1
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 June 30, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from ________ to ________
Commission file number 000-23740
---------
INNOTRAC CORPORATION
- ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Georgia 58-1592285
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6655 Sugarloaf Parkway Duluth, Georgia 30097
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
-------------------------
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 at August 6, 2001
-----------------------------
Common Stock at $.10 par value 11,364,595 Shares
2
INDEX
Page
Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
June 30, 2001 (Unaudited) and December 31, 2000 2
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2001 and 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2001 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000 (Unaudited) 5
Notes to Condensed Consolidated Financial Statements 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 11
Part II. Other Information
Item 4. Submission of Matters to a Vote of Securities Holders 12
Item 6. Exhibits and Reports on Form 8-K 12
Signatures 13
1
3
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ............................................. $ 22,221 $ 18,334
Accounts receivable, net .............................................. 24,708 31,217
Inventories, net ...................................................... 11,533 15,056
Deferred income taxes ................................................. 4,233 3,984
Prepaid expenses and other ............................................ 3,529 7,559
-------- --------
Total current assets ........................................ 66,224 76,150
Property and equipment:
Rental equipment ...................................................... 2,348 3,464
Computer, machinery and equipment ..................................... 19,633 16,362
Furniture, fixtures and leasehold improvements ........................ 3,897 3,695
-------- --------
25,878 23,521
Less accumulated depreciation and amortization ........................ (10,945) (9,804)
-------- --------
14,933 13,717
Goodwill, net .............................................................. 3,380 3,466
Deferred income taxes ...................................................... 2,308 2,579
Other assets, net .......................................................... 1,156 1,233
-------- --------
Total assets ................................................ $ 88,001 $ 97,145
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ...................................................... $ 13,582 $ 22,104
Accrued expenses and other ............................................ 14,032 12,071
-------- --------
Total current liabilities ................................... 27,614 34,175
Total noncurrent liabilities ............................................... 150 166
-------- --------
Total liabilities ........................................... 27,764 34,341
Minority interest in subsidiary ............................................ 0 4,169
Shareholders' equity:
Common stock .......................................................... 1,136 1,136
Additional paid-in capital ............................................ 60,956 60,889
Retained earnings ..................................................... (1,649) (3,184)
Less: Treasury stock .................................................. (206) (206)
-------- --------
Total shareholders' equity ................................... 60,237 58,635
-------- --------
Total liabilities and shareholders' equity ................... $ 88,001 $ 97,145
======== ========
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
2
4
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended June 30,
2001 2000
-------- --------
Revenues, net .............................................................. $ 26,025 $ 50,897
Cost of revenues ........................................................... 12,282 41,125
Special charges ............................................................ 0 7,477
-------- --------
Gross profit ................................................ 13,743 2,295
-------- --------
Operating expenses:
Selling, general and administrative expenses ........................ 10,770 8,195
Special charges ..................................................... 0 8,473
Depreciation and amortization ....................................... 1,191 932
-------- --------
Total operating expenses ................................... 11,961 17,600
-------- --------
Operating income (loss) .................................................... 1,782 (15,305)
-------- --------
Other (income) expenses, net ............................................... (197) 187
-------- --------
Income (loss) before income taxes and minority interest .................... 1,979 (15,492)
Income tax (provision) benefit ............................................. (944) 6,240
-------- --------
Net income (loss) before minority interest ................................. 1,035 (9,252)
Minority interest, net of income tax benefit ............................... 0 (46)
-------- --------
Net income (loss) .......................................... $ 1,035 $ (9,206)
======== ========
Earnings per share:
Basic and diluted earnings (loss) per share:
Basic ............................................................... $ 0.09 $ (0.82)
======== ========
Diluted ............................................................. $ 0.09 $ (0.82)
======== ========
Weighted average shares outstanding:
Basic ............................................................... 11,319 11,215
