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 September 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
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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 at November 5, 2001
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Common Stock at $.10 par value 11,364,595 Shares
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets-
September 30, 2001 (Unaudited) and December 31, 2000 2
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2001 and 2000 (Unaudited) 3
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2001 and 2000 (Unaudited) 4
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 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 13
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 14
Signatures 15
1
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
ASSETS SEPTEMBER 30, 2001 DECEMBER 31, 2000
-------------------- --------------------
(UNAUDITED)
Current assets:
Cash and cash equivalents .................... $ 9,201 $ 18,334
Accounts receivable, net ..................... 22,296 31,217
Inventories, net ............................. 32,286 15,056
Deferred income taxes ........................ 3,776 3,984
Prepaid expenses and other ................... 3,075 7,559
-------------------- --------------------
Total current assets ............... 70,634 76,150
-------------------- --------------------
Property and equipment:
Rental equipment ............................. 2,165 3,464
Computer, machinery and equipment ............ 22,420 16,362
Furniture, fixtures and leasehold improvements 3,997 3,695
-------------------- --------------------
28,582 23,521
Less accumulated depreciation and amortization (11,764) (9,804)
-------------------- --------------------
16,818 13,717
Goodwill, net ..................................... 10,292 3,466
Deferred income taxes ............................. 2,329 2,579
Other assets, net ................................. 1,114 1,233
-------------------- --------------------
Total assets ....................... $ 101,187 $ 97,145
==================== ====================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................. $ 23,606 $ 22,104
Accrued expenses and other ................... 15,681 12,071
-------------------- --------------------
Total current liabilities .......... 39,287 34,175
Total noncurrent liabilities ...................... 412 166
-------------------- --------------------
Total liabilities .................. 39,699 34,341
Minority interest in subsidiary ................... 0 4,169
Shareholders' equity:
Common stock ................................. 1,136 1,136
Additional paid-in capital ................... 60,992 60,889
Retained earnings ............................ (385) (3,184)
Less: Treasury stock ......................... (255) (206)
-------------------- --------------------
Total shareholders' equity .......... 61,488 58,635
-------------------- --------------------
Total liabilities and shareholders' equity $ 101,187 $ 97,145
==================== ====================
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
2
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Three Months Ended September 30,
2001 2000
--------------- ---------------
Revenues, net ..................................... $ 22,406 $ 50,284
Cost of revenues .................................. 9,592 39,606
--------------- ---------------
Gross profit ....................... 12,814 10,678
--------------- ---------------
Operating expenses:
Selling, general and administrative expenses 9,712 9,229
Depreciation and amortization .............. 1,162 1,166
--------------- ---------------
Total operating expenses .......... 10,874 10,395
--------------- ---------------
Operating income .................................. 1,940 283
--------------- ---------------
Other income, net ................................. (126) (121)
--------------- ---------------
Income before income taxes and minority interest .. 2,066 404
Income tax provision .............................. (802) (139)
--------------- ---------------
Net income before minority interest ............... 1,264 265
Minority interest, net of income tax benefit ...... 0 (54)
--------------- ---------------
Net income ........................ $ 1,264 $ 319
=============== ===============
Earnings per share:
Basic and diluted earnings per share:
Basic ...................................... $ 0.11 $ 0.03
=============== ===============
Diluted .................................... $ 0.11 $ 0.03
=============== ===============
Weighted average shares outstanding:
Basic ...................................... 11,319 11,200
=============== ===============
Diluted .................................... 11,828 11,200
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
3
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Nine Months Ended September 30,
2001 2000
--------------- ---------------
Revenues, net ..................................... $ 73,352 $ 149,031
Cost of revenues .................................. 33,182 119,813
Special charges ................................... 0 7,477
--------------- ---------------
Gross profit ....................... 40,170 21,741
--------------- ---------------
Operating expenses:
Selling, general and administrative expenses 33,722 26,963
Special charges ............................ 0 8,473
Depreciation and amortization .............. 3,550 2,893
--------------- ---------------
Total operating expenses .......... 37,272 38,329
--------------- ---------------
Operating income (loss) ........................... 2,898 (16,588)
--------------- ---------------
Other (income) expenses, net ...................... (537) 359
--------------- ---------------
Income (loss) before income taxes and minority interest 3,435 (16,947)
Income tax (provision) benefit .................... (1,507) 6,836
--------------- ---------------
Net income (loss) before minority interest ........ 1,928 (10,111)
Minority interest, net of income tax benefit ...... (871) (100)
