SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 2004
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934
For the transition period from to
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Commission file number 000-23740
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INNOTRAC CORPORATION
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(Exact name of registrant as specified in its charter)
Georgia 58-1592285
- -------------------------------- --------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6655 Sugarloaf Parkway Duluth, Georgia 30097
----------------------------------------- --------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
-----------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Outstanding at November 9, 2004
-------------------------------
Common Stock at $.10 par value 11,920,543 Shares
INNOTRAC CORPORATION
INDEX
Part I. Financial Information Page
---
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets -
September 30, 2004 (Unaudited) and December 31, 2003 3
Condensed Consolidated Statements of Operations for the
Three Months Ended September 30, 2004 and 2003 (Unaudited) 4
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 2004 and 2003 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Nine Months Ended September 30, 2004 and 2003 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosure About Market Risks 20
Item 4. Controls and Procedures 20
Part II. Other Information
Item 6. Exhibits 21
Signatures 22
1
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
The following condensed consolidated financial statements of Innotrac
Corporation, a Georgia corporation ("Innotrac" or the "Company"), have been
prepared in accordance with the instructions to Form 10-Q and, therefore, omit
or condense certain footnotes and other information normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America. In the opinion of management, all
adjustments are of a normal and recurring nature, except those specified
otherwise, and include those necessary for a fair presentation of the financial
information for the interim periods reported. Results of operations for the
three and nine months ended September 30, 2004 are not necessarily indicative of
the results for the entire year ending December 31, 2004. These financial
statements should be read in conjunction with the consolidated financial
statements and notes thereto included in the Company's 2003 Annual Report on
Form 10-K.
2
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS SEPTEMBER 30, 2004 DECEMBER 31, 2003
------ ------------------ -----------------
(UNAUDITED)
Current assets:
Cash and cash equivalents ............................................ $ 1,456 $ 2,228
Accounts receivable (net of allowance for doubtful
accounts of $1,897 at September 30, 2004 and
$1,696 at December 31, 2003) ........................................ 17,055 15,682
Inventory ............................................................ 4,611 10,896
Prepaid expenses and other ........................................... 2,500 915
-------- --------
Total current assets ................................................ 25,622 29,721
-------- --------
Property and equipment:
Rental equipment ..................................................... 594 895
Computer software and equipment ...................................... 28,457 27,320
Furniture, fixtures and leasehold improvements ....................... 4,884 4,682
-------- --------
33,935 32,897
Less accumulated depreciation and amortization ....................... (20,848) (18,147)
-------- --------
13,087 14,750
-------- --------
Goodwill .................................................................. 25,169 25,169
Other assets, net ......................................................... 1,207 1,322
-------- --------
Total assets ........................................................ $ 65,085 $ 70,962
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current liabilities:
Accounts payable ..................................................... $ 5,875 $ 5,738
Line of credit ....................................................... 4,348 11,802
Accrued expenses and other ........................................... 3,491 2,577
-------- --------
Total current liabilities ........................................... 13,714 20,117
-------- --------
Noncurrent liabilities:
Other noncurrent liabilities ............................................. 1,028 1,083
-------- --------
Total noncurrent liabilities ........................................ 1,028 1,083
-------- --------
Commitments and contingencies (see Note 5)
Shareholders' equity:
Preferred stock: 10,000,000 shares authorized, $0.10 par value,
no shares issued or outstanding .................................... -- --
Common stock: 50,000,000 shares authorized, $0.10 par value,
11,917,143 shares issued, 11,917,143 (2004) and 11,715,280 (2003)
shares outstanding .................................................. 1,192 1,171
Additional paid-in capital ........................................... 64,491 63,791
Accumulated deficit .................................................. (15,340) (15,200)
-------- --------
Total shareholders' equity .......................................... 50,343 49,762
-------- --------
Total liabilities and shareholders' equity .......................... $ 65,085 $ 70,962
======== ========
See notes to condensed consolidated financial statements.