======== ========
Diluted ............................................................. 11,739 11,215
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
3
5
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Six Months Ended June 30,
2001 2000
-------- --------
Revenues, net ................................................... $ 50,946 $ 98,747
Cost of revenues ................................................ 23,590 80,206
Special charges ................................................. 0 7,477
-------- --------
Gross profit ..................................... 27,356 11,064
-------- --------
Operating expenses:
Selling, general and administrative expenses ............. 24,010 17,734
Special charges .......................................... 0 8,473
Depreciation and amortization ............................ 2,387 1,727
-------- --------
Total operating expenses ........................ 26,397 27,934
-------- --------
Operating income (loss) ......................................... 959 (16,870)
-------- --------
Other (income) expenses, net .................................... (409) 481
-------- --------
Income (loss) before income taxes and minority interest ......... 1,368 (17,351)
Income tax (provision) benefit .................................. (704) 6,975
-------- --------
Net income (loss) before minority interest ...................... 664 (10,376)
Minority interest, net of income tax benefit .................... (871) (46)
-------- --------
Net income (loss) ............................... $ 1,535 $(10,330)
======== ========
Earnings per share:
Basic and diluted earnings (loss) per share:
Basic .................................................... $ 0.14 $ (0.92)
======== ========
Diluted .................................................. $ 0.13 $ (0.92)
======== ========
Weighted average shares outstanding:
Basic .................................................... 11,319 11,215
======== ========
Diluted .................................................. 11,645 11,215
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
4
6
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED JUNE 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) ...................................................... $ 1,535 $(10,330)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Depreciation and amortization ...................................... 2,387 1,727
Loss on disposal of property and equipment ......................... 164 451
Minority interest in subsidiary .................................... (871) (46)
Amortization of deferred compensation .............................. 67 0
Deferred income taxes .............................................. 22 372
Decrease (increase) in accounts receivable ......................... 6,438 (5,971)
Decrease in inventories ............................................ 3,523 26,241
Decrease (increase) in prepaid expenses and other .................. 620 (8,584)
(Decrease) increase in accounts payable ............................ (8,521) 9,348
Increase in accrued expenses and other ............................. 2,035 1,082
-------- --------
Net cash provided by operating activities ..................... 7,399 14,290
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .................................... (3,490) (7,313)
Other .................................................................. 0 (32)
-------- --------
Net cash used in investing activities ......................... (3,490) (7,345)
-------- --------
Cash flows from financing activities:
Net repayments under line of credit .................................... 0 (5,278)
Repayment of long-term debt ............................................ (22) (7)
Proceeds from issuance of stock in subsidiary .......................... 0 1,000
-------- --------
Net cash used in financing activities ......................... (22) (4,285)
-------- --------
Net increase in cash and cash equivalents ................................... 3,887 2,660
Cash and cash equivalents, beginning of period .............................. 18,334 894
-------- --------
Cash and cash equivalents, end of period .................................... $ 22,221 $ 3,554
======== ========
Supplemental cash flow disclosures:
Cash paid for interest ................................................. $ 25 $ 430
======== ========
Cash paid for income taxes, net of refunds received .................... $ (68) $ 77
======== ========
The accompanying notes are an integral part of these
condensed consolidated financial statements.
5
7
Financial Statements-Continued
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 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 June 30, 2001 and December 31, 2000, the Company had approximately
$4.7 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 June 30, 2001 included $3.6 million for the
Company's shift to a fee-for-service business model and $1.1 million for
e-commerce costs. Cash payments for the three and six months ended June
30, 2001 were approximately $0.6 million and $1.5 million, respectively.
The Company expects that the majority of the remaining accruals will be
utilized by the year ended December 31, 2001.
3. IMPAIRMENT OF LONG-LIVED ASSETS
During the three months ended June 30, 2001, the Company recorded an
impairment reserve of approximately $0.7 million primarily for certain
call center related software. The Company also has an impairment reserve
of approximately $2.4 million, which was recorded during the first
quarter of 2001. This first quarter reserve was primarily for software
development costs incurred as part of the development of a software
engine for Return.com.