--------------- ---------------
Net income (loss) ................. $ 2,799 $ (10,011)
=============== ===============
Earnings per share:
Basic and diluted earnings (loss) per share:
Basic ...................................... $ 0.25 $ (0.89)
=============== ===============
Diluted .................................... $ 0.24 $ (0.89)
=============== ===============
Weighted average shares outstanding:
Basic ...................................... 11,319 11,209
=============== ===============
Diluted .................................... 11,694 11,209
=============== ===============
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
4
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
(UNAUDITED)
(IN THOUSANDS)
2001 2000
-------- --------
Cash flows from operating activities:
Net income (loss) ................................................ $ 2,799 $(10,011)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities, net of the effect of business acquired:
Depreciation and amortization ................................ 3,550 2,893
Loss on disposal of property and equipment ................... 206 454
Minority interest in subsidiary .............................. (871) (100)
Amortization of deferred compensation ........................ 100 0
Deferred income taxes ........................................ 458 602
Decrease in accounts receivable .............................. 9,024 9,533
(Increase) decrease in inventories ........................... (17,230) 24,213
Decrease (increase) in prepaid expenses and other ............ 1,042 (5,709)
Increase in accounts payable ................................. 1,463 10,594
Increase in accrued expenses and other ....................... 1,483 361
-------- --------
Net cash provided by operating activities ............... 2,024 32,830
-------- --------
Cash flows from investing activities:
Purchases of property and equipment .............................. (4,979) (9,077)
Acquisition of business, net of cash acquired .................... (6,057) 0
Other ............................................................ 0 (45)
-------- --------
Net cash used in investing activities ................... (11,036) (9,122)
-------- --------
Cash flows from financing activities:
Net repayments under line of credit .............................. 0 (7,008)
Repayment of capital lease obligations ........................... (75) (9)
Proceeds from issuance of stock in subsidiary .................... 0 1,000
Purchase of treasury stock shares ................................ (46) (150)
-------- --------
Net cash used in financing activities ................... (121) (6,167)
-------- --------
Net (decrease) increase in cash and cash equivalents .................. (9,133) 17,541
Cash and cash equivalents, beginning of period ........................ 18,334 894
-------- --------
Cash and cash equivalents, end of period .............................. $ 9,201 $ 18,435
======== ========
Supplemental cash flow disclosures:
Cash paid for interest ........................................... $ 64 $ 132
======== ========
Cash paid for income taxes, net of refunds received .............. $ 0 $ (2,274)
======== ========
The accompanying notes are an integral part of these
condensed consolidated balance sheets.
5
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 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 September 30, 2001 and December 31, 2000, the Company had
approximately $4.3 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 September 30, 2001 included $3.3
million for the Company's shift to a fee-for-service business model and
$1.0 million for exiting the e-commerce business. Cash payments for the
three and nine months ended September 30, 2001 were approximately $0.3
million and $1.8 million, respectively. The Company expects that the
majority of the remaining accruals will be utilized by December 31,
2001.
3. IMPAIRMENT OF LONG-LIVED ASSETS
During the nine months ended September 30, 2001, the Company has
recorded impairment reserves of approximately $0.7 million primarily
for certain call center related software and approximately $2.4 million
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 MBE's ownership interest in 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 nine months ended
September 30, 2001, severance payments of approximately $0.2 million
were made related to the reduction in Return.com employees. At
September 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
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 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 and nine months ended
September 30, 2000 because their effect was anti-dilutive. Shares used
to compute diluted EPS for the three and nine months ended September
30, 2001 and 2000 are as follows (in 000's):
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------------------------------
2001 2000 2001 2000
------ ------ ------ ------
Diluted earnings per share:
Weighted average shares outstanding 11,319 11,200 11,319 11,209
Employee and director stock options 509 0 375 0
------ ------ ------ ------
Weighted average shares assuming dilution 11,828 11,200 11,694 11,209
====== ====== ====== ======
6. SUBSEQUENT EVENTS
Effective December 1, 2001, SBC Communications will terminate its
contract with the Company and shift its call center services to another
provider. Due primarily to the termination of this contract, the
Company has elected to close its call center operations in Atlanta,
Georgia in January 2002 and shift its Atlanta clients to its call
center operations in Pueblo, Colorado. The Company notified
approximately 240 employees at the Atlanta and Pueblo call center
facilities on October 31, 2001 regarding termination of employment
effective in January 2002. The Company will continue to operate its
call center facilities in Pueblo and in Reno, Nevada. Management
believes that the financial impact of the closure of the Atlanta call
center operations will not have a material impact on the Company's
consolidated results of operations and financial position.
