1
EXHIBIT 13.1
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the
Company. The selected historical statements of operations data for each of the
years ended December 31, 2000, 1999, 1998, 1997 and 1996 and the selected
historical balance sheet data for the periods then ended have been derived from
the Consolidated Financial Statements that have been audited by Arthur Andersen
LLP, independent public accountants.
RESULTS FOR YEAR ENDED DECEMBER 31: 2000 1999 1998 1997 1996
- ---------------------------------------------------------------------------------------------------
(IN 000'S, EXCEPT PER SHARE AMOUNTS)
Revenues, net ...................... $ 174,085 $ 227,011 $ 139,673 $ 87,978 $ 71,297
Cost of revenues ................... 129,626 169,602 90,195 57,551 52,514
Special charges .................... 16,462 -- -- -- --
--------- --------- --------- --------- ---------
Gross profit ....................... 27,997 57,409 49,478 30,427 18,783
--------- --------- --------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative 41,665 36,341 31,332 19,296 10,391
Special charges .................... 17,801 -- -- -- --
Depreciation and amortization ...... 4,168 3,414 3,843 4,342 3,434
--------- --------- --------- --------- ---------
TOTAL OPERATING EXPENSES ........... 63,634 39,755 35,175 23,638 13,825
--------- --------- --------- --------- ---------
Operating (loss) income ............ (35,637) 17,654 14,303 6,789 4,958
--------- --------- --------- --------- ---------
Interest expense, net .............. 80 1,370 956 1,788 1,457
Other expenses ..................... 141 60 35 118 94
--------- --------- --------- --------- ---------
TOTAL OTHER EXPENSE ................ 221 1,430 991 1,906 1,551
--------- --------- --------- --------- ---------
(Loss) income before income taxes
and minority interest .............. (35,858) 16,224 13,312 4,883 3,407
Income tax benefit (provision) ..... 14,084 (6,389) (3,743) 77 (212)
--------- --------- --------- --------- ---------
Net (loss) income before minority
interest ........................... (21,774) 9,835 9,569 4,960 3,195
Minority interest, net of income tax (199) -- -- -- --
--------- --------- --------- --------- ---------
NET (LOSS) INCOME ................. $ (21,575) $ 9,835 $ 9,569 $ 4,960 $ 3,195
========= ========= ========= ========= =========
Pro forma net (loss) income ........ $ (21,575) $ 9,835 $ 8,186 $ 3,003 $ 2,095
========= ========= ========= ========= =========
Pro forma net (loss) income per
share-basic ........................ $ (1.92) $ 0.99 $ 1.01 $ 0.46 $ 0.32
Pro forma net (loss) income per
share-diluted ...................... $ (1.92) $ 0.98 $ 1.00 $ 0.46 $ 0.32
YEAR-END FINANCIAL POSITION:
Current assets ..................... $ 76,150 $ 94,810 $ 66,416 $ 24,330 $ 37,845
Current liabilities ................ 34,175 24,930 39,563 22,809 38,887
Property and equipment, net ........ 13,717 8,922 7,463 7,609 10,939
Total assets ....................... 97,145 104,218 73,992 32,497 49,037
Long-term obligations .............. 166 75 135 3,944 4,779
Total liabilities .................. 34,341 25,005 39,698 26,753 43,666
Shareholders' equity ............... 58,635 79,213 34,294 4,827 4,540
COMMON STOCK INFORMATION:
Average number of common shares
outstanding ........................ 11,212 9,911 8,096 6,500 6,500
Common stock price per share:
High .......................... 13 1/2 26 3/4 24 3/8 N/A N/A
Low ........................... 3 1/8 10 5 3/4 N/A N/A
Year-end ...................... 3 1/2 13 3/4 18 1/8 N/A N/A
Book value per common share ........ $ 5.23 $ 7.99 $ 4.24 $ 0.74 $ 0.70
OTHER DATA:
Capital expenditures ............... $ 13,644 $ 5,328 $ 5,739 $ 6,937 $ 7,972
1
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion may contain certain forward-looking statements
that are subject to conditions that are beyond the control of the Company.
Actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
include, but are not limited to, the reliance on a small number of major
clients; risks associated with the terms of our contracts; reliance on the
telecommunications industry; the impact of the trend toward outsourcing; risks
associated with changing technology; risks associated with competition; risks
associated with fluctuations in operating and quarterly results; compliance with
government regulation; risks associated with the start-up subsidiary,
Return.com, LLC and other factors discussed in more detail under "Business" on
Form 10-K.
OVERVIEW
Innotrac, founded in 1984 and headquartered in Atlanta, Georgia,
provides customized, technology-based marketing support, order fulfillment, call
center and total customer relationship management services to large corporations
that outsource these functions. The Company offers inventory management, inbound
call center, pick/pack/ship services, order tracking, transaction processing and
returns of telecommunications products, including Digital Subscriber Line Modems
("DSL Modems"), to BellSouth, Pacific Bell, Southwestern Bell, Ameritech
Services, Inc., and Qwest and their customers. The Company also provides these
services for a significant number of non-telecommunications related companies
such as Home Depot, Coca-Cola, NAPA and Siemens. Historically, over ninety
percent of the Company's volume has been generated from its telecommunications
clients.
During 2000, the Company substantially completed its migration towards
a fee-for-service business model which eliminates inventory ownership risk and
also elected to discontinue its front-end web site development, maintenance and
hosting services to its e-commerce clients. As a result of these significant
changes in the Company's business, a special, pre-tax charge of $34.3 million
was recognized during the year of which $33.3 million was non-cash related. This
special charge includes charges for impairment of certain assets, other exit
costs related to the e-commerce business and inventory, accounts receivable,
software and other items related to the Company's shift to a fee-for-service
model.
With the Company's conversion of its clients to a fee-for-service
model, the Company no longer purchases and sells Caller ID equipped phones, DSL
modems and other telecommunications equipment from third party manufacturers for
a majority of its clients. Instead, the Company warehouses products on a
consignment basis and fulfills equipment on behalf of its customers for a fee.
In certain cases, the Company purchases and owns inventory, but on a
significantly reduced risk basis as a result of client guarantees and
contractual indemnifications. Management believes that this new model will
substantially reduce revenues as pass through cost of purchased equipment will
no longer be included in revenues; however, since the Company will no longer
have inventory risk or cost of equipment, gross margins, and more importantly,
operating cash flows should improve.
On May 17, 2000, the Company invested in a new venture, Return.com
Online, Inc. ("Return.com") with its equity partner, Mail Boxes Etc. ("MBE"), to
process product returns for online and catalog retailers. Return.com is the
first full-service returns portal supported by the convenience of 3,400 physical
locations. Customers returning merchandise purchased online, or by catalog or
phone, can simply take the item to any participating MBE location in the U.S.
for packaging and shipping.
