SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant [X]
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[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-12
INNOTRAC CORPORATION
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(Name of Registrant as Specified in its Charter)
N/A
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[INNOTRAC LOGO]
April 15, 2004
To Our Shareholders:
On behalf of the Board of Directors and management of Innotrac
Corporation, I cordially invite you to the Annual Meeting of Shareholders to be
held on May 17, 2004, at 9:00 AM, Eastern Daylight Time, at the Gwinnett Civic
and Cultural Center located at 6400 Sugarloaf Parkway in Duluth, Georgia.
At the Annual Meeting, shareholders will be asked to consider and vote
upon the re-election of two current Innotrac directors. Information about the
nominees for directors and certain other matters is contained in the
accompanying Proxy Statement. A copy of Innotrac's 2003 Annual Report to
Shareholders, which contains financial statements and other important
information about Innotrac's business, is also enclosed.
It is important that your shares of stock be represented at the
meeting, regardless of the number of shares you hold. We encourage you to
specify your voting preferences by marking and dating the enclosed Proxy Card.
If you wish to vote for re-electing all the nominees for director specified
herein, however, all you need to do is sign and date the Proxy Card.
Regardless of whether you plan to attend the meeting in person, please
complete the enclosed Proxy Card and return it promptly in the enclosed
envelope, or vote by using any other method described on your Proxy Card. If you
do attend and wish to vote in person, you may revoke your proxy at that time.
I hope you are able to attend, and look forward to seeing you.
Sincerely,
/s/ SCOTT D. DORFMAN
SCOTT D. DORFMAN
Chairman of the Board, President and
Chief Executive Officer
INNOTRAC CORPORATION
6655 SUGARLOAF PARKWAY
DULUTH, GEORGIA 30097
-----------------
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 17, 2004
-----------------
To the Shareholders of Innotrac Corporation:
Notice is hereby given that the Annual Meeting of Shareholders of
Innotrac Corporation will be held at 9:00 AM, Eastern Daylight Time, on Monday,
May 17, 2004, at the Gwinnett Civic and Cultural Center located at 6400
Sugarloaf Parkway, Duluth, Georgia 30097, for the following purposes:
1. To elect 2 directors whose terms, if re-elected, will expire
in 2007; and
2. To consider such other matters as may properly come before the
meeting and any adjournment or postponement thereof.
A Proxy Statement and a Proxy Card solicited by the Board of Directors
are enclosed herewith. Please sign, date and return the Proxy Card promptly in
the enclosed business reply envelope, or vote using any other method that may be
described on your Proxy Card. If you attend the meeting, you may, if you wish,
withdraw your Proxy and vote in person.
BY ORDER OF THE BOARD OF DIRECTORS,
DAVID L. GAMSEY
APRIL 15, 2004 Secretary
WHETHER OR NOT YOU EXPECT TO BE PRESENT AT THE ANNUAL MEETING, WE URGE YOU TO
FILL IN, DATE, SIGN, AND PROMPTLY RETURN THE ENCLOSED PROXY CARD IN THE ENCLOSED
BUSINESS REPLY ENVELOPE, OR VOTE USING ANY OTHER METHOD THAT MAY BE DESCRIBED ON
YOUR PROXY CARD. THE PROXY MAY BE REVOKED AT ANY TIME PRIOR TO EXERCISE, AND IF
YOU ARE PRESENT AT THE ANNUAL MEETING, YOU MAY, IF YOU WISH, REVOKE YOUR PROXY
AT THAT TIME AND EXERCISE THE RIGHT TO VOTE YOUR SHARES PERSONALLY.
INNOTRAC CORPORATION
PROXY STATEMENT CONTENTS
Introduction............................................................................................ 1
Quorum and Voting Requirements.......................................................................... 2
Voting Securities and Principal Shareholders............................................................ 2
Board Matters........................................................................................... 4
Items for Vote:
Item No. 1: Election of Directors.............................................................. 7
Executive Compensation.................................................................................. 9
Related Party Transactions.............................................................................. 12
Report of the Compensation Committee on Executive Compensation.......................................... 13
Stock Performance Graph................................................................................. 15
Equity Compensation Plans............................................................................... 15
Independent Public Accountants.......................................................................... 16
Report of the Audit Committee........................................................................... 17
Shareholders' Proposals for 2005 Annual Meeting......................................................... 18
Other Matters........................................................................................... 18
Appendix A.............................................................................................. A-1
[INNOTRAC LETTERHEAD]
PROXY STATEMENT
DATED APRIL 15, 2004
FOR THE ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD MAY 17, 2004
INTRODUCTION
This Proxy Statement is furnished to shareholders in connection with
the solicitation of proxies by the Board of Directors of Innotrac Corporation
("Innotrac" or the "Company") for use at Innotrac's 2004 Annual Meeting of
Shareholders (the "Annual Meeting") to be held on Monday, May 17, 2004,
including any postponement, adjournment or adjournments thereof, for the
purposes set forth in the accompanying Notice of Annual Meeting. Management
intends to mail this Proxy Statement and the accompanying form of proxy to
shareholders on or about April 15, 2004.
Only shareholders of record at the close of business on March 31, 2004
(the "Record Date") are entitled to notice of and to vote in person or by proxy
at the Annual Meeting. As of the Record Date, there were 11,833,193 shares of
common stock, $0.10 par value per share (the "Common Stock"), of Innotrac
outstanding and entitled to vote at the Annual Meeting.
Proxies in the accompanying form duly executed and returned to the
management of Innotrac, and not revoked, will be voted at the Annual Meeting.
Any proxy given pursuant to this solicitation may be revoked by the shareholder
at any time prior to the voting of the proxy by delivery of a subsequently dated
proxy, by written notification to the Secretary of Innotrac or by personally
withdrawing the proxy at the Annual Meeting and voting in person.
Proxies that are executed, but that do not contain any specific
instructions, will be voted for the election of all the nominees for director
specified herein. The persons appointed as proxies will vote in their discretion
on any other matter that may properly come before the Annual Meeting or any
postponement, adjournment or adjournments thereof, including any vote to
postpone or adjourn the Annual Meeting.
If your shares of Common Stock are held by a broker, bank or other
nominee (i.e., in "street name"), you will receive instructions from your
nominee, which you must follow in order to have your shares voted - the
instructions may appear on the special proxy card provided to you by your
nominee (also called a "voting instruction form"). Your nominee may offer you
different methods of voting, such as by telephone or Internet. If you do hold
your shares in "street" name and plan on attending the Annual Meeting, you
should request a proxy from your broker or other nominee holding your shares in
record name on your behalf in order to attend the Annual Meeting and vote at
that time (your broker may refer to it as a "legal" proxy).
A copy of Innotrac's Annual Report to Shareholders is being furnished
herewith to each shareholder of record as of the close of business on the Record
Date. Copies of Innotrac's Annual Report on Form 10-K for the year ended
December 31, 2003 will be provided free of charge upon written request to:
INNOTRAC CORPORATION
6655 SUGARLOAF PARKWAY
DULUTH, GEORGIA 30097
ATTN.: SECRETARY
1
If the person requesting the Annual Report on Form 10-K for the year
ended December 31, 2003 was not a shareholder of record on the Record Date, the
request must include a representation that the person was a beneficial owner of
Common Stock on that date. Copies of any exhibits to Innotrac's Annual Report on
Form 10-K for the year ended December 31, 2003 also will be furnished on request
and upon payment of Innotrac's expenses in furnishing the exhibits.
QUORUM AND VOTING REQUIREMENTS
The holders of a majority of the shares entitled to vote on the Record
Date, represented in person or by proxy, shall constitute a quorum for the
purpose of transacting business at the Annual Meeting. Each outstanding share
shall be entitled to one vote on each matter submitted to a vote at the Annual
Meeting. The required vote for each item of business at the Annual Meeting is as
follows:
-- For Item 1 on the Proxy Card, the election of directors, those
nominees receiving the greatest number of votes at the Annual
Meeting, assuming a quorum is present, shall be deemed
elected, even though such nominees may not receive a majority
of the votes cast.
-- For any other business at the Annual Meeting, if more shares
are voted in favor of the matter than against it, assuming a
quorum is present, the matter shall be approved, unless the
vote of a greater number is required by law.
In counting the votes cast, only those cast "for" and "against" a
matter are included, although you cannot vote "against" a nominee for director.
An abstention and a "broker non-vote" are counted only for purposes of
determining the presence of a quorum at the Annual Meeting. "Broker non-votes"
are votes that brokers holding shares of record for their customers (i.e., in
"street name") are not permitted to cast under applicable regulations because
the brokers have not received clear voting instructions from their customers.
VOTING SECURITIES AND PRINCIPAL SHAREHOLDERS
The following table sets forth the information concerning the
beneficial ownership of the Common Stock, which is Innotrac's only class of
voting stock, at February 15, 2004, by:
- each person known to Innotrac to beneficially own more than 5%
of the Common Stock;
- each director (including nominees for re-election), the Chief
Executive Officer and the four other most highly compensated
executive officers; and
- all of Innotrac's directors and executive officers as a group.
