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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 2001
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
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Commission file number 000-23740
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INNOTRAC CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-1592285
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6655 Sugarloaf Parkway Duluth, Georgia 30097
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding April 30, 2001
--------------------------
Common Stock at $.10 par value 11,364,595 Shares
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INDEX
Part I. Financial Information
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
March 31, 2001 (Unaudited) and December 31, 2000 3
Condensed Consolidated Statement of Operations for the
Three Months Ended March 31, 2001 and 2000 (Unaudited) 4
Condensed Consolidated Statement of Cash Flows for the
Three Months Ended March 31, 2001 and 2000 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements (Unaudited) 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
Item 3. Quantitative and Qualitative Disclosure About Market Risk 10
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 11
Signatures 12
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PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The following condensed consolidated financial statements of Innotrac
Corporation, a Georgia corporation (the "Company"), have been prepared in
accordance with the instructions to Form 10-Q and, therefore, omit or condense
certain footnotes and other information normally included in financial
statements prepared in accordance with generally accepted accounting principles.
Certain amounts in the prior year have been reclassified to conform to the
current presentation. In the opinion of management, all adjustments are of a
normal and recurring nature, except those specified otherwise, and include those
necessary for a fair presentation of the financial information for the interim
periods reported. Results of operations for the three months ended March 31,
2001 are not necessarily indicative of the results for the entire year ending
December 31, 2001. These financial statements should be read in conjunction with
the consolidated financial statements and notes thereto included in the
Company's 10-K filing and annual report.
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INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS MARCH 31, 2001 DECEMBER 31, 2000
------ -------------- -----------------
(UNAUDITED)
Current assets:
Cash and cash equivalents .......................... $ 20,345 $ 18,334
Accounts receivable, net ........................... 26,299 31,217
Inventories, net ................................... 13,825 15,056
Deferred income taxes .............................. 3,242 3,984
Prepaid expenses and other ......................... 8,492 7,559
-------- --------
Total current assets ......................... 72,203 76,150
Property and equipment:
Rental equipment ................................... 3,120 3,464
Computer, machinery and equipment .................. 18,534 16,362
Furniture, fixtures and leasehold improvements ..... 3,840 3,695
-------- --------
25,494 23,521
Less accumulated depreciation and amortization ..... (10,553) (9,804)
-------- --------
14,941 13,717
Goodwill, net ........................................... 3,423 3,466
Deferred income taxes ................................... 2,577 2,579
Other assets, net ....................................... 1,363 1,233
-------- --------
$ 94,507 $ 97,145
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ................................... $ 18,354 $ 22,104
Accrued expenses and other ......................... 13,549 12,071
-------- --------
Total current liabilities .................... 31,903 34,175
Total noncurrent liabilities ............................ 137 166
-------- --------
Total liabilities ............................ 32,040 34,341
Minority interest in subsidiary ......................... 3,299 4,169
Shareholders' equity:
Common stock ....................................... 1,136 1,136
Additional paid-in capital ......................... 60,923 60,889
Retained earnings .................................. (2,685) (3,184)
Less: Treasury stock ............................... (206) (206)
-------- --------
Total shareholders' equity ................... 59,168 58,635
-------- --------
Total liabilities and shareholders' equity ... $ 94,507 $ 97,145
======== ========
The accompanying notes are an integral part of these
condensed balance sheets.