4. MINORITY INTEREST
The minority interest represents an investment in Return.com Online, LLC
("Return.com"), a subsidiary of the Company previously held by Mail Boxes
Etc. ("MBE"), including their proportionate share of losses in Return.com
prior to April 17, 2001. 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.
As a result of the Company's controlling ownership interest in
Return.com, the Company consolidated the results of operations and
financial position of Return.com in the accompanying condensed
consolidated financial statements. During the three months ended June 30,
2001, severance payments of approximately $0.3 million were made related
to the reduction in Return.com employees. At June 30, 2001, the Company
had a remaining accrual for severance costs of approximately $0.1
million, which will be utilized by December 31, 2001. The Company expects
Return.com to continue to generate operating losses in 2001.
6
8
Financial Statements-Continued
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2001 AND 2000
(UNAUDITED)
5. SUBSEQUENT EVENT
On July 24, 2001, the Company acquired for cash the assets and assumed
specified liabilities of iFulfillment, Inc., which is located in a
354,000 square foot leased facility in Bolingbrook, Illinois.
iFulfillment specializes in fully integrated, automated, order
fulfillment services for multi-channel retailers and catalogers including
such clients as Nordstrom.com's online catalog shoe sales and Wilsons
Leather. The assets and operating results of iFulfillment prior to the
acquisition were not material to the Company's consolidated assets or
results of operations.
6. 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 and six months ended June 30,
2000 because their effect was anti-dilutive. Shares used to compute
diluted EPS for the three and six months ended June 30, 2001 and 2000 are
as follows (in 000's):
Three Months Ended Six Months Ended
-------------------- --------------------
June 30, June 30,
------------------------------------------------
2001 2000 2001 2000
------------------------------------------------
Diluted earnings per share:
Weighted average shares outstanding 11,319 11,215 11,319 11,215
Employee and director stock options 420 0 326 0
------ ------ ------ ------
Weighted average shares assuming dilution 11,739 11,215 11,645 11,215
====== ====== ====== ======
7. NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
two new pronouncements: Statement of Financial Accounting Standards
("SFAS") No. 141, "Business Combinations", and SFAS No. 142, "Goodwill
and Other Intangible Assets". SFAS 141 prohibits the use of the
pooling-of-interest method for business combinations initiated after June
30, 2001 and also applies to all business combinations accounted for by
the purchase method that are completed after June 30, 2001. There were
also transition provisions that apply to business combinations completed
before July 1, 2001, that were accounted for by the purchase method. SFAS
142 is effective for fiscal years beginning after December 15, 2001 to
all goodwill and other intangible assets recognized in an entity's
statement of financial position at that date, regardless of when those
assets were initially recognized. The acquisition of iFulfillment will be
accounted for in accordance with these statements. The Company is
currently evaluating the provisions of SFAS 141 and SFAS 142 and has not
yet made a determination of the impact adoption will have on the
consolidated financial statements.
7
9
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 during
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. While the new model substantially reduces revenues
as pass through cost of purchased equipment is no longer included in revenues,
gross margins, and more importantly, operating cash flows have improved since
the Company no longer has inventory risk or cost of equipment.
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. As a result of the Company's ownership interest in Return.com, 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.
SUBSEQUENT EVENT
On July 24, 2001, the Company acquired for cash the assets and assumed specified
liabilities of iFulfillment, Inc., which is located in a 354,000 square foot
leased facility in Bolingbrook, Illinois. iFulfillment specializes in fully
integrated, automated, order fulfillment services for multi-channel retailers
and catalogers including such clients as Nordstrom.com's online catalog shoe
sales and Wilsons Leather. The assets and operating results of iFulfillment
prior to the acquisition were not material to the Company's consolidated assets
or results of operations.