During 2000, Innotrac invested $3.0 million in this subsidiary and has
committed to fund an additional $3.0 million when needed. Approximately $1.0
million of this commitment was funded in the first quarter of 2001. During 2000,
MBE invested $1.0 million in this venture and on December 29, 2000, MBE entered
into a note agreement to fund an additional $3.4 million into Return.com
resulting in a total
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3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
investment of $4.4 million. On December 28, 2000, Return.com was converted to
a limited liability company. As of December 31, 2000, Innotrac owned 60% of this
subsidiary with the remaining 40% owned by MBE. As a result of this ownership
structure, the Company consolidated the results of operations and financial
position of Return.com in the consolidated financial statements. The Company
expects Return.com to continue to generate significant operating losses in 2001.
In March 2001, it was announced that United Parcel Services, Inc.
("UPS") had entered into a definitive agreement to purchase MBE. As a result of
this agreement, MBE and Innotrac have begun discussions about the future of
Return.com under joint ownership. While the outcome is not currently known, it
is possible that Innotrac may obtain 100% ownership of Return.com in the future
and that the relationship with MBE may be terminated. Management does not
believe that this would have a material adverse effect on the Company's future
results of operations.
On December 8, 2000, the Company acquired Universal Distribution
Services ("UDS"), located in Reno, Nevada, for approximately $4.3 million in
total consideration. UDS is a leading provider of integrated order processing,
order management, fulfillment, and customer relationship management services.
UDS's customer base includes traditional direct marketing companies as well as
retailers including Thane International, Gateway Learning and Digital
Convergence.
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4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth summary operating data, expressed as a
percentage of revenues, for the years ended December 31, 2000, 1999 and 1998.
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 consolidated financial statements and
notes thereto.
Year Ended December 31,
----------------------------------
2000 1999 1998
----- ----- -----
REVENUES, NET 100.0% 100.0% 100.0%
COST OF REVENUES 74.5 74.7 64.6
SPECIAL CHARGES 9.5 -- --
----- ----- -----
GROSS PROFIT 16.0 25.3 35.4
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES 23.9 16.0 22.4
SPECIAL CHARGES 10.2 -- --
DEPRECIATION AND AMORTIZATION 2.4 1.5 2.8
----- ----- -----
OPERATING (LOSS) INCOME (20.5) 7.8 10.2
OTHER EXPENSE 0.1 0.6 0.7
----- ----- -----
(LOSS) INCOME BEFORE INCOME TAXES AND MINORITY INTEREST (20.6)% 7.2% 9.5%
SPECIAL CHARGES
Special charges are infrequent transactions that may affect comparability
between years. The special charges of $34.3 million for the year ended December
31, 2000 include the following: $24.4 million for inventory, accounts
receivable, and other items primarily related to the Company's shift to a
fee-for-service business model; $6.2 million for the impairment of long-lived
assets primarily due to the abandonment of specified software development
projects; and $3.7 million in costs to exit the e-commerce business related to
web development, maintenance and hosting services. The Company has approximately
$6.9 million in accruals related to the special charges at December 31, 2000,
which include $5.1 million for the Company's shift to a fee-for-service business
model and $1.8 million for e-commerce exit costs. Cash payments for the year
totaled approximately $1.0 million. The Company expects that substantially all
of the remaining accruals will be utilized during the year ending December 31,
2001.
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Net revenues decreased 23.3% to $174.1 million for the year ended
December 31, 2000 from $227.0 million for the year ended December 31,1999. The
decrease in revenue is consistent with the Company's switch to a fee-for-service
model and the decline in sales of Caller ID equipment, offset by an increase in
DSL modems fulfilled. Under the fee-for-service model, revenues are recorded net
of equipment costs sold or fulfilled.
COST OF REVENUES. Cost of revenues decreased 23.6% to $129.6 million for the
year ended December 31, 2000 compared to $169.6 million for the year ended
December 31, 1999. Cost of revenues decreased primarily due to the decrease in
equipment units sold, as opposed to fulfilled, by the Company due to the shift
to fee-for-service and the decline in Caller ID equipment volume.
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5
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SPECIAL CHARGES. The Company recorded a special charge of $16.5 million
associated with its exit from inventory ownership.
GROSS PROFIT. For the year ended December 31, 2000, the Company's gross margin
decreased 51.2% to $28.0 million compared to $57.4 million for the year ended
December 31, 1999. The decrease in gross margin was due primarily to special
charges of $16.5 million as discussed above. Exclusive of the special charges,
gross margins for the year ended December 31, 2000 remained consistent at
approximately 25% as compared to 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. S,G&A expenses for the year ended
December 31, 2000 increased 14.7% to $41.7 million or 23.9% of revenues compared
to $36.3 million or 16.0% of revenues for the year ended December 31, 1999. This
increase is primarily due to two factors: cost incurred during the year
associated with the Company's subsidiary, Return.com, which was founded in
February 2000 and a significant investment, beyond normal levels, being expended
on information technology during 2000. Management expects such expenditures to
return to normal levels in 2001 due to a reduction in headcount and expenditures
with the Company's discontinuation of its front-end web site development,
maintenance and hosting services.
SPECIAL CHARGES. The Company recorded special charges of $17.8 million for
impaired assets, accounts receivable and other write-offs during the year ended
December 31, 2000. These special charges, as previously discussed, were
primarily related to the Company's shift to a fee-for-service business model,
its exit from the e-commerce business and the abandonment of specified software
development projects.
INCOME TAXES. The Company's effective tax rate for the years ended December 31,
2000 and 1999 was 39.3% and 39.4%, respectively.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
REVENUES. Net revenues increased 62.5% to $227.0 million for the year ended
December 31, 1999 from $139.7 million for the year ended December 31,1998. The
increase in revenue was due primarily to increased sales of Caller ID equipment
in 1999. There was also an increase in promotional sales programs by certain
clients during 1999. The increase in unit volume was partially offset by a
decrease in its average per unit price.
COST OF REVENUES. Cost of revenues increased 88.0% to $169.6 million for the
year ended December 31, 1999 compared to $90.2 million for the year ended
December 31, 1998. Cost of revenues increased primarily due to an increase in
cost of equipment associated with the increase in units sold by the Company and
the impact of the new call center in Pueblo, Colorado that became operational
during the third quarter of 1999.
GROSS PROFIT. Gross profit for the year ended December 31, 1999 increased 16.0%
to $57.4 million or 25.3% of revenues as compared to $49.5 million or 35.4% of
revenues for the year ended December 31, 1998. The increase in gross profit was
due primarily to the increase in revenue. Gross margins declined for several
reasons. First, for strategic reasons, in the first quarter of 1999 the Company
conducted a promotional program that resulted in $11.0 million in revenues and
$11.0 million in cost of sales. The Company chose to conduct the program in
order to strengthen its relationship with the client. In addition, gross margins
were impacted by the increased percentage of business derived from certain
clients where the Company did not assume the bad debt risk associated with the
sale as it had done in the past. This decline is offset by lower bad debt
expense, which is included in selling, general and administrative expenses.
Also, during the third quarter of 1999, the Company opened a new call center in
Pueblo, Colorado. The impact of the new call center was an increase in revenues
and cost of revenues of $1.0 million. The $1.0 million in cost of revenues
included start up costs of the new facility.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. S,G&A expenses for the year ended
December 31, 1999 were $36.3 million or 16.0% of revenues compared to $31.3
million or 22.4% of revenues for the year ended December 31, 1998. The Company's
bad debt expense was $3.3 million, or 1.5% of net revenues for the year ended
December 31, 1999 as compared to $8.2 million, or 5.9% of net revenues for the
year ended December 31, 1998. The decrease in bad debt expense as a percentage
of revenue is due primarily to the increased percentage of business derived from
clients who pay the Company directly for telecommunications equipment
sold to end-users. The increase in other S,G&A expenses is due to increased
sales and marketing efforts and increased costs to support the Company's growth.
