EXHIBIT 13.1
SELECTED FINANCIAL DATA
The following table sets forth selected financial data for the Company.
The selected historical statements of operations data for each of the years
ended December 31, 2001, 2000, 1999, 1998 and 1997 and the selected historical
balance sheet data for the periods then ended have been derived from the
Consolidated Financial Statements that have been audited by Arthur Andersen LLP,
independent public accountants.
(in 000's, except per share amounts)
RESULTS FOR YEAR ENDED DECEMBER 31: 2001 2000 1999 1998 1997
- ----------------------------------- ---------- ---------- ---------- ---------- ----------
Revenues, net $ 94,793 $ 174,085 $ 227,011 $ 139,673 $ 87,978
Cost of revenues 41,087 133,082 175,483 90,195 57,551
Special charges -- 16,462 -- -- --
---------- ---------- ---------- ---------- ----------
Gross profit 53,706 24,541 51,528 49,478 30,427
---------- ---------- ---------- ---------- ----------
OPERATING EXPENSES:
Selling, general and administrative 43,329 38,209 30,460 31,332 19,296
Special charges -- 17,801 -- -- --
Depreciation and amortization 4,864 4,168 3,414 3,843 4,342
---------- ---------- ---------- ---------- ----------
TOTAL OPERATING EXPENSES 48,193 60,178 33,874 35,175 23,638
---------- ---------- ---------- ---------- ----------
Operating income (loss) 5,513 (35,637) 17,654 14,303 6,789
---------- ---------- ---------- ---------- ----------
Interest (income) expense, net (532) 80 1,370 956 1,788
Other (income) expense (20) 141 60 35 118
---------- ---------- ---------- ---------- ----------
TOTAL OTHER (INCOME) EXPENSE (552) 221 1,430 991 1,906
---------- ---------- ---------- ---------- ----------
Income (loss) before income taxes
and minority interest 6,065 (35,858) 16,224 13,312 4,883
Income tax (provision) benefit (2,573) 14,084 (6,389) (3,743) 77
---------- ---------- ---------- ---------- ----------
Net income (loss) before minority 3,492 (21,774) 9,835 9,569 4,960
interest
Minority interest, net of income taxes (893) (199) -- -- --
---------- ---------- ---------- ---------- ----------
NET INCOME (LOSS) $ 4,385 $ (21,575) $ 9,835 $ 9,569 $ 4,960
========== ========== ========== ========== ==========
Net income (loss) per share-basic $ 0.39 $ (1.92) $ 0.99 $ 1.01 $ 0.46
Net income (loss) per share-diluted $ 0.38 $ (1.92) $ 0.98 $ 1.00 $ 0.46
YEAR-END FINANCIAL POSITION:
Current assets $ 58,093 $ 76,150 $ 94,810 $ 66,416 $ 24,330
Current liabilities 35,717 34,175 24,930 39,563 22,809
Property and equipment, net 14,500 13,717 8,922 7,463 7,609
Total assets 99,393 97,145 104,218 73,992 32,497
Long-term obligations 393 166 75 135 3,944
Total liabilities 36,110 34,341 25,005 39,698 26,753
Total shareholders' equity $ 63,283 $ 58,635 $ 79,213 $ 34,294 $ 4,827
COMMON STOCK INFORMATION:
Average number of common shares 11,318 11,212 9,911 8,096 6,500
outstanding
Common stock price per share:
High $ 8.92 $ 13.50 $ 26.75 $ 24.38 N/A
Low 3.25 3.13 10.00 5.75 N/A
Year-end 6.90 3.50 13.75 8.13 N/A
Book value per common share $ 5.59 $ 5.23 $ 7.99 $ 4.24 $ 0.74
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 Company's 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; and
other factors discussed in more detail under "Business" in our Annual Report on
Form 10-K.
OVERVIEW
Innotrac, founded in 1984 and headquartered in Atlanta, Georgia,
provides customized, technology-based 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 clients such as BellSouth Corporation ("BellSouth") and Qwest
International, Inc. ("Qwest") and their customers. As of December 1, 2001, the
Company no longer provided these services to SBC Communications, Inc. ("SBC"),
Home Depot or Siemens, which represented approximately 15%, 2% and 1%,
respectively, of the Company's consolidated revenue for the year ended December
31, 2001. 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 companies such as Coca-Cola, NAPA, Tactica,
Nordstrom.com, Porsche, Wilsons Leather and Thane International. Approximately
49% of the Company's revenues in 2001 were generated from its telecommunications
clients, 18% from its DSL equipment clients and 33% from its other traditional
fulfillment and marketing services clients. The Company anticipates that the
percentage of its revenues attributable to telecommunications clients will
decrease in 2002 due to the loss of SBC and the addition of Martha Stewart
Living Omnimedia, Inc. as a fulfillment and call center client, commencing in
February 2002.
With the Company's conversion of a majority 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 these clients. Instead, the Company
warehouses products on a consignment basis and fulfills equipment on behalf of
its customers for a fee. The Company purchases and owns inventory for certain
clients, but on a significantly reduced risk basis as a result of client
guarantees and contractual indemnifications. The new model substantially reduces
revenues as the 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 year ended December 31, 2001,
operating cash flows, while remaining positive, have declined from the same
period in 2000 primarily due to the significant increase in inventory levels to
provide for the initiation 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.
1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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. This
became effective in April 2001. As a result of the Company's ownership interest
in Return.com since the date of inception, the Company consolidated the results
of operations and financial position of Return.com in the accompanying
consolidated financial statements. During the year ended December 31, 2001, the
Company utilized its $2.8 million impairment reserve, which was recorded in the
first quarter of 2001 to write off its investment in Return.com. At December 31,
2001, Return.com is no longer in operation.
On July 24, 2001, the Company acquired the assets and assumed specified
liabilities of iFullfillment, Inc. ("iFullfillment") for approximately $5.8
million. iFullfillment 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, Wilsons Leather and Archibald Candies. The assets
and operating results of iFulfillment have been included in the Company's
consolidated financial statements since the date of acquisition.
As a result of the loss of the SBC contract, the Company elected to
close its call center operations in Atlanta, Georgia in January 2002 and shifted
its Atlanta clients to its call center operations in Pueblo, Colorado. The
Company notified approximately 260 employees at the Atlanta and Pueblo call
center facilities on October 31, 2001 regarding termination of employment
effective January 2002. The Company incurred approximately $1.0 million in
severance, write-off of assets, and other expenses related to the closure of the
Atlanta call center operations during the year ended December 31, 2001.
Management does not anticipate incurring any additional costs associated with
this closure. The Company continues to operate its call center facilities in
Pueblo, Colorado and Reno, Nevada.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The following table sets forth summary operating data, expressed as a
percentage of revenues, for the years ended December 31, 2001, 2000 and 1999.