8
10
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 and six months ended June 30, 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 Six Months
Ended June 30, Ended June 30,
-------------------- --------------------
2001 2000 2001 2000
------ ------ ------ ------
Revenues .............................................. 100.0% 100.0% 100.0% 100.0%
Cost of revenues ...................................... 47.2 80.8 46.3 81.2
Special charges ....................................... -- 14.7 -- 7.6
------ ------ ------ ------
Gross margin ....................................... 52.8 4.5 53.7 11.2
Selling, general and administrative expenses .......... 41.4 16.1 47.1 18.0
Special charges ....................................... -- 16.6 -- 8.6
Depreciation and amortization ......................... 4.6 1.8 4.7 1.7
------ ------ ------ ------
Operating income (loss) ............................ 6.8 (30.0) 1.9 (17.1)
Other (income) expense, net ........................... (0.8) 0.4 (0.8) 0.5
------ ------ ------ ------
Income (loss) before income taxes
and minority interest .............................. 7.6 (30.4) 2.7 (17.6)
Income tax (provision) benefit ........................ (3.6) 12.2 (1.4) 7.0
------ ------ ------ ------
Net income (loss) before minority interest ............ 4.0 (18.2) 1.3 (10.6)
Minority interest ..................................... -- (0.1) (1.7) (0.1)
------ ------ ------ ------
Net income (loss) .................................. 4.0% (18.1)% 3.0% (10.5)%
====== ====== ====== ======
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Revenues. Net revenues decreased 48.9% to $26.0 million for the three months
ended June 30, 2001 from $50.9 million for the three months ended June 30, 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 70.1% to $12.3 million for the
three months ended June 30, 2001 compared to $41.1 million for the three months
ended June 30, 2000. Cost of revenues decreased primarily due to the decrease in
equipment units sold, as opposed to fulfilled, by the Company resulting from the
shift to fee-for-service and the decline in sales of Caller ID equipment.
Special Charges. The Company recorded special charges of $7.5 million for
inventory write-downs and write-offs during the quarter ended June 30, 2000.
Gross Profit. For the three months ended June 30, 2001, the Company's gross
profit increased by $11.4 million to $13.7 million, or 52.8% of revenues,
compared to $2.3 million, or 4.5% of revenues, for the three months ended June
30, 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 June 30, 2001 increased to $10.8 million, or 41.4% of revenues,
compared to $8.2 million, or 16.1% of revenues, for the same period in 2000.
This increase in expenses was attributable to reserves recorded for the
impairment of software development costs, an increase in bad debt expense and
increased costs incurred from the acquisition of Universal Distribution Services
in December 2000.
9
11
Special Charges. The Company recorded special charges of $8.4 million for
accounts receivable, inventory and other write-offs during the three months
ended June 30, 2000. These special charges were primarily related to the switch
to a fee-for-service model.
Income Taxes. The Company's effective tax rate for the three months ended June
30, 2001 and 2000 was 47.7% and 40.3%, respectively. The increase was
principally due to the Company no longer purchasing tax-exempt bonds.
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Revenues. The Company's net revenues decreased 48.4% to $50.9 million for the
six months ended June 30, 2001 from $98.7 million for the six months ended June
30, 2000. 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.
Cost of Revenues. The Company's cost of revenues decreased 70.6% to $23.6
million for the six months ended June 30, 2001 compared to $80.2 million for the
six months ended June 30, 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.
Special Charges. The Company recorded special charges of $7.5 million for
inventory writedowns and write-offs during the six months ended June 30, 2000.
Gross Margin. For the six months ended June 30, 2001, the Company's gross profit
increased to $27.4 million, or 53.7% of revenues, compared to $11.1 million, or
11.2% of revenues, for the six months ended June 30, 2000. The increase in gross
profit was due primarily to the factors discussed above.
Selling, General and Administrative Expenses. S,G&A expenses for the six months
ended June 30, 2001 increased 35.4% to $24.0 million or 47.1% of revenues
compared to $17.7 million or 18.0% of revenues for the six months ended June 30,
2000. This increase in expenses was attributable to reserves recorded for the
impairment of software development costs, an increase in bad debt expense and
increased costs incurred from the acquisition of Universal Distribution Services
in December 2000.