INCOME TAXES. The Company's effective tax rates for the years ended December 31,
1999 and 1998 were 39.4% and 28.1%, respectively. The effective tax rates are
lower than statutory rates for the year ended December 31, 1998 due to the
amount of income attributable to the pass-through entities involved in the
combination of Innotrac at the same time as consummation of our initial public
offering in May 1998.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations and capital expenditures primarily through cash
flow from operating activities and borrowings under a credit facility with a
bank and, from time to time, equity offerings. The Company had cash and cash
equivalents of approximately $18.3 million at December 31, 2000, including $3.0
million that is committed to the startup and development of Return.com. The
Company maintains a $40.0 million revolving line of credit with a bank, maturing
in June 2002. 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 December 31, 2000, the interest rate on the line of
credit was 9.50%. At December 31, 2000, there was no outstanding balance under
the line of credit.
During the year ended December 31, 2000, the Company generated $39.0
million in cash flow from operating activities compared to the use of $23.4
million in cash flow from operating activities during 1999. The generation of
cash flow from operating activities during 2000 as compared to the use of cash
flow from operating activities in 1999 was due primarily to the decrease in
inventory levels attributable to the Company's migration towards a
fee-for-service business model, decrease in accounts receivable and the timing
of various payables.
Net cash used in investing activities was $15.3 million in 2000 as
compared to $5.3 million for the year ended December 31, 1999. This increase was
primarily due to an increase in capital expenditures to $13.6 million in 2000
from $5.3 million in 1999. The Company made purchases of new technology for
e-commerce applications and internal systems development in 2000.
During the year ended December 31, 2000, the net cash used in financing
activities was $6.2 million compared to $26.2 million provided by financing
activities in 1999. This use of cash during 2000 was primarily due to repayments
of borrowings under the Company's line of credit. In 1999, the Company received
$34.9 million in net proceeds from its equity offering.
The Company estimates that its cash and financing needs in 2001 will be
met by cash flows from operating activities and its line of credit facility. The
Company may need to raise additional funds in order to take advantage of
unanticipated opportunities, such as acquisitions of complementary businesses.
There can be no assurance that the Company will be able to raise any such
capital on terms acceptable to the Company or at all.
6
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Management believes the exposure to markets risks is immaterial.
Innotrac holds no market risk sensitive instruments for trading purposes. At
present, the Company does not employ any derivative financial instruments, other
financial instruments or derivative commodity instruments to hedge any market
risks and its does not currently plan to employ them in the future. To the
extent that the Company has borrowings outstanding under its credit facility,
the Company will have market risk relating to the amount of borrowings due to
variable interest rates under the credit facility. The Company's exposure is
immaterial due to the short-term nature of these borrowings.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting
for Derivative Instruments and Hedging Activities". The statement establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. SFAS 133 requires that changes in the derivative`s fair value be
recognized currently in earnings unless specific hedge accounting criteria are
met. In June 2000, the FASB issued Statement of Financial Accounting Standards
No. 138 (" SFAS 138"), "Accounting for Certain Derivative Instruments and
Certain Hedging Activities", an amendment of SFAS No. 133. SFAS 138 addresses a
limited number of issues causing implementation difficulties for numerous
entities that apply SFAS 133 and amends the accounting and reporting standards
of SFAS 133 for certain derivative instruments and certain hedging activities.
SFAS 133/138 is effective for fiscal years beginning after June 15, 2000. In
management's opinion, the impact of adopting SFAS 133/138 will not have a
material impact upon the Company's results of operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101
"Revenue Recognition" ("SAB No.101"), which provides guidance on the
recognition, presentation, and disclosure of revenue in financial statements
filed with the SEC. SAB No. 101 outlines the basic criteria that must be met to
recognize revenue and provides guidance for disclosure related to revenue
recognition policies. An amendment in June 2000 delayed the effective date until
the fourth quarter of 2000. Management believes that the Company's revenue
recognition practices are in conformity with the guidelines prescribed in SAB
No. 101.
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8
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innotrac Corporation:
We have audited the accompanying consolidated balance sheets of
INNOTRAC CORPORATION (a Georgia corporation) AND SUBSIDIARY as of December 31,
2000 and 1999 and the related consolidated statements of operations, partners',
members' and shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2000. These consolidated financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Innotrac Corporation and its subsidiary as of December 31, 2000 and 1999 and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 2000 in conformity with accounting standards
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 2, 2001
8
9
INNOTRAC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
DECEMBER 31,
ASSETS 2000 1999
------ ---------- -----------
CURRENT ASSETS:
Cash and cash equivalents $ 18,334 $ 894
Accounts receivable, net (Note 3) 31,217 52,431
Inventories, net 15,056 39,503
Deferred income taxes (Note 7) 3,984 583
Prepaid expenses and other (Note 4) 7,559 1,399
---------- -----------
TOTAL CURRENT ASSETS 76,150 94,810
---------- -----------
PROPERTY AND EQUIPMENT:
Rental equipment 3,464 4,986
Computer, machinery and equipment 16,362 8,711
Furniture, fixtures and leasehold improvements 3,695 2,830
---------- -----------
23,521 16,527
Less accumulated depreciation and amortization (9,804) (7,605)
---------- -----------
13,717 8,922
---------- -----------
Goodwill, net (Notes 2 and 9) 3,466 0
Deferred income taxes (Notes 7) 2,579 353
Other assets, net (Notes 2 and 9) 1,233 133
---------- -----------
TOTAL ASSETS $ 97,145 $ 104,218
========== ===========
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ ---------- -----------
CURRENT LIABILITIES:
Accounts payable $ 22,104 $ 10,530
Accrued expenses and other 12,071 7,384
Current portion of long-term debt (Note 5) 0 8
Line of credit (Note 5) 0 7,008
---------- -----------
TOTAL CURRENT LIABILITIES 34,175 24,930
---------- -----------
TOTAL NONCURRENT LIABILITIES (NOTES 5 AND 6) 166 75
COMMITMENTS AND CONTINGENCIES (NOTE 6)
MINORITY INTEREST IN SUBSIDIARY 4,169 0
SHAREHOLDERS' EQUITY (NOTE 10):
Common stock 1,136 1,121
Additional paid-in capital 60,889 59,701
Retained earnings (3,184) 18,391
Less: Treasury stock (206) 0
---------- -----------
TOTAL SHAREHOLDERS' EQUITY 58,635 79,213
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 97,145 $ 104,218
========== ===========
The accompanying notes are an integral part of these consolidated balance
sheets.
