, Chief Operating Officer and
Secretary
Larry C. Hanger........................................ 87,825 25,000
Vice President--Business Development
No options were granted by the Company to its executive officers during the
year ended December 31, 1996 and none were exercised. None of the Company's
executive officers or key personnel has an employment agreement with the
Company.
DIRECTORS COMPENSATION
The Company pays its outside directors an annual fee of $10,000, and
additional fees of $250 and $100, respectively, for each Board meeting and
committee meeting attended. The Company reimburses all directors for their
travel and other expenses incurred in connection with attending Board or
committee meetings. In addition, on December 11, 1997, the Company granted
options to purchase 20,000 shares of Common Stock to Mr. Benator at a price of
$9.10. The Company has granted each outside director options to purchase
10,000 shares of Common Stock at the initial public offering price, effective
as of the date of this Prospectus.
35
STOCK OPTION PLAN
In November 1997, the Company adopted its 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
("IRC"), 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, including its
subsidiaries. Non-qualified options, restricted stock awards, SARs and other
permitted forms of awards may be granted to any person employed by or
performing services for the Company, including directors, contractors and
consultants. The Stock Option Plan provides for the issuance of options and
awards for up to 800,000 shares of Common Stock.
Incentive stock options are also subject to certain limitations prescribed by
the IRC, 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, may be exercised
for no more than five years from the grant date. 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 the date of this Prospectus, options to purchase an aggregate of
383,000 shares of Common Stock have been granted under the Stock Option Plan,
including options for 155,000 and 25,000 shares of Common Stock issued to
Messrs. Ellin and Hanger, respectively, having an exercise price of $9.10 per
share.
36
PRINCIPAL SHAREHOLDERS
The table below sets forth certain information regarding the beneficial
ownership of the Common Stock, as of the date of this Prospectus and giving
effect to the Consolidation and to the Offering, by (i) each person known to
the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock, (ii) each director of the Company, (iii) each Named
Executive Officer and (iv) all directors and executive officers of the Company
as a group. Unless otherwise indicated, each of the shareholders listed below
has sole voting and investment power with respect to the shares beneficially
owned.
PERCENTAGE BENEFICIALLY OWNED
NUMBER OF SHARES ------------------------------
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BEFORE OFFERING AFTER OFFERING
- ---------------- --------------------- --------------- --------------
Scott D. Dorfman(2)...... 6,146,154(3) 94.6% 68.3%
ITC Service Company(4)... 353,846(5) 5.4 3.9
David L. Ellin........... 87,500(6) 1.3 *
Larry C. Hanger.......... -- -- --
Bruce V. Benator......... -- -- --
Martin J. Blank.......... -- -- --
Campbell B. Lanier, III.. 353,846(7) 5.4 3.9
William H. Scott, III.... 353,846(7) 5.4 3.9
All directors and
executive officers as a
group (9 persons)....... 6,555,000 100.0% 72.4%
- --------
* 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 such person or group has the
right to acquire within 60 days after the date of this Prospectus or with
respect to which such 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 such 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 such person or group but are not
deemed to be outstanding for the purpose of computing the percentage of any
other person or group. None of the options granted under the Company's
Stock Option Plan is exercisable within 60 days from the date of this
Prospectus.
(2) Mr. Dorfman's address is 1828 Meca Way, Norcross, Georgia 30093.
(3) Includes an aggregate of 160,060 shares owned by Mr. Dorfman's wife
individually and as custodian and trusts for the benefit of his children
and 32,500 shares subject to presently exercisable purchase options granted
to Mr. Ellin.
(4) ITC's and Messrs. Lanier and Scott's address is 1239 O.G. Skinner Drive,
West Point, Georgia 31833.
(5) ITC is entitled to receive shares of Common Stock in the Consolidation
equal to 10% of $46.0 million divided by the initial public offering price.
The other equity holders of the combining entities will own the remainder
of the 6,500,000 shares that will be outstanding after the Consolidation.
This formula is expected to result in 353,846 shares being issued to ITC,
assuming an initial public offering price of $13.00.
(6) Consists of 32,500 shares subject to presently exercisable options to
purchase such shares from Mr. Dorfman and 55,000 shares subject to
presently exercisable options from the Company.
(7) Consists of the shares owned of record by ITC, with respect to which
Messrs. Lanier and Scott, as principal shareholders and officers of such
entity, may be deemed the beneficial owner. Messrs. Lanier and Scott
disclaim beneficial ownership of such shares.
37
CERTAIN TRANSACTIONS
Scott D. Dorfman, Chairman of the Board, Chief Executive Officer and
majority shareholder of the Company, has guaranteed the Company's obligations
under its credit facility with a bank, which consists of a $25,000,000
revolving line of credit and a $2,000,000 term loan, and the subordinated note
in the principal amount of $3.5 million payable to ITC described below. The
bank guarantee will terminate upon the completion of the Offering, and the
subordinated note will be repaid with a portion of the proceeds from the
Offering.
In connection with the Consolidation, Mr. Dorfman, together with his
children, and ITC, will receive distributions of $6.0 million and $400,000,
respectively, from two pass-through entities that are parties to the
Consolidation, which distributions represent a portion of these entities'
accumulated earnings. In addition, each of the entities will reimburse Mr.
Dorfman and ITC for estimated tax payments with respect to their earnings for
1997 and 1998. Two directors of the Company, Messrs. Lanier and Scott, are
officers, directors and principal shareholders of ITC. See "Use of Proceeds."
As a result of the Consolidation, and as consideration for their respective
interests in the affiliated entities that are parties to the Consolidation,
shares of Common Stock of the Company will be owned as follows: Mr. Dorfman--
6,146,154 shares (including 493 shares beneficially owned by his wife, and
159,567 shares held by trusts or in custodianship for his children) and ITC--
353,846 shares, assuming an initial public offering price of $13.00. ITC is
entitled to receive shares of Common Stock in the Consolidation equal to 10%
of $46.0 million divided by the initial public offering price.
Prior to the closing of the Offering, the Company intends to redeem for
approximately $390,000 from Arnold Dorfman, the father of Scott D. Dorfman,
all of his shares of one of the entities that is a party to the Consolidation.
In December 1998, the Company intends to redeem for approximately $590,000
from Arnold Dorfman all of his shares of a second affiliated entity that is a
party to the Consolidation.
ITC is a creditor of the Company with respect to a certain subordinated note
in the principal amount of $3.5 million. The note bears interest at the prime
rate plus 8.0% per annum and matures in April 1999. Upon the completion of the
Offering, the Company intends to repay such note, plus accrued interest, in
full. See "Use of Proceeds."
From January 1, 1996 through October 1, 1997, the Company paid $145,914 in
fees to Williams Benator & Libby, LLP, certified public accountants, for
accounting and consulting services. Bruce V. Benator, a director of the
Company, is a partner of Williams Benator & Libby, LLP. After consummation of
the Offering, it is expected that Williams Benator & Libby, LLP will continue
to provide accounting and consulting services for the Company.
On December 11, 1997, the Board of Directors adopted a policy that any
transactions between the Company 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.
38
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have outstanding 9,000,000
shares of Common Stock (9,375,000 shares if the Underwriters' over-allotment
option is exercised in full). Of such shares, the 2,500,000 shares sold in the
Offering (2,875,000 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 acquired by "affiliates" of the
Company, as that term is defined in Rule 144 under the Securities Act ("Rule
144"), in which case these shares will be subject to the resale limitations of
Rule 144.
The outstanding shares of Common Stock not sold in the Offering were issued
and sold by the Company in a private transaction 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, beginning 90 days
after the Offering, a person who has beneficially owned any such shares for at
least one year, including "affiliates" of the Company, 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 the greater of one percent of
the then outstanding shares of Common Stock (estimated to be 90,000 shares
after completion of this Offering, or 93,750 shares if the Underwriters' over-
allotment option is exercised in full) or the average weekly trading volume of
the 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 Commission.
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 the Company. A person (or persons whose shares are aggregated) who
is not an "affiliate" of the Company at any time during the 90 days preceding
a sale, and who has beneficially owned such shares for at least two years,
would be entitled to sell such 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.
The Company, its officers and directors, and all shareholders of the Company
have agreed that they will enter into lock-up agreements generally providing
that they will not, directly or indirectly, offer, pledge, sell, contract to
sell, or otherwise dispose of or grant any options or other rights with
respect to, any shares of Common Stock or any securities that are convertible
into or exchangeable or exercisable for Common Stock owned by them for a
period of 180 days after the date of this Prospectus, without the prior
written consent of J.C. Bradford & Co. on behalf of Underwriters. If a
shareholder should request J.C. Bradford & Co. to waive the 180 day lock-up
period, J.C. Bradford & Co., consistent with past practice with regard to
other issuing companies, would take into consideration the number of shares as
to which such request relates, the identity of the requesting shareholder, the
relative demand for additional shares of Common Stock in the market, the
period of time since the completion of the Offering and the average trading
volume and price performance of the Common Stock during such period. See
"Underwriting."