Operating results for any period are not necessarily indicative of results for
any future period.
The financial information provided below has been rounded in order to
simplify its presentation. However, the percentages below are calculated using
the detailed information contained in the consolidated financial statements and
notes thereto.
- ---------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
2001 2000 1999
------------------------------------
REVENUES, NET 100.0% 100.0% 100.0%
COST OF REVENUES 43.3 76.4 77.3
SPECIAL CHARGES -- 9.5 --
-----------------------------------
GROSS PROFIT 56.7 14.1 22.7
SELLING, GENERAL AND ADMINISTRATIVE 45.7 21.9 13.4
SPECIAL CHARGES -- 10.2 --
DEPRECIATION AND AMORTIZATION 5.2 2.5 1.5
-----------------------------------
OPERATING INCOME (LOSS) 5.8 (20.5) 7.8
OTHER (INCOME) EXPENSE (0.6) 0.1 0.6
-----------------------------------
INCOME (LOSS) BEFORE TAXES AND MINORITY INTEREST 6.4 (20.6) 7.2
INCOME TAX (PROVISION) BENEFIT (2.7) 8.1 (2.8)
-----------------------------------
NET INCOME (LOSS) BEFORE MINORITY INTEREST 3.7 (12.5) 4.4
MINORITY INTEREST, NET OF INCOME TAXES (0.9) (0.1) --
-----------------------------------
NET INCOME (LOSS) 4.6% (12.4)% 4.4%
===================================
- ---------------------------------------------------------------------------------------------------
SPECIAL CHARGES
Special charges are infrequent transactions that may affect
comparability between years. The special charges of $34.3 million for the year
ended December 31, 2000 include the following: $24.4 million for inventory,
accounts receivable, and other items primarily related to the Company's shift to
a fee-for-service business model; $6.2 million for the impairment of long-lived
assets primarily due to the abandonment of specified software development
projects; and $3.7 million in costs to exit the e-commerce business related to
web development, maintenance and hosting services. The Company has approximately
$4.6 million in accruals remaining related to the special charges at December
31, 2001, which include $2.8 million for the Company's shift to a
fee-for-service business model and $1.8 million for e-commerce exit costs. Cash
payments during 2001 totaled approximately $2.3 million. The majority of the
remaining accruals either will be utilized or reversed to income during the year
ending December 31, 2002. Any accruals reversed to income will be reported as a
special item.
3
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED DECEMBER 31, 2000
REVENUES. The Company's net revenues decreased 45.5% to $94.8 million for the
year ended December 31, 2001 from $174.1 million for the year ended December 31,
2000. The decrease in revenue is primarily due to 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 and increased revenues of $19.9 million from
the Company's acquisition of Universal Distribution Services ("UDS"), which
occurred in December 2000.
COST OF REVENUES. The Company's cost of revenues decreased 69.1% to $41.1
million for the year ended December 31, 2001 compared to $133.1 million for the
year ended December 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
offset by increased cost of revenues of $10.0 million as a result of the
acquisition of UDS in December 2000.
SPECIAL CHARGES. The Company recorded a special charge of $16.5 million for
inventory write downs and write-offs during 2000, associated with its switch to
a fee-for-service business model.
GROSS PROFIT. For the year ended December 31, 2001, the Company's gross profit
increased to $53.7 million, or 56.7% of revenues, compared to $24.5 million, or
14.1% of revenues, for the year ended December 31, 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 year ended
December 31, 2001 increased 13.4% to $43.3 million or 45.7% of revenues compared
to $38.2 million or 21.9% of revenues for the year ended December 31, 2000. This
increase in expenses was primarily attributable to the write-off of the
Company's investment in Return.com; expenses incurred from the impairment of
certain software development costs and other long-lived assets associated with
the termination of the SBC contract; the closure of the Atlanta call center
operations; and increased costs incurred from the acquisitions of iFulfillment
in July 2001 and UDS 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 $17.8 million for
impaired assets, accounts receivable and other write-offs during the year ended
December 31, 2000. These special charges, as previously discussed, were
primarily related to the Company's shift to a fee-for-service business model,
its exit from the e-commerce business and the abandonment of specified software
development projects.
INCOME TAXES. The Company's effective tax rate for the year ended December 31,
2001 and 2000 was 42.4% and 39.3%, respectively. The increase was principally
due to the Company no longer investing in tax-exempt securities and certain
items not deductible for tax purposes representing a greater percentage of
taxable income.
4
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
REVENUES. Net revenues decreased 23.3% to $174.1 million for the year ended
December 31, 2000 from $227.0 million for the year ended December 31,1999. The
decrease in revenue is primarily due to 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 24.2% to $133.1 million for the
year ended December 31, 2000 compared to $175.5 million for the year ended
December 31, 1999. Cost of revenues decreased primarily due to the decrease in
equipment units sold, as opposed to fulfilled, by the Company due to the shift
to fee-for-service and the decline in sales of Caller ID equipment.
SPECIAL CHARGES. The Company recorded a special charge of $16.5 million
associated with its exit from inventory ownership.
GROSS PROFIT. For the year ended December 31, 2000, the Company's gross profit
decreased 52.4% to $24.5 million compared to $51.5 million for the year ended
December 31, 1999. The decrease in gross margin was due primarily to special
charges of $16.5 million as discussed above. Exclusive of the special charges,
gross margins for the year ended December 31, 2000 remained consistent at
approximately 23.5% as compared to 1999.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. S,G&A expenses for the year ended
December 31, 2000 increased 25.2% to $38.2 million or 21.9% of revenues compared
to $30.5 million or 13.4% of revenues for the year ended December 31, 1999. This
increase is primarily due to two factors: cost incurred during the year
associated with the Company's subsidiary, Return.com, which was founded in
February 2000 and a significant investment, beyond normal levels, being expended
on information technology during 2000. These expenditures returned to normal
levels in 2001 due to a reduction in headcount and expenditures as a result of
the Company's discontinuation of its front-end web site development, maintenance
and hosting services.
SPECIAL CHARGES. The Company recorded special charges of $17.8 million for
impaired assets, accounts receivable and other write-offs during the year ended
December 31, 2000. These special charges, as previously discussed, were
primarily related to the Company's shift to a fee-for-service business model,
its exit from the e-commerce business and the abandonment of specified software
development projects.
INCOME TAXES. The Company's effective tax rate for the years ended December 31,
2000 and 1999 was 39.3% and 39.4%, respectively.