To Innotrac's knowledge, except under applicable community property
laws or as otherwise indicated, the persons named in the table have sole voting
and sole investment control with regard to all shares beneficially owned.
NUMBER OF SHARES PERCENTAGE
BENEFICIAL OWNER BENEFICIALLY OWNED(1) BENEFICIALLY OWNED
- ---------------- --------------------- ------------------
Scott D. Dorfman................................................. 5,611,972 (2)(3) 47.8%
IPOF Fund, LP.................................................... 2,969,000 (4) 25.3%
Dimensional Fund Advisors Inc.................................... 633,900 (5) 5.4%
David L. Ellin................................................... 341,510 (6) 2.9%
Larry C. Hanger.................................................. 126,510 (7) 1.1%
David L. Gamsey.................................................. 122,010 (8) 1.0%
Martin J. Blank.................................................. 97,000 (9) *
Bruce V. Benator................................................. 76,000 (10) *
Robert J. Toner.................................................. 35,510 (11) *
Joel E. Marks.................................................... 42,500 (12) *
All directors and executive officers as a group (9 persons)...... 6,453,012 54.9%
- -----------------
* Denotes less than 1%
2
(1) Beneficial ownership is determined under the rules of the Securities
and Exchange Commission. These rules deem common stock subject to
options currently exercisable, or exercisable within 60 days, to be
outstanding for purposes of computing the percentage ownership of the
person holding the options or of a group of which the person is a
member, but they do not deem such stock to be outstanding for purposes
of computing the percentage ownership of any other person or group. As
of February 15, 2004, there were 11,745,030 shares of Common Stock
outstanding.
(2) Includes an aggregate of 178,003 shares owned by: (i) Mr. Dorfman's
wife individually and as custodian for the benefit of their three
oldest children; (ii) Mr. Dorfman's brother as trustee for the benefit
of Mr. Dorfman's three oldest children; (iii) shares held by Mr.
Dorfman's two oldest children directly; and (iv) shares held by Mr.
Dorfman as custodian for his three youngest children. Mr. Dorfman's
address is 6655 Sugarloaf Parkway, Duluth, Georgia 30097.
(3) Includes 87,500 shares subject to presently exercisable options and
options vesting in the next 60 days, as well as 10,510 shares of
restricted stock that vested on March 1, 2004.
(4) According to a Schedule 13G filed June 18, 2003, IPOF Fund, LP ("IPOF")
is an Ohio limited partnership and David Dadante ("Dadante") is IPOF's
General Partner. IPOF and Dadante jointly own and possess voting and
investment power with respect to the shares of Innotrac's Common Stock
owned. The address of IPOF and Dadante is 25381 Chatworth Drive,
Euclid, Ohio 44117.
(5) According to a Schedule 13G filed February 6, 2004, Dimensional Fund
Advisors Inc. ("Dimensional") is a registered investment advisor that
furnishes investment advice to four registered investment companies and
serves as investment manager to certain other commingled group trusts
and separate accounts. In its role as investment advisor or manager,
Dimensional possesses voting and/or investment power with respect to
the shares of Innotrac's Common Stock owned by the investment
companies, trusts and separate accounts. Dimensional disclaims
beneficial ownership over the shares of Innotrac's Common Stock owned
by the investment companies, trusts and separate accounts. The address
of Dimensional is 1299 Ocean Avenue, 11th Floor, Santa Monica,
California 90401.
(6) Includes 248,500 shares subject to presently exercisable stock options
and options vesting in the next 60 days, as well as 10,510 shares of
restricted stock that vested on March 1, 2004.
(7) Includes 116,000 shares subject to presently exercisable stock options,
as well as 10,510 shares of restricted stock that vested on March 1,
2004.
(8) Includes 111,500 shares subject to presently exercisable stock options
and options vesting in the next 60 days, as well as 10,510 shares of
restricted stock that vested on March 1, 2004.
(9) Includes 55,000 shares subject to presently exercisable stock options
and options vesting in the next 60 days.
(10) Includes 75,000 shares subject to presently exercisable stock options
and options vesting in the next 60 days.
(11) Includes 25,000 shares subject to options vesting in the next 60 days.
(12) Includes 10,000 shares held by the Marks Family, LLLP and 12,500
shares subject to presently exercisable stock options.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires
Innotrac's directors and executive officers, and persons who own more than 10%
of Innotrac's Common Stock, to file with the Securities and Exchange Commission
(the "SEC") certain reports of beneficial ownership of the Common Stock. Based
solely on copies of such reports furnished to Innotrac and written
representations that no other reports were required, Innotrac believes that all
applicable Section 16(a) reports were timely filed by its directors, officers
and 10% shareholders during the fiscal year ended December 31, 2003, with the
exceptions noted below.
On June 18, 2003, IPOF Fund, LP and its General Partner, David Dadante
(together, the "IPOF Group") filed Schedule 13G and Form 3 with the SEC
indicating that the IPOF Group had acquired approximately 1.8 million shares of
Common Stock since January 1, 2003. The IPOF Group filed Schedule 13D on July
30, 2003, which it subsequently amended on December 9, 2003, at which time it
also filed a Form 4 indicating that the IPOF Group had acquired approximately
3.0 million shares representing 25.5% of the outstanding Common Stock. On
February 6, 2004, the IPOF Group filed a Form 4 indicating that it made total
open market purchases of 3,032,400 shares of Common Stock during 2003. On March
18, 2004, the IPOF Group again amended the Schedule 13D to indicate that it made
open market purchases between December 9, 2003 and March 18, 2004 that increased
its ownership to 3,109,500 shares representing 26.7% of the outstanding Common
Stock. Based on these filings, the Company does not believe that the IPOF Group
timely filed all required Form 4s in 2003.
3
BOARD MATTERS
BOARD INDEPENDENCE
The Bylaws of Innotrac provide that the Board of Directors shall
consist of not less than five nor more than eleven directors, with the exact
number being set from time to time by the Board or the shareholders. In fiscal
2003, the Board consisted of seven directors, four of whom were employees of the
Company. In light of the Sarbanes-Oxley Act of 2002 and the new listing
standards of the Nasdaq Stock Market, which require the majority of directors on
the Board to meet certain independence requirements by the time of the Annual
Meeting, Larry C. Hanger resigned effective March 1, 2004 and David L. Ellin
agreed not to stand for re-election at the expiration of his current term, which
expires at the Annual Meeting. The Board determined that Messrs. Blank, Marks
and Benator meet the independence requirements of the new Nasdaq listing
standards. The Board concluded that it needed one additional independent
director to meet these independence requirements. The Chairman and Chief
Executive Officer and the Company's legal counsel identified Alston Gardner as a
potential director nominee. After due consideration, the Board agreed that Mr.
Gardner qualified to serve as a director of the Company under the nominations
criteria described more fully below under the heading "Director Nominations" and
voted to elect Mr. Gardner as a Class III Director at its March 1, 2004 meeting.
Also at this meeting, the Board resolved to reduce the number of directors to
six, effective as of May 17, 2004. Effective with Mr. Gardner's election, the
majority of the directors of the Board are independent. Mr. Gardner will stand
for re-election at the Company's Annual Meeting.
MEETINGS AND COMMITTEES OF THE BOARD
The Board of Directors meets on a regular basis to supervise, review
and direct Innotrac's business and affairs. During fiscal 2003, the Board of
Directors had four committees to which it assigned certain responsibilities in
connection with the governance and management of its affairs: an Executive
Committee, an Audit Committee, a Compensation Committee, and an Executive
Compensation Subcommittee. In 2004, the Board combined the Compensation
Committee and the Executive Compensation Subcommittee, established an
independent Nominating/Governance Committee, and dissolved the Executive
Committee. Each committee operates under a written charter adopted by the Board.
During the 2003 fiscal year, the Board held eight meetings. Each of the
directors attended at least 75% of the Board meetings and meetings of committees
on which they served during the 2003 fiscal year.
The composition of these committees for fiscal 2003 was as follows:
EXECUTIVE
COMPENSATION
NAME OF DIRECTOR AUDIT COMPENSATION SUBCOMMITTEE (3) EXECUTIVE(4)
----------------------------- --------------- ------------------- --------------------- ---------------
Non-Employee Directors
Joel E. Marks X X X
Bruce V. Benator X(1)* X
Martin J. Blank X X X
Employee Directors
Scott D. Dorfman X(2)* X*
David L. Gamsey
Larry C. Hanger(5)
David L. Ellin(6) X
- -----------------
* Denotes Chairman.
(1) Mr. Benator resigned from the Audit Committee at the March 1, 2004 meeting
in light of the independence requirements under the Sarbanes-Oxley Act of
2002, and Mr. Gardner was appointed to this Committee at that date.
(2) Mr. Dorfman resigned from the Compensation Committee at the March 1, 2004
meeting in light of the independence requirements of the new Nasdaq listing
standards.
(3) This Subcommittee was dissolved at the March 1, 2004 meeting.
(4) This Committee was dissolved as of March 1, 2004.
4
(5) Mr. Hanger resigned from the Board at the March 1, 2004 meeting in light of
the independence requirements under the new Nasdaq listing standards.
(6) Mr. Ellin is not standing for re-election at the Annual Meeting.