9
10
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
----------------------------------------
2000 1999 1998
----------- ----------- -----------
Revenues, net $ 174,085 $ 227,011 $ 139,673
Cost of revenues 129,626 169,602 90,195
Special charges (Note 14) 16,462 0 0
----------- ----------- -----------
Gross profit 27,997 57,409 49,478
----------- ----------- -----------
OPERATING EXPENSES:
Selling, general and administrative
expenses 41,665 36,341 31,332
Special charges (Note 14) 17,801 0 0
Depreciation and amortization 4,168 3,414 3,843
----------- ----------- -----------
Total operating expenses 63,634 39,755 35,175
----------- ----------- -----------
Operating (loss) income (35,637) 17,654 14,303
----------- ----------- -----------
OTHER EXPENSE:
Interest expense, net (Note 5) 80 1,370 956
Other 141 60 35
----------- ----------- -----------
Total other expense 221 1,430 991
----------- ----------- -----------
(Loss) income before income
taxes and minority interest (35,858) 16,224 13,312
Income tax benefit (provision) 14,084 (6,389) (3,743)
----------- ----------- -----------
Net (loss) income before minority interest (21,774) 9,835 9,569
Minority interest, net of income taxes (199) 0 0
----------- ----------- -----------
NET (LOSS) INCOME $ (21,575) $ 9,835 $ 9,569
=========== =========== ===========
UNAUDITED PRO FORMA DATA:
Pro forma net (loss) income (Note 2) $ (21,575) $ 9,835 $ 8,186
=========== =========== ===========
Pro forma net (loss) income per share-basic $ (1.92) $ 0.99 $ 1.01
=========== =========== ===========
Pro forma net (loss) income per share-diluted $ (1.92) $ 0.98 $ 1.00
=========== =========== ===========
The accompanying notes are an integral part of these consolidated statements.
10
11
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF PARTNERS',
MEMBERS' AND SHAREHOLDERS' EQUITY
(IN 000'S)
PARTNERS' MEMBERS' COMMON PAID-IN RETAINED TREASURY
CAPITAL CAPITAL STOCK CAPITAL EARNINGS STOCK TOTAL
------- -------- ------ -------- -------- ------- --------
BALANCE, DECEMBER 31, 1997 $ 1,759 $(490) $ 5 $ 14 $ 3,539 $ 0 $ 4,827
Distributions to partners, members
and shareholders (4,836) (209) 0 0 (4,747) 0 (9,792)
Merger of companies (461) 288 645 (1,667) 1,195 0 0
Record deferred
taxes associated with merger 0 0 0 0 3,016 0 3,016
Proceeds from sale of common
stock, net 0 0 250 26,491 0 0 26,741
Net income 3,538 411 0 0 5,620 0 9,569
Accreted dividends on
redeemable capital stock 0 0 0 0 (67) 0 (67)
------- ----- ------ -------- -------- ----- --------
BALANCE, DECEMBER 31, 1998 $ 0 $ 0 $ 900 $ 24,838 $ 8,556 $ 0 $ 34,294
Proceeds from sale of common
stock, net 0 0 220 34,694 0 0 34,914
Proceeds from exercise of
stockholder's options and 0 0 1 169 0 0 170
grants
Net income 0 0 0 0 9,835 0 9,835
------- ----- ------ -------- -------- ----- --------
BALANCE, DECEMBER 31, 1999 $ 0 $ 0 $1,121 $ 59,701 $ 18,391 $ 0 $ 79,213
Issuance of common stock 0 0 15 1,238 0 0 1,253
Purchase of treasury stock 0 0 0 0 0 (206) (206)
Restricted stock grant, net 0 0 0 (50) 0 0 (50)
Net loss 0 0 0 0 (21,575) 0 (21,575)
------- ----- ------ -------- -------- ----- --------
BALANCE, DECEMBER 31, 2000 $ 0 $ 0 $1,136 $ 60,889 $ (3,184) $(206) $ 58,635
======= ===== ====== ======== ======== ===== ========
The accompanying notes are an integral part of these consolidated statements.
11
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INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
YEAR ENDED DECEMBER 31,
--------------------------------------
2000 1999 1998
--------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income $ (21,575) $ 9,835 $ 9,569
Adjustments to reconcile net (loss) income to net cash provided by used in)
operating activities:
Depreciation and amortization 4,168 3,414 3,843
Loss on disposal of fixed assets 6,430 502 2,158
Deferred income taxes (5,627) 1,824 602
Minority interest in subsidiary (199) 0 0
Amortization of deferred compensation 38 0 0
Changes in working capital, net of effect of business acquired:
Decrease (increase) in accounts receivable 21,908 (8,077) (24,273)
Decrease (increase) in inventories 24,447 (25,122) (11,445)
(Increase) in prepaid expenses and other assets (2,554) (30) (734)
Increase in accounts payable 9,390 1,143 4,621
Increase (decrease) in accrued expenses and other 2,538 (6,867) 6,571
--------- --------- ---------
Net cash provided by (used in) operating activities 38,964 (23,378) (9,088)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (13,644) (5,328) (5,739)
Acquisition of business, net of cash acquired (1,678) 0 0
--------- --------- ---------
Net cash used in investing activities (15,322) (5,328) (5,739)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (repayments) borrowings under line of credit (7,008) (8,728) 7,191
Borrowing (repayment) of long-term debt 12 (65) (1,067)
Repayment of subordinated debt 0 0 (3,500)
Proceeds from equity offerings, net 0 34,914 26,741
Proceeds from stock options exercised 0 170 0
Redemption of redeemable capital stock 0 0 (984)
Distributions to partners, members and
shareholders 0 (70) (10,729)
Proceeds from minority interest in subsidiary 1,000 0 0
Purchase of treasury stock shares (206) 0 0
--------- --------- ---------
Net cash (used in) provided by financing activities (6,202) 26,221 17,652
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents 17,440 (2,485) 2,825
Cash and cash equivalents, beginning of period 894 3,379 554
--------- --------- ---------
Cash and cash equivalents, end of period $ 18,334 $ 894 $ 3,379
========= ========= =========
Supplemental cash flow disclosures:
Cash paid for interest $ 429 $ 1,386 $ 1,006
========= ========= =========
Cash paid for income taxes, net of refunds received $ (5,907) $ 7,364 $ 1,493
========= ========= =========
Non-cash transactions:
Accreted dividends on redeemable capital stock $ 0 $ 0 $ 67
========= ========= =========
The accompanying notes are an integral part of these consolidated statements.
12
13
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Innotrac Corporation ("Innotrac" or the "Company") provides customized,
technology-based marketing support, order fulfillment, call center and total
customer relationship management services. The Company offers inventory
management, inbound call center, pick/pack/ship services, order tracking,
transaction processing and returns, primarily of telecommunication equipment.
Prior to May 6, 1998, Innotrac operated as eight separate affiliates: Innotrac,
IELC, Inc., RenTel #1, Inc. ("RenTel"), SellTel #1, Inc. ("SellTel"), HomeTel
Systems, Inc., HomeTel Providers, Inc., RenTel #2, LLC, SellTel #2, LLC and
HomeTel Providers Partners, L.P. ("Providers L.P.") (collectively referred to
herein as the "Companies"). The Companies were all owned 100% by one shareholder
or his immediate family except for RenTel, SellTel, and Providers L.P. which
each had a 10% minority interest owned by one party. The minority interests of
RenTel and SellTel were owned by a related party of the shareholder.