5
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. The Company had cash and cash equivalents of approximately $9.4 million at
December 31, 2001. During the year ended December 31, 2001, the Company's prior
investment in Return.com was written off against a $2.8 million impairment
reserve recorded during the first quarter of 2001 (see Note 1 to the
consolidated financial statements). At December 31, 2001, the Company recorded
an accrual for approximately $15.3 million for payment to the sellers of UDS in
accordance with the earn-out provisions outlined in the December 8, 2000 Merger
Agreement by and among the Company and UDS. In February 2002, the payment was
made consisting of $13.7 million of cash and 310,000 shares of the Company's
common stock valued at $1.6 million. On February 11, 2002, the Board of
Directors authorized the repurchase of up to $10 million of the Company's
outstanding common stock through February 2003. The Company maintains a $40
million revolving line of credit with a bank, maturing in June 2002. The Company
anticipates renewing this line of credit prior to its expiration date under
similar terms and conditions. Borrowings under the line of credit bear interest
at the Company's option at the bank's prime rate, as adjusted from time to time,
or LIBOR plus up to 225 basis points. At December 31, 2001, there was no
outstanding balance under the line of credit.
During the year ended December 31, 2001, the Company generated $4.5
million in cash flow from operating activities compared to $39.0 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 year ended December
31, 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 during 2002.
This decline is also attributed to a higher accounts receivable balance and the
timing of payables in 2001 as compared to the same period in 2000.
During the year ended December 31, 2001, net cash used in investing
activities was $13.2 million in 2001 as compared to $15.3 million in 2000. This
decrease was primarily due to reduced expenditures for technology related to
e-commerce applications and internal systems development during 2001 offset by
the acquisition of iFulfillment in July 2001.
During the year ended December 31, 2001, the net cash used in financing
activities was $0.2 million compared to $6.2 million in the same period in 2000
primarily due to no borrowings and therefore, no repayments made under the
Company's line of credit during 2001.
The Company estimates that its cash and financing needs through 2002
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. Additionally, the
Company's line of credit expires in June 2002. While the Company anticipates
that the line of credit will be renewed under similar terms and conditions,
there can be no assurances that this will occur.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's primary long-term contractual commitments consist of
capital and operating leases. As previously discussed, the Company has largely
transitioned from an inventory ownership to fee-for-service model, so the
Company's commitments to purchase inventory have been greatly reduced from
historical levels. To the extent the Company commits to purchase and own
inventory for certain clients, the Company now generally seeks client guarantees
and contractual indemnifications to protect it from inventory risk. As of
December 31, 2001, the Company had none of the following: outstanding debt for
borrowed funds, material guarantees of other entities' obligations, off-balance
sheet or structured finance arrangements, synthetic leases, repurchase
obligations or similar commercial or financing commitments. Additionally, the
Company does not generally trade in commodity contracts.
The following table sets forth payments due under the Company's capital
and operating lease commitments by period. For additional information, see Note
5 to the consolidated financial statements.
Payments Due by Period
----------------------------------------------------------------------
Total Less than 1 year 1-3 years 4-5 years After 5 years
------- ---------------- --------- --------- -------------
Capital Leases $ 595 $ 302 $ 235 $ 58 $ 0
Operating Leases $19,221 $ 5,456 $ 6,630 $ 4,317 $ 2,818
7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Management believes the Company's exposure to markets risks is
immaterial. Innotrac holds no market risk sensitive instruments for trading
purposes. At present, the Company does not employ any derivative financial
instruments, other financial instruments or derivative commodity instruments to
hedge any market risks and does not currently plan to employ them in the future.
To the extent that the Company has borrowings outstanding under its credit
facility, the Company will have market risk relating to the amount of borrowings
due to variable interest rates under the credit facility. The Company's exposure
is immaterial due to the short-term nature of these borrowings. Additionally,
all of the Company's lease obligations are fixed in nature as noted in Note 5 to
the consolidated financial statements, and the Company has no long-term purchase
commitments.
CRITICAL ACCOUNTING POLICIES
Innotrac's significant accounting policies are described in Note 2 to
the consolidated financial statements.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS 141 prohibits the use of pooling-of-interest 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 are 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 for 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 statement changes the accounting for goodwill and
other indefinite life intangible assets from an amortization method to an
impairment only approach. Upon adoption of the statement, which for the Company
will be the beginning of fiscal year 2002, amortization of current goodwill will
cease, thereby reducing amortization expense for 2002 by approximately $0.9
million after factoring in the recent earn-out payment. In 2001, amortization
expense associated with goodwill was $0.3 million. The Company plans to complete
its impairment analysis during the first quarter of 2002 and will recognize an
impairment, if any, at that time.
In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development, and/or the normal operation of a
long-lived asset, except for certain obligations for leases and the associated
asset retirement costs. The statement required that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company does not anticipate that the adoption of SFAS 143 will have a material
effect on the Company's financial position or results of operations.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to
be Disposed of," and the accounting and reporting provisions of APB Opinion No.
30, "Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," and amends APB No. 51, "Consolidated Financial
Statements." SFAS 144 retains many of the requirements of SFAS 121 and the basic
provisions of APB Opinion 30; however, it establishes a single accounting model
for long-lived assets to be disposed of by sale. SFAS 144 furthermore resolves
significant implementation issues related to SFAS 121. The provisions of the
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and are to be applied prospectively. The
Company does not anticipate that the adoption of SFAS 144 will have a material
effect on the Company's financial position or results of operations.
9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Innotrac Corporation:
We have audited the accompanying consolidated balance sheets of
INNOTRAC CORPORATION (a Georgia corporation) AND SUBSIDIARIES as of December 31,
2001 and 2000 and the related consolidated statements of operations,
shareholders' equity and cash flows for each of the three years in the period
ended December 31, 2001. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Innotrac Corporation and its subsidiaries as of December 31, 2001 and 2000 and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2001 in conformity with accounting standards
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Atlanta, Georgia
February 8, 2002
10
INNOTRAC CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN 000'S)
DECEMBER 31,
ASSETS 2001 2000
-------- --------
CURRENT ASSETS:
Cash and cash equivalents $ 9,413 $ 18,334
Accounts receivable, net (Note 3) 13,662 31,217
Inventories, net 27,264 15,056
Prepaid expenses and other 5,018 7,559
Deferred income taxes (Note 6) 2,736 3,984
-------- --------
TOTAL CURRENT ASSETS 58,093 76,150
-------- --------
PROPERTY AND EQUIPMENT:
Rental equipment 2,003 3,464
Computer, machinery and equipment 19,715 16,362
Furniture, fixtures and leasehold improvements 4,005 3,695
-------- --------
25,723 23,521
Less accumulated depreciation and amortization (11,223) (9,804)
-------- --------
14,500 13,717
-------- --------
Goodwill, net (Notes 2 and 8) 25,213 3,466
Deferred income taxes (Note 6) 438 2,579
Other assets, net (Notes 2 and 8) 1,149 1,233
-------- --------
TOTAL ASSETS $ 99,393 $ 97,145
======== ========
DECEMBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2001 2000
-------- --------
CURRENT LIABILITIES:
Accounts payable $ 8,581 $ 22,104
Accrued earn-out payment (Note 8) 15,275 0
Accrued expenses and other 11,861 12,071
-------- --------
TOTAL CURRENT LIABILITIES 35,717 34,175
-------- --------
TOTAL NONCURRENT LIABILITIES (NOTE 5) 393 166
Commitments and contingencies (Note 5)
Minority interest in subsidiary 0 4,169
SHAREHOLDERS' EQUITY (NOTE 9):
Common stock 1,136 1,136
Additional paid-in capital 61,023 60,889
Retained earnings 1,201 (3,184)
Accumulated other comprehensive income 178 0
Less: Treasury stock (255) (206)
-------- --------
TOTAL SHAREHOLDERS' EQUITY 63,283 58,635
-------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 99,393 $ 97,145
======== ========
The accompanying notes are an integral part of these
consolidated balance sheets.