Prior to the Offering, there has been no market for the Common Stock and 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. Such
sales may also make it more difficult for the Company to sell equity
securities or equity-related securities in the future at a time and price that
it deems appropriate.
39
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company 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 (the "Preferred Stock"), having such rights
and privileges as the Board of Directors may from time to time determine.
Giving effect to the Consolidation, 6,500,000 shares of Common Stock and no
shares of Preferred Stock will be issued and outstanding immediately prior to
the Offering.
The following summary of the Company's capital stock does not purport to be
complete and is qualified in its entirety by reference to the Amended and
Restated Articles of Incorporation (the "Articles of Incorporation") and the
Amended and Restated Bylaws (the "Bylaws") of the Company that are included 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 such dividends
as the Board of Directors of the Company may, in its discretion, declare out
of sources legally available therefor. See "Dividend Policy." Upon
dissolution, liquidation, or winding up of the Company, holders of Common
Stock are entitled to receive on a ratable basis, after payment or provision
for payment of all debts and liabilities of the Company and any preferential
amount due with respect to outstanding shares of Preferred Stock, all assets
of the Company available for distribution, in cash or in kind. Holders of
shares of Common Stock do not have preemptive or other subscription rights,
conversion or redemption rights, or any rights to share in any sinking fund.
All currently outstanding shares of Common Stock are, and the shares offered
hereby (when sold in the manner contemplated by this Prospectus) will be,
fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Company's Articles of Incorporation, the Board of Directors,
from time to time, may authorize the issuance of shares of Preferred Stock in
one or more series, 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 thereon. No shareholder
authorization is required for the issuance of 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 dividends and liquidation than the rights of holders of Common
Stock. Any such series of Preferred Stock also could be used for the purpose
of preventing a hostile takeover of the Company that is considered to be
desirable by the holders of the Common 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 the Company 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, no transaction is now contemplated that would result in the
issuance of any such shares of Preferred Stock.
CERTAIN PROVISIONS OF THE COMPANY'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 seven directors, four of
whom are not employees of the Company. The Board of Directors is divided into
three classes of directors serving staggered three-year terms. The
classification of directors has the effect of making it more difficult for
shareholders to change the composition of the Board of Directors. The Company
believes, however,
40
that the longer time required to elect a majority of a classified Board of
Directors will help to ensure the continuity and stability of the Company's
management and policies. The classification provisions could also have the
effect of discouraging a third party from accumulating large blocks of the
Company's stock or attempting to obtain control of the Company, even though
such an attempt might be beneficial to the Company and its shareholders.
Accordingly, shareholders could be deprived of certain opportunities to sell
their shares of Common Stock at a higher market price than might otherwise be
the case. See "Risk Factors--Certain Anti-Takeover Provisions." The
shareholders will be entitled to vote on the election or removal of directors,
with each share entitled to one vote.
The Bylaws 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, the Company's Board of
Directors declared a dividend of one preferred share purchase right (a
"Right") for each outstanding share of Common Stock of the Company. Each Right
entitles the registered holder to purchase from the Company one one-hundredth
(1/100) of a share of Series A Participating Cumulative Preferred Stock, par
value $0.10 per share (the "Preferred Shares"), of the Company at a price of
$60.00 per one one-hundredth of a Preferred Share (the "Purchase Price"),
subject to adjustments to the exercise price and the number of Preferred
Shares issuable upon exercise from time to time to prevent dilution. The
Rights are not exercisable until the earlier to occur of (i) 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 (ii) 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 (the earlier of such dates being called the "Distribution Date").
In the event that the Company 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 Right will thereafter have the
right to receive, upon the exercise thereof at the then current exercise price
of the 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 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 Right, other than Rights beneficially
owned by the Acquiring Person (which will thereafter be void), will thereafter
have the right to receive upon exercise that number of shares of Common Stock
having a market value of two times the exercise price of the Right.
Preferred Shares purchasable upon exercise of the Rights will not be
redeemable. Each 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 of liquidation, the holders of the 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 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 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 Distribution Date, the Rights may not be detached or
transferred separately from the Common Stock. The Rights will expire on
, 2007 (the "Final Expiration Date"), unless the Final Expiration Date
is extended or unless the Rights are earlier redeemed or exchanged by the
Company, 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, the Board
of Directors of the Company may redeem the Rights in whole, but not in part,
at a price of $0.001 per Right (the "Redemption
41
Price"). Immediately upon any redemption of the Rights, the right to exercise
the Rights will terminate and the only right of the holders of Rights will be
to receive the Redemption Price. A more detailed description and terms of the
Rights are set forth in a Rights Agreement (the "Rights Agreement") between
the Company and Reliance Trust Company as Rights Agent (the "Rights Agent").
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 the Company, to consider the interests of the employees,
customers, suppliers and creditors of the Company, the communities in which
offices or other establishments of the Company are located and all other
factors the directors consider pertinent, in addition to considering the
effects of any actions on the Company 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, and on the basis of these considerations 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 the Company's
shareholders.
INDEMNIFICATION AND LIMITATIONS ON LIABILITY OF DIRECTORS AND OFFICERS
The Company's 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 the Company 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. Insofar as
indemnification for liabilities under the Securities Act may be permitted to
directors, officers or persons controlling the Company pursuant to the
foregoing provisions, the Company has been informed that, in the opinion of
the Commission, such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable. Pursuant to its Bylaws, the
Company may also indemnify its officers, employees, agents and other persons
to the fullest extent permitted by Georgia law. The Company's Bylaws obligate
the Company, under certain circumstances, to advance expenses to its directors
and officers in defending an action, suit or proceeding for which
indemnification may be sought. The Company has entered into Indemnification
Agreements with its directors and executive officers.
The Company's Bylaws also provide that the Company 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 Company, or who, while a director,
officer, employee or agent, is or was serving as a director, officer, trustee,
general partner, employee or agent of one of the Company's subsidiaries or, at
the request of the Company, of any other organization, against any liability
asserted against such person or incurred by such person in any such capacity,
where the Company would have the power to indemnify such person against such
liability under Georgia law. The Company intends to purchase and maintain
insurance on behalf of all of its directors and executive officers.
OTHER MATTERS
The Company has filed an application for the Common Stock to be approved for
quotation on The Nasdaq National Market under the symbol "INOC."
The transfer agent and registrar for the Company's Common Stock is Reliance
Trust Company, Atlanta, Georgia.
42
UNDERWRITING
Pursuant to the Underwriting Agreement, and subject to the terms and
conditions thereof, the Underwriters named below, acting through J.C. Bradford
& Co. and Wheat, First Securities, Inc., as representatives of the several
underwriters (the "Representatives"), have severally agreed to purchase from
the Company the number of shares of Common Stock set forth below opposite
their respective names:
NAME OF UNDERWRITERS NUMBER OF SHARES
-------------------- ----------------
J.C. Bradford & Co. ...........................................
Wheat, First Securities, Inc. .................................
---------
Total........................................................ 2,500,000
=========
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all shares of Common Stock
offered hereby, if any of such shares are purchased.
The Company has been advised by the Representatives that the Underwriters
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such price less a concession not in excess of $
per share. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per share to certain other dealers. After the
initial public offering, the public offering price and such concessions may be
changed. The Representatives have informed the Company that the Underwriters
do not intend to confirm sales to accounts over which they exercise
discretionary authority.
The Offering of the shares of Common Stock 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 offer without notice. The Underwriters
reserve the right to reject any offer for the purchase of shares.
The Company has granted the Underwriters an option, exercisable not later
than 30 days from the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock to cover over-allotments, if any. To the
extent that the Underwriters exercise such option, each of them will have a
firm commitment to purchase approximately the same percentage thereof which
the number of shares of Common Stock to be purchased by it shown in the table
above bears to the total number of shares in such table, and the Company will
be obligated, pursuant to the option, to sell such shares to the Underwriters.
The Underwriters may exercise such option only to cover over-allotments made
in connection with the sale of the 2,500,000 shares of Common Stock offered
hereby. If purchased, the Underwriters will sell such additional shares on the
same terms as those on which the 2,500,000 shares are being offered.
Prior to the Offering, there has been no public market for the Common Stock.
The initial public offering price has been determined by negotiation between
the Company and the Representatives. In determining such price, consideration
was given to, among other things, the financial and operating history and
trends of the Company, the experience of its management, the position of the
Company in its industry, the Company's prospects and the Company's financial
results. In addition, consideration was given to the status of the securities
markets, market conditions for new offerings of securities and the prices of
similar securities of comparable companies.