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Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED MARCH 31,
2001 2000
-------- --------
Revenues, net ...................................... $ 24,921 $ 47,850
Cost of revenues ................................... 11,159 39,329
-------- --------
Gross profit ............................. 13,762 8,521
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Operating expenses:
Selling, general and administrative expenses ... 13,390 9,340
Depreciation and amortization .................. 1,196 795
-------- --------
Total operating expenses ....................... 14,586 10,135
-------- --------
Operating loss ........................... (824) (1,614)
-------- --------
Other (income) expenses, net ...................... (213) 245
Income before income taxes and minority interest ... (611) (1,859)
Income tax benefit ................................. 240 735
-------- --------
Net loss before minority interest .................. (371) (1,124)
Minority interest, net of income taxes ............. (871) 0
-------- --------
Net income (loss) ........................ $ 500 $ (1,124)
======== ========
Basic and diluted earnings (loss) per share:
Basic .......................................... $ 0.04 $ (0.10)
======== ========
Diluted ........................................ $ 0.04 $ (0.10)
======== ========
Weighted average shares outstanding:
Basic .......................................... 11,319 11,215
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Diluted ........................................ 11,540 11,215
======== ========
The accompanying notes are an integral part of these
condensed consolidated statements.
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Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
Three Months Ended March 31,
2001 2000
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Cash flows from operating activities:
Net income (loss) .............................................................. $ 500 $(1,124)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ................................................ 1,196 795
Loss on disposal of fixed assets ............................................. 4 45
Deferred income taxes ........................................................ 742 (148)
Minority interest in subsidiary .............................................. (871) 0
Amortization of deferred compensation ........................................ 33 0
Decrease in accounts receivable .............................................. 4,918 (9,188)
Decrease in inventories ...................................................... 1,231 8,091
(Increase) decrease in prepaid expenses and other ............................ (1,125) (1,275)
Increase in accounts payable and accrued expenses ............................ (2,278) (1,714)
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Net cash provided by (used in) operating activities ..................... 4,350 (4,518)
-------- -------
Cash flows from investing activities:
Capital expenditures ........................................................... (2,317) (2,764)
-------- -------
Net cash used in investing activities ................................... (2,317) (2,764)
-------- -------
Cash flows from financing activities:
Borrowings under line of credit ................................................ 0 6,627
Repayment of other debt ........................................................ (22) (2)
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Net cash (used in) provided by financing activities ..................... (22) 6,625
-------- -------
Net increase (decrease) in cash and cash equivalents ............................... 2,011 (657)
Cash and cash equivalents, beginning of period ..................................... 18,334 894
-------- -------
Cash and cash equivalents, end of period ........................................... $ 20,345 $ 237
======== =======
Supplemental cash flow disclosures:
Cash paid for interest ......................................................... $ 0 $ 207
======== =======
Cash paid for income taxes, net of refunds received ............................ $ 0 $ 77
======== =======
The accompanying notes are an integral part of these
condensed consolidated statements.
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Financial Statements-Continued
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for quarterly financial reporting are
the same as those disclosed in the Notes to Consolidated Financial
Statements included in the Company's Form 10-K filed with the
Securities and Exchange Commission on March 30, 2001 for the year ended
December 31, 2000. Certain prior year amounts have been reclassified to
conform with current year financial statement presentation.
2. SPECIAL CHARGES
At March 31, 2001 and December 31, 2000, the Company had approximately
$5.5 million and $6.9 million, respectively, in accruals related to the
special charges incurred during the year ended December 31, 2000. The
remaining accruals at March 31, 2001 included $3.9 million for the
Company's shift to a fee-for-service business model and $1.6 million
for e-commerce costs. Cash payments for the three months ended March
31, 2001 were approximately $0.9 million. The Company expects that
substantially all of the remaining accruals will be utilized during the
year ended December 31, 2001.
3. IMPAIRMENT OF LONG -LIVED ASSETS
During the three months ended March 31, 2001, the Company recorded an
impairment reserve of approximately $2.4 million primarily for software
development costs incurred by Return.com due to the uncertainty of the
ultimate realizability of these costs as a result of the Company's exit
from e-commerce initiatives. The Company also recorded approximately
$0.4 million in severance costs for the reduction in Return.com
employees due to the utilization of other internal resources of the
Company. The Company expects Return.com to continue to generate
operating losses in 2001.