11
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN 000'S, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31,
--------------------------------------------
2001 2000 1999
---------- ---------- ----------
Revenues, net $ 94,793 $ 174,085 $ 227,011
Cost of revenues 41,087 133,082 175,483
Special charges (Note 13) 0 16,462 0
--------- --------- ---------
GROSS PROFIT 53,706 24,541 51,528
--------- --------- ---------
OPERATING EXPENSES:
Selling, general and administrative 43,329 38,209 30,460
Special charges (Note 13) 0 17,801 0
Depreciation and amortization 4,864 4,168 3,414
--------- --------- ---------
Total operating expenses 48,193 60,178 33,874
--------- --------- ---------
OPERATING INCOME (LOSS) 5,513 (35,637) 17,654
--------- --------- ---------
OTHER (INCOME) EXPENSE:
Interest (income) expense, net (Note 4) (532) 80 1,370
Other (20) 141 60
--------- --------- ---------
TOTAL OTHER (INCOME) EXPENSE (552) 221 1,430
--------- --------- ---------
Income (loss) before income
taxes and minority interest 6,065 (35,858) 16,224
Income tax (provision) benefit (2,573) 14,084 (6,389)
--------- --------- ---------
Net income (loss) before minority interest 3,492 (21,774) 9,835
Minority interest, net of income taxes (893) (199) 0
--------- --------- ---------
NET INCOME (LOSS) $ 4,385 $ (21,575) $ 9,835
========= ========= =========
EARNINGS PER SHARE:
Basic $ 0.39 $ (1.92) $ 0.99
========= ========= =========
Diluted $ 0.38 $ (1.92) $ 0.98
========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING:
Basic 11,318 11,212 9,911
========= ========= =========
Diluted 11,690 11,212 10,033
========= ========= =========
The accompanying notes are an integral part of these
consolidated statements.
12
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF
SHAREHOLDERS' EQUITY
(IN 000'S)
ACCUMULATED
OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL EARNINGS INCOME STOCK TOTAL
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 900 $ 24,838 $ 8,556 $ 0 $ 0 $ 34,294
Proceeds from sale of common
stock, net 220 34,694 0 0 0 34,914
Proceeds from exercise of
stockholder's options and grants 1 169 0 0 0 170
Net income 0 0 9,835 0 0 9,835
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 1,121 $ 59,701 $ 18,391 $ 0 $ 0 $ 79,213
Issuance of common stock 15 1,238 0 0 0 1,253
Purchase of treasury stock 0 0 0 0 (206) (206)
Restricted stock grant, net 0 (50) 0 0 0 (50)
Net loss 0 0 (21,575) 0 0 (21,575)
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 1,136 $ 60,889 $ (3,184) $ 0 $ (206) $ 58,635
Restricted stock grant, net 0 134 0 0 0 134
Purchase of treasury stock 0 0 0 0 (49) (49)
Comprehensive income:
Net income 0 0 4,385 0 0 4,385
Unrealized gain on
available-to-sale securities 0 0 0 178 0 178
--------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2001 $ 1,136 $ 61,023 $ 1,201 $ 178 $ (255) $ 63,283
======================================================================================
The accompanying notes are an integral part of these
consolidated statements.
13
INNOTRAC CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN 000'S)
YEAR ENDED DECEMBER 31,
------------------------------------
2001 2000 1999
------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 4,385 $(21,575) $ 9,835
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 4,864 4,168 3,414
Loss on disposal of fixed assets 3,385 6,430 502
Deferred income taxes 3,389 (5,627) 1,824
Minority interest in subsidiary (893) (199) 0
Amortization of deferred compensation 134 38 0
Changes in working capital, net of effect of businesses acquired:
Decrease (increase) in accounts receivable 17,659 21,908 (8,077)
(Increase) decrease in inventories (12,208) 24,447 (25,122)
Increase in prepaid expenses and other assets (180) (2,554) (30)
(Decrease) increase in accounts payable (13,562) 9,390 1,143
(Decrease) increase in accrued expenses and other (2,491) 2,538 (6,867)
------------------------------------
Net cash provided by (used in) operating activities 4,482 38,964 (23,378)
------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (6,914) (13,644) (5,328)
Acquisition of businesses, net of cash acquired (5,859) (1,678) 0
Purchase of available-to-sale securities (436) 0 0
------------------------------------
Net cash used in investing activities (13,209) (15,322) (5,328)
------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net repayments under line of credit 0 (7,008) (8,728)
Repayment of capital lease obligations and other (145) 12 (65)
Proceeds from equity offerings, net 0 0 34,914
Proceeds from stock options exercised 0 0 170
Distributions to partners, members and
shareholders 0 0 (70)
Proceeds from minority interest in subsidiary 0 1,000 0
Purchase of treasury stock shares (49) (206) 0
------------------------------------
Net cash (used in) provided by financing activities (194) (6,202) 26,221
------------------------------------
Net (decrease) increase in cash and cash equivalents (8,921) 17,440 (2,485)
Cash and cash equivalents, beginning of period 18,334 894 3,379
------------------------------------
Cash and cash equivalents, end of period $ 9,413 $ 18,334 $ 894
====================================
Supplemental cash flow disclosures:
Cash paid for interest $ 89 $ 429 $ 1,386
====================================
Cash paid for income taxes, net of refunds received $ 0 $ (5,907) $ 7,364
====================================
The accompanying notes are an integral part of these
consolidated statements.