On May 6, 1998, Innotrac consolidated these eight entities (the
"Consolidation"), effective simultaneously with, and as a condition to, the
Company's initial public offering (the "Offering") of 2.5 million shares, at an
initial public offering price of $12.00 per share (see Note 10).
On May 17, 2000, the Company invested in a new venture, Return.com Online, Inc.
("Return.com") with its equity partner, Mail Boxes Etc. ("MBE"), to process
product returns for online and catalog retailers. Return.com is the first
full-service returns portal supported by the convenience of 3,400 physical
locations. Customers returning merchandise purchased online, or by catalog or
phone, can simply take the item to any participating MBE location in the U.S.
for packaging and shipping. On December 28, 2000, Return.com was converted from
a C-corporation to a limited liability company.
On December 8, 2000, the Company acquired Universal Distribution Services
("UDS"), located in Reno, Nevada, for approximately $4.3 million in total
consideration. UDS is a leading provider of integrated order processing, order
management, fulfillment, and customer relationship management services. UDS's
customer base includes traditional direct marketing companies as well as
retailers including Thane International, Gateway Learning and Digital
Convergence.
2. SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Prior to the Consolidation, the accompanying financial statements were combined
to include the accounts of the Companies and were prepared on the accrual basis
of accounting. Significant intercompany accounts and transactions have been
eliminated in the combination. Combined financial statements were presented
since the Companies have similar ownership and interrelated activities. The
financial information included herein may not necessarily reflect the financial
position, results of operations, or cash flows of the Companies in the future or
what the financial position, results of operations, or cash flows of the
Companies would have been if they were combined as a separate, stand-alone
company during the periods presented.
Subsequent to the Consolidation, the accompanying financial statements include
the consolidated accounts of Innotrac. Significant intercompany accounts and
transactions have been eliminated in the consolidation.
Certain prior year amounts have been reclassified to conform with the current
financial statement presentation.
13
14
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF REVENUES
Revenues earned under the Company's contracts with its telecommunication clients
to provide fulfillment of telecommunications equipment, including DSL
modems, accounted for approximately 92%, 93% and 97% of total revenues for the
years ended December 31, 2000, 1999 and 1998, respectively.
The following table sets forth the percentage of total net revenues derived from
services provided to each of the largest clients for the years ended December
31, 2000, 1999 and 1998. Except for the major clients noted in the following
table, no single customer provided more than 10% of consolidated revenues during
these years. Pacific Bell and Southwestern Bell are subsidiaries of SBC
Communications, Inc.
Year Ended December 31,
-----------------------------
2000 1999 1998
---- ---- ----
BELL SOUTH 28% 39% 59%
PACIFIC BELL 27 31 25
SOUTHWESTERN BELL 16 20 11
14
15
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an original
maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories, consisting primarily of telecommunications equipment, including DSL
modems, are stated at the lower of cost or market, with cost determined by the
first-in, first-out method. Substantially all inventory is for the account of
one client who has completely indemnified the Company from all risk associated
with such inventory.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is determined using
straight-line methods over the following estimated useful lives:
Rental equipment 3 years
Computers and software 3-5 years
Machinery and equipment 5-7 years
Furniture and fixtures 7 years
Leasehold improvements are amortized using the straight-line method over the
shorter of the service lives of the improvements or the remaining term of the
lease. Maintenance and repairs are expensed as incurred.
During the third quarter of 1999, the Company opened a call center in Pueblo,
Colorado. As part of the establishment of the facility in Pueblo, the Company
received various tax incentives from the city of Pueblo. These tax incentives
have been recorded as a reduction in the basis of property and equipment.
Rental equipment is written off at its net book value when it is no longer
generating revenues or is not returned by the customer. Equipment rental losses
were approximately $103,000, $502,000 and $2,158,000 for the years ended
December 31, 2000, 1999 and 1998, respectively, and are included in
"Depreciation and Amortization" in the accompanying Consolidated Statements of
Operations.
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
("SFAS 121") requires that long-lived assets, including certain identifiable
intangibles, and goodwill related to those assets, be reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
the asset in question may not be recoverable. Management has reviewed the
Company's long-lived assets and has determined that there are no long-lived
assets requiring impairment loss recognition, other than those included in the
Company's special charges recorded in the fourth quarter of 2000 (see Note 14).
15
16
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GOODWILL AND OTHER ACQUIRED INTANGIBLES
Goodwill represents the cost of an acquired enterprise in excess of the fair
market value of the net tangible and identifiable intangible assets acquired.
Goodwill and other acquired intangibles are being amortized over 5-20 years on a
straight-line basis , which represents management's estimation of the related
benefit to be derived from the acquired business. During the year ended December
31, 2000, amortization expense totaled approximately $31,000 (see Note 9).
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). The Company has adopted the disclosure option of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). SFAS 123 requires that companies which do not choose
to account for stock-based compensation as prescribed by this statement, shall
disclose the pro forma effects on earnings and earnings per share as if SFAS 123
had been adopted. Additionally, certain other disclosures are required with
respect to stock compensation and the assumptions used to determine the pro
forma effects of SFAS 123 (see Note 12).
INCOME TAXES
Innotrac, as a C corporation, utilizes the liability method of accounting for
income taxes. Under the liability method, deferred taxes are determined based on
the difference between the financial and tax bases of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse.
Prior to the Consolidation, the shareholders of certain affiliated companies had
elected to have the Companies treated as S corporations. The Internal Revenue
Code of 1986, as amended (the "Code") and certain applicable state statutes
provide that the income and expenses of an S corporation are not taxable
separately to the corporation but rather accrue directly to the shareholders. In
addition, other entities were limited liability companies which are not subject
to federal and state income taxes. Accordingly, no provisions for federal and
certain state income taxes related to these entities have been made in the
accompanying consolidated financial statements.
Prior to the Consolidation, it was the policy of management to pay and accrue
distributions primarily for income taxes that were required to be paid by the
shareholders, members and partners due to the flow through of income of these
entities. During the year ended December 31, 1998, distributions of
approximately $2.3 million, were recorded. Additionally, in conjunction with the
Consolidation (see Note 1) in May 1998, the Company distributed $7.5 million of
the undistributed earnings of approximately $9.0 million to the owners of
certain pass-through entities.
MINORITY INTERESTS
The minority interest represents the investment in Return.com Online, LLC
("Return.com"), a subsidiary of the Company, held by Mail Boxes Etc ("MBE")
including their proportionate share of losses. Prior to December 29, 2000 when
MBE increased its ownership to 40%, this amount was 14%. In March 2001, United
Parcel Services, Inc. ("UPS") announced a definitive agreement to purchase MBE.
As a result of this agreement, MBE and Innotrac have begun discussions about the
future of Return.com under joint ownership. While the outcome is not currently
known, it is possible that the Company may obtain 100% ownership of Return.com
in the future and that the relationship with MBE may be terminated. Management
does not believe that this would have a material adverse effect on the Company's
future results of operations.
16
17
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. In the computation of diluted
earnings per share, the weighted average number of common shares outstanding is
adjusted for the effect of all potential common stock equivalent shares.