The Company, its executive officers and directors and all of its
shareholders have agreed with the Representatives not to offer, sell or
otherwise dispose of any shares of Common Stock, any securities exercisable
for or convertible into Common Stock or any options to acquire Common Stock
owned by them prior to the expiration of 180 days from the date of this
Prospectus, without the prior written consent of J.C. Bradford & Co., except
that the Company may issue shares in connection with the exercise of stock
options granted or to be granted under the Company's stock option plan. See
"Shares Eligible for Future Sale."
43
The Underwriting Agreement provides that the Company will indemnify the
Underwriters and controlling persons, if any, against certain civil
liabilities, including liabilities under the Securities Act, or will
contribute to payments that the Underwriters or any such controlling persons
may be required to make in respect thereof.
In connection with the Offering, the Underwriters and other persons
participating in the Offering may engage in transactions that stabilize,
maintain or otherwise affect the price of Common Stock. Specifically, the
Underwriters may over-allot in connection with the Offering, creating a short
position in Common Stock for their own account. To cover over-allotments or to
stabilize the price of Common Stock, the Underwriters may bid for, and
purchase, shares of Common Stock in the open market. The Underwriters may also
impose a penalty bid whereby they may reclaim selling concessions allowed to
an underwriter or a dealer for distributing Common Stock in the Offering, if
the Underwriters repurchase previously distributed Common Stock in
transactions to cover their short position, in stabilization transactions or
otherwise. Finally, the Underwriters may bid for, and purchase, shares of
Common Stock in market making transactions. These activities may stabilize or
maintain the market price of Common Stock above market levels that may
otherwise prevail. The Underwriters are not required to engage in these
activities and may end any of these activities at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the shares of Common
Stock offered hereby will be passed upon for the Company by Kilpatrick
Stockton LLP, Atlanta, Georgia. Certain legal matters in connection with this
Offering will be passed upon for the Underwriters by Nelson Mullins Riley &
Scarborough, L.L.P., Atlanta, Georgia.
EXPERTS
The financial statements of the Company at December 31, 1995 and 1996, and
for the nine months ended September 30, 1997, 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
The Company has filed with the Commission a Registration Statement on Form
S-1 under the Securities Act with respect to the Common Stock offered hereby.
This Prospectus, which is a part of the Registration Statement, does not
contain all of the information set forth in the Registration Statement and the
exhibits thereto. For further information with respect to the Company and the
Common Stock, reference is made to the Registration Statement, including the
exhibits thereto. Statements contained in this Prospectus concerning the
contents of any contract or any other document are not necessarily complete.
With respect to each such contract or document filed as an exhibit to the
Registration Statement, reference is made to such exhibit for a more complete
description of the matters involved, and each statement shall be deemed
qualified in its entirety by such reference to the copy of the applicable
document filed with the Commission. A copy of the Registration Statement,
including the exhibits thereto, may be inspected without charge at the Public
Reference section of the commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549 and at the following regional offices of
the Commission: New York Regional Office, 7 World Trade Center, 13th Floor,
New York, New York 10048; and Chicago Regional Office, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of the Registration
Statement and the exhibits and schedules thereto can be obtained from the
Public Reference Section of the Commission upon payment of prescribed fees.
The Commission maintains an Internet web site that contains reports, proxy and
information statements and other information regarding issuers that file
electronically with the Commission. The address of that site is
http://www.sec.gov.
44
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13
or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). Upon effectiveness of the Registration Statement, the Company will
become subject to the informational and periodic reporting requirements of the
Exchange Act, and in accordance therewith, will file periodic reports, proxy
statements, and other information with the Commission. Such periodic reports,
proxy statements, and other information will be available for inspection and
copying at the public reference facilities and other regional offices referred
to above. The Company intends to register the securities offered by the
Registration Statement under the Exchange Act simultaneously with the
effectiveness of the Registration Statement and to furnish its shareholders
with annual reports containing audited financial statements and such other
reports as may be required from time to time by law or the Nasdaq National
Market.
45
INDEX TO THE FINANCIAL STATEMENTS
OF INNOTRAC CORPORATION
COMBINED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................................. F-2
Combined Balance Sheets as of September 30, 1997 and December 31, 1996.... F-3
Combined Statements of Operations for the Nine Months Ended September 30,
1997 and 1996 (unaudited) and for the Years Ended December 31, 1996 and
1995..................................................................... F-4
Combined Statements of Partners', Members' and Shareholders' Equity for
the Nine Months Ended September 30, 1997 and for the Years Ended December
31, 1996 and 1995........................................................ F-5
Combined Statements of Cash Flows for the Nine Months Ended September 30,
1997 and 1996 (unaudited) and for the Years Ended December 31, 1996 and
1995..................................................................... F-6
Notes to Combined Financial Statements.................................... F-7
Unaudited Pro Forma Financial Data........................................ F-19
Unaudited Consolidated Pro Forma Statement of Operations for the Nine
Months Ended September 30, 1997.......................................... F-20
Unaudited Consolidated Pro Forma Balance Sheet as of September 30, 1997... F-21
F-1
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To: 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.:
We have audited the accompanying combined balance sheets of INNOTRAC
CORPORATION (a Georgia 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 September 30, 1997 and December 31, 1996
and the related combined statements of operations, partners', members' and
shareholders' equity and cash flows for the nine-month period ended September
30, 1997 and years ended December 31, 1996 and 1995. 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 combined financial statements referred to above present
fairly, in all material respects, the combined 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 September 30, 1997 and December 31, 1996 and
the results of their operations and their cash flows for the nine-month period
ended September 30, 1997 and the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
/s/ Arthur Andersen LLP
Atlanta, Georgia
December 12, 1997
F-2
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.
COMBINED BALANCE SHEETS AS OF SEPTEMBER 30, 1997 AND DECEMBER 31, 1996
ASSETS 1997 1996
------ ----------- -----------
Current assets:
Cash and cash equivalents............................. $ 425,624 $ 2,004,746
Accounts receivable, net (Note 3)..................... 21,672,839 25,460,016
Inventories........................................... 5,308,965 10,020,635
Deferred tax assets (Note 6).......................... 376,000 15,000
Prepaid expenses and other current assets............. 225,196 344,951
----------- -----------
Total current assets.................................. 28,008,624 37,845,348
----------- -----------
Property and equipment:
Rental equipment...................................... 11,070,723 13,005,802
Computer, machinery and transportation equipment...... 1,429,182 1,368,471
Furniture, fixtures and leasehold improvements........ 720,097 732,182
----------- -----------
13,220,002 15,106,455
Less accumulated depreciation and amortization........ 4,971,353 4,167,937
----------- -----------
8,248,649 10,938,518
----------- -----------
Other assets, net of amortization of $276,868 and
$160,255 as of September 30, 1997 and December 31,
1996, respectively.................................... 130,211 252,656
----------- -----------
Total assets.......................................... $36,387,484 $49,036,522
=========== ===========
PRO FORMA
SHAREHOLDERS'
EQUITY AT
SEPTEMBER 30,
1997 1997 1996
----------- ------------- -----------
LIABILITIES AND PARTNERS', MEMBERS',
AND SHAREHOLDERS' EQUITY (NOTE 10)
Current liabilities:
Current portion of long-term debt
(Note 4)............................ $ 736,249 $ 787,523
Line of credit (Note 4).............. 10,446,000 17,230,621
Accounts payable..................... 4,370,629 15,420,211
Distributions payable (Note 2)....... 3,509,960 300,229
Accrued expenses..................... 7,148,524 5,083,672
Other................................ 203,943 65,173
----------- -----------
Total current liabilities............ 26,415,305 38,887,429
----------- -----------
Noncurrent liabilities:
Subordinated debt (Note 4)........... 3,500,000 3,500,000
Long-term debt (Note 4).............. 555,555 1,060,720
Deferred tax liabilities (Note 6).... 101,000 206,000
Other................................ 0 12,300
----------- -----------
Total noncurrent liabilities......... 4,156,555 4,779,020
----------- -----------
Total liabilities.................... 30,571,860 43,666,449
----------- -----------
Commitments and contingencies (Note
5)...................................
Redeemable capital stock (Note 7)..... 894,402 830,033
----------- -----------
Partners', members' and shareholders'
equity (Note 7):
Partners' capital.................... 1,577,303 (2,422,697) 1,902,038
Members' deficit..................... (999,271) (999,271) (272,381)
Common stock......................... 4,590 4,590 4,590
Additional paid-in capital........... 14,370 14,370 14,370
Retained earnings.................... 4,324,230 1,924,230 2,891,423
----------- ---------- -----------
Total partners', members' and
shareholders' equity................ 4,921,222 (1,478,778) 4,540,040
----------- ---------- -----------
Total liabilities and partners',
members' and shareholders' equity... $36,387,484 $49,036,522
=========== ===========
The accompanying notes are an integral part of these combined balance sheets.