Audit Committee. The primary function of the Audit Committee is to
assist the Board of Directors in fulfilling its financial and other oversight
responsibilities. At a meeting on March 1, 2004, the Board amended and restated
its written Audit Committee Charter in light of the Sarbanes-Oxley Act of 2002
and the new listing standards of the Nasdaq Stock Market. A copy of the amended
and restated Audit Committee Charter is available at the Company's internet site
(http://www.innotrac.com/company/investors/corpgovern.html) and is attached as
Appendix A to this Proxy Statement. The Audit Committee's duties,
responsibilities and activities include reviewing Innotrac's financial
statements, reports and other financial information, overseeing the annual audit
and the independent auditors, and reviewing the integrity of Innotrac's
financial reporting process and the quality and appropriateness of its
accounting principles. The Audit Committee held six meetings during fiscal 2003.
The Report of the Audit Committee is included herein beginning at page 17.
The Board has determined that Mr. Marks satisfies the "audit committee
financial expert" criteria adopted by the SEC under Section 407 of the
Sarbanes-Oxley Act of 2002 and serves as the Audit Committee Chairman. The
members of the Audit Committee are all independent and meet the financial
literacy requirements of the new Nasdaq listing standards.
Compensation Committee and Executive Compensation Subcommittee. The
Compensation Committee is responsible for the review and approval of
compensation of employees above a certain salary level, the review of management
recommendations relating to incentive compensation plans, the administration of
Innotrac's Stock Incentive and Senior Executive Compensation Plans, the review
of compensation of directors and consultation with management and the Board on
senior executive continuity matters. In light of the new Nasdaq listing
standards, the Board amended and restated its written Compensation Committee
Charter, a copy of which is available at the Company's internet site
(http://www.innotrac.com/company/investors/corpgovern.html). The Compensation
Committee held one meeting during fiscal 2003. The Report of the Compensation
Committee is included herein beginning at page 13.
The Executive Compensation Subcommittee was constituted to (1) achieve
certain securities law advantages with respect to stock-based compensation to
Innotrac's officers and directors, and (2) maintain the tax deductibility of
certain executive compensation in excess of $1 million. In light of the new
Nasdaq listing standards, Mr. Dorfman resigned from the Compensation Committee
effective March 1, 2004. The Board determined that, without Mr. Dorfman serving
on the Compensation Committee, the Committee can fulfill all of the
responsibilities of the Executive Compensation Subcommittee and accordingly
dissolved the Subcommittee. Messrs. Blank and Marks, who comprise the
Compensation Committee for 2004, are both independent as defined in the new
listing standards of the Nasdaq Stock Market.
Executive Committee. The Executive Committee, pursuant to authority
delegated by the Board, from time to time considered certain matters in lieu of
convening a meeting of the full Board, subject to any restrictions in applicable
law related to the delegation of certain powers to a committee of the Board.
Messrs. Dorfman, Ellin and Benator comprised the members of the Executive
Committee in 2003. The Executive Committee held no meetings during fiscal 2003
and was dissolved effective March 1, 2004.
Nominating/Governance Committee. The Board of Directors established the
Nominating/Governance Committee at the March 1, 2004 meeting in light of the new
Nasdaq listing standards. The Board established a written Nominating/Governance
Committee Charter, a copy of which is available at the Company's internet site
(http://www.innotrac.com/company/investors/corpgovern.html). The
Nominating/Governance Committee is responsible for reviewing matters pertaining
to the composition, organization and practices of the Board of Directors
(including a periodic evaluation of the Board in meeting its corporate
governance responsibilities) and for recommending to the full Board a slate of
directors for consideration by the stockholders at the annual meeting and
candidates to fill any vacancies on the Board. The Nominating/Governance
Committee is comprised of Messrs. Blank, Benator, Marks and Gardner, all of whom
the Board has determined are independent under the new Nasdaq listing standards.
5
In the opinion of the Board, the Board and its committees perform their
duties in accordance with the current regulations of the SEC and the Nasdaq
Stock Market. At each regular quarterly meeting, the non-management directors
meet in executive session without management present, led by one director on a
rotating basis.
DIRECTOR NOMINATIONS
Nominations Process. The Nominating/Governance Committee is responsible
for considering and making recommendations to the Board concerning nominees to
recommend to the shareholders in connection with Innotrac's annual meeting of
shareholders, and nominees for appointments to fill any vacancy on the Board. To
fulfill these responsibilities, the Committee periodically considers and makes
recommendations to the Board regarding what experience, talents, skills and
other characteristics the Board as a whole should possess in order to maintain
its effectiveness. In determining whether to nominate an incumbent director for
re-election, the Board and the Nominating/Governance Committee evaluate each
incumbent's continued service in light of the Board's collective requirements at
the time such director's Class comes up for re-election.
When the need for a new director arises (whether because of a newly
created Board seat or vacancy), the Nominating/Governance Committee proceeds by
whatever means it deems appropriate to identify a qualified candidate or
candidates, including by engaging director search firms. The Committee reviews
the qualifications of each candidate. Final candidates are generally interviewed
by one or more Board members. The Committee then makes a recommendation to the
Board based on its review, the results of interviews with the candidate and all
other available information. The Board makes the final decision on whether to
invite the candidate to join the Board.
Director Qualifications. The Nominating/Governance Committee is
responsible for considering and making recommendations to the Board concerning
criteria for the selection of qualified directors. At a minimum, directors
should have high moral character and personal integrity, demonstrated
accomplishment in his or her field, the ability to devote sufficient time to
carry out the duties of a director, and be at least 21 years of age. In addition
to these minimum qualifications for candidates, in evaluating candidates the
Board and the Committee may consider all information relevant in their business
judgment to the decision of whether to nominate a particular candidate for a
particular Board seat, taking into account the then-current composition of the
Board. These factors may include: a candidate's professional and educational
background, reputation, industry knowledge and business experience, and the
relevance of those characteristics to Innotrac and the Board; whether the
candidate will complement or contribute to the mix of talents, skills and other
characteristics needed to maintain the Board's effectiveness; the candidate's
ability to fulfill the responsibilities of a director and of a member of one or
more of the Board's standing committees; whether the candidate is independent;
and whether the candidate is financially literate or a financial expert.
Shareholder Nominations. Nominations of individuals for election to the
Board at any meeting of shareholders at which directors are to be elected may be
made by any Innotrac shareholder entitled to vote for the election of directors
at that meeting by complying with the procedures set forth in Article III,
Section 3 of Innotrac's Bylaws. Article III, Section 3 generally requires that
shareholders submit nominations by written notice to the President of the
Company setting forth certain prescribed information about the nominee and
nominating shareholder. That section also requires that the nomination be
submitted at a prescribed time in advance of the meeting, as described below in
"Shareholders' Proposals for the 2005 Annual Meeting."
The Nominating/Governance Committee will consider recommending to the
Board that it include in the Board's slate of director nominees for a
shareholders' meeting a nominee submitted to Innotrac by a shareholder. In order
for the Committee to consider such nominees, the nominating shareholder should
submit the information about the nominee and nominating shareholder described in
Article III, Section 3 of the Bylaws to the President at Innotrac's principal
executive offices at least 120 days before the first anniversary of the date
that Innotrac's proxy statement was released to shareholders in connection with
the previous year's annual meeting of shareholders. The nominating shareholder
should expressly indicate that such shareholder desires that the Board and the
Committee consider such shareholder's nominee for inclusion with the Board's
slate of nominees for the meeting. The nominating shareholder and shareholder's
nominee should undertake to provide, or consent to Innotrac obtaining, all other
information the Board and the Committee request in connection with their
evaluation of the nominee.
6
The shareholder's nominee must satisfy the minimum qualifications for
director described above. In addition, in evaluating shareholder nominees for
inclusion with the Board's slate of nominees, the Board and Committee may
consider all relevant information, including: the factors described above;
whether there are or will be any vacancies on the Board; the size of the
nominating shareholder's Innotrac holdings and the length of time such
shareholder has owned such holdings; whether the nominee is independent of the
nominating shareholder and able to represent the interests of Innotrac and its
shareholders as a whole; and the interests and/or intentions of the nominating
shareholder.
DIRECTORS' COMPENSATION
During fiscal 2003, we paid our outside directors an annual fee of
$10,000, as well as additional fees of $250 and $100, respectively, for each
Board meeting and committee meeting attended. Also, we have traditionally
granted options annually to each of our outside directors. The exercise price is
the closing price of our Common Stock reported on the Nasdaq Stock Market on the
date of grant. No stock options were granted to outside directors in 2003. On
March 1, 2004, the Board approved an increase in director compensation to
$20,000 annually, which will be effective at the election of directors at the
Annual Meeting. We also reimburse all directors for their travel and other
expenses incurred in connection with attending Board or committee meetings.
COMMUNICATING WITH THE BOARD
The Board has established a procedure by which shareholders may send
communications to the Board. Shareholders desiring to communicate directly with
the Board can leave a confidential voice mail message at (678) 584-4003, which
is a dedicated telephone number for the Board, or can send communications to the
Board by e-mail at bod@innotrac.com or by regular mail sent to the Company's
headquarters listed on the first page of this Proxy Statement directed to the
attention of the Chairman of the Board. An independent director will review the
communication and respond accordingly.