14
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Innotrac Corporation ("Innotrac" or the "Company") provides customized,
technology-based marketing support, order fulfillment, call center and total
customer relationship management services. The Company offers inventory
management, inbound call center, pick/pack/ship services, order tracking,
transaction processing and returns handling from its leased facilities in
Atlanta, Georgia, Pueblo, Colorado, Reno, Nevada and Bolingbrook, Illinois. The
Company's facilities represent approximately one million square feet of
warehouse space and 600 dedicated call center seats.
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. On December 28, 2000,
Return.com was converted to a limited liability company. On April 17, 2001, the
Company agreed to reacquire MBE's 40% ownership interest in Return.com resulting
in 100% ownership by the Company. The Company wrote off its investment in
Return.com during the year ended December 31, 2001 against a $2.8 million
impairment reserve recorded in the first quarter of 2001. Return.com is no
longer in operation.
On December 8, 2000, the Company acquired Universal Distribution Services
("UDS"), located in Reno, Nevada, for approximately $4.3 million in total
consideration. The Company's UDS division provides integrated order processing,
order management, fulfillment, and customer relationship management services.
UDS's customer base includes traditional direct marketing companies as well as
retailers including Thane International, Tactica and Gateway Learning. At
December 31, 2001, the Company recorded an accrual for approximately $15.3
million for payment to the sellers of UDS in accordance with the earn-out
provisions outlined in the December 8, 2000 Merger Agreement by and among the
Company and UDS. In February 2002, the payment was made consisting of $13.7
million of cash and 310,000 shares of the Company's common stock valued at $1.6
million.
On July 24, 2001, the Company acquired for $5.8 million the assets and assumed
specified liabilities of iFulfillment, Inc. ("iFulfillment"), which includes a
354,000 square foot leased facility located in Bolingbrook, Illinois. The
Company's iFulfillment subsidiary specializes in fully integrated, automated,
order fulfillment services for multi-channel retailers and catalogers including
such clients as Nordstrom.com, Wilsons Leather and Archibald Candies. The assets
and operating results of iFulfillment have been included in the Company's
consolidated financial statements since the date of acquisition.
15
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The financial statements have been prepared on the accrual
basis of accounting in conformity with generally accepted accounting principles
in the United States. All significant intercompany transactions and balances
have been eliminated in consolidation. Certain prior year amounts have been
reclassified to conform with current year financial statement presentation.
ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
CONCENTRATION OF REVENUES
Revenues earned under the Company's contracts with its telecommunication clients
to provide fulfillment of telecommunications equipment and related call center
support services, including DSL modems, accounted for approximately 67%, 92% and
93% of total revenues for the years ended December 31, 2001, 2000 and 1999,
respectively. Revenues generated from the fulfillment of DSL equipment accounted
for 18%, 22%, and 0% of the aforementioned totals.
The following table sets forth the percentage of total net revenues derived from
services provided to each of the largest clients for the years ended December
31, 2001, 2000 and 1999. Except for the major clients noted in the following
table, no single customer provided more than 10% of consolidated revenues during
these years.
Year Ended December 31,
----------------------------------------------------------------
2001 2000 1999
---- ---- ----
BELLSOUTH - TELECOM EQUIPMENT 13% 11% 39%
- DSL EQUIPMENT 10 9 0
SBC 15 45 52
WARRANTY CORPORATION OF AMERICA 11 4 0
----------------------------------------------------------------
16
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CASH AND CASH EQUIVALENTS
The Company considers all short-term, highly liquid investments with an original
maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Current available-for-sale marketable securities are carried at their estimated
fair value based on current market quotes. Any unrealized gains or losses are
reported in shareholders' equity as a component of other accumulated
comprehensive income (loss). At December 31, 2001, the Company held
approximately $436,000 in available-to-sale securities, which is included in
"Prepaid expenses and other" in the accompanying Consolidated Balance Sheets.
The unrealized gain was not material to the Company's financial position. This
short-term investment was sold at a gain in January 2002.
INVENTORIES
Inventories, consisting primarily of telephones, interactive wireless pagers and
DSL and cable modems, are stated at the lower of cost or market, with cost
determined by the first-in, first-out method. Substantially all inventory is for
the account of one client who has indemnified the Company from substantially all
risk associated with such inventory.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is determined using
straight-line methods over the following estimated useful lives:
Rental equipment 3 years
Computers and software 3-5 years
Machinery and equipment 5-7 years
Furniture and fixtures 7 years
Leasehold improvements are amortized using the straight-line method over the
shorter of the service lives of the improvements or the remaining term of the
lease. Maintenance and repairs are expensed as incurred.
During the third quarter of 1999, the Company opened a call center in Pueblo,
Colorado. As part of the establishment of the facility in Pueblo, the Company
received various tax incentives from the city of Pueblo. These tax incentives
have been recorded as a reduction in the basis of property and equipment.
Rental equipment is written off at its net book value when it is no longer
generating revenues or is not returned by the customer. Equipment rental losses
were approximately $0, $103,000 and $502,000 for the years ended December 31,
2001, 2000 and 1999, respectively, and are included in "Depreciation and
Amortization" in the accompanying Consolidated Statements of Operations.
17
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LONG-LIVED ASSETS
Statement of Financial Accounting Standards No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
requires that long-lived assets, including certain identifiable intangibles and
goodwill related to those assets, be reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset in
question may not be recoverable. Management has reviewed the Company's
long-lived assets and has determined that there are no long-lived assets
requiring impairment loss recognition, other than those included in the
Company's special charges recorded in the fourth quarter of 2000 (see Note 14)
and the Company's investment in Return.com, which was written off during the
year ended December 31, 2001 (see "Minority Interests").
GOODWILL AND OTHER ACQUIRED INTANGIBLES
Goodwill represents the cost of an acquired enterprise in excess of the fair
market value of the net tangible and identifiable intangible assets acquired.
Goodwill and other acquired intangibles related to business combinations prior
to July 1, 2001 were being amortized over 5-20 years on a straight-line basis,
which represented management's estimation of the related benefit to be derived
from the acquired business. However, goodwill and other acquired intangibles
from business combinations occurring after June 30, 2001 are accounted for under
the transition provisions for business combinations of SFAS No. 141, "Business
Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets" which
includes iFulfillment (see Note 8). The Company will adopt SFAS 142 effective
January 1, 2002, which changes the accounting for goodwill and other indefinite
life intangibles from an amortization method to an impairment only approach.
During the year ended December 31, 2001 and 2000, amortization expense for
goodwill and other acquired intangibles totaled approximately $525,000 and
$31,000, respectively (see Note 8).