F-3
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.
COMBINED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------ ------------------------
1997 1996 1996 1995
----------- ----------- ----------- -----------
(UNAUDITED)
Revenues, net.............. $67,313,499 $53,230,767 $71,297,170 $44,886,334
Cost of revenues........... 51,799,309 39,232,114 55,519,503 30,658,112
----------- ----------- ----------- -----------
Gross profit........... 15,514,190 13,998,653 15,777,667 14,228,222
----------- ----------- ----------- -----------
Operating expenses:
Selling, general and
administrative
expenses................ 9,072,142 8,007,071 10,390,817 6,510,069
Depreciation and
amortization............ 453,609 230,659 429,170 292,609
----------- ----------- ----------- -----------
Total operating
expenses.............. 9,525,751 8,237,730 10,819,987 6,802,678
----------- ----------- ----------- -----------
Operating income........... 5,988,439 5,760,923 4,957,680 7,425,544
----------- ----------- ----------- -----------
Other (income) expense:
Interest expense......... 1,422,302 954,607 1,456,508 1,089,853
Other.................... (1,715) 1,767 94,367 (72,645)
----------- ----------- ----------- -----------
Total other expense.... 1,420,587 956,374 1,550,875 1,017,208
----------- ----------- ----------- -----------
Income before income
taxes..................... 4,567,852 4,804,549 3,406,805 6,408,336
Income tax provision....... (75,300) (472,226) (211,494) (793,629)
----------- ----------- ----------- -----------
Net income............. $ 4,492,552 $ 4,332,323 $ 3,195,311 $ 5,614,707
=========== =========== =========== ===========
The accompanying notes are an integral part of these combined statements.
F-4
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.
COMBINED STATEMENTS OF PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED
CAPITAL DEFICIT STOCK CAPITAL EARNINGS TOTAL
----------- --------- ------ ------- ----------- -----------
BALANCE, DECEMBER 31,
1994...................... $ 406,275 $ 0 $4,590 $14,370 $ 1,199,057 $ 1,624,292
Net income................. 2,032,545 0 0 0 3,582,162 5,614,707
Distributions to
shareholders, members and
partners.................. (1,331,028) 0 0 0 (2,607,242) (3,938,270)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (105,608) (105,608)
----------- --------- ------ ------- ----------- -----------
BALANCE, DECEMBER 31,
1995...................... 1,107,792 0 4,590 14,370 2,068,369 3,195,121
Member contributions....... 0 2,000 0 0 0 2,000
Net income (loss)............. 1,323,246 (39,381) 0 0 1,911,446 3,195,311
Distributions to
shareholders, members and
partners.................. (529,000) (235,000) 0 0 (977,000) (1,741,000)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (111,392) (111,392)
----------- --------- ------ ------- ----------- -----------
BALANCE, DECEMBER 31,
1996...................... 1,902,038 (272,381) 4,590 14,370 2,891,423 4,540,040
Net income (loss).......... 2,940,265 (961,889) 0 0 2,514,176 4,492,552
Distributions to
shareholders, members and
partners.................. (3,265,000) 234,999 0 0 (1,017,000) (4,047,001)
Accreted dividends on
redeemable capital stock.. 0 0 0 0 (64,369) (64,369)
----------- --------- ------ ------- ----------- -----------
BALANCE, SEPTEMBER 30,
1997...................... $ 1,577,303 $(999,271) $4,590 $14,370 $ 4,324,230 $ 4,921,222
=========== ========= ====== ======= =========== ===========
The accompanying notes are an integral part of these combined statements.
F-5
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.
COMBINED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------------- -------------------------
1997 1996 1996 1995
----------- ------------ ----------- ------------
(UNAUDITED)
Cash flows from operating
activities:
Net income.............. $ 4,492,552 $ 4,332,323 $ 3,195,311 $ 5,614,707
Adjustments to reconcile
net income to net cash
provided by operating
activities:
Depreciation and
amortization........... 453,609 230,659 429,170 292,609
Depreciation--rental
equipment.............. 2,861,214 2,084,545 3,004,699 1,763,028
Loss on disposal of
rental equipment....... 3,174,742 1,835,397 2,538,129 1,755,956
Subordinated debt
accretion.............. 0 163,781 163,781 179,776
Deferred income taxes... (466,000) (254,000) (107,000) 227,000
Decrease (increase) in
accounts receivable.... 3,787,177 (10,779,733) (6,753,077) (12,594,156)
Decrease (increase) in
inventories............ 4,711,670 (8,141,131) (7,683,173) (1,092,926)
Decrease (increase) in
prepaid expenses and
other assets........... 119,755 (45,315) (327,074) 44,466
(Decrease) increase in
accounts payable....... (9,687,582) 1,727,406 3,610,642 8,814,933
Increase in accrued
expenses............... 2,064,852 3,213,546 2,484,253 1,397,043
Other................... 126,469 (151,867) (468,149) 12,119
----------- ------------ ----------- ------------
Net cash provided by
(used in) operating
activities............ 11,638,458 (5,784,389) 87,512 6,414,555
----------- ------------ ----------- ------------
Cash flows from investing
activities:
Accrued equipment
purchases.............. (1,362,000) 0 (272,000) 0
Purchases of property
and equipment.......... (3,677,250) (4,440,772) (7,699,769) (7,812,510)
----------- ------------ ----------- ------------
Net cash used in
investing activities.. (5,039,250) (4,440,772) (7,971,769) (7,812,510)
----------- ------------ ----------- ------------
Cash flows from financing
activities:
Net (repayments)
borrowings under lines
of credit.............. (6,784,621) 9,868,876 13,168,781 3,164,848
Proceeds from long-term
debt................... 0 2,027,000 2,096,000 0
Repayment of long-term
debt................... (556,439) (156,123) (327,766) (397,401)
Repayment of
subordinated debt...... 0 (1,000,000) (1,000,000) 0
Loan commitment fees.... 0 (200,000) (200,000) 0
Proceeds from members'
contributions.......... 0 2,000 2,000 0
Distributions to
shareholders, members
and partners........... (837,270) (3,822,861) (3,890,244) (2,179,797)
----------- ------------ ----------- ------------
Net cash (used in)
provided by financing
activities............ (8,178,330) 6,718,892 9,848,771 587,650
----------- ------------ ----------- ------------
Net (decrease) increase
in cash and cash
equivalents............. (1,579,122) (3,506,269) 1,964,514 (810,305)
Cash and cash
equivalents, beginning
of period............... 2,004,746 40,232 40,232 850,537
----------- ------------ ----------- ------------
Cash and cash
equivalents, end of
period.................. $ 425,624 $ (3,466,037) $ 2,004,746 $ 40,232
=========== ============ =========== ============
Supplemental cash flow
disclosures:
Cash paid for interest.. $ 1,440,255 $ 740,826 $ 1,207,483 $ 846,010
=========== ============ =========== ============
Cash paid for income
taxes, net of refunds
received............... $ 251,931 $ 356,256 $ 891,552 $ 523,134
=========== ============ =========== ============
Non cash transactions:
Accreted dividends on
Redeemable Capital
Stock.................. $ 64,369 $ 90,982 $ 111,392 $ 105,608
=========== ============ =========== ============
The accompanying notes are an integral part of these combined statements.
F-6
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.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION
Innotrac Corporation ("Innotrac"), 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. are all entities under common
control and are collectively referred to herein as the "Companies." Each of
these entities provides various forms of marketing support and distribution
services. In conjunction with Innotrac's planned initial public offering, the
Companies will reorganize as one consolidated entity. (See Note 10 for a
description of the Companies' planned reorganization.)
Innotrac provides marketing support services, including fulfillment, order
processing, data processing, and teleservices. IELC, Inc. ("IELC") is owned by
Innotrac's sole shareholder and provides employee-leasing services. RenTel #1,
Inc. ("RenTel") is 90%-owned by Innotrac's sole shareholder and rents caller
identification display devices ("Caller I.D. units") to consumers in Tennessee
and South Carolina. RenTel #2, L.L.C. ("RenTel #2") is primarily owned by
Innotrac's sole shareholder and rents Caller I.D. units to consumers in
California. SellTel, Inc. ("SellTel") is 90%-owned by Innotrac's sole
shareholder and sells Caller I.D. units and other telecommunications equipment
on an installment basis to consumers in Tennessee and South Carolina. SellTel
#2, L.L.C. ("SellTel #2") is primarily owned by Innotrac's sole shareholder and
sells Caller I.D. units and other telecommunications equipment on an
installment basis to consumers in California. HomeTel Systems, Inc. ("HomeTel")
is primarily owned by Innotrac's sole shareholder and sells and rents various
types of telecommunications equipment to consumers in the southeastern and
western United States. HomeTel Providers, Inc. ("Providers Inc.") is wholly
owned by Innotrac's sole shareholder and is the general partner of HomeTel
Providers Partners, L.P. ("Providers, L.P."). Providers, L.P. rents and sells
Caller ID units and other telecommunications equipment on an installment basis
to consumers in Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi and
North Carolina.