ELECTION OF DIRECTORS
(ITEM NUMBER 1 ON THE PROXY CARD)
The Board is divided into three classes of directors serving staggered
three-year terms. Two directors are to be elected at the Annual Meeting for a
three-year term expiring in 2007. The Board has nominated Scott D. Dorfman and
Alston Gardner for those positions. These two nominees have indicated that they
will serve if elected, but if the situation should arise that any nominee is no
longer able or willing to serve, the proxy may be voted for the election of such
other person as may be designated by the Board of Directors.
The following information as of March 1, 2004 has been furnished by the
nominees for director and the continuing directors. Except as otherwise
indicated, the nominees and the continuing directors have been or were engaged
in their present or last principal employment, in the same or a similar
position, for more than five years.
Nominees for Director at the Annual Meeting and Whose Terms Will Expire in 2007
if Elected
Name (Age) Information About the Nominees and the Continuing
Directors
SCOTT D. DORFMAN (46) Mr. Dorfman founded Innotrac and has served as
Chairman of the Board, President and Chief Executive
Officer since its inception in 1984. Prior to
founding Innotrac, Mr. Dorfman was employed by
Paymaster Checkwriter Company, Inc. ("Paymaster"), an
equipment distributor. At Paymaster, Mr. Dorfman
gained experience in distribution, tracking and
inventory control by developing and managing
Paymaster's mail order catalog.
7
ALSTON GARDNER (48) Mr. Gardner joined the Company's Board of Directors
in March 2004. Mr. Gardner is the founder and
principal in Fulcrum Ventures, LLC, a venture capital
development firm focused on early stage information
technology, biotechnology and health care companies
in the southeast United States. In 1989, before
founding Fulcrum Ventures, Mr. Gardner founded
OnTarget, Inc., a leading sales training and
consulting firm, where he served as Chief Executive
Officer until it was acquired by Siebel Systems in
November 1999. Mr. Gardner's earlier employment
experience includes sales and sales management
positions with Dun & Bradstreet Computing Services,
Information Science, and Automatic Data Processing.
Mr. Gardner is a director of Chatham Capital
(Atlanta, GA), Bandwith.com (Cary, NC), BioPheresis
(Atlanta, GA), and Marketing Central (Atlanta, GA),
and previously served on the Board of Forte Software,
a Nasdaq company purchased by Sun Microsystems in
1998.
Directors Whose Terms Expire in 2005
Name (Age) Information About the Nominees and the Continuing
Directors
BRUCE V. BENATOR (46) Mr. Benator is the Managing Partner of Williams
Benator & Libby, LLP, certified public accountants,
and has been a director since 1997. He has been
affiliated with the firm since 1984 and is the firm's
Director of Accounting and Auditing Services. From
1979 to 1984, Mr. Benator was employed by Ernst &
Young, LLP.
Directors Whose Terms Expire in 2006
Name (Age) Information About the Nominees and the Continuing
Directors
MARTIN J. BLANK (57) Mr. Blank has been a director of Innotrac since 1997
and currently serves as an independent legal
consultant. Mr. Blank was a co-founder of Automobile
Protection Corporation, or APCO, a subsidiary of the
Ford Motor Company engaged in the marketing of
extended vehicle service contracts and warranty
programs. Mr. Blank served as Secretary and Director
of APCO since its inception in 1984 and as Chairman of
the Board and Chief Operating Officer since 1988 until
his retirement on December 31, 2003. Mr. Blank's
experiences prior to co-founding APCO include the
practice of law and the representation of and
financial management for professional athletes. Mr.
Blank is admitted to the bar in the States of Georgia
and California.
JOEL E. MARKS (47) Mr. Marks has been a director of Innotrac since 2002
and serves as an independent consultant to the
financial services industry. Mr. Marks has been the
President of Innovative Brokerage Solutions, Inc.
since May 2002, providing investment banking services.
From January 2001 to April 2002, Mr. Marks served as a
Senior Vice President and Managing Director of First
Union Securities, Inc., a securities firm. Prior to
that, Mr. Marks served as Vice Chairman and Chief
Operating Officer of securities firm JWGenesis
Financial Corp. Mr. Marks co-founded JWGenesis in 1983
and served in various capacities with that firm until
its merger with First Union Securities, Inc. in
January 2001. From 1987 through 1994, Mr. Marks served
as Chief Financial Officer and Senior Vice President
of APCO. Mr. Marks obtained his certification as a
public accountant in 1978 and was employed in various
capacities in both the audit and tax departments of
the accounting firm of Deloitte Haskins & Sells (now
Deloitte & Touche LLP).
8
DAVID L. GAMSEY (46) Mr. Gamsey has served as Senior Vice President,
Chief Financial Officer, Treasurer and Secretary
since May 2000. In 2001, Mr. Gamsey was appointed to
Innotrac's Board of Directors. Prior to joining
Innotrac, from September 1995 to May 2000, he served
as Chief Financial Officer of AHL Services, Inc., a
provider of contract staffing and outsourcing
solutions. From 1988 to September 1995, Mr. Gamsey
was a Managing Director of Investment Banking at the
accounting firm Price Waterhouse LLP (now
PricewaterhouseCoopers LLP). From 1987 to 1988, he
served as Chief Financial Officer of Visiontech,
Inc., a manufacturer of contact lenses, and from 1979
to 1987, he was a Senior Audit Manager for the
accounting firm Arthur Andersen LLP. Mr. Gamsey is a
certified public accountant.
EXECUTIVE COMPENSATION
The following table sets forth the total compensation paid or accrued
by Innotrac for services rendered during the fiscal years ended December 31,
2003, 2002 and 2001, to or for Innotrac's Chief Executive Officer and its four
other most highly compensated executive officers, based on salary and bonus (the
"Named Executive Officers"). The total amount of perquisites, personal benefits
and other annual compensation paid to the Named Executive Officers do not in any
case exceed the lesser of $50,000 or ten percent of such officer's total salary
and bonus.
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG TERM COMPENSATION
----------------------- --------------------------
RESTRICTED SECURITIES
FISCAL STOCK UNDERLYING ALL OTHER
NAME YEAR SALARY BONUS AWARD OPTIONS (#) COMPENSATION
------------------------- ------- ---------- --------- ----------- ------------ ----------------
Scott D. Dorfman 2003 $321,250 $ -- $ -- -- $ 1,854(1)
Chairman of the Board, 2002 346,250 27,440 41,200(2) 50,000 1,854
President and Chief 2001 408,942 466,331 -- -- 57,608
Executive Officer
David L. Gamsey 2003 252,000 35,000 -- -- --
Senior Vice President, 2002 252,000 27,440 41,200(2) 50,000 --
Chief Financial Officer, 2001 252,000 131,670 -- -- 2,758
Treasurer and Secretary
David L. Ellin 2003 222,634 (3) -- -- -- --
Senior Vice President - 2002 194,250 16,940 41,200(2) 50,000 --
Sales 2001 181,060 115,211 -- -- 11,876
Robert J. Toner (4) 2003 189,616 40,000 -- -- --
Vice President- 2002 185,000 27,440 41,200(2) 50,000 --
Logistics 2001 74,731 -- -- 25,000 --
Larry C. Hanger 2003 178,500 15,000 -- -- --
Senior Vice President- 2002 158,942 27,440 41,200(2) 50,000 --
Client Services 2001 155,192 99,066 -- -- 1,431
- -----------------
(1) Includes the full dollar amount of premiums paid by Innotrac with
respect to split-dollar life insurance on the life of Mr. Dorfman.
(2) On February 28, 2003, the Company granted each of its executive officers
10,510 shares of restricted stock in connection with services rendered in
fiscal year 2002, which vested on March 1, 2004. The aggregate value of
each such grant as of December 31, 2003 based on the closing price of our
common stock on the Nasdaq Stock Market on such date was $110,144.80. In
addition, Mr. Ellin received a grant of 50,000 shares of restricted stock
on December 20, 2000, the value of
9
which was $524,000 at December 31, 2003. Outstanding shares of
restricted stock are entitled to receive dividends when and if declared
on Innotrac's Common Stock.
(3) Includes sales commissions of $38,884.
(4) Mr. Toner's employment commenced June 2001.
None of the Named Executive Officers received option grants during
fiscal 2003.
AGGREGATED OPTION EXERCISES IN FISCAL 2003 AND FISCAL YEAR-END OPTION VALUES
The following table sets forth the aggregate option exercises by each
Named Executive Officer during 2003, as well as the year-end value of
unexercised options held by the Named Executive Officers at December 31, 2003.