STOCK-BASED COMPENSATION PLANS
The Company accounts for its stock-based compensation plans under Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees"
("APB 25"). The Company has adopted the disclosure option of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation". SFAS 123 requires that companies, which do not choose to account
for stock-based compensation as prescribed by this statement, shall disclose the
pro forma effects on earnings and earnings per share as if SFAS 123 had been
adopted. Additionally, certain other disclosures are required with respect to
stock compensation and the assumptions used to determine the pro forma effects
of SFAS 123 (see Note 11).
INCOME TAXES
Innotrac utilizes the liability method of accounting for income taxes. Under the
liability method, deferred taxes are determined based on the difference between
the financial and tax bases of assets and liabilities using enacted tax rates in
effect in the years in which the differences are expected to reverse.
18
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MINORITY INTERESTS
The minority interest represents the investment in Return.com Online, LLC
("Return.com"), a subsidiary of the Company, held by Mail Boxes Etc ("MBE"),
including their proportionate share of losses. Prior to December 29, 2000, when
MBE increased its ownership to 40%, this amount was 14%. In March 2001, United
Parcel Services, Inc. ("UPS") announced a definitive agreement to purchase MBE.
As a result of this agreement, the Company agreed to reacquire MBE's 40%
ownership interest in Return.com on April 17, 2001. 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 consolidated financial statements. During the
year ended December 31, 2001, the Company wrote off its $2.8 million investment
in Return.com against an impairment reserve the Company recorded in the first
quarter of 2001. At December 31, 2001, Return.com was no longer in operation.
EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the weighted
average number of common shares outstanding. In the computation of diluted
earnings per share, the weighted average number of common shares outstanding is
adjusted for the effect of all potential common stock equivalent shares.
REVENUE RECOGNITION
Revenues are recognized on the accrual basis as services are provided to
customers or as units are shipped. Revenues are reduced for freight and an
estimate of product returns and allowances. In 2001 and 2000, revenues have been
recorded net of the cost of the equipment for all fee-for-service clients.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying value of the Company's financial instruments approximates fair
value.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations," and FASB No. 142, "Goodwill and Other Intangible
Assets." SFAS 141 prohibits the use of pooling-of-interest 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 are 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 for 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 statement changes the accounting for goodwill and
other indefinite life intangible assets from an amortization method to an
impairment only approach. Upon adoption of the statement, which for the Company
will be the beginning of fiscal year 2002, amortization of
19
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
current goodwill will cease, thereby reducing amortization expense for 2002 by
approximately $0.9 million after factoring in the recent earn-out payment. In
2001, amortization expense associated with goodwill was $0.3 million. The
Company plans to complete its impairment analysis during the first quarter of
2002 and will recognize an impairment, if any, at that time.
In June 2001, the FASB also issued SFAS No. 143, "Accounting for Asset
Retirement Obligations," effective for fiscal years beginning after June 15,
2002. SFAS 143 addresses financial accounting and reporting for obligations
associated with the retirement of tangible long-lived assets that result from
the acquisition, construction, development, and/or the normal operation of a
long-lived asset, except for certain obligations for leases and the associated
asset retirement costs. The statement required that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
Company does not anticipate that the adoption of SFAS 143 will have a material
effect on the Company's financial position or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 supercedes SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed
of," and the accounting and reporting provisions of APB Opinion No. 30,
"Reporting the Results of Operations--Reporting the Effects of Disposal of a
Segment of a Business and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions," and amends APB No. 51, "Consolidated Financial
Statements." SFAS 144 retains many of the requirements of SFAS 121 and the basic
provisions of APB Opinion 30; however, it establishes a single accounting model
for long-lived assets to be disposed of by sale. SFAS 144 furthermore resolves
significant implementation issues related to SFAS 121. The provisions of the
statement are effective for financial statements issued for fiscal years
beginning after December 15, 2001 and are to be applied prospectively. The
Company does not anticipate that the adoption of SFAS 144 will have a material
effect on the Company's financial position or results of operations.
20
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. ACCOUNTS RECEIVABLE
Accounts receivable were composed of the following at December 31, 2001 and 2000
(in 000's):
2001 2000
-------- --------
Billed receivables $ 16,846 $ 31,933
Unbilled receivables 79 2,700
-------- --------
16,925 34,633
Less: Allowance for doubtful accounts (3,263) (3,416)
-------- --------
$ 13,662 $ 31,217
======== ========
4. FINANCING OBLIGATIONS
The Company has a revolving credit agreement with a bank for borrowings up to
$40 million. An amendment to the revolving credit agreement was entered into
during 2001 that eliminated borrowings based on specified advance rates
resulting in availability of the entire $40 million line of credit. Interest is
payable monthly at rates equal to the prime rate, or at the Company's option,
LIBOR plus up to 225 basis points. The line of credit is secured by all assets
of the Company and expires on June 1, 2002. At December 31, 2001 and 2000, the
Company had no balance outstanding on the line of credit.
The Company incurred unused revolving credit facility fees of approximately
$85,000 during the year ended December 31, 2001. During the years ended December
31, 2000 and 1999, the Company incurred interest expense related to the line of
credit of $0.5 million and $1.3 million, respectively, based on weighted average
interest rates of 7.49% and 6.26%, respectively.
The revolving line of credit agreement contains various restrictive financial
and change of ownership control covenants. At December 31, 2001, the Company was
in compliance with all covenants.
21
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. COMMITMENTS AND CONTINGENCIES
OPERATING LEASES
Innotrac leases office and warehouse space and equipment under various operating
leases. The primary office and warehouse operating leases provide for escalating
payments over the lease term. Innotrac recognizes rent expense on a
straight-line basis over the lease term. The Company also has capital lease
obligations that expire over the next three years primarily for warehouse
equipment and computer hardware.
Aggregate future minimum lease payments under noncancellable operating and
capital leases with original periods in excess of one year as of December 31,
2001 are as follows (in 000's):
CAPITAL OPERATING
LEASES LEASES
------- ---------
2002 ......................... $ 302 $ 5,456
2003 ......................... 138 3,542
2004 ......................... 97 3,088
2005 ......................... 58 2,147
2006 ......................... 0 2,170
Thereafter ................... 0 2,818
------ -------
Total minimum lease payments... $ 595 $19,221
=======
Amount related to interest (75)
------
Capital lease obligations 520
Current portion (302)
------
Long-term portion $ 218
======
Rent expense under all operating leases totaled approximately $4.2 million, $3.1
million and $2.0 million during the years ended December 31, 2001, 2000 and
1999, respectively.
LEGAL PROCEEDINGS
The Company is subject to various legal proceedings and claims that arise in the
ordinary course of business. There are no material pending legal proceedings to
which the Company is a party.