See Note 7 for a discussion of RenTel and SellTel debt and equity
arrangements.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Combination
The accompanying combined financial statements include the accounts of
Innotrac, IELC, RenTel, SellTel, HomeTel, Providers Inc., RenTel #2, SellTel #2
and Providers, L.P. and are prepared on the accrual basis of accounting.
Significant intercompany accounts and transactions have been eliminated in the
combination. Combined financial statements are 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.
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
F-7
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 two 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 87%,
82% and 82% of total revenues for the nine month period ended September 30,
1997 and the years ended December 31, 1996 and 1995, 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.
Prior to January 1, 1996, depreciation for rental equipment was computed
using the straight-line method over a four-year period. As a result of a
review of its rental equipment, management decreased the useful lives of its
rental equipment to three years. The effect of this change was not material to
the results of operations.
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.
F-8
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Equipment rental losses were approximately $3,175,000, $2,538,000 and
$1,756,000 for the nine month period ended September 30, 1997 and for the
years ended December 31, 1996 and 1995 respectively, and are included in "Cost
of Revenues" on 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.
Income Taxes
Innotrac, IELC and SellTel, as C corporations, utilize 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.
The shareholders of RenTel, Providers Inc. and HomeTel have 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. Accordingly, no
provisions for federal and certain state income taxes related to these
entities have been made in the accompanying financial statements.
The Code and certain applicable state statutes provide that the income and
expenses of a partnership are not separately taxable to the partnership, but
rather accrue directly to the partners. Accordingly, no provision for federal
and certain state income taxes related to Providers, L.P. have been made in
the accompanying financial statements.
As limited liability companies, RenTel #2 and SellTel #2 are not subject to
federal and state income taxes. The taxable income or loss of these entities
are included in the federal and state income tax returns of their members.
Accordingly, no provisions for income taxes have been reflected in the
accompanying financial statements related to these entities.
It is 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 RenTel, RenTel #2, SellTel #2,
HomeTel, Providers Inc., and Providers, L.P. During the nine-month period
ended September 30, 1997 and the years ended December 31, 1996 and 1995,
distributions of approximately $4,047,000, $1,741,000 and $3,938,000,
respectively, were recorded, of which approximately $3,510,000 and $300,000
were accrued and unpaid as of September 30, 1997 and December 31, 1996,
respectively. Additionally, in conjunction with the reorganization (Note 10),
management anticipates distributing approximately $6,400,000 of the
undistributed earnings of approximately $9,000,000 to the owners of HomeTel
and Providers, L.P.
Revenue Recognition
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped or rentals are provided. Allowances are made
for estimated billings that are not collectible and for estimates of product
returns (Note 3).
F-9
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Fair Value of Financial Instruments
The carrying values of the Companies' financial instruments approximate
their fair values.
Advertising Costs
The Companies expense all advertising costs as incurred.
3. ACCOUNTS RECEIVABLE
The Companies' accounts receivable include amounts that are billed in
installments over a five to twelve month period. Accounts receivable were
composed of the following at September 30, 1997 and December 31, 1996:
1997 1996
----------- -----------
Billed receivables................................. $18,112,282 $16,857,463
Unbilled installment receivables................... 9,156,565 12,844,916
----------- -----------
Total receivables.................................. 27,268,847 29,702,379
Less allowances.................................... (5,596,008) (4,242,363)
----------- -----------
$21,672,839 $25,460,016
=========== ===========
Management believes that the allowances for doubtful accounts and returns
reduce the gross accounts receivable to net amounts that will be collected.
F-10
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. FINANCING OBLIGATIONS
Financing obligations as of September 30, 1997 and December 31, 1996
consisted of the following:
1997 1996
----------- -----------
Borrowings under revolving credit agreement (up to
$18,000,000 individually or in aggregate, except as
to Rentel and SellTel, which combined borrowings
cannot exceed $2,000,000 and Providers, L.P., which
borrowings cannot exceed $12,000,000; 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
the prime rate (8.5% at September 30, 1997 and
December 31, 1996), matured on October 15, 1997,
secured by all assets of the Companies and a personal
guarantee of the sole shareholder of Innotrac........ $10,446,000 $17,230,621
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 September 30, 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............................................ 3,500,000 3,500,000
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..................................... 1,222,222 1,722,222
Other................................................. 69,582 126,021
----------- -----------
15,237,804 22,578,864
Current portion....................................... 11,182,249 18,018,144
----------- -----------
$ 4,055,555 $ 4,560,720
=========== ===========
Scheduled maturities of financing obligations are as follows:
Through December 31, 1997....................................... $10,612,667
1998............................................................ 736,249
1999............................................................ 3,888,888
-----------
Total......................................................... $15,237,804
===========
The revolving line of credit agreement and the term note contain various
restrictive financial and change of ownership control covenants, with which
the Company is currently in compliance.
Subsequent to September 30, 1997, the Companies extended the maturity of the
revolving line of credit from October 15, 1997 to November 15, 1999. Under the
terms of the new agreement, the total borrowings available under the line will
be increased from $18,000,000 to $25,000,000. The Companies paid a loan
commitment fee of $125,000 associated with this agreement.
F-11
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED 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 September 30, 1997
are as follows:
Three months ending December 31, 1997............................ $ 262,483
1998............................................................. 690,028
1999............................................................. 294,312
----------
Total minimum lease payments..................................... $1,246,823
==========
Rent expense under all operating leases totaled approximately $802,000,
$770,000 and $393,000 during the nine-month period ended September 30, 1997
and the years ended December 31, 1996 and 1995, respectively.
The Companies entered into an operating lease agreement to lease new
facilities subsequent to September 30, 1997. Under the new agreement, which
commences in July 1998, rental expense will increase by approximately $400,000
per year through 2008.
Marketing Support Agreements
The Companies have entered into a six-year agreement, which expires in March
2000, 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 upon 24
months written 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 Companies are subject to legal proceedings and claims that arise in the
ordinary course of business. There are no material pending legal proceedings
to which the Companies are a party.
6. INCOME TAXES
Details of the income tax provision for the nine-month period ended
September 30, 1997 and the years ended December 31, 1996 and 1995 are as
follows:
1997 1996 1995
--------- --------- --------
Current....................................... $ 541,300 $ 318,494 $566,629
Deferred...................................... (466,000) (107,000) 227,000
--------- --------- --------
$ 75,300 $ 211,494 $793,629
========= ========= ========
F-12
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED 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
September 30, 1997 and December 31, 1996 are as follows:
1997 1996
--------- ---------
Noncurrent deferred tax (liabilities) assets:
Property, plant, equipment basis differences....... $ 18,000 $ 16,000
Conversion from cash to accrual taxpayer method--
long term......................................... (119,000) (227,000)
Other.............................................. 0 5,000
--------- ---------
(101,000) (206,000)
--------- ---------
Current deferred tax (liabilities) assets:
Reserves for uncollectable accounts................ 504,000 131,000
Conversion from cash to accrual taxpayer method--
current........................................... (143,000) (143,000)
Other.............................................. 15,000 27,000
--------- ---------
376,000 15,000
--------- ---------
Net deferred tax asset (liability)................... $ 275,000 $(191,000)
========= =========
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.
A reconciliation of the income tax provision computed at statutory rates to
the income tax provision for the periods presented is as follows:
SEPTEMBER 30 DECEMBER 31
------------ ------------
1997 1996 1995
------------ ----- -----
Federal statutory rate.......................... 34.0% 34.0% 34.0%
Increase (reduction) in taxes resulting from:
State income taxes, net of federal benefit.... 1.4 3.6 3.1
Income taxable directly to shareholders,
partners and members (Notes 1 and 2)......... (34.1) (31.8) (24.9)
Other........................................... 0.3 0.4 0.1
----- ----- -----
1.6% 6.2% 12.3%
===== ===== =====
7. REDEEMABLE CAPITAL STOCK
In September 1993, the Companies obtained $1,000,000 of financing from a
related party in the form of subordinated debt and equity in RenTel and
SellTel. The subordinated debt required monthly payments of interest with the
principal maturing at 60 months (September 1998). The subordinated debt was
repaid in full in September 1996. Additionally, the related party received
callable common stock representing 10 percent of the common stock in RenTel
and SellTel. The terms of the callable common stock provide each of Rentel and
SellTel the option to call the common stock at predetermined amounts on or
before September 30, 1998. If the
F-13
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Companies do not call the common stock interests, the Companies are obligated
to issue the related party an additional 10 percent common stock interest in
each of RenTel and SellTel. The related party does not have the right to
require each of RenTel and SellTel to redeem the common stock. However, due to
the related party nature of the transaction, the Companies are accounting for
the callable common stock as redeemable equity.