NUMBER OF SECURITIES VALUE OF UNEXERCISED
AGGREGATE OPTIONS UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
EXERCISED DURING 2003 OPTIONS AT DECEMBER 31, 2003 DECEMBER 31, 2003(1)
--------------------- ----------------------------- -----------------------------
SHARES VALUE
NAME ACQUIRED REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- -------- --------- ----------- --------------- ------------ -------------
Scott D. Dorfman........ 25,000 $ 81,128 50,000 75,000 $217,750 $487,875
David L. Gamsey......... 26,000 74,312 86,500 87,500 409,546 553,238
David L. Ellin.......... 25,000 74,662 211,000 75,000 431,650 487,875
Robert J. Toner......... 12,500 17,595 0 62,500 0 397,625
Larry C. Hanger......... 25,000 78,525 78,500 75,000 252,250 487,875
- -----------------
(1) Represents aggregate excess of market value of shares under option as of
December 31, 2003, using the closing price of $10.48 at such date, over the
exercise price of the options.
EXECUTIVE CONTRACTS, TERMINATION AND CHANGE-IN-CONTROL ARRANGEMENTS
Innotrac has entered into employment agreements with all its current
Named Executive Officers. The following summaries are qualified in their
entirety by the full text of the employment agreements, which are on file with
the SEC.
Scott D. Dorfman. Mr. Dorfman has entered into an agreement to serve as
Innotrac's Chairman of the Board, President and Chief Executive Officer. His
employment agreement expires on December 31, 2005. Mr. Dorfman is entitled to a
salary of no less than $425,000 per year and is eligible for annual increases
and a performance-based bonus which can be up to 100% of his salary, although he
has voluntarily elected to take a lesser amount in 2002 and 2003. He may
participate in such benefit plans as Innotrac maintains from time to time for
senior executives, and receives customary perquisites.
Mr. Dorfman's employment agreement may be terminated by either party if
he dies or becomes disabled, by Innotrac for "good cause" (as defined) or for
any reason by either party upon 90 days' notice. Upon any termination of his
employment, he is entitled to all compensation and benefits accrued through the
date of termination plus any bonus earned for the year during which he is
terminated, calculated based on the performance of Innotrac through the
termination date and prorated for the partial year of employment. If Mr.
Dorfman's employment is terminated because he dies or becomes disabled, then in
addition to accrued compensation, all of his stock options become vested as of
the termination date and will expire in accordance with their respective
scheduled expiration dates. If Innotrac terminates his agreement for good cause
or if Mr. Dorfman terminates his employment (if there has been no change in
control of Innotrac in the 18 months prior to termination), then all his
unvested stock options are forfeited as of the termination date and his vested
options remain exercisable for a period of 90 days after the termination date,
after which they will expire. If Innotrac terminates Mr. Dorfman's employment
without good cause, then in addition to accrued compensation, Mr. Dorfman is
entitled to continue to receive his normal salary for a period of six months
following the termination date. Upon termination without good cause, all of his
10
stock options become vested as of the termination date and will expire upon the
first anniversary of the termination date.
If Innotrac terminates Mr. Dorfman without good cause within 18 months
after a change in control of Innotrac, or if Mr. Dorfman terminates his
employment for "good reason" (as defined) within the same period, Mr. Dorfman is
entitled to continue to receive his normal salary and certain benefits and
perquisites for a period of 18 months following the termination date. All his
stock options shall become vested on the termination date and remain exercisable
for the longer of their respective scheduled expiration dates or three years
following the termination date. If Mr. Dorfman terminates his employment without
good reason within 18 months after a change in control of Innotrac, he is
entitled to all the same compensation and benefits described in this paragraph,
except that his salary and other benefits shall only continue for 12 months
following the termination date.
Mr. Dorfman is subject to customary confidentiality, noncompete and
nonsolicitation covenants during the term of his employment and for an
additional period of one year following his termination. During this period, Mr.
Dorfman must keep Innotrac's confidential information confidential. Mr. Dorfman
is obligated to keep Innotrac's trade secrets confidential for as long as they
remain trade secrets. He is prohibited during this period from engaging in the
businesses of selling Caller ID technology and hardware, fulfillment services,
e-commerce fulfillment and e-commerce return services as well as other similar
services that Innotrac offers, within a 35-mile radius of any of Innotrac's
locations. Furthermore, he is prohibited during this period from soliciting
Innotrac customers, with some exceptions during the period from his termination
to the first anniversary of his termination.
David L. Gamsey. Mr. Gamsey has entered into an agreement to serve as
Innotrac's Senior Vice President and Chief Financial Officer until December 31,
2005. Mr. Gamsey is entitled to a salary of no less than $240,000 per year and
is eligible for annual increases and a performance-based bonus which can be up
to 50% of his salary. The other provisions of Mr. Gamsey's employment agreement
are similar to those described above with respect to Mr. Dorfman's employment
agreement.
David L. Ellin. Mr. Ellin has entered into an agreement to serve as
Innotrac's Senior Vice President - Sales until December 31, 2005, or in such
other executive capacity as the Board may from time to time determine. Mr. Ellin
is entitled to a salary of no less than $175,000 per year and is eligible for
annual increases, sales commissions and a performance-based bonus which can be
up to 60% of his salary, less commissions. The other provisions of Mr. Ellin's
employment agreement are similar to those described above with respect to Mr.
Dorfman's employment agreement.
Robert J. Toner. Mr. Toner has entered into an agreement to serve as
Innotrac's Vice President - Logistics until December 31, 2004, or in such other
executive capacity as the Board may from time to time determine. Mr. Toner is
entitled to a salary of no less than $185,000 per year and is eligible for
annual increases and a performance-based bonus which can be up to 50% of his
salary. The other provisions of Mr. Toner's employment agreement are similar to
those described above with respect to Mr. Dorfman's employment agreement.
Larry C. Hanger. Mr. Hanger has entered into an agreement to serve as
Innotrac's Senior Vice President - Client Services until December 31, 2005, or
in such other executive capacity as the Board may from time to time determine.
Mr. Hanger is entitled to a salary of no less than $150,000 per year and is
eligible for annual increases and a performance-based bonus which can be up to
60% of his salary. The other provisions of Mr. Hanger's employment agreement are
similar to those described above with respect to Mr. Dorfman's employment
agreement.
11
RELATED PARTY TRANSACTIONS
The Company leases a single engine aircraft from a company wholly-owned
by its Chairman and Chief Executive Officer. The Company pays a pro rated amount
of the maintenance, insurance, taxes, fuel and other expenses associated with
the aircraft based on Innotrac's business use of the aircraft, which was
approximately 85% for 2003. This allocation is reviewed annually. Innotrac paid
$133,656 for Innotrac's use of the aircraft in 2003.
In 2003, the Company paid approximately $82,500 in fees to Williams
Benator & Libby, LLP, an accounting firm, for tax compliance and consulting
services and related software products. Bruce Benator, one of the Directors of
Innotrac, is the Managing Partner and part owner of that firm.
In 2003, the Company paid approximately $863,000 in fees to Harp Ink, a
print broker, for services related to the printing of marketing, client,
inter-company and other materials. Harp Ink is owned by Hy Dorfman, the brother
of the Company's Chairman and Chief Executive Officer, and Hy Dorfman's wife.
For 2003, the Company paid approximately $78,000 in salary and bonuses
to Mindy Dorfman, an employee who functioned full-time as a client service
director for Innotrac. She is the sister of the Company's Chairman and Chief
Executive Officer.
In 2003, the Company and the IPOF Group (consisting of IPOF Fund, LP
and its general partner, David Dadante), which as of December 31, 2003
beneficially owned approximately 3.0 million shares of Common Stock, entered
into an amended Agreement to permit the IPOF Group to acquire up to 40% of the
Common Stock on the terms set forth in that Agreement without becoming an
"Acquiring Person" under the Company's Rights Agreement with SunTrust Bank. The
Agreement with the IPOF Group contains various restrictions on the IPOF Group's
right to vote and take certain other shareholder actions. Among these
restrictions, the IPOF Group agreed to vote all shares in excess of 15%
proportionately with vote(s) cast by the other shareholders of the Company and
not to seek to place a representative on the Company's Board or seek to remove
any member of the Board. The IPOF Group further acknowledged that it is an
"affiliate" as defined under applicable federal securities law.
In early 2004, the Company learned that certain trading activity of the
IPOF Group, an owner of more than 5% of the outstanding Common Stock, may have
violated the short swing profit rules under Section 16(b) of the Securities
Exchange Act of 1934. The Company promptly conducted an investigation of the
matter. On March 3, 2004, the Company and the IPOF Group entered into a
Settlement Agreement regarding the potential Section 16(b) liability issues that
provides for the Company's recovery of $301,957.
POLICY RESPECTING RELATED PARTY TRANSACTIONS
The Board of Directors has adopted a policy that any transactions
between Innotrac and any of its officers, directors or principal shareholders or
affiliates must be on terms no less favorable than those that could be obtained
from unaffiliated parties in comparable situations and must be approved by the
Audit Committee of the Board of Directors.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Messrs. Dorfman, Blank and Marks comprised the members of the
Compensation Committee during fiscal 2003. Messrs. Blank and Marks comprised the
members of the Executive Compensation Subcommittee. While Mr. Dorfman is our
Chairman, President and Chief Executive Officer, neither Mr. Blank nor Mr. Marks
is a current or former officer of Innotrac. No interlocking relationship exists
between our Board of Directors, Compensation Committee, Executive Compensation
Subcommittee or executive officers and the board of directors, compensation
committee or executive officers of another company. We have entered into a
transaction with Mr. Dorfman as described in "Related Party Transactions."