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
September 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, Inc., which was not material to the
financial statements, is being accounted for in accordance with these
statements based on management's best estimates of the allocation of
the purchase price. The allocation is subject to adjustment up to
one-year from the date of acquisition. 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
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, SBC Communications and Qwest and their customers.
As of December 1, 2001, the Company will no longer provide services to SBC
Communications, which represents approximately 15% and 17% of the Company's
consolidated revenue for the three and nine months ended September 30, 2001,
respectively. However, the Company resumed its fulfillment services of consumer
phones and expanded its services to include wireless pager equipment with
BellSouth during the third and fourth quarters of 2001, respectively. The
Company also provides these services for a significant number of
non-telecommunications related companies such as Coca-Cola, NAPA, Tactica and
Thane International. Approximately two-thirds of the Company's volume is
currently 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 have improved since the Company no longer has inventory risk or
cost of equipment. For the nine months ended September 30, 2001, operating cash
flows have declined from the same period in 2000 primarily due to the
significant increase in inventory levels to provide for the start of the
consumer phone and wireless pager sales programs with BellSouth. The Company
began these new sales programs during the third and fourth quarters of 2001, and
the Company is indemnified by the client for substantially all risks associated
with the ownership of this new inventory. Management expects operating cash
flows to improve by the first quarter 2002 as these inventory levels are
reduced.
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
8
ITEM 2 - CONTINUED
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.
On July 24, 2001, the Company acquired for cash the assets and assumed specified
liabilities of iFulfillment, Inc. ("iFulfillment"), 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, Wilsons Leather and Archibald Candies. The assets and
operating results of iFulfillment prior to the acquisition were not material to
the Company's consolidated assets or results of operations.
Effective December 1, 2001, SBC Communications will terminate its contract with
the Company and shift its call center services to another provider. Due to the
termination of this contract, the Company has elected to close its call center
operations in Atlanta, Georgia in January 2002 and shift its Atlanta clients to
its call center operations in Pueblo, Colorado. The Company notified
approximately 240 employees at the Atlanta and Pueblo call center facilities on
October 31, 2001 regarding termination of employment effective January 2002. The
Company will continue to operate its call center facilities in Pueblo and in
Reno, Nevada. Management believes that the financial impact of the closure of
the Atlanta call center operations will not have a material impact on the
Company's consolidated results of operations and financial position.
9
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 nine months ended September 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 Nine Months
Ended September 30, Ended September 30,
-------------------- --------------------
2001 2000 2001 2000
----- ----- ----- -----
Revenues ................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ........................... 42.8 78.8 45.2 80.4
Special charges ............................ -- -- -- 5.0
----- ----- ----- -----
Gross profit ............................ 57.2 21.2 54.8 14.6
Selling, general and administrative expenses 43.3 18.3 46.0 18.1
Special charges ............................ -- -- -- 5.7
Depreciation and amortization .............. 5.2 2.3 4.8 1.9
----- ----- ----- -----
Operating income (loss) ................. 8.7 0.6 4.0 (11.1)
Other (income) expenses, net ............... (0.5) (0.2) (0.7) 0.2
----- ----- ----- -----
Income (loss) before income taxes
and minority interest ................... 9.2 0.8 4.7 (11.3)
Income tax (provision) benefit ............. (3.6) (0.3) (2.1) 4.6
----- ----- ----- -----
Net income (loss) before minority interest . 5.6 0.5 2.6 (6.7)
Minority interest .......................... -- (0.1) (1.2) (0.0)
----- ----- ----- -----
Net income (loss) ....................... 5.6% 0.6% 3.8% (6.7)%
===== ===== ===== =====
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2000
Revenues. Net revenues decreased 55.4% to $22.4 million for the three months
ended September 30, 2001 from $50.3 million for the three months ended September
30, 2000. The decrease in revenue is consistent with the Company's switch to a
fee-for-service model, the decline in the sales of outbound Caller ID equipment
and a decline in call center volume attributable to SBC Communications, 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 75.8% to $9.6 million for the three
months ended September 30, 2001 compared to $39.6 million for the three months
ended September 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 outbound
Caller ID equipment.