The Companies allocated the capital raised between "Subordinated Debt" and
"Redeemable Capital Stock" 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 via 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 proposed initial public offering (the "Offering") (see Note 10), the
Companies anticipate calling the RenTel shares prior to or on the effective
date of the Offering for $390,000 and the SellTel shares for $590,000
subsequent to the effective date of the Offering.
8. PARTNERS', MEMBERS' AND SHAREHOLDERS' EQUITY
Common stock and paid-in capital consisted of the following at September 30,
1997 and December 31, 1996:
COMMON PAID-IN
STOCK CAPITAL
------ -------
Innotrac Corporation, $0.10 par value, 100,000 shares
authorized, 15,300 shares issued and outstanding.......... $1,530 $13,470
IELC, Inc., no par value, 1,000 shares authorized, 10
shares issued
and outstanding........................................... 100 0
RenTel #1, Inc., no par value, 1,000 shares authorized, 100
shares issued
and outstanding........................................... 900 0
SellTel #1, Inc., no par value, 1,000 shares authorized,
100 shares issued
and outstanding........................................... 900 0
HomeTel Systems, Inc., no par value, 10,000 shares
authorized, 100 shares issued and outstanding............. 1,060 0
HomeTel Providers Inc., $0.10 par value, 10,000 shares
authorized, 1,000 shares issued and outstanding........... 100 900
------ -------
$4,590 $14,370
====== =======
See Note 10 for a description of the Companies' plan of consolidation.
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
F-14
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
January 1, 1997) and are 18 years of age. Participants may elect to defer 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 nine-month period ended September 30,
1997 and the years ended December 31, 1996 and 1995 were $12,600, $9,400 and
$6,000, respectively.
10. SUBSEQUENT EVENTS
Initial Public Offering
In the first quarter of 1998, Innotrac is planning an initial public
offering of common stock. Innotrac plans to issue 2,500,000 shares (2,875,000
if the underwriters overallotment is exercised in full) at an estimated
initial public offering price of between $12.00 and $14.00 per share. There
can be, however, no assurance that the Offering will be completed at a per
share price within the estimated range or at all. There are significant
potential risks associated with this Offering as well as Innotrac's ability to
compete profitability in this industry including, but not limited to, the
following:
RISKS ASSOCIATED WITH PRODUCT-BASED MARKETING SUPPORT SERVICES
In connection with certain of its fulfillment services, the Company
purchases the Caller ID and other equipment from third party vendors and,
therefore, assumes the risks of inventory obsolescence, damage to leased
units, theft and creditworthiness of purchasers. The ability of the Company
to receive payment for sales or rentals of such equipment is dependent on
the transmittal of correct customer invoices and remittance on a timely
basis by BellSouth and Pacific Bell. The occurrence of any of these events
could have a material adverse effect on the Company's business, results of
operations and financial condition. The credit risk assumed by the Company
is particularly significant because of the large number of customers, each
of which owes a relatively small amount. The Company's allowance for bad
debt was approximately $5.6 million at September 30, 1997.
F-15
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
RELIANCE ON TELECOMMUNICATIONS INDUSTRY
Caller ID is a relatively recent offering by telecommunications companies
and there can be no assurance that it will gain or sustain wide acceptance
in the marketplace. In addition, the provision of Caller ID services by
telecommunications companies is regulated at both the federal and state
level. Such regulations may have the effect of delaying the offering of
Caller ID service in a market of one of the Company's clients.
The Company is also dependent on the level of resources (financial and
otherwise) expended by its clients to promote Caller ID service. There can
be no assurance that the Company's telecommunications clients will
sufficiently promote, or continue to promote, Caller ID service in their
areas. Furthermore, there can be no assurance that the Company's
telecommunications clients will achieve their estimated "market
penetration" (the percentage of consumer telephone lines capable of
receiving Caller ID services that actually receive such services) goals,
upon which the Company, in part, plans its operations. In addition, at some
time in the future, peak market penetration for Caller ID service may be
achieved by the Company's clients or Caller ID service may be replaced by a
different service or hardware. The occurrence of any of these factors could
have a material adverse effect on the Company's business, results of
operations and financial condition.
RISKS OF BUSINESS INTERRUPTION; NEW FACILITY
The Company's operations are dependent upon its ability to protect its
distribution facilities, call center, computer and telecommunications
equipment and software systems against damage from fire, power loss,
telecommunications interruption or failure, natural disaster and other
similar events. In the third quarter of 1998, the Company expects to move
its corporate offices and four distribution facilities into a new facility.
In the event the Company experiences a temporary or permanent interruption
of its business, through casualty, operating malfunction, as a result of
the move or otherwise, the Company's business, results of operations or
financial condition could be materially adversely affected. The Company's
property and business interruption insurance, may not adequately compensate
the Company for all losses that it may incur.
RISKS ASSOCIATED WITH RAPIDLY CHANGING TECHNOLOGY; CONVERSION TO NEW
SOFTWARE
The Company's business is highly dependent on its computer and
telecommunications equipment and software systems. The Company intends to
use a portion of the net proceeds of the Offering to upgrade certain
computer hardware and software, and, as a result, will convert certain
existing programs to the new system. There can be no assurance that the
Company can effectively or efficiently convert its programs to the new
system. In addition, the Company's failure to maintain its technological
capabilities or to respond
F-16
INNOTRAC CORPORATION, IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS, INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
effectively to technological changes could have a material adverse effect
on the Company's business, results of operations and financial condition.
The Company's future success also will be highly dependent upon its ability
to enhance existing services and develop applications to focus on its
clients' needs and introduce new services and products to respond to
changing technological developments. There can be no assurance that the
Company can select, invest in and develop new and enhanced technology on a
timely basis in the future in order to meet clients' needs and to maintain
its own competitiveness, and the Company's failure to do so could have a
material adverse effect on the Company's business, results of operations
and financial condition.
ABILITY TO CONTINUE AND MANAGE GROWTH
Innotrac has recently experienced significant growth in its operations.
The Company's success will depend upon its ability to initiate, develop and
maintain existing and new client relationships; respond to competitive
developments; develop its sales and marketing forces; attract, train,
motivate and retain management and hourly personnel; and maintain the high
quality of the services and products that it provides to its clients. In
addition, the Company has entered into a long-term lease for a new
facility, which will increase lease expenses by approximately $400,000 per
year. The Company's continued rapid growth can be expected to place a
significant strain on the Company's management, operations, employees and
resources. There can be no assurance that the Company will be able to
maintain or accelerate its current growth, effectively manage its expanding
operations or achieve planned growth on a timely or profitable basis. If
the Company is unable to manage its growth effectively, its business,
results of operations and financial condition could be materially adversely
affected.
DEPENDENCE ON KEY PERSONNEL
The Company's operations depend in large part on the abilities and
continuing efforts of its executive officers and senior management. In
order to support its growth the Company will be required to effectively
recruit, develop and retain additional qualified management personnel.
There can be no assurance that the Company will be able to (i) retain the
services of its executive officers and key management, with whom the
Company has no employment agreements or (ii) recruit, develop and retain
additional qualified management personnel. The business and prospects of
the Company could be adversely affected if these persons do not continue in
their key roles and the Company is unable to attract and retain qualified
replacements.
Stock Options
In November 1997, the Company adopted a 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 Code, non-qualified stock options,
restricted stock awards, and stock appreciation rights ("SARs"). Incentive
stock options may be granted only to full-time employees (including officers)
of the Company and its subsidiaries. Non-qualified options, restricted stock
awards, SARs, and other permitted forms of awards may be granted to any person
employed by or performing services for the Company, including directors,
contractors, and consultants. The Stock Option Plan provides for the issuance
of options to purchase up to an aggregate of 800,000 shares of Common Stock.
F-17
INNOTRAC CORPORATION,IELC, INC., RENTEL #1, INC.,
SELLTEL #1, INC., HOMETEL SYSTEMS, INC.,
HOMETEL PROVIDERS INC., RENTAL #2, LLC,
SELLTEL #2, LLC AND HOMETEL PROVIDERS PARTNERS, L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
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 Plan.