In March 2004, Mr. Dorfman resigned from the Compensation Committee and
the Board consequently dissolved the Executive Compensation Subcommittee as
described above under "Board Matters."
12
REPORT OF THE COMPENSATION COMMITTEE ON EXECUTIVE COMPENSATION
This report sets forth Innotrac's current compensation policies for its
executive officers and describes the basis on which fiscal 2003 compensation
determinations were made with respect to the executive officers, including the
Chairman, President and Chief Executive Officer, Mr. Dorfman, and the other
Named Executive Officers. Messrs. Dorfman, Blank and Marks comprised the
Compensation Committee during fiscal 2003 and Messrs. Blank and Marks comprised
the Executive Compensation Subcommittee. The Committee's structure was changed
in early 2004 as discussed at the end of this Report.
GENERAL COMPENSATION PHILOSOPHY
The programs and policies for the compensation of Innotrac's executive
officers are designed to attract and retain capable executive officers and to
link the compensation of executive officers to the attainment of performance
goals and increases in Innotrac's stock price.
The Committee reviews and determines the appropriateness of the
compensation paid to each of Innotrac's executive officers annually, with the
philosophy described above as its guide. While promoting initiative and
providing incentives for superior executive management performance, the
Committee also seeks to assure that Innotrac is able to compete for and retain
talented personnel to lead it in achieving levels of financial performance that
enhances shareholder value over the long-term as well as the short-term.
PRINCIPAL EXECUTIVE COMPENSATION ELEMENTS
Our compensation programs consist of the following basic components:
- Competitive base salaries;
- Annual incentive bonuses;
- Long-term incentive stock options or bonuses; and
- Customary benefits.
Base Salaries. The base salaries of Innotrac's executive officers are
generally established without reference to specific Company performance or
competitive criteria. Employment agreements of our senior executive officers
guarantee certain minimum salaries determined through a process of arm's length
negotiations. Salaries of executive officers are reviewed on an annual basis,
but increases are not mandated by the employment agreements. With the exception
of Mr. Toner and Mr. Hanger, there were no salary increases for executive
officers in 2003 and Mr. Dorfman, Chief Executive Officer, had a salary
reduction.
Annual Incentive Bonuses. Annual incentive bonuses for executive
officers are determined under Innotrac's Senior Executive Incentive Compensation
Plan (the "Executive Plan"), which Innotrac's shareholders approved in fiscal
2000. The Executive Plan ties the incentive compensation payable to the
executive officers directly to the attainment of specific, objective performance
targets, thereby aligning the interests of management with the interests of
Innotrac's shareholders. The amount of bonuses potentially payable to executive
officers is determined as a range of percentages of an individual officer's
salary. Bonuses paid in accordance with the Executive Plan can be based on the
achievement of any number of enumerated performance criteria, such as earnings
before interest and taxes; earnings before interest, taxes, depreciation and
amortization ("EBITDA"); return on capital employed; cash flow; cash flow
return; operating income; gross margin; net income; earnings per share; return
on equity; return on assets (or net assets); pre-tax profit; market value of the
Company's stock; and total shareholder return. For 2003, bonuses were based on
the satisfaction of individual performance goals and objectives determined by
the Committee.
Bonuses were paid pursuant to the Executive Plan to some of the Named
Executive Officers for fiscal 2003 in the form of cash. See "Summary
Compensation Table" for the amounts of bonuses paid to those Named Executive
Officers for 2003. Commissions earned by Mr. Ellin, Innotrac's Senior Vice
President - Sales, were deducted from his cash bonus, resulting in no additional
bonus paid to him. The commissions are included in the
13
"Salary" column of the "Summary Compensation Table." Mr. Dorfman, the Chief
Executive Officer, did not receive a bonus for fiscal 2003.
Long-Term Stock Incentives. Innotrac believes that stock options and
other stock incentives play an integral role in its ability to attract and
retain employees and directors and to provide incentives for such persons to
promote Innotrac's financial success. Moreover, stock incentives benefit
Innotrac by closely aligning the interests of grantees with the interests of
Innotrac's shareholders.
Under the Stock Incentive Plan, employees, including executive
officers, non-employee directors and independent advisors and consultants to the
Company and its subsidiaries, may be granted long-term stock incentives in the
form of stock options, stock appreciation rights, restricted stock and
performance shares. Although incentive grants made in prior periods are taken
into account when making grants to the same grantees in subsequent periods, this
consideration is only one of several criteria. No options were granted to any of
the Named Executive Officers in fiscal 2003. During fiscal 2003, grants of
restricted stock were made to the Named Executive Officers, but these were made
in connection with services rendered in fiscal 2002.
BENEFITS
Executives also participate, on a voluntary basis, in Innotrac's
regular employee benefit programs, including group medical and dental coverage,
group life insurance and group long-term disability insurance. In addition,
executive officers can participate in a deferred compensation plan with respect
to which Innotrac may provide matching contributions. All Company matches
permitted under the executive deferred compensation plan were suspended in 2003.
NEW COMMITTEE STRUCTURE AND COMPENSATION DEDUCTIBILITY POLICY
In March 2004, in accordance with new Nasdaq listing standards, Mr.
Dorfman resigned from the Compensation Committee and the Committee adopted an
amended and restated charter which, among other things, requires that all of its
members be "independent" directors within the meaning of the new listing
standards. The Executive Compensation Subcommittee, which had originally been
constituted to (1) help achieve certain securities law advantages with respect
to stock-based compensation to Innotrac's officers and directors, and (2) help
maintain the tax deductibility of certain compensation in excess of $1 million
to Innotrac's Named Executive Officers under Section 162(m) of the Internal
Revenue Code, was dissolved as no longer necessary to achieve those objectives
in light of the full Committee's all-independent director membership.
During fiscal 2003 and through the restructuring of the Compensation
Committee discussed above, the Committee followed its usual practices of
delegating certain deliberations to the Subcommittee and of having Mr. Dorfman
recuse himself from discussions and votes regarding his own compensation, or in
circumstances where his participation, as an Innotrac executive officer, would
affect compliance with the securities laws mentioned above or Section 162(m).
Although Innotrac's policy is generally to maintain the tax deductibility of
executive officer compensation under Section 162(m), Innotrac and the Committee
believe that other compensation objectives, such as attracting, retaining and
providing incentives to qualified managers, may supersede the goal of
maintaining deductibility. Consequently, Innotrac and the Committee retain the
discretion to make compensation decisions without regard to deductibility when
it is in the best interests of Innotrac and its shareholders to do so.
Martin J. Blank -- Joel E. Marks
(Members of Compensation Committee)
14
STOCK PERFORMANCE GRAPH
Set forth below is a line graph comparing the percentage change in the
cumulative total shareholder return of Innotrac's Common Stock against the
cumulative total return of the Nasdaq Stock Market (U.S.) Index and the Nasdaq
Non-Financial Index for the period commencing on January 1, 1999 and ending on
December 31, 2003.
[GRAPHIC CHART]
CUMULATIVE TOTAL RETURN
-------------------------------------------------------------------------
12/1998 12/1999 12/2000 12/2001 12/2002 12/2003
------- ------- ------- ------- ------- -------
Innotrac Corporation 100 76 19 38 12 58
Nasdaq Stock Market (U.S.) Index 100 54 89 113 163 109
Nasdaq Non-Financial Index 100 196 114 86 57 88
EQUITY COMPENSATION PLANS
The following table sets forth aggregate information as of December 31,
2003 about all Innotrac compensation plans, including individual compensation
arrangements, under which our equity securities are authorized for issuance. The
weighted-average exercise price does not include restricted stock.
NUMBER OF SECURITIES TO WEIGHTED-AVERAGE NUMBER OF SECURITIES
BE ISSUED UPON EXERCISE EXERCISE PRICE OF REMAINING AVAILABLE FOR
OF OUTSTANDING OPTIONS, OUTSTANDING OPTIONS, FUTURE ISSUANCE UNDER
PLAN CATEGORY WARRANTS AND RIGHTS WARRANTS AND RIGHTS EQUITY COMPENSATION PLANS
- ---------------------------------- ------------------------ -------------------- -------------------------
Equity Compensation Plans
Approved by Shareholders ........ 1,642,100 $ 5.59 1,651,650
Equity Compensation Plans Not
Approved by Shareholders ........ N/A N/A N/A
15
INDEPENDENT PUBLIC ACCOUNTANTS
Pursuant to the Audit Committee Charter, the Audit Committee appoints
the firm that will serve as Innotrac's independent accountants each year. Such
appointment is not subject to ratification or other vote by the shareholders.
The Audit Committee is still evaluating which independent accountants to appoint
for the current fiscal year, but has appointed Deloitte & Touche LLP as its
independent auditors for purposes of reviewing the Company's quarterly financial
statements for the first quarter of 2004.
A representative of Deloitte & Touche LLP is expected to be present at
the Annual Meeting, with the opportunity to make a statement if he or she
desires to do so, and is expected to be available to respond to appropriate
questions.