PRO FORMA NET INCOME AND NET INCOME PER SHARE
In conjunction with the Consolidation, HomeTel Providers, Inc., Providers, L.P.,
RenTel #1, RenTel #2, and SellTel #2 lost their non C-corporation status as of
May 6, 1998 due to the Company's initial public offering. Accordingly, the pro
forma income taxes for the year ended December 31, 1998 reflect income taxes at
statutory rates applied to pro forma earnings. In addition, the pro forma
earnings per share reflect the Consolidation as if it had occurred at January 1,
1998 (see Note 8).
REVENUE RECOGNITION
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped. Revenues are reduced for freight and an
estimate of product returns and allowances. In 2000, revenues have also been
recorded net of the cost of the equipment for all fee-for-service clients.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments approximates fair
value.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board ("FASB") issued SFAS No.
133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging
Activities". The statement establishes accounting and reporting standards
requiring that every derivative instrument (including certain derivative
instruments embedded in other contracts) be recorded in the balance sheet as
either an asset or liability measured at its fair value. SFAS 133 requires that
changes in the derivative's fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. In June 2000, the FASB issued
Statement of Financial Accounting Standards No. 138 ("SFAS 138"), "Accounting
for Certain Derivative Instruments and Certain Hedging Activities", an amendment
of SFAS No. 133. SFAS 138 addresses a limited number of issues causing
implementation difficulties for numerous entities that apply SFAS No. 133 and
amends the accounting and reporting standards of SFAS 133 for certain derivative
instruments and certain hedging activities. SFAS 133/138 is effective for fiscal
years beginning after June 15, 2000. In management's opinion, the impact of
adopting SFAS 133 and 138 will not have a material impact upon the Company's
results of operations or financial position.
In December 1999, the SEC issued Staff Accounting Bulletin No. 101 "Revenue
Recognition" ("SAB No. 101"), which provided guidance on the recognition,
presentation, and disclosure of revenue in financial statements filed with the
SEC. SAB No. 101 outlines the basic criteria that must be met to recognize
revenue and provided guidance for disclosure related to revenue recognition
policies. An amendment in June 2000 delayed the effective date until the fourth
quarter of 2000. Management believes that the Company's revenue recognition
practices are in conformity with the guidelines prescribed in SAB No. 101.
17
18
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACCOUNTS RECEIVABLE
Accounts receivable were composed of the following at December 31, 2000 and 1999
(in 000's):
2000 1999
---------- ----------
Billed receivables $ 31,933 $ 32,778
Unbilled receivables 2,700 20,831
---------- ----------
34,633 53,609
Less: Allowance for doubtful accounts (3,416) (1,178)
---------- ----------
$ 31,217 $ 52,431
========== ==========
4. NOTE RECEIVABLE
MBE issued a $3.4 million, 6.15% note receivable to the Company for MBE's
additional investment in Return.com on December 29, 2000. The note receivable
matures on October 1, 2001 and is included in "Prepaid expenses and other" in
the Company's Consolidated Balance Sheets.
5. FINANCING OBLIGATIONS
Financing obligations as of December 31, 2000 and 1999 consisted of the
following (in 000's):
2000 1999
-------- --------
Borrowings under revolving credit agreement (up to $40,000,000); the revolving
advances cannot exceed an amount equal to the sum
of 80% of the eligible accounts receivable plus 70% of the eligible
installment receivables; interest payable monthly at rates equal to the
prime rate (9.5% and 8.5% at December 31, 2000 and 1999, respectively), or
at the Company's option, LIBOR plus up to 225 basis points, expires on June 1, 2002,
secured by all the assets of the Company $ 0 $ 7,008
Other 0 10
-------- --------
0 7,018
Current portion 0 7,016
-------- --------
$ 0 $ 2
======== ========
The balance of the line of credit was paid during the third quarter of 2000 with
a weighted average interest rate of 7.49% through this period. The weighted
average interest rate on the revolving line of credit agreement was 6.26% for
the year ended December 31, 1999.
The Company incurred interest expense related to its line of credit of $0.5
million, $1.3 million and $1.0 million for the years ended December 31, 2000,
1999 and 1998, respectively.
The revolving line of credit agreement contains various restrictive financial
and change of ownership control covenants. The Company was in compliance with
all covenants as of December 31, 2000.
18
19
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Innotrac leases office and warehouse space and equipment under various operating
leases. The primary office and warehouse operating leases provide for escalating
payments over the lease term. Innotrac recognizes rent expense on a
straight-line basis over the lease term.
Aggregate future minimum lease payments under noncancellable operating leases
with original periods in excess of one year as of December 31, 2000 are as
follows (in 000's):
2001.................................................................................. $ 3,874
2002.................................................................................. 3,620
2003.................................................................................. 3,435
2004.................................................................................. 2,947
2005.................................................................................. 2,078
Thereafter............................................................................ 4,795
--------
Total minimum lease payments.......................................................... $ 20,749
========
Rent expense under all operating leases totaled approximately $3.1 million, $2.0
million and $1.2 million during the years ended December 31, 2000, 1999 and
1998, respectively.
LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. There are no material pending legal proceedings to
which the Company is a party.
7. INCOME TAXES
Details of the income tax benefit (provision) for the years ended December 31,
2000, 1999 and 1998 are as follows (in 000's):
2000 1999 1998
--------- --------- ---------
Current $ 8,457 $ (4,565) $ (3,141)
Deferred 5,627 (1,824) (602)
--------- --------- ---------
$ 14,084 $ (6,389) $ (3,743)
========= ========= =========
19
20
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net effect of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Companies' deferred tax assets and liabilities as of December
31, 2000 and 1999 are as follows (in 000's):
2000 1999
---------- -----------
Current deferred tax assets:
Allowance for doubtful accounts 1,351 466
Reserve for returns and equipment losses 1,512 117
Other reserves 1,121 0
---------- -----------
3,984 583
---------- -----------
Noncurrent deferred tax assets (liabilities):
Net operating loss carryforwards $ 3,428 $ 0
Depreciation (810) 324
Other (39) 29
---------- -----------
2,579 353
---------- -----------
Net deferred tax asset $ 6,563 $ 936
========== ===========
Management believes that sufficient income will be earned in the future to
realize the net deferred tax assets.
At December 31, 2000, the Company had net operating loss ("NOL") carryforwards
of approximately $8.7 million for income tax purposes, which primarily begin to
expire beginning in 2020. Section 382 of the Internal Revenue Code limits the
utilization of net operating loss carryforwards when there are changes in
ownership greater than 50%, as defined. If such a change occurs, the timing of
the Company's utilization of its NOL carryforwards could be impacted.
Innotrac converted from the cash basis to the accrual basis for income tax
purposes effective August 1995, with the accumulated difference added back to
taxable income over a four-year period.
Effective with the Consolidation in 1998, the Company converted all of its
entities that were non-C-corporations for income tax reporting purposes
to C-corporation status and recorded a one-time benefit of approximately $3.0
million related to certain temporary differences at these entities.