Special Charges. The Company recorded special charges of $8.4 million for
accounts receivable, inventory and other write-offs during the six months ended
June 30, 2000. These special charges were primarily related to the switch to a
fee-for-service model.
Income Taxes. The Company's effective tax rate for the six months ended June 30,
2001 and 2000 was 51.5% and 40.2%, respectively. The increase was principally
due to the Company no longer purchasing tax-exempt bonds.
10
12
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 $22.2 million at June 30, 2001. Effective 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 June 30, 2001, there was no
outstanding balance under the line of credit.
During the six months ended June 30, 2001, the Company generated $7.4 million in
cash flow from operating activities compared to $14.3 million in cash flow from
operating activities in the same period in 2000. This decline in the generation
of cash flow from operating activities for the six months ended June 30, 2001
compared to the same period in 2000 was due primarily to a slower decline in
inventory levels in 2001 versus 2000 which was the first year of the
fee-for-service conversion program.
During the six months ended June 30, 2001, net cash used in investing activities
was $3.5 million in 2001 as compared to $7.3 million in 2000. This decrease was
primarily due to reduced expenditures for technology related to e-commerce
applications and internal systems development during 2001.
During the six months ended June 30, 2001, the net cash used in financing
activities was $22,000 compared to $4.3 million in the same period in 2000
primarily due to no repayments 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.
NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued two new
pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141,
"Business Combinations", and SFAS No. 142, "Goodwill and Other Intangible
Assets". SFAS 141 prohibits the use of the pooling-of-interest method for
business combinations initiated after June 30, 2001 and also applies to all
business combinations accounted for by the purchase method that are completed
after June 30, 2001. There were also transition provisions that apply to
business combinations completed before July 1, 2001, that were accounted for by
the purchase method. SFAS 142 is effective for fiscal years beginning after
December 15, 2001 to all goodwill and other intangible assets recognized in an
entity's statement of financial position at that date, regardless of when those
assets were initially recognized. The acquisition of iFulfillment will be
accounted for in accordance with these statements. The Company is currently
evaluating the provisions of SFAS 141 and SFAS 142 and has not yet made a
determination of the impact adoption will have on the consolidated financial
statements.
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 June 30, 2001.
11
13
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
On May 21, 2001 the Company held its annual meeting of shareholders. A quorum of
10,405,161 out of 11,364,595 shares eligible to be voted (91.6%) were
represented at the meeting either in person or by proxy. The purpose of the
meeting was to re-elect two directors whose terms expired in 2001 and approve
the amendment to Innotrac's 2000 Stock Option and Incentive Award Plan to
increase the number of shares of Common Stock reserved for issuance under the
Plan from 1,300,000 to 2,800,000. At the meeting, Messrs. Scott D. Dorfman and
David L. Ellin were both re-elected for a three-year term, which expires 2004,
and the amendment to the 2000 Stock Option and Incentive Award Plan was
approved. For both nominees, the number of votes cast in favor was 9,618,814,
against 786,347 and the number of abstentions and broker non-votes was zero.
With respect to the amendment to the 2000 Stock Option and Incentive Plan,
6,927,404 shares were voted in favor, 1,053,837 shares were voted against and
the number of abstentions and broker non-votes was 2,423,920.
ITEM 6 - EXHIBITS AND REPORTS ON 8-K
(a) Exhibits - None
(b) Reports on Form 8-K - There were no Form 8-K filings during the
quarter ended June 30, 2001.
12
14
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: August 14, 2001 By: /s/ Scott D. Dorfman
-----------------------------------------------
Scott D. Dorfman
President, Chief Executive Officer and
Chairman of the Board
Date: August 14, 2001 By: /s/ David L. Gamsey
-----------------------------------------------
David L. Gamsey
Senior Vice President, Chief Financial Officer
and Secretary (Principal Financial Officer)
13