As of December 12, 1997, stock options to purchase an aggregate of 343,000
shares at $9.10 per share of Common Stock have been granted under the Stock
Option Plan. 55,000 of these options vest immediately at the effective date of
the Offering; 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. Additionally, the Company plans on granting options to purchase
40,000 shares to four non-employee members of the Board of Directors at a
price equal to the initial public offering price which will vest immediately
upon grant.
Consolidation
In conjunction with the proposed Offering, Innotrac plans to consolidate the
eight affiliated entities (the "Consolidation") that had previously conducted
the business of the Company as an integrated business unit. The Consolidation
will be effected simultaneously with, and as a condition to, the Offering.
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. In exchange for their previous ownership interests,
5,420,000 shares of $0.10 par value common stock will be issued to the owners
pari-passu except for the minority stockholder of RenTel and SellTel, whose
ownership interests will be repurchased as scheduled effective with the
Offering and in the fourth quarter of 1998, respectively. In connection with
the Consolidation as detailed in the pro forma shareholders' equity, two of
the entities will make certain distributions of undistributed accumulated
earnings (approximately $6,400,000) to their principals. No shares of
Preferred Stock will be issued.
F-18
UNAUDITED PRO FORMA FINANCIAL DATA
As discussed in Note 1 to the combined financial statements, the historical
combined financial statements include the financial statements of Innotrac
Corporation, IELC, Inc., RenTel #1, Inc., SellTel #1, Inc., HomeTel Systems,
Inc., HomeTel Providers, Inc., RenTel #2, L.L.C., SellTel #2, L.L.C. and
HomeTel Providers Partners, L.P. Effective simultaneous with the Offering, the
Companies will be reorganized and consolidated. For accounting purposes,
HomeTel Providers Partners, LP will be deemed to be the acquiring entity. See
"The Consolidation."
The pro forma adjustments to the statements of operations for the nine month
period ended September 30, 1997 reflect (i) the Consolidation and (ii) the
Offering and the use of net proceeds thereof, as if each of such transactions
had occurred on January 1, 1997. The pro forma adjustments to the balance sheet
reflect (i) the Consolidation and (ii) the Offering and the use of net proceeds
thereof, as if each of such transactions had occurred on September 30, 1997.
The pro forma financial information does not purport to represent what
Innotrac's consolidated results of operations would have been if these
transactions had in fact occurred on these dates, nor does it purport to
indicate the future consolidated financial position or consolidated results of
future operations of Innotrac. The pro forma adjustments are based on currently
available information and certain assumptions that management believes to be
reasonable.
F-19
UNAUDITED CONSOLIDATED PRO FORMA STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
PRO FORMA
HISTORICAL PRO FORMA CONSOLIDATED
COMBINED ADJUSTMENTS AS ADJUSTED
---------- ----------- ------------
Revenues net............................ $67,314 $ -- $67,314
Cost of revenues........................ 51,800 -- 51,800
------- ------- -------
Gross profit............................ 15,514 -- 15,514
------- ------- -------
Operating expenses:
Selling, general and administrative
expenses.............................. 9,072 -- 9,072
Depreciation and amortization.......... 454 -- 454
------- ------- -------
Total operating expenses............ 9,526 -- 9,526
------- ------- -------
Operating income........................ 5,988 -- 5,988
------- ------- -------
Other (income) expense:
Interest expense...................... 1,422 (1,417)(a) 5
Other................................. (2) -- (2)
------- ------- -------
Total other expense................. 1,420 (1,417) 3
------- ------- -------
Income before income taxes.............. 4,568 1,417 5,985
Income tax provision.................... (75) (2,317)(b) (2,392)
------- ------- -------
Net income.............................. $ 4,493 $ (900) $ 3,593
======= ======= =======
Weighted average number of shares....... 2,500 (c)
6,603 (d) 9,103
Net income per share.................... $ 0.39 (e)
=======
- --------
(a) Reflects the elimination of interest expense on the line of credit, bank
note, and subordinated debt borrowings assumed to be repaid with the net
proceeds of the Offering.
(b) Reflects the tax effect of HomeTel Systems, HomeTel Providers Inc.,
HomeTel Providers Partners, L.P., RenTel #1, Inc., RenTel #2 LLC and
SellTel #2 LLC losing their non-C corporation status in conjunction with
the Consolidation as well as the tax effects of (a) above.
(c) Reflects 2,500,000 shares being offered hereby.
(d) Reflects 1,080,000 shares of Innotrac (after the stock split) and
5,420,000 shares of the Company issued in conjunction with the
Consolidation plus 102,900 shares granted under the Company's Stock Option
Plans within the 12 months prior to the effective date of the initial
public offering using the "treasury stock" method as if all shares had
been outstanding for all periods.
(e) Excludes the dividend accretion on redeemable capital stock of a
subsidiary of approximately $64,000 or $(0.01) per share.
F-20
UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEET
AS OF SEPTEMBER 30, 1997
(DOLLARS IN THOUSANDS)
HISTORICAL PRO FORMA PRO FORMA
COMBINED ADJUSTMENTS CONSOLIDATED
---------- ----------- ------------
Cash and cash equivalents................ $ 426 $ 4,184 (b) $ 4,610
Restricted cash.......................... -- 3,332 (b) 3,332
Accounts receivable, net................. 21,673 -- 21,673
Inventory................................ 5,309 -- 5,309
Prepaids and other....................... 600 3,621 (a) 4,221
------- -------- -------
Total current assets................. 28,008 11,137 39,145
------- -------- -------
Property and equipment, net.............. 8,249 -- 8,249
------- -------- -------
Other assets, net........................ 130 -- 130
------- -------- -------
Total assets......................... $36,387 $ 11,137 $47,524
======= ======== =======
Accounts payable......................... $ 4,371 $ -- $ 4,371
Accrued expenses......................... 10,658 -- 10,658
Current portion of debt.................. 736 (666)(b) 70
Line of credit........................... 10,446 (10,446)(b) 0
Other.................................... 204 -- 204
------- -------- -------
Total current liabilities............ 26,415 (11,112) 15,303
------- -------- -------
Subordinated debt........................ 3,500 (3,500)(b) 0
Long term debt........................... 556 (556)(b) 0
Deferred income taxes.................... 101 352 (a) 453
------- -------- -------
Total non-current liabilities........ 4,157 (3,704) 453
------- -------- -------
Total liabilities.................... 30,572 (14,816) 15,756
------- -------- -------
Redeemable Capital Stock................. 894 (390)(b) 504
------- -------- -------
Shareholders' equity:
Partners' capital...................... 1,577 (1,577)(b) 0
Members' deficit....................... (999) 999 (b) 0
Common stock........................... 5 645 (b) 900
250 (b)
Additional paid-in capital............. 14 (2,536)(b) 25,375
29,225 (b)
(6,400)(b)
Retained earnings...................... 4,324 3,268 (a) 4,989
(2,603)(b)
------- -------- -------
Total shareholders' equity........... 4,921 26,343 31,264
------- -------- -------
Total liabilities and shareholders'
equity.............................. $36,387 $ 11,137 $47,525
======= ======== =======
- --------
(a) Reflects the recording of deferred tax assets and liabilities associated
with the change in tax status to C corporation of HomeTel Systems, HomeTel
Providers Inc., HomeTel Providers Partners, L.P., RenTel #1, Inc., RenTel
#2 LLC and SellTel #2 LLC in conjunction with the Consolidation. See "The
Consolidation" for discussion.
(b) Reflects the Consolidation of the Company as described in "The
Consolidation" including the reclassification of the portion of retained
earnings attributable to the S corporation and to additional paid in
capital and the issuance of 5,420,000 shares of $0.10 par value Innotrac
Common Stock as well as the 1,080,000 shares of Innotrac after the stock
split. Also reflects the issuance of 2,500,000 shares of common stock at an
assumed offering price of $13.00 offered hereby and an increase in cash
equal to the net proceeds less repayment of the borrowings under the line-
of-credit facility ("LOC"), bank note, and the subordinated debt as well as
the redemption of the redeemable capital stock of a subsidiary. Restricted
cash represents the difference between borrowings under the LOC and the
term note at September 30, 1997 and the anticipated amounts outstanding at
closing. Remaining portion represents redeemable capital stock of a
subsidiary (SellTel) to be redeemed in the fourth quarter of 1998. Reflects
distribution of $6.4 million of the undistributed earnings of HomeTel
Systems and HomeTel Providers Partners L.P.