4. MINORITY INTEREST
As a result of the Company's 60% ownership interest in Return.com as of
March 31, 2001, the Company consolidated the results of operations and
financial position of Return.com in the accompanying condensed
consolidated financial statements. 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 in Return.com. On April 17, 2001 the
Company agreed to reacquire MBE's 40% ownership interest in Return.com.
The note receivable of $3.4 million due from MBE was forgiven by the
Company in exchange for the remaining shares of common stock of
Return.com, resulting in 100% ownership by the Company. All remaining
contractual commitments for additional funding by the Company were also
cancelled.
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Financial Statements-Continued
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2001 AND 2000
(UNAUDITED)
5. 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 three months ended March 31,
2000 because their effect was anti-dilutive. Shares used to compute
diluted EPS for the three months ended March 31, 2001 and 2000 are as
follows (in 000's):
Three Months Ended
March 31,
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2001 2000
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Diluted earnings per share:
Weighted average shares outstanding 11,319 11,215
Employee and director stock options 221 0
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Weighted average shares
assuming dilution 11,540 11,215
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ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion may contain certain forward-looking statements
that are subject to conditions that are beyond the control of the Company.
Actual results may differ materially from those expressed or implied by such
forward-looking statements. Factors that could cause actual results to differ
include, but are not limited to, the 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
Online, LLC; and other factors discussed in more detail under "Business" on Form
10-K for the year ended December 31, 2000.
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, Siemens and Thane International.
Historically, over ninety percent of the Company's volume has been generated
from its telecommunications clients.
With the Company's conversion of its clients to a fee-for-service model
by the end of 2000, 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 is no
longer included in revenues; however, since the Company no longer has 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 was
converted to a limited liability corporation on December 28, 2000. As of March
31, 2001, Innotrac owned 60% of this subsidiary with the remaining 40% owned by
MBE. However, due to the announcement in March 2001 that United Parcel Services,
Inc. ("UPS") had entered into a definitive agreement to purchase MBE, the
Company elected to acquire from MBE the remaining 40% ownership interest in
Return.com and terminate its arrangement with MBE as its exclusive front-end
solution in April 2001. Subsequently, Return.com entered into a non-exclusive
arrangement with the United States Postal Service ("USPS") for at-home pick up
services or drop off of authorized Return.com returns at any of USPS's
participating locations. Return.com is the first full-service returns portal
supported by the convenience of approximately 38,000 USPS locations throughout
the United States. As a result of this ownership structure of Return.com as of
March 31, 2001, the Company consolidated the results of operations and financial
position of Return.com in the accompanying condensed consolidated financial
statements. The Company expects Return.com to continue to generate operating
losses in 2001.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth unaudited summary operating data, expressed as a
percentage of revenues, for the three months ended March 31, 2001 and 2000. The
data has been prepared on the same basis as the annual consolidated financial
statements. In the opinion of management, it reflects normal and recurring
adjustments, necessary for a fair presentation of the information for the
periods presented. Operating results for any period are not necessarily
indicative of results for any future period.
The financial information provided below has been rounded in order to simplify
its presentation. However, the percentages below are calculated using the
detailed information contained in the condensed consolidated financial
statements.
Three Months
Ended March 31,
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2001 2000
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Revenues ......................................... 100.0% 100.0%
Cost of revenues ................................. 44.8 82.2
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Gross margin ................................... 55.2 17.8
Selling, general and administrative expenses ..... 53.7 19.5
Depreciation and amortization .................... 4.8 1.7
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Operating loss ................................. (3.3) (3.4)
Other (income) expense, net ...................... (0.8) 0.5
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Loss before income taxes
and minority interest ........................ (2.5) (3.9)
Income tax benefit ............................... 1.0 1.5
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Loss before minority interest .................... (1.5) (2.4)
Minority interest ................................ (3.5) --
------ ------
Net income (loss) .............................. 2.0% (2.4)%
====== ======
THREE MONTHS ENDED MARCH 31, 2001 COMPARED TO THREE MONTHS ENDED MARCH 31, 2000
Revenues. Net revenues decreased 47.9% to $24.9 million for the three months
ended March 31, 2001 from $47.8 million for the three months ended March 31,
2000. The decrease in revenue is consistent with the Company's switch to a
fee-for-service model and the decline in the 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 71.6% to $11.1 million for the
three months ended March 31, 2001 compared to $39.3 million for the three months
ended March 31, 2000. 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 sales of Caller ID equipment.