Gross Profit. For the three months ended September 30, 2001, the Company's gross
profit increased by $2.1 million to $12.8 million, or 57.2% of revenues,
compared to $10.7 million, or 21.2% of revenues, for the three months ended
September 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 September 30, 2001 increased to $9.7 million, or 43.3% of revenues,
compared to $9.2 million, or 18.3% of revenues, for the same period in 2000.
This increase in expenses was attributable to costs incurred from the
acquisitions of iFulfillment, Inc. in July 2001 and Universal Distribution
Services in December 2000 and an increase in bad debt expense. These additional
expenses were offset by a decrease in costs related to the Company's investment
in Return.com and a reduction in expenditures for technology related to
10
e-commerce applications and internal systems development, which were incurred
in the third quarter of 2000.
Income Taxes. The Company's effective tax rate for the three months ended
September 30, 2001 and 2000 was 38.8% and 34.4%, respectively. The increase was
principally due to the Company no longer purchasing tax-exempt bonds and certain
items not deductible for tax purposes representing a greater percentage of
taxable income.
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2000
Revenues. The Company's net revenues decreased 50.8% to $73.4 million for the
nine months ended September 30, 2001 from $149.0 million for the nine months
ended September 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 72.3% to $33.2
million for the nine months ended September 30, 2001 compared to $119.8 million
for the nine months ended September 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 three months ended June 30, 2000.
Gross Profit. For the nine months ended September 30, 2001, the Company's gross
profit increased to $40.2 million, or 54.8% of revenues, compared to $21.7
million, or 14.6% of revenues, for the nine months ended September 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 nine months
ended September 30, 2001 increased 25.1% to $33.7 million or 46.0% of revenues
compared to $27.0 million or 18.1% of revenues for the nine months ended
September 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 acquisitions of iFulfillment,
Inc. in July 2001 and Universal Distribution Services in December 2000. The
increase in expenses was offset by a reduction in expenditures for technology
related to e-commerce applications and internal systems development during 2001.
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 nine months ended
September 30, 2001 and 2000 was 43.9% and 40.3%, respectively. The increase was
principally due to the Company no longer purchasing tax-exempt bonds and certain
items not deductible for tax purposes representing a greater percentage of
taxable income.
11
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 $9.2 million at September 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 September 30, 2001, there was
no outstanding balance under the line of credit.
During the nine months ended September 30, 2001, the Company generated $2.0
million in cash flow from operating activities compared to $32.8 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 nine months ended
September 30, 2001 compared to the same period in 2000 was due primarily to an
increase in inventory levels to provide for the start of the consumer phone and
wireless pager sales programs with BellSouth initiated during the third and
fourth quarters of 2001, respectively. The Company is indemnified by the client
for substantially all risks associated with the ownership of this inventory.
Management anticipates that these inventory levels will be reduced by the first
quarter of 2002.
During the nine months ended September 30, 2001, net cash used in investing
activities was $11.0 million in 2001 as compared to $9.1 million in 2000. This
increase was primarily due to the acquisition of iFulfillment, Inc. in July 2001
partially offset by reduced expenditures for technology related to e-commerce
applications and internal systems development during 2001.
During the nine months ended September 30, 2001, the net cash used in financing
activities was $121,000 compared to $6.2 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 September 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, which was not
material to the financial statements, is being accounted for in accordance with
these statements based on management's best estimates of the allocation of
purchase price. The allocation is subject to adjustment up to one-year from the
date of the acquisition. 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.
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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 nine months ended September 30, 2001.
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PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Letter of Amendment to Amended and Restated Loan and Security
Agreement by and between Innotrac Corporation and SouthTrust
Bank, N.A. effective September 10, 2001.
(b) Reports on Form 8-K - There were no Form 8-K filings during the quarter
ended September 30, 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: November 13, 2001 By: /s/ Scott D. Dorfman
---------------------------------
Scott D. Dorfman
President, Chief Executive Officer and
Chairman of the Board
Date: November 13, 2001 By: /s/ David L. Gamsey
--------------------------------------
David L. Gamsey
Senior Vice President, Chief Financial
Officer and Secretary
(Principal Financial Officer)
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