6. INCOME TAXES
Details of the income tax (provision) benefit for the years ended December 31,
2001, 2000 and 1999 are as follows (in 000's):
2001 2000 1999
-------- -------- --------
Current $ 815 $ 8,457 $ (4,565)
Deferred (3,388) 5,627 (1,824)
-------- -------- --------
$ (2,573) $ 14,084 $ (6,389)
======== ======== ========
22
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net effect of the temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. The significant
components of the Companies' deferred tax assets and liabilities as of December
31, 2001 and 2000 are as follows (in 000's):
2001 2000
-------- --------
Current deferred tax assets:
Allowance for doubtful accounts 1,466 1,351
Reserve for returns and equipment losses 413 1,512
Other reserves 857 1,121
------- -------
2,736 3,984
------- -------
Noncurrent deferred tax assets (liabilities):
Net operating loss carryforwards $ 1,910 3,428
Depreciation (1,454) (810)
Other (18) (39)
------- -------
438 2,579
------- -------
Net deferred tax asset $ 3,174 $ 6,563
======= =======
Management believes that sufficient income will be earned in the future to
realize the net deferred tax assets.
At December 31, 2001, the Company had net operating loss ("NOL") carryforwards
of approximately $5.0 million for income tax purposes, which primarily begin to
expire beginning in 2020. Section 382 of the Internal Revenue Code limits the
utilization of net operating loss carryforwards when there are changes in
ownership greater than 50%, as defined. If such a change occurs, the timing of
the Company's utilization of its NOL carryforwards could be impacted.
A reconciliation of the income tax (provision) benefit computed at statutory
rates to the income tax (provision) benefit for the years ended December 31,
2001, 2000 and 1999 is as follows:
2001 2000 1999
----- ----- -------
Federal statutory rate (34.0)% 35.0% (35.0)%
(Increase) decrease in taxes resulting from:
State income taxes, net of federal benefit (4.0) 4.0 (4.0)
Items not deductible for tax purposes (4.3) 0.7 (0.6)
Other (0.1) (0.4) 0.2
----- ---- -----
(42.4)% 39.3% (39.4)%
===== ==== =====
23
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. EARNINGS PER SHARE
The following table shows the amounts used in computing earnings per share
("EPS") in accordance with Statement of Financial Accounting Standards No. 128
and the effects on income and the weighted average number of shares of potential
diluted common stock. Options outstanding to purchase shares of the Company's
common stock were not included in the computation of diluted EPS for the year
ended December 31, 2000 because their effect would be anti-dilutive if
exercised. Shares used to compute diluted earnings per share are as follows (in
000's):
2001 2000 1999
------ ------ ------
Diluted earnings per share:
Weighted average shares outstanding 11,318 11,212 9,911
Employee and director stock options 372 -- 122
------ ------ ------
Weighted average shares 11,690 11,212 10,033
assuming dilution ====== ====== ======
8. ACQUISITIONS
On July 24, 2001, the Company acquired the assets and assumed specified
liabilities of iFulfillment, Inc. ("iFulfillment") for approximately $5.8
million. iFulfillment is located in a 354,000 square foot leased facility in
Bolingbrook, Illinois and specializes in fully integrated, automated order
fulfillment services for multi-channel retailers and catalogers, including such
clients as Nordstrom.com, Wilsons Leather and Archibald Candies. The transaction
was accounted for under the purchase method of accounting and, accordingly, the
operating results of iFulfillment have been included since the date of
acquisition in the Company's consolidated results of operations. The Company has
accounted for this transaction in accordance with the provisions of SFAS 141 and
SFAS 142. The following table summarizes the assets purchased and liabilities
assumed as well as the preliminary allocation of the purchase price to various
intangibles and goodwill (in 000's):
Purchase price $5,813
Current assets 207
Current liabilities (2,094)
Property 1,417
Other liabilities (632)
Customer contract 250
Goodwill 6,665
This allocation represents management's best estimate of the values acquired.
This allocation is subject to change up to one year from the date of
acquisition, but management does not currently anticipate any material changes.
24
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 8, 2000, the Company acquired UDS, which was accounted for under the
purchase method of accounting. At December 31, 2001, the Company recorded an
accrual for approximately $15.3 million for payment to the sellers of UDS under
the terms of an earn-out provision contained in the December 8, 2000 Merger
Agreement. The earn-out accrual was recorded as additional purchase price
consideration. In February 2002, the payment was made consisting of $13.7
million of cash and 310,000 shares of the Company's common stock valued at $1.6
million. As a result, goodwill related to UDS amounted to $18.8 million, net of
accumulated amortization of $0.3 million.
Neither of the transactions was deemed to be material at the time of the
acquisitions; accordingly, no proforma results are presented herein. However, as
according to the transition provisions of SFAS 142, the Company's consolidated
proforma net income and diluted earnings per share for 2001 with
non-amortization of goodwill would have been $4.5 million and $0.39 per share,
respectively. There was no material impact for the year ended December 31, 2000.
9. SHAREHOLDERS' EQUITY
Innotrac has authorized 50,000,000 shares of Common Stock, $0.10 par value, and
10,000,000 shares of Preferred Stock, $0.10 par value. At December 31, 2001 and
2000, there were 11,674,595 shares of common stock and no shares of preferred
stock outstanding.
In June 2000, the Company's Board of Directors authorized the repurchase, at the
direction of senior management, of up to $5.0 million of the Company's common
stock. During the years ended December 31, 2001 and 2000, the Company had
repurchased approximately 6,400 and 45,000 shares at a total cost of $49,000 and
$206,000, respectively. The repurchased shares are recorded at cost as treasury
stock and result in a reduction of shareholder's equity.
Subsequent to December 31, 2001, the Company's Board of Directors authorized the
repurchase, at the direction of senior management, of up to an additional $10.0
million of the Company's common stock.
10. EMPLOYEE RETIREMENT PLAN
Innotrac employees may participate in a 401(k) defined contribution plan. The
plan covers all employees who have at least six months of service and are 18
years of age or older. Participants may elect to defer up to 15% of compensation
up to a maximum amount determined annually pursuant to IRS regulations. Innotrac
has elected to provide matching employer contributions equal to 15% of
contributions for less than five years of service, 25% of contributions for five
to nine years of service, and 35% of contributions for over nine years of
service. Total matching contributions made to the plan and charged to expense by
Innotrac for the year ended December 31, 2001 was approximately $108,000. The
Company's matching for the years ended December 31, 2000 and 1999 were not
material.