3
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED SEPTEMBER 30,
2004 2003
-------- --------
(UNAUDITED) (UNAUDITED)
Revenues ......................................... $ 17,631 $ 18,545
Cost of revenues ................................. 8,756 8,548
-------- --------
Gross profit ............................ 8,875 9,997
-------- --------
Operating expenses:
Selling, general and administrative expenses .... 7,931 8,819
Depreciation and amortization ................... 1,283 1,358
-------- --------
Total operating expenses ...................... 9,214 10,177
-------- --------
Operating loss .......................... (339) (180)
-------- --------
Other expense:
Interest expense ................................ 63 180
Other expense ................................... -- 1
-------- --------
Total other expense ........................... 63 181
-------- --------
Loss before income taxes ......................... (402) (361)
Income tax benefit ............................... -- 112
-------- --------
Net loss ................................ $ (402) $ (249)
======== ========
Loss per share:
Basic ........................................... $ (0.03) $ (0.02)
======== ========
Diluted ......................................... $ (0.03) $ (0.02)
======== ========
Weighted average shares outstanding:
Basic ........................................... 11,905 11,584
======== ========
Diluted ......................................... 11,905 11,584
======== ========
See notes to condensed consolidated financial statements.
4
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
-------- --------
(UNAUDITED) (UNAUDITED)
Revenues .............................................. $ 57,433 $ 54,510
Cost of revenues ...................................... 26,670 25,706
-------- --------
Gross profit ......................................... 30,763 28,804
-------- --------
Operating expenses:
Selling, general and administrative expenses ......... 26,574 26,332
Depreciation and amortization ........................ 3,905 4,289
-------- --------
Total operating expenses ........................... 30,479 30,621
-------- --------
Operating income (loss) ...................... 284 (1,817)
-------- --------
Other (income) expense:
Interest expense ..................................... 234 581
Other income ......................................... -- (5)
-------- --------
Total other expense .......................... 234 576
-------- --------
Income (loss) before income taxes ..................... 50 (2,393)
Income tax benefit .................................... -- 859
-------- --------
Net income (loss) ............................ $ 50 $ (1,534)
======== ========
Earnings (loss) per share:
Basic ................................................ $ -- $ (0.13)
======== ========
Diluted .............................................. $ -- $ (0.13)
======== ========
Weighted average shares outstanding:
Basic ................................................ 11,843 11,498
======== ========
Diluted .............................................. 12,540 11,498
======== ========
See notes to condensed consolidated financial statements.
5
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30,
2004 2003
------- -------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net income (loss) ............................................................... $ 50 $(1,534)
Adjustments to reconcile net income (loss) to net cash provided by (used in)
operating activities:
Depreciation and amortization ............................................... 3,905 4,289
Loss on disposal of fixed assets ............................................ 106 1
Deferred income taxes ....................................................... -- (1,049)
Amortization of deferred compensation ....................................... 68 54
Changes in operating assets and liabilities:
Increase in accounts receivable ............................................. (1,373) (796)
Decrease in inventory ....................................................... 6,285 8,460
(Increase) decrease in prepaid expenses and other ........................... (1,690) 58
Increase (decrease) in accounts payable ..................................... 138 (8,549)
Increase (decrease) in accrued expenses and other ........................... 924 (3,008)
------- -------
Net cash provided by (used in) operating activities .................... 8,413 (2,074)
------- -------
Cash flows from investing activities:
Capital expenditures ............................................................ (2,112) (1,018)
Payment for business acquired ................................................... -- (181)
------- -------
Net cash used in investing activities .................................. (2,112) (1,199)
------- -------
Cash flows from financing activities:
(Repayments) borrowings under line of credit .................................... (7,455) 2,619
Repayment of capital lease and other obligations ................................ (65) (100)
Loan fees paid .................................................................. (15) (31)
Stock reacquired to settle employee stock bonus withholding tax obligation ...... (286) --
Exercise of employee stock options .............................................. 748 1,009
------- -------
Net cash (used in) provided by financing activities .................... (7,073) 3,497
------- -------
Net (decrease) increase in cash and cash equivalents ................................. (772) 224
Cash and cash equivalents, beginning of period ....................................... 2,228 961
------- -------
Cash and cash equivalents, end of period ............................................. $ 1,456 $ 1,185
======= =======
Supplemental cash flow disclosures:
Cash paid for interest .......................................................... $ 261 $ 610
======= =======
Cash income tax refunds received, net of taxes paid ............................. $ -- $(1,565)
======= =======
See notes to condensed consolidated financial statements.