A reconciliation of the income tax (benefit) provision computed at statutory
rates to the income tax (benefit) provision for the years ended December 31,
2000, 1999 and 1998 is as follows:
2000 1999 1998
------ ------ ------
Federal statutory rate (35.0)% 35.0% 35.0%
Increase (decrease) in taxes resulting from:
State income taxes, net of federal benefit (4.0) 4.0 6.0
Income taxable directly to shareholders, partners
and members (see Note 2) 0.0 0.0 (13.3)
Other (0.3) 0.4 0.5
------ ------ ------
(39.3)% 39.4% 28.2%
====== ====== ======
20
21
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share
("EPS") in accordance with Statement of Financial Accounting Standards No. 128
and the effects on income and the weighted average number of shares of potential
diluted common stock. Options outstanding to purchase shares of the Company's
common stock were not included in the computation of diluted EPS for the year
ended December 31, 2000 because their effect would be anti-dilutive if
exercised. Shares used to compute diluted earnings per share are as follows
(in 000's):
2000 1999 1998
------- ------- ------
Diluted earnings per share:
Weighted average shares outstanding 11,212 9,911 8,096
Employee and director stock options -- 122 59
------- ------- ------
Weighted average shares
assuming dilution 11,212 10,033 8,155
======= ======= ======
9. ACQUISITION
On December 8, 2000, the Company acquired Universal Distribution Services, Inc.
("UDS") for approximately $4.3 million in total consideration, including $1.3
million in shares of common stock. The purchase agreement contains certain
earn-out provisions, which, if achieved, will be recorded as additional purchase
price consideration when earned. The transaction was accounted for under the
purchase method of accounting and, accordingly, the operating results of UDS
have been included since the date of acquisition in the Company's consolidated
results of operations. The following table summarizes the assets purchased and
liabilities assumed as well as the preliminary allocation of the purchase price
to various intangibles and goodwill (in 000's):
Purchase price $ 4,272
Current assets 2,402
Current liabilities (4,291)
Property 1,686
Other (17)
Customer base 1,010
Goodwill 3,482
This allocation represents management's best estimate of the values acquired.
This allocation is subject to change up to one year from the date of
acquisition, but management does not currently anticipate any material changes.
21
22
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. SHAREHOLDERS' EQUITY
Innotrac has authorized 50,000,000 shares of Common Stock, $0.10 par value, and
10,000,000 shares of Preferred Stock, $0.10 par value. On December 12, 1997,
Innotrac effected a 70.58823-for-1 stock split resulting in 1,080,000 shares
outstanding. Additionally, in exchange for their previous ownership interests,
5,420,000 shares of $0.10 par value common stock were issued to the remaining
entity owners pari-passu based on their relative value to the consolidated group
except for the minority stockholder of one of the affiliated entities, whose
ownership interest was repurchased as scheduled in the fourth quarter of 1998.
After the Consolidation, there were an aggregate of 6,500,000 shares
outstanding. As discussed in Note 1, on May 6, 1998 the Company completed an
initial public offering of 2.5 million shares at a price of $12.00 per share for
net proceeds of approximately $26,741,000. On July 30,1999, the Company
completed a secondary public offering of 2.2 million shares at a price of $17.00
per share for net proceeds of approximately $34,914,000.
In June 2000, the Company's Board of Directors authorized the repurchase, at the
direction of senior management, of up to $5.0 million of the Company's common
stock. As of December 31, 2000, the Company had repurchased 45,000 shares at a
total cost of $206,000. The repurchased shares are recorded at cost as treasury
stock and result in a reduction of shareholder's equity.
At December 31, 2000 and 1999, there were 11,364,595 and 11,215,000 shares of
common stock outstanding, respectively.
11. 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 six months of service and are 18 years of age or older.
Participants may elect to defer up to 15% of compensation up to a maximum amount
determined annually pursuant to IRS regulations. Innotrac has elected to provide
matching employer contributions equal to 15% of contributions for less than five
years of service, 25% of contributions for five to nine years of service, and
35% of contributions for over nine years of service. Total matching
contributions made to the plan and charged to expense by Innotrac for the years
ended December 31, 2000, 1999 and 1998 were not material.
12. STOCK BASED COMPENSATION
The Company has adopted two stock option plans: the 1997 and 2000 Stock Option
and Incentive Award Plans ("The Plans"). The Plans provide key employees,
officers, directors, contractors and consultants an opportunity to own shares of
common stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under The Plans may be
structured in a variety of ways, including as "incentive stock options" as
defined in Section 422 of the Internal Revenue Code, as amended, non-qualified
stock options, restricted stock awards, and stock appreciation rights ("SARs").
Incentive stock options may be granted only to full-time employees (including
officers) of the Company and its subsidiaries. Non-qualified options, restricted
stock awards, SARs, and other permitted forms of awards may be granted to any
person employed by or performing services for the Company, including directors,
contractors and consultants. The 1997 Stock Option Plan and 2000 Stock Option
Plan provides for the issuance of options to purchase up to an aggregate of
800,000 shares and 1,300,000 shares of common stock, respectively. The Company
also has an amendment to the 2000 Plan for the issuance of options to purchase
up to an additional 1,500,000 shares of common stock pending approval at the
2001 Shareholder's Meeting.
22
23
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Incentive stock options are also subject to certain limitations prescribed by
the Code, including the requirement that such options may not be granted to
employees who own more than 10% of the combined voting power of all classes of
voting stock of the Company, unless the option price is at least 110% of the
fair market value of the common stock subject to the option. The Board of
Directors of the Company (or a committee designated by the Board) otherwise
generally has discretion to set the terms and conditions of options and other
awards, including the term, exercise price and vesting conditions, if any; to
select the persons who receive such grants and awards; and to interpret and
administer The Plans.