Gross Profit. For the three months ended March 31, 2001, the Company's gross
profit increased by $5.3 million to $13.8 million, or 55.2% of revenues,
compared to $8.5 million, or 17.8% of revenues, for the three months ended March
31, 2000. This increase was due primarily to the factors discussed above.
Selling, General and Administrative Expenses. S,G&A expenses for the three
months ended March 31, 2001 increased to $13.4 million, or 53.7% of revenues,
compared to $9.3 million, or 19.5% of revenues, for the same period in 2000.
This increase in expenses was mainly attributable to the $2.8 million in
reserves primarily for the impairment of software development costs and
severance costs related to Return.com. There were also increased costs incurred
from the recent acquisition of Universal Distribution Services in December 2000.
The increase in S,G&A expenses was offset by reduced expenditures related to the
Company's discontinuation of its front-end web-site development, maintenance and
hosting services.
Income Taxes. The Company's effective tax rate for the three months ended March
31, 2001 and 2000 was 39.3% and 39.5%, respectively.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations and capital expenditures primarily through cash
flow from operations and borrowings under a credit facility with a bank and,
from time to time, equity offerings. The Company had cash and cash equivalents
of approximately $20.3 million at March 31, 2001. In April 2001 the Company no
longer has a contractual commitment for funding the start up and development of
Return.com with the reacquisition of 100% ownership in Return.com (see note 4).
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 March 31, 2001, there was no outstanding
balance under the line of credit.
During the three months ended March 31, 2001, the Company generated $4.4 million
in cash flow from operating activities compared to the use of $4.5 million in
cash flow from operating activities in the same period in 2000. The generation
of cash flow from operating activities for the three months ended March 31, 2001
compared to the use of cash flow from operating activities in the same period in
2000 was due primarily to the decrease in accounts receivable, offset by a lower
decrease in inventory levels.
During the three months ended March 31, 2001, net cash used in investing
activities was $2.3 million in 2001 as compared to $2.8 million in 2000. This
slight decrease was primarily due to reduced expenditures for technology related
to e-commerce applications and internal systems development during 2001.
During the three months ended March 31, 2001, the net cash used in financing
activities was $22,000 compared to $6.6 million provided by financing activities
in the same period in 2000 primarily due to no borrowings made under the
Company's line of credit during 2001.
The Company estimates that its cash and financing needs through 2001 will be met
by cash flows from operations 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.
ITEM 3- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Reference is made to item 7A, Part II of the Company's annual report on Form
10-K for the year ended December 31, 2000, for discussion pertaining to the
Company's exposure to certain market risk. There have been no material changes
in the disclosure for the three months ended March 31, 2001.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON 8-K
(a) Exhibits
Exhibit
Number Description
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10.1 Agreement to Discharge Debt , dated April 17, 2001,
between Return.com Online, LLC and Mail Boxes Etc.
USA, Inc.
10.2 Agreement to Terminate Services and Marketing
Agreement, dated April 17, 2001, between Return.com
Online, LLC, Mail Boxes, Etc. USA, Inc. and Innotrac
Corporation
(b) Reports on Form 8-K - There were no Form 8-K filings during the quarter
ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOTRAC CORPORATION
(Registrant)
Date: May 14, 2001 By: /s/ Scott D. Dorfman
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Scott D. Dorfman
President, Chief Executive
Officer and Chairman
of the Board
Date: May 14, 2001 By: /s/ David L. Gamsey
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David L. Gamsey
Senior Vice President, Chief
Financial Officer
and Secretary (Principal
Financial Officer)
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