6
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed for quarterly financial reporting are
the same as those disclosed in the Notes to Consolidated Financial
Statements included in the Company's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December
31, 2003. Certain of the Company's more significant accounting policies
are as follows:
Accounting Estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United
States of America 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.
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. The Company
accounts for goodwill and other acquired intangibles in accordance with
SFAS No. 142, "Goodwill and Other Intangible Assets". The Company tests
goodwill annually for impairment as of January 1 or sooner if
circumstances indicate.
Under SFAS No. 142, goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value. Upon
completion of its analysis for impairment in the first quarter of 2004 in
accordance with SFAS No. 142, no impairment was determined to exist at
that time. Innotrac's goodwill carrying amount as of September 30, 2004
is $25.2 million.
Impairment of Long-Lived Assets. The Company reviews long-lived assets
and certain intangible assets for impairment when events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Impairment would be measured based on a projected cash flow
model. If the projected undiscounted cash flows for the asset are not in
excess of the carrying value of the related asset, the impairment would
be determined based upon the excess of the carrying value of the asset
over the projected discounted cash flows for the asset.
Deferred Tax Asset. 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 basis of
assets and liabilities using enacted tax rates in effect in the years in
which the differences are expected to reverse. A valuation allowance was
recorded against the net deferred tax asset as of December 31, 2003 (see
Note 4).
Revenue Recognition. Innotrac derives its revenue primarily from two
sources: (1) fulfillment operations and (2) the delivery of call center
services. Innotrac's fulfillment services operations record revenue at
the conclusion of performing the applicable service. Innotrac's call
center services business recognizes revenue according to written pricing
agreements based on the number of calls received by call center
operators, the length of the calls, or on an hourly rate basis. As
required by the consensus reached in Emerging Issue Task Force ("EITF")
Issue No. 99-19, revenues have been recorded net of the cost of the
inventory for all fee-for-service clients.
7
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
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"). Since the exercise
price for all options granted under those plans was equal to the market
value of the underlying common stock on the date of grant, no
compensation cost is recognized in the accompanying condensed
consolidated statements of operations. Had compensation cost for stock
options been determined under a fair value based method, in accordance
with Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation," as amended by Statement of Financial
Accounting Standards No. 148, the Company's net income (loss) and net
income (loss) per share would have been the following pro forma amounts
(in thousands, except per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- --------------------------
2004 2003 2004 2003
-------- -------- -------- ---------
Net (loss) income $ (402) $ (249) $ 50 $ (1,534)
Pro forma net (loss) $ (606) $ (450) $ (561) $ (2,093)
Basic and diluted net (loss)
income per share $ (0.03) $ (0.02) $ 0.00 $ (0.13)
Basic and diluted pro forma net
loss per share $ (0.05) $ (0.04) $ (0.05) $ (0.18)
Under the fair value based method, compensation cost, net of tax would
have been $204,000 and $201,000 for the three months ended September 30,
2004 and 2003, respectively and $611,000 and $559,000 for the nine months
ended September 30, 2004 and 2003, respectively.
During the three months ended September 30, 2004 and 2003, options
representing 24,700 and 101,700 shares were exercised, respectively.
During the nine months ended September 30, 2004 and 2003, options
representing 159,700 and 217,750 shares were exercised, respectively.
2. FINANCING OBLIGATIONS
Effective May 10, 2004, the Company amended its revolving credit
agreement with a bank to reduce the maximum borrowing limit from $40.0
million to $25.0 million and to revise certain debt covenants. Although
the maximum borrowing limit as amended is $25.0 million, the credit
facility limits borrowings to a specified percentage of eligible accounts
receivable and inventory, which totaled $15.3 million at September 30,
2004. At September 30, 2004 the Company had $10.9 million available under
the revolving credit agreement. The credit facility expires in June 2005.
The Company and its subsidiary have granted a security interest in all of
their assets and the subsidiary has provided a guarantee to the lender as
collateral under this revolving credit agreement. The revolving credit
agreement contains various restrictive financial and change of ownership
control covenants.