F-21
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS
AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED
UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PRO-
SPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO
BUY, ANY OF THE COMMON STOCK IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIR-
CUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE
FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE
DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
----------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary....................................................... 3
Risk Factors............................................................. 8
The Consolidation........................................................ 14
Use of Proceeds.......................................................... 14
Dividend Policy.......................................................... 15
Dilution................................................................. 15
Capitalization........................................................... 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 19
Business................................................................. 24
Management............................................................... 33
Principal Shareholders................................................... 37
Certain Transactions..................................................... 38
Shares Eligible for Future Sale.......................................... 39
Description of Capital Stock............................................. 40
Underwriting............................................................. 43
Legal Matters............................................................ 44
Experts.................................................................. 44
Additional Information................................................... 44
Index to Financial Statements............................................ F-1
UNTIL , 1998 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING IN
THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY RE-
QUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
2,500,000 SHARES
[LOGO]
INNOTRAC
CORPORATION
COMMON STOCK
----------------
PROSPECTUS
----------------
J.C.Bradford&Co.
Wheat First Butcher Singer
, 1997
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
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 discount) payable by the Registrant in
connection with the issuance and distribution of the shares of Common Stock in
the Offering.
Securities and Exchange Commission Registration Fee........... $11,873.75
NASD Filing Fees.............................................. 4,525.00
Nasdaq National Market Filing Fees............................ 40,000.00
Blue Sky Fees and Expenses.................................... *
Printing and Engraving Expenses............................... *
Legal Fees and Expenses....................................... *
Accounting Fees and Expenses.................................. *
Transfer Agent Fees and Expenses.............................. *
Miscellaneous................................................. *
----------
Total..................................................... $ *
==========
- --------
* To be provided by amendment.
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 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, officer, employee or
agent (i) in connection with a proceeding by or in right of the Registrant in
which such person was adjudged liable to the Registrant or (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.
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.
II-1
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
The following persons or entities will be issued the following number of
shares of Common Stock of the Registrant in the Consolidation as of the
effective date of the Registration Statement in consideration of each person's
or entity's equity interests in one of the eight companies involved in the
Consolidation. Such shares will be 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 December 1994.
NAME NO. SHARES
---- ----------
Scott D. Dorfman 4,989,428
ITC Service Company 353,846
Susan Mary Trotochaud 493
Trust and custodianship for Bradley H. Dorfman 25,411
Trust and custodianship for Brent M. Dorfman 25,411
Trust and custodianship for Jesse E. Dorfman 25,411
II-2
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
1.1 Form of Underwriting Agreement between the Representatives of the
Underwriters and the Registrant**
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Amended and Restated By-laws of the Registrant*
4.1 Form of Common Stock Certificate of the Registrant**
4.2 Rights Agreement between Registrant and Reliance Trust Company as
Rights Agent, dated as of **
5 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*
10.2 Stock Option and Incentive Award Plan*
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*
10.4 Equipment Negotiation and Referral Agreement between BellSouth
Telecommunications, Inc. and the Registrant, effective May 1, 1995*+
10.5 Form of Indemnification Agreements entered into as of December 11,
1997, by and between the Company and each of Messrs. Scott D. Dorfman,
David L. Ellin, Donald L. Colter, Jr., John H. Nichols II, Bruce V.
Benator, Martin J. Blank, Campbell B. Lanier, III and William H.
Scott, III*
10.6 Loan and Security Agreement by and between HomeTel Providers Partners,
L.P. and ITC Holding Company, Inc. dated as of April 11, 1994*
10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the
Registrant*
10.8 Lease, dated , by and between Weeks Development Partnership and
the Registrant**
23.1 Consent of Kilpatrick Stockton LLP, included in Exhibit 5
23.2 Consent of Arthur Andersen LLP*
24 Power of attorney (on signature page)
27 Financial Data Schedule*
- --------
* Filed herewith
** To be filed by amendment
+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In
accordance with Rule 406(b)(2), these confidential portions have been
omitted from this exhibit and filed separately with the Commission.
II-3
(B) FINANCIAL STATEMENT 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
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 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,
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-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized in the City of Atlanta, State of
Georgia, on the 16th day of December 1997.
INNOTRAC CORPORATION
/s/ Scott D. Dorfman
By:__________________________________
SCOTT D. DORFMAN
CHAIRMAN, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
POWER OF ATTORNEY
Each person whose signature appears below hereby constitutes and appoints
Scott D. Dorfman and David L. Ellin and either of them, his true and lawful
attorneys-in-fact with full power of substitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
sign a Registration Statement pursuant to Rule 462(b) under the Securities Act
of 1933 and to cause the same to be filed, with all exhibits thereto and other
documents in connection therewith, with the Securities and Exchange
Commission, hereby granting to said attorneys-in-fact and agents, full power
and authority to do and perform each and every act and thing whatsoever
requisite or desirable to be done in and about the premises, as fully to all
intents and purposes as the undersigned might or could do in person, hereby
ratifying and confirming all acts and things that said attorneys-in-fact and
agents, or their substitutes or substitute, may lawfully do or cause to be
done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons on the 16th
day of December 1997, in the capacities indicated.
SIGNATURES POSITION
/s/ Scott D. Dorfman Chairman, President and
- ------------------------------------- Chief Executive Officer
Scott D. Dorfman (Principal Executive
Officer)
/s/ David L. Ellin Senior Vice President,
- ------------------------------------- Secretary, Chief Operating
David L. Ellin Officer and Director
/s/ Larry C. Hanger Vice President--Business
- ------------------------------------- Development and Director
Larry C. Hanger
/s/ John H. Nichols, III Vice President and Chief
- ------------------------------------- Financial Officer
John H. Nichols, III (Principal Financial and
Accounting Officer)
SIGNATURES POSITION
/s/ Bruce V. Benator Director
- -------------------------------------
Bruce V. Benator
/s/ Martin J. Blank Director
- -------------------------------------
Martin J. Blank
/s/ Campbell B. Lanier, III Director
- -------------------------------------
Campbell B. Lanier, III
/s/ William H. Scott, III Director
- -------------------------------------
William H. Scott, III
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS AS TO SCHEDULE
We have audited, in accordance with generally accepted auditing standards,
the combined financial statements of INNOTRAC CORPORATION (a Georgia
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) included in this Registration Statement and have
issued our report thereon dated December 12, 1997. Our audits were made for
the purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule listed in Item 16(b) 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
Atlanta, Georgia
December 12, 1997
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
(AMOUNTS IN THOUSANDS)
ADDITIONS
BALANCE ------------------
AT CHARGED CHARGES TO
BEGINNING TO OTHER BALANCE AT END
DESCRIPTION OF PERIOD INCOME ACCOUNTS DEDUCTIONS OF PERIOD
----------- --------- ------- ---------- ---------- --------------
Provision for
uncollectible accounts
1997................... $4,242 $14,227 $0.00 $(12,873)(1) $5,596
1996................... $2,552 $9,377 $0.00 $(7,687) $4,242
1995................... $575 $3,043 $0.00 $(1,066)(1) $2,552
- --------
(1) Represents write-off of accounts considered to be uncollectible, less
recoveries of amounts previously written off.
(A) EXHIBITS
EXHIBIT
NO. DESCRIPTION OF EXHIBIT
------- ----------------------
1.1 Form of Underwriting Agreement between the Representatives of the
Underwriters and the Registrant**
3.1 Amended and Restated Articles of Incorporation of the Registrant*
3.2 Amended and Restated By-laws of the Registrant*
4.1 Form of Common Stock Certificate of the Registrant**
4.2 Rights Agreement between Registrant and Reliance Trust Company as
Rights Agent, dated as of **
5 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*
10.2 Stock Option and Incentive Award Plan*
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*
10.4 Equipment Negotiation and Referral Agreement between BellSouth
Telecommunications, Inc. and the Registrant, effective May 1, 1995*+
10.5 Form of Indemnification Agreements entered into as of December 11,
1997, by and between the Company and each of Messrs. Scott D. Dorfman,
David L. Ellin, Donald L. Colter, Jr., John H. Nichols II, Bruce V.
Benator, Martin J. Blank, Campbell B. Lanier, III and William H.
Scott, III*
10.6 Loan and Security Agreement by and between HomeTel Providers Partners,
L.P. and ITC Holding Company, Inc. dated as of April 11, 1994*
10.7 Lease, dated April 1, 1996, by and between Weeks Realty, L.P. and the
Registrant*
10.8 Lease, dated , by and between Weeks Development Partnership and
the Registrant**
23.1 Consent of Kilpatrick Stockton LLP, included in Exhibit 5
23.2 Consent of Arthur Andersen LLP*
24 Power of attorney (on signature page)
27 Financial Data Schedule
- --------
* Filed herewith
** To be filed by amendment
+ Confidential treatment has been requested for certain confidential portions
of this exhibit pursuant to Rule 406(b)(2) under the Securities Act. In
accordance with Rule 406(b)(2), these confidential portions have been
omitted from this exhibits and filed separately with the Commission.