FEES
The following table summarizes the aggregate fees billed to Innotrac by
Deloitte & Touche LLP:
($ in thousands) 2003 2002
---- ----
Audit Fees (1) ................. $170 $136
Audit-Related Fees (2) ......... 23 11
Tax Fees ....................... 0 0
All Other Fees ................. 00 0
---- ----
Total .......................... $193 $147
==== ====
- -----------------
(1) Fees for audit services billed in 2003 and 2002 consisted of audit of
the Company's annual financial statements and reviews of the Company's
quarterly financial statements.
(2) Fees for audit-related services billed in 2003 and 2002 consisted of
employee benefit plan audits and agreed-upon procedures engagements.
PRE-APPROVAL POLICIES AND PROCEDURES
In considering the nature of the services provided by the independent
auditor, the Audit Committee determined that such services are compatible with
the provision of independent audit services. The Audit Committee discussed these
services with the independent auditor and Company management to determine that
they are permitted under the rules and regulations concerning auditor
independence promulgated by the SEC to implement the Sarbanes-Oxley Act of 2002,
as well as the American Institute of Certified Public Accountants.
The Audit Committee has established policies and procedures for the
approval and pre-approval of audit services and permitted non-audit services.
These policies and procedures describe the permitted audit, audit-related, tax
and other services (collectively, the "Disclosure Categories") that the
independent auditor may perform. These policies and procedures require that
prior to the beginning of each fiscal year, a description of the services (the
"Service List") expected to be performed by the independent auditor in each of
the Disclosure Categories in the following fiscal year be presented to the Audit
Committee for approval. On a quarterly basis, the Audit Committee reviews the
status of services and fees incurred year-to-date against the original Service
List and the forecast of remaining services and fees for the fiscal year.
The Audit Committee also may pre-approve requests for specific audit,
audit-related, tax and other services not contemplated on the Service List on a
case-by-case basis, although these services cannot commence until such approval
has been granted. Normally, pre-approval is provided at regularly scheduled
meetings; however, the authority to grant specific pre-approval between
meetings, as necessary, has been delegated to the Chairman of the Audit
Committee, who must update the Audit Committee at the next regularly scheduled
meeting of any services that were granted specific pre-approval.
Provisions of the Sarbanes-Oxley Act of 2002 requiring Audit Committee
pre-approval of all services to be performed by the independent auditor became
effective during the Company's 2003 fiscal year. Following the effectiveness of
such provisions, all services performed by the independent auditor in 2003 were
pre-approved in accordance with this policy. The Audit Committee did not waive
any approval requirements during these periods.
16
The policy contains a de minimis provision that operates to provide
retroactive approval for permissible non-audit services under certain
circumstances. The provision allows for the pre-approval requirement to be
waived if all of the following criteria are met:
1. The service is not an audit, review or other attest service;
2. The aggregate amount of all such services provided under this provision
does not exceed the lesser of $25,000 or five percent of total fees
paid to the independent auditor in a given fiscal year;
3. Such services were not recognized at the time of the engagement to be
non-audit services (to date, the SEC has not provided any guidance with
respect to determining whether or not a service was "recognized" at the
time of the engagement. We believe that the SEC intended the term
"recognized" to mean "identified");
4. Such services are promptly brought to the attention of the Audit
Committee and approved by the Audit Committee or its designee; and
5. The service and fee are specifically disclosed in the Proxy Statement
as meeting the de minimis requirements.
During 2003, fees for audit-related services totaling $6,000 were
approved under the de minimis provision.
FORMER ACCOUNTANTS
On April 22, 2002, the Board of Directors of Innotrac, upon
recommendation of its Audit Committee, dismissed its accountants, Arthur
Andersen LLP ("Andersen"), and appointed Deloitte & Touche LLP as its new
independent accountants, effective immediately. During Innotrac's fiscal years
2000 and 2001 and through April 22, 2002, there were no disagreements between
Innotrac and Andersen on any matter of accounting principles or practices,
financial statement disclosure or auditing scope or procedure which, if not
resolved to Andersen's satisfaction, would have caused Andersen to make
reference to the subject matter of the disagreements in connection with its
reports on Innotrac's consolidated financial statements for such periods, nor
have there been any reportable events as listed in Item 304(a)(1)(v) of
Regulation S-K. During Innotrac's fiscal years 2000 and 2001 and through April
22, 2002, Innotrac did not consult with Deloitte & Touche LLP with respect to
any of the matters or reportable events set forth in Item 304(a)(2)(i) or (ii)
of Regulation S-K.
REPORT OF THE AUDIT COMMITTEE
The Board of Directors, in its business judgment, has determined that
all three members of the Audit Committee are "independent" as required by
applicable current listing standards of The Nasdaq Stock Market. The Committee
operates pursuant to an Audit Committee Charter that was amended and restated by
the Board on March 1, 2004. A copy of the amended and restated Audit Committee
Charter is attached as Appendix A to this Proxy Statement. The Company's
management is responsible for its internal accounting controls and the financial
reporting process. The Company's independent accountants, Deloitte & Touche LLP,
are responsible for performing an audit of the Company's consolidated financial
statements in accordance with auditing standards generally accepted in the
United States and for expressing an opinion as to their conformity with
generally accepted accounting principles. The Audit Committee's responsibility
is to monitor and oversee these processes.
In keeping with that responsibility, the Audit Committee has reviewed
and discussed the Company's audited consolidated financial statements with
management and the independent accountants. In addition, the Audit Committee has
discussed with the Company's independent accountants the matters required to be
discussed by Statement on Auditing Standards No. 61, "Communications with Audit
Committee," as currently in effect. The Audit Committee also has received the
written disclosures from the independent accountants required by Independence
Standards Board Standard No. 1, "Independence Discussions with Audit
Committees," and has discussed with the independent accountants their
independence.
Members of the Committee rely without independent verification on the
information provided to them and on the representations made by management and
the independent accountants. Accordingly, the Audit Committee's oversight does
not provide an independent basis to determine that management has maintained
appropriate accounting and financial reporting principles or appropriate
internal controls designed to assure compliance with accounting standards and
applicable laws and regulations. Furthermore, the Audit Committee's
considerations and discussions referred to above do not assure that the audit of
the Company's financial statements has been carried out
17
in accordance with generally accepted auditing standards, that the financial
statements are presented in accordance with generally accepted accounting
principles or that the Company's auditors are in fact "independent."
Based on the reports and discussions described in this report, and
subject to the limitations on the role and responsibilities of the Committee
referred to above and in the Audit Committee Charter, the Committee recommended
to the Board of Directors that the audited consolidated financial statements of
the Company be included in the Annual Report on Form 10-K for the year ended
December 31, 2003 for filing with the SEC.
This report is respectfully submitted by the Audit Committee of the
Board of Directors.
Joel E. Marks -- Martin J. Blank -- Alston Gardner
(Members of the Audit Committee)
SHAREHOLDERS' PROPOSALS FOR 2005 ANNUAL MEETING
Any shareholder who wishes to present a proposal appropriate for
consideration at Innotrac's 2005 Annual Meeting of Shareholders must submit the
proposal in proper form to Innotrac at its address set forth on the first page
of this Proxy Statement no later than December 16, 2004 for the proposal to be
considered for inclusion in Innotrac's Proxy Statement and form of proxy
relating to such Annual Meeting. Proposals should be sent by certified mail,
return receipt requested. Innotrac must be notified of any other shareholder
proposal intended to be presented for consideration at the 2005 Annual Meeting
not later than March 1, 2005 or else proxies may be voted on such proposal at
the discretion of the persons named in the proxy.
OTHER MATTERS
All of the expenses involved in preparing, assembling and mailing this
Proxy Statement and the materials enclosed herewith and soliciting proxies will
be paid by Innotrac. It is estimated that such costs will be nominal. Innotrac
may reimburse banks, brokerage firms and other custodians, nominees and
fiduciaries for expenses reasonably incurred by them in sending proxy materials
to beneficial owners of stock. The solicitation of proxies will be conducted
primarily by mail but may include telephone, telegraph or oral communications by
directors, officers or regular employees of Innotrac, acting without special
compensation.
The Board of Directors is aware of no other matters, except for those
incidental to the conduct of the Annual Meeting, that are to be presented to
shareholders for formal action at the Annual Meeting. If, however, any other
matters properly come before the Annual Meeting or any postponement, adjournment
or adjournments thereof, it is the intention of the persons named in the proxy
to vote the proxy in accordance with their judgment.
Shareholders are urged to fill in, date and sign the accompanying form
of proxy and return it to Innotrac as soon as possible.
BY ORDER OF THE BOARD OF DIRECTORS,
David L. Gamsey
Secretary
18
APPENDIX A
AUDIT COMMITTEE CHARTER
I. PURPOSE AND AUTHORITY
The primary function of the Audit Committee is to assist the Board of
Directors in fulfilling its financial and other oversight responsibilities by
serving as an independent and objective party to oversee, monitor and appraise:
(1) the integrity of the Company's financial statements and other external
financial information, financial reporting process and internal controls; (2)
the Company's auditing process, including all engagements of the Company's
independent accountants, the internal auditors and the performance of financial
management; and (3) the Company's ethical and legal compliance. In furtherance
of its purpose, the Committee shall strive to provide an open avenue of
communication among the Company's independent accountants, internal auditors,
management and the Board.