25
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. STOCK BASED COMPENSATION
The Company has adopted two stock option plans: the 1997 and 2000 Stock Option
and Incentive Award Plans ("The Plans"). The Plans provide key employees,
officers, directors, contractors and consultants an opportunity to own shares of
common stock of the Company and to provide incentives for such persons to
promote the financial success of the Company. Awards under The Plans may be
structured in a variety of ways, including as "incentive stock options" as
defined in Section 422 of the Internal Revenue Code, as amended, non-qualified
stock options, restricted stock awards, and stock appreciation rights ("SARs").
Incentive stock options may be granted only to full-time employees (including
officers) of the Company and its subsidiaries. Non-qualified options, restricted
stock awards, SARs, and other permitted forms of awards may be granted to any
person employed by or performing services for the Company, including directors,
contractors and consultants. The 1997 Stock Option Plan and 2000 Stock Option
Plan, as amended, provide for the issuance of options to purchase up to an
aggregate of 800,000 shares and 2,800,000 shares of common stock, respectively.
Incentive stock options are also subject to certain limitations prescribed by
the Code, including the requirement that such options may not be granted to
employees who own more than 10% of the combined voting power of all classes of
voting stock of the Company, unless the option price is at least 110% of the
fair market value of the common stock subject to the option. The Board of
Directors of the Company (or a committee designated by the Board) otherwise
generally has discretion to set the terms and conditions of options and other
awards, including the term, exercise price and vesting conditions, if any; to
select the persons who receive such grants and awards; and to interpret and
administer The Plans.
A summary of the options outstanding and exercisable by price range as of
December 31, 2001 is as follows (shares in 000's):
Options Outstanding Options Exercisable
------------------- -------------------
Weighted Average Weighted
Range of As of Remaining Weighted Average As of Average
Exercise Prices December 31, 2001 Contractual Life Exercise Price December 31, 2001 Exercise Price
--------------- ----------------- ---------------- ---------------- ----------------- --------------
$1.77 - $3.54 440 9.0 $ 3.13 -- $ --
$3.54 - $5.31 322 8.4 4.86 -- --
$5.31 - $7.07 343 8.9 6.53 -- --
$7.07 - $8.84 345 8.8 7.37 -- --
$8.84 - $10.61 239 5.8 9.10 239 9.10
$10.61 - $12.38 30 6.3 12.00 30 12.00
$12.38 - $14.15 37 5.1 13.31 25 13.52
$15.92 - $17.68 35 7.2 16.71 25 17.00
---------------------------------------------------------------------------------------------------
1,791 8.2 $ 6.33 319 $10.34
===================================================================================================
26
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the status of the Company's two stock option plans as of December
31, 2001, 2000 and 1999 is as follows (shares in 000's):
Shares Weighted Average Price
-------- ----------------------
Outstanding at December 31, 1998 363 $ 9.42
Granted 209 14.35
Exercised (13) 11.33
Forfeited (31) 14.11
-------- --------
Outstanding at December 31, 1999 528 10.98
Granted 1,730 5.01
Forfeited (459) 7.14
-------- --------
Outstanding at December 31, 2000 1,799 6.19
Granted 454 7.35
Forfeited (462) 6.98
-------- --------
Outstanding at December 31, 2001 1,791 $ 6.33
======== ========
Options exercisable at December 31, 2001 319 $ 10.34
======== ========
The Company accounts for The Plans under APB No. 25, under which no compensation
cost has been recognized. Had compensation cost for stock options been
determined under SFAS No. 123, the Company's net income (loss) and net income
(loss) per share would have been the following pro forma amounts (in 000's,
except per share data):
YEAR ENDED DECEMBER 31,
-----------------------------------------
2001 2000 1999
-------- -------- --------
Net income (loss) $ 4,385 $(21,575) $ 9,835
Pro forma net income (loss) adjusted for the
impact of SFAS No. 123 $ 3,350 $(22,347) $ 9,048
Diluted net income (loss) per share $ 0.30 $ (1.92) $ 0.98
Pro forma net income (loss) per share adjusted for the
impact of SFAS No. 123 $ 0.29 $ (1.99) $ 0.90
The Company has computed for pro forma disclosure purposes the value of all
options granted using the Black-Scholes option-pricing model as prescribed by
SFAS No. 123 using the following weighted average assumptions:
2001 2000 1999
-------- -------- --------
Risk-free interest rate 5.45% 5.44% 6.34%
Expected dividend yield 0% 0% 0
Expected lives 2.7 Years 2.7 Years 2.7 Years
Expected volatility 84.3% 90.4% 80.5%
27
INNOTRAC CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
(In 000's, except per share data) First Second Third Fourth
--------- -------- --------- --------
2001 Quarters:
Revenues, net $ 24,921 $ 26,025 $ 22,406 $ 21,441
Operating income (loss) (824) 1,782 1,940 2,615
Net income 500 1,035 1,264 1,586
Net income per share-basic 0.04 0.09 0.11 0.15
Net income per share-diluted $ 0.04 $ 0.09 $ 0.11 $ 0.14
2000 Quarters:
Revenues, net $ 47,850 $ 50,352 $ 50,284 $ 25,599
Operating (loss) income (1,614) (15,337) 283 (18,969)
Net (loss) income (1,124) (9,206) 319 (11,564)
Net (loss) income per share-basic (0.10) (0.82) 0.03 (1.03)
Net (loss) income per share-diluted $ (0.10) $ (0.82) $ 0.03 $ (1.03)
1999 Quarters:
Revenues, net $ 67,320 $ 57,496 $ 51,661 $ 50,534
Operating income 5,784 5,869 4,075 1,926
Net income 3,286 3,266 2,303 980
Net income per share-basic 0.37 0.36 0.22 0.09
Net income per share-diluted $ 0.36 $ 0.36 $ 0.22 $ 0.09
13. SPECIAL CHARGES
During 2000, the Company substantially completed its migration towards a
fee-for-service business model, which eliminates inventory ownership risk and
also elected to discontinue its front-end web site development, maintenance and
hosting services to its e-commerce clients. As a result of these significant
changes in the Company's business, a special pre-tax charge of $34.3 million was
recognized. The special charges of $34.3 million for the year ended December 31,
2000 includes the following: $24.4 million for inventory, accounts receivable
and other items primarily related to the Company's shift to a fee-for-service
business model; $6.2 million for the impairment of long-lived assets primarily
due to the abandonment of specified software development projects; and $3.7
million in costs to exit the e-commerce business related to web development,
maintenance and hosting services. The Company has approximately $4.6 million in
remaining accruals related to the special charges at December 31, 2001, which
include $2.8 million for the Company's shift to a fee-for-service business model
and $1.8 million for e-commerce exit costs. Cash payments during 2001 totaled
approximately $2.3 million. The Company expects that substantially all of the
remaining accruals either will be utilized or reversed to income during the year
ended December 31, 2002. Any accruals reversed to income will be reported as a
special item.
28