8
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
Noncompliance with any of the covenants allows the lender to declare any
outstanding borrowing amounts to be immediately due and payable.
The financial covenants require the Company to maintain a minimum fixed
charge ratio of 1.30 to 1.00. The Company's fixed charge ratio at
September 30, 2004 was 1.54 to 1.00. Additionally, the revolving credit
agreement contains a minimum tangible net worth requirement of $24.0
million. The Company's tangible net worth at September 30, 2004 was $24.9
million. Compliance with the minimum tangible net worth covenant and
other financial covenants is determined on a quarterly basis.
Interest on borrowings is payable monthly at rates equal to the prime
rate, or at the Company's option, LIBOR plus up to 225 basis points.
Consistent with prior periods, on August 13, 2004, the Company fixed $2.0
million of its $4.3 million of borrowings at the 90-day LIBOR rate of
3.21%. During the three months ended September 30, 2004 and 2003, the
Company incurred interest expense related to the line of credit of
approximately $50,000 and $161,000, respectively, resulting in a weighted
average interest rate of 3.90%, and 3.54%, respectively. During the nine
months ended September 30, 2004 and 2003, the Company incurred interest
expense related to the line of credit of approximately $174,000 and
$562,000, respectively, resulting in a weighted average interest rate of
3.37% and 3.93%, respectively. The Company also incurred unused revolving
credit facility fees of approximately $8,000 and $14,000 during the three
months ended September 30, 2004 and 2003, respectively, and $46,000 and
$37,000 during the nine months ended September 30, 2004 and 2003,
respectively.
3. EARNINGS PER SHARE
The following table shows the shares (in thousands) used in computing
diluted earnings per share ("EPS") in accordance with Statement of
Financial Accounting Standards No. 128:
Three Months Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
------ ------ ------ ------
Diluted earnings per share:
Weighted average shares outstanding ......... 11,905 11,584 11,843 11,498
Employee and director stock options and
unvested restricted shares .............. -- -- 697 --
------ ------ ------ ------
Weighted average shares assuming dilution ... 11,905 11,584 12,540 11,498
====== ====== ====== ======
Options outstanding to purchase 1.7 million shares and 87,500 shares of
the Company's common stock for the three and nine months ended September
30, 2004, respectively, and 1.9 million shares for both the three and the
nine months ended September 30, 2003 were not included in the computation
of diluted EPS because their effect was anti-dilutive.
4. 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 basis of assets and liabilities
using enacted tax rates in effect in the years in which the differences
are expected to reverse. A valuation allowance is recorded against
deferred tax assets if the Company considers it is more likely than not
that
9
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
deferred tax assets will not be realized. Innotrac's gross deferred tax
asset as of September 30, 2004 and December 31, 2003 was approximately
$12.7 million and $12.8 million, respectively. This deferred tax asset
was generated primarily by net operating loss carryforwards created
mainly by the special charge of $34.3 million recorded in 2000 and the
net losses generated in 2002 and 2003. Innotrac has a tax net operating
loss carryforward of $31.5 million at December 31, 2003 that expires
between 2020 and 2023.
Innotrac's ability to generate the expected amounts of taxable income
from future operations is dependent upon general economic conditions,
competitive pressures on sales and margins and other factors beyond
management's control. These factors, combined with losses in recent
years, create uncertainty about the ultimate realization of the gross
deferred tax asset in future years. Therefore, a valuation allowance of
approximately $9.8 million and $9.9 million has been recorded as of
September 30, 2004 and December 31, 2003, respectively. Income taxes
associated with future earnings will be offset by a reduction in the
valuation allowance. For the three and nine months ended September 30,
2004, an income tax benefit of $77,000 and an income tax provision of
$14,000, respectively, was offset by a corresponding increase and
reduction of the deferred tax asset valuation allowance. When, and if,
the Company can return to consistent profitability, and management
determines that it will be able to utilize the deferred tax assets prior
to their expiration, then the valuation allowance can be reduced or
eliminated.