A summary of the options outstanding and exercisable by price range as of
December 31, 2000 is as follows:
Options Outstanding Options Exercisable
------------------------------------ -----------------------------------
Weighted Average Weighted
Range of As of Remaining Weighted Average As of Average
Exercise Prices December 31, 2000 Contractual Life Exercise Price December 31, 2000 Exercise Price
- --------------- ----------------- ---------------- ---------------- ----------------- --------------
$ 1.77 - $ 3.54 535,000 10.0 $ 3.13 -- $ --
$ 3.54 - $ 5.31 380,000 9.4 4.86 -- --
$ 5.31 - $ 7.07 160,000 9.4 6.07 -- --
$ 7.07 - $ 8.84 310,000 9.2 7.13 -- --
$ 8.84 - $10.61 239,175 6.9 9.10 193,131 9.10
$10.61 - $12.38 30,000 7.3 12.00 30,000 12.00
$12.38 - $14.15 99,500 8.7 13.07 12,499 14.13
$15.92 - $17.68 40,500 8.2 16.63 9,999 17.69
--------- ------ ------- ------- -------
1,794,175 9.1 $ 6.19 245,629 $ 10.05
========= ====== ======= ======= =======
A summary of the status of the Company's two stock option plans as of December
31, 2000, 1999 and 1998 is as follows (shares in thousands):
Shares Weighted Average Price
------ ----------------------
Outstanding at December 31, 1997 343 $ 9.10
Granted 40 12.00
Forfeited (20) 9.10
----- --------
Outstanding at December 31, 1998 363 9.42
Granted 209 14.35
Exercised (13) 11.33
Forfeited (31) 14.11
----- --------
Outstanding at December 31, 1999 528 10.98
Granted 1,725 5.01
Forfeited (459) 7.14
----- --------
Outstanding at December 31, 2000 1,794 $ 6.19
===== ========
Options exercisable at December 31, 2000 246 $ 10.05
===== ========
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INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for The Plans under APB No. 25, under which no compensation
cost has been recognized. Had compensation cost for stock options been
determined under SFAS No. 123, the Company's net (loss) income and net (loss)
income per share would have been the following pro forma amounts (in 000's,
except per share data):
YEAR ENDED DECEMBER 31,
--------------------------------------------------
2000 1999 1998
----------- ----------- -----------
Net (loss) income
Pro forma $ (21,575) $ 9,835 $ 8,186
Pro forma adjusted for the
impact of SFAS No. 123 $ (22,347) $ 9,048 $ 7,402
Diluted net (loss) income per share
Pro forma $ (1.92) $ 0.98 $ 1.00
Pro forma adjusted for the
impact of SFAS No. 123 $ (1.99) $ 0.90 $ 0.91
The Company has computed for pro forma disclosure purposes the value of all
options granted using the Black-Scholes option-pricing model as prescribed by
SFAS No. 123 using the following weighted average assumptions:
2000 1999 1998
-------- --------- ---------
Risk-free interest rate 5.44% 6.34% 5.17%
Expected dividend yield 0% 0% 0%
Expected lives 2.7 Years 2.7 Years 2.7 Years
Expected volatility 90.4% 80.5% 86.0%
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INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In 000's, except per share data) First Second Third Fourth
--------- --------- -------- ---------
2000 Quarters:
Revenues, net $ 47,850 $ 50,352 $ 50,284 $ 25,599
Operating (loss) income (1,614) (15,337) 283 (18,969)
Net (loss) income (1,124) (9,206) 319 (11,564)
Net (loss) income per share-basic (0.10) (0.82) 0.03 (1.03)
Net (loss) income per share-diluted $ (0.10) $ (0.82) $ 0.03 $ (1.03)
1999 Quarters:
Revenues, net $ 67,320 $ 57,496 $ 51,661 $ 50,534
Operating income 5,784 5,869 4,075 1,926
Net income 3,286 3,266 2,303 980
Net income per share-basic 0.37 0.36 0.22 0.09
Net income per share-diluted $ 0.36 $ 0.36 $ 0.22 $ 0.09
1998 Quarters:
Revenues, net $ 22,565 $ 36,346 $ 35,233 $ 45,529
Operating income 2,587 4,494 3,669 3,553
Net income 1,393 2,596 2,169 2,028
Net income per share-basic 0.21 0.33 0.24 0.23
Net income per share-diluted $ 0.21 $ 0.33 $ 0.24 $ 0.22
14. SPECIAL CHARGES
During 2000, the Company substantially completed its migration towards a
fee-for-service business model, which eliminates inventory ownership risk and
also elected to discontinue its front-end web site development, maintenance and
hosting services to its e-commerce clients. As a result of these significant
changes in the Company's business, a special pre-tax charge of $34.3 million was
recognized. The special charges of $34.3 million for the year ended December 31,
2000 includes the following: $24.4 million for inventory, accounts receivable
and other items primarily related to the Company's shift to a fee-for-service
business model; $6.2 million for the impairment of long-lived assets primarily
due to the abandonment of specified software development projects; and $3.7
million in costs to exit the e-commerce business related to web development,
maintenance and hosting services. The Company has approximately $6.9 million in
accruals related to the special charges at December 31, 2000, which include $5.1
million for the Company's shift to a fee-for-service business model and $1.8
million for e-commerce exit costs. Cash payments for the year totaled
approximately $1.0 million. The Company expects that substantially all of the
remaining accruals will be utilized during the year ended December 31, 2001.
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INNOTRAC CORPORATION
SHAREHOLDER INFORMATION
CORPORATE HEADQUARTERS
Innotrac Corporation
6655 Sugarloaf Parkway
Georgia 30097
678-584-4000
www.innotrac.com
TRANSFER AGENT
SunTrust Bank
P.O. Box 4625
Atlanta, Georgia, 30302
ANNUAL MEETING
Wednesday, May 21, 2001
9 a.m. Eastern Daylight Time
Gwinnett Civic and Cultural Center
6400 Sugarloaf Parkway
Duluth, Georgia 30097
INDEPENDENT PUBLIC ACCOUNTANTS
Arthur Andersen LLP
Atlanta, Georgia
FORM 10-K/INVESTOR CONTACT
A copy of the Innotrac Annual Report on Form 10-K for
2000 filed with the Securities and Exchange
Commission is available from the Company at no
charge. These requests and other investor contacts
should be directed to the Chief Financial Officer at
the Company's corporate office.
COMMON STOCK
Innotrac's common stock trades on The Nasdaq Stock Market under the symbol INOC.
As of March 20, 2001, the Company had approximately 3,074 shareholders based on
the number of holders of record and an estimate of the number of individual
participants represented by securities position listings.
The following table sets forth the reported high and low sales prices for
Innotrac's common stock as reported by Nasdaq:
2000 HIGH LOW
---- ----- -----
First Quarter 13 1/2 6 3/4
Second Quarter 8 1/4 4 3/4
Third Quarter 6 3/4 4 3/4
Fourth Quarter 5 3/4 3 1/8
1999 HIGH LOW
---- ------ ------
First Quarter 18 1/2 10
Second Quarter 20 1/4 14 1/8
Third Quarter 26 3/4 15 1/4
Fourth Quarter 17 5/8 10 5/8
The Company has never paid a dividend on its common stock. The Company presently
intends to retain its earnings to support the growth of its business and does
not expect to pay any dividends in the foreseeable future.
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27
INNOTRAC CORPORATION
DIRECTORS AND OFFICERS
BOARD OF DIRECTORS
Scott D. Dorfman(1)(3)
Chairman, President and Chief Executive Officer
David L. Ellin(1)
Senior Vice President and Chief Operating Officer
Larry C. Hanger
Senior Vice President - Business Development
Bruce V. Benator(1)(2)
Managing Partner
William, Benator and Libby, LLP
Certified Public Accountants
Martin J. Blank(2)(3)
Chairman and Chief Operating Officer
Automobile Protection Corporation (a subsidiary of
the Ford Motor Company)
markets extended vehicle service contracts and
warranty programs
William H. Scott, III(2)(3)
President and Chief Operating Officer
ITC Holding Company, Inc.
a telecommunications company
OFFICERS
Scott D. Dorfman
Chairman, President and Chief Executive Officer
David L. Ellin
Senior Vice President and Chief Operating Officer
David L. Gamsey
Senior Vice President, Chief Financial Officer, and
Secretary
Larry C. Hanger
Senior Vice President - Business Development
William F. Hendrick, Jr.
Vice President - Telecommunications
Clifford A. Ruden
Vice President - Sales
(1) Member of Executive Committee
(2) Member of Audit Committee
(3) Member of Compensation Committee
27