In discharging its oversight role, the Committee is empowered to
investigate any matter brought to its attention with full access to all books,
records, facilities and personnel of the Company and has the authority to engage
independent counsel and other advisers as it determines necessary to carry out
its duties. The Company shall provide funding, as determined by the Committee,
for payment of compensation to the independent auditors and to any advisers the
Committee retains.
II. MEMBERSHIP REQUIREMENTS
The Committee shall be comprised of three or more directors as
determined by the Board. All members of the Committee shall be "independent"
within the meaning of the listing standards of the Nasdaq Stock Market,
including the independence standards for Committee members prescribed by Rule
10A-3 under the Securities Exchange Act. All members of the Committee shall be
able to read and understand fundamental financial statements, including the
Company's balance sheet, income statement, and cash flow statement. At least one
member shall be an "audit committee financial expert" within the meaning of the
rules of the Securities & Exchange Commission. Members of the Committee shall
also meet such other qualifications as may be imposed from time to time by the
Board, by law or by the listing requirements of the Nasdaq Stock Market.
Committee members should be able to devote sufficient time to carrying out the
responsibilities of a member of the Committee.
III. MEETINGS AND GOVERNANCE
The Committee shall meet in connection with the Company's annual audit
and for other purposes as circumstances dictate. To foster open communications,
the Committee will meet in executive sessions with the independent accountants,
internal auditors and management as appropriate. The Committee will report its
activities and findings to the Board on a regular basis.
The Board may appoint a Chair of the Committee. The Chair will preside,
when present, at all meetings of the Committee. One-third of the members, but
not less than two, will constitute a quorum. A majority of the members present
at any meeting at which a quorum is present may act on behalf of the Committee.
The Committee may meet by telephone or video conference and may take action by
written consent.
IV. DUTIES, RESPONSIBILITIES AND ACTIVITIES
While the Committee has the duties and responsibilities set forth in
this Charter, management has primary responsibility for the financial statements
and the reporting process, including the systems of internal controls and
management's report thereon; and the Company's independent accountants are
responsible for performing an audit of the Company's consolidated financial
statements in accordance with auditing standards generally accepted in the
United States, for expressing an opinion as to their conformity with generally
accepted accounting principles, for reviewing the Company's quarterly financial
statements and for attesting to management's report on the Company's internal
control. The Committee's responsibility is to monitor and oversee these
processes.
A-1
To fulfill its purpose, the Committee shall from time to time perform
the following duties and responsibilities and shall engage in the following
activities to the extent necessary or appropriate in the judgment of the
Committee:
(A) Review of Financial Statements, Reports and Charter
The Committee shall review the Company's financial statements, reports
and other financial information, in conjunction with the Company's internal
financial management and independent accountants, as appropriate. Such review
shall generally include candid discussions of the quality - not merely the
acceptability - of the Company's accounting principles as applied in its
financial reporting. Reviews shall generally occur prior to dissemination of the
statement, report or other document to a third party or the public. Without
limitation, the Committee shall review, to the extent it deems necessary or
appropriate:
- The annual financial statements and other material financial
content of the Company's Annual Reports to Shareholders and/or
Annual Reports on Form 10-K.
- Any quarterly or other interim financial statements and other
material financial content of the Company's Quarterly Reports
on Form 10-Q.
- Any other material external financial information, such as
earnings releases.
- Any material internal reports prepared by the independent
accountants, internal auditors or management.
- The annual Report of the Committee for inclusion in the
Company's annual proxy statement.
- This Charter on an annual basis, or more frequently as
circumstances dictate.
The Chair or another member of the Committee may represent the entire
Committee for purposes of reviewing quarterly information, other material
external financial information such as earnings releases, or internal reports to
the extent permissible under the listing requirements of the Nasdaq Stock Market
and generally accepted auditing standards.
(B) Relationship with Independent Accountants and Internal
Auditors
- The Committee shall be directly responsible for the
appointment, compensation, retention and termination of the
independent accountants and the independent accountants shall
report directly to the Committee. The Committee shall have
sole authority to determine the compensation to be paid to the
independent accountants for any service. The Committee also
shall be responsible for the oversight and evaluation of the
work of the independent accountants, including resolution of
disagreements between management and the independent
accountants.
- The Committee shall pre-approve all audit and permitted
non-audit services provided to the Company by the independent
accountants. The Committee may delegate pre-approval authority
to a member or members of the Committee or may adopt
pre-approval policies and procedures, to the extent permitted
by applicable laws. Any pre-approvals made pursuant to
delegated authority or pre-approval policies and procedures
must be presented to the full Committee at its next scheduled
meeting.
- The Committee shall receive a report or report update from the
independent accountants, within the time periods prescribed by
the rules of the Securities and Exchange Commission, on: all
critical accounting policies and practices of the Company; all
material alternative treatments within generally accepted
accounting principles for policies and practices related to
material items that have been discussed with management,
including the ramifications of the use of such alternative
disclosures and treatments and the treatment preferred by the
independent accountants; and other material written
communications between the independent accountants and
management.
A-2
- The Committee shall receive a formal written statement from
the independent accountants delineating all relationships
between the independent accountants and the Company. The
Committee shall actively engage the independent accountants in
a dialogue with respect to any disclosed relationships or
services that may impact the objectivity and independence of
the independent accountants and take appropriate action to
oversee the independence of the independent accountants.
- The Committee shall oversee the objectives, activities and
staffing of the internal auditors.
(C) Financial Reporting and Auditing Processes
- The Committee shall oversee the integrity of the Company's
financial reporting process, both internal and external.
- The Audit Committee shall discuss with the independent
accountants, internal auditors and management the overall
scope and plans for their respective audits.
- The Committee shall review with the independent accountants,
the internal auditors and management the adequacy and
effectiveness of the Company's internal controls, including
management's report on the adequacy or effectiveness of
internal controls and the fullness and accuracy of the
Company's financial statements. The Committee shall consider
the quality of presentation of, among other matters, critical
accounting policies, off-balance sheet transactions and
financial measures presented on a basis other than in
accordance with generally accepted accounting principles.
- The Committee shall review the quality and appropriateness of
the Company's accounting principles and underlying estimates
as applied in its financial reporting, including the
independent accountants' judgments concerning the foregoing.
- In consultation with the independent accountants, management
and the internal auditors, the Committee shall review any
major changes or improvements to the Company's financial and
accounting principles and practices and internal controls.
- The Committee may, as it deems necessary or advisable, discuss
with management policies with respect to risk assessment and
risk management, including the Company's major financial risk
exposures and the steps management has taken to monitor and
control such exposures.
(D) Ethical and Legal Compliance
- The Committee shall establish and oversee procedures for the
receipt, retention and treatment of complaints received by the
issuer regarding accounting, internal accounting controls or
auditing matters, and the confidential, anonymous submission
by employees of the Company of concerns regarding questionable
accounting or auditing matters.
- The Committee shall review and approve all transactions to
which the Company is a party and in which any director and
executive officer has a direct or indirect material interest,
apart from in their capacity as director or executive officer.
- The Committee shall oversee the development and administration
of an appropriate ethics and compliance program, including a
code or codes of ethics and business conduct. The Committee
shall review requests for and determine whether to grant or
deny waivers of the Company's code of ethics applicable to
directors and executive officers.
In addition, the Committee may perform any other activities in its
discretion that are consistent with the Committee's purpose, or as determined
necessary or appropriate by the Board.
A-3
COMMON STOCK
OF INNOTRAC CORPORATION
THIS PROXY IS SOLICITED BY THE BOARD OF
DIRECTORS FOR THE MAY 17, 2004
ANNUAL MEETING OF SHAREHOLDERS
The undersigned hereby appoints Scott D. Dorfman and David L. Gamsey, and
each of them, the proxy of the undersigned to vote the Common Stock of the
undersigned at the Annual Meeting of Shareholders of Innotrac Corporation (the
"Company") to be held on May 17, 2004, and any adjournments or postponement
thereof.
1. Election of Directors
Scott D. Dorfman Alston Gardner
<Table>
[ ] FOR all nominees for director listed above [ ] WITHHOLD AUTHORITY to vote for all nominees
(except as marked to the contrary). listed above.
[ ] WITHHOLD AUTHORITY to vote for an individual
nominee. Write name(s) below.
</Table>
- --------------------------------------------------------------------------------
2. In accordance with their best judgment with respect to any other matters
that may properly come before the meeting.
THE BOARD OF DIRECTORS FAVORS A VOTE "FOR" THE ELECTION AS DIRECTORS OF THE
PERSONS NAMED IN THE PROXY AND ACCOMPANYING PROXY STATEMENT, AND UNLESS
INSTRUCTIONS TO THE CONTRARY ARE INDICATED IN THE SPACE PROVIDED, THIS PROXY
WILL BE SO VOTED.
<Table>
,
Date: 2004
-------------------------
--------------------------------------------
Please sign this Proxy exactly as name
appears on the Proxy.
Note: When signing as attorney,
trustee, administrator, or guardian,
please give your title as such. In the
case of joint tenants, each joint owner
must sign.
</Table>