5. COMMITMENTS AND CONTINGENCIES
Shareholder Rights Plan. In December 1997, the Company's Board of
Directors approved a Shareholder Rights Plan (the "Rights Plan"). The
Rights Plan provides for the distribution of one right for each
outstanding share of the Company's common stock held of record as of the
close of business on January 1, 1998 or that thereafter becomes
outstanding prior to the earlier of the final expiration date of the
rights or the first date upon which the rights become exercisable. Each
right entitles the registered holder to purchase from the Company one
one-hundredth of a share of Series A participating cumulative preferred
stock, par value $.10 per share, at a price of $60.00 (the "Purchase
Price"), subject to adjustment. The rights are not exercisable until ten
calendar days after a person or group (an "Acquiring Person") buys, or
announces a tender offer for, 15% or more of the Company's common stock.
Such ownership level has been increased to 40% for a particular
shareholder that owned approximately 26.1% of the shares outstanding on
September 30, 2004. In the event the rights become exercisable, each
right will entitle the holder to receive that number of shares of common
stock having a market value equal to the Purchase Price. If, after any
person has become an Acquiring Person (other than through a tender offer
approved by qualifying members of the board of directors), the Company is
involved in a merger or other business combination where the Company is
not the surviving corporation, or the Company sells 50% or more of its
assets, operating income, or cash flow, then each right will entitle the
holder to purchase, for the Purchase Price, that number of shares of
common or other capital stock of the acquiring entity which at the time
of such transaction have a market value of twice the Purchase Price. The
rights will expire on January 1, 2008, unless extended, unless the rights
are earlier exchanged, or unless the rights are earlier redeemed by the
Company in whole, but not in part, at a price of $0.001 per right. No
shares have been issued under the Rights Plan.
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.
Employment Commitment. In June 1999, in conjunction with the opening of a
new call center facility, the Company entered into an employment
commitment agreement with the City of Pueblo, Colorado, whereby the
Company received cash incentives of $968,000. These funds were accounted
for as a reduction in the basis of the assets acquired. In return for
this consideration, the Company is obligated to
10
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2004 AND 2003
(UNAUDITED)
employ a minimum number of full-time employees at its Pueblo facility,
measured on a quarterly basis. This obligation, which became effective
June 2002, will continue through June 2009. In the event that the number
of full-time employees fails to meet the minimum requirement, the Company
will incur a quarterly penalty of $96.30 for each employee less than the
minimum required amount. During the three and nine months ended September
30, 2004 and 2003, the Company had substantially met the minimum employee
requirements of 359 full-time employees, as measured on a quarterly
basis, incurring a penalty of $6,000 and $16,000 for the three and nine
months ended September 30, 2004, respectively.
6. RELATED PARTY TRANSACTION
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, which is due no later than March 3, 2006.
11
ITEM 2 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion may contain certain forward-looking statements that are
subject to conditions that are beyond the control of the Company. Actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ include, but are
not limited to, the Company's reliance on a small number of major clients; risks
associated with the terms and pricing of our contracts; reliance on the
telecommunications and direct marketing industries and the effect on the Company
of the downturns, consolidation and changes in those industries in the past two
years; risks associated with the fluctuations in volumes from our clients; risks
associated with upgrading, customizing, migrating or supporting existing
technology; risks associated with competition; and other factors discussed in
more detail under "Business---Certain Factors Affecting Forward-Looking
Statements" in our Annual Report on Form 10-K.
OVERVIEW
Innotrac Corporation ("Innotrac" or the "Company"), founded in 1984 and
headquartered in Atlanta, Georgia, is a full-service fulfillment and logistics
provider serving enterprise clients and world-class brands. The Company employs
sophisticated order processing and warehouse management technology and operates
eight fulfillment centers and two call centers in six cities spanning all time
zones across the continental United States.
We receive most of our clients' orders either through inbound call center
services, electronic data interchange ("EDI") or the Internet. On a same-day
basis, depending on product availability, the Company picks, packs, verifies and
ships the item, tracks inventory levels through an automated, integrated
perpetual inventory system, warehouses data and handles customer support
inquiries.
Our core service offering includes the following:
- Fulfillment Services:
- sophisticated warehouse management technology
- automated shipping solutions
- real-time inventory tracking and order status
- purchasing and inventory management
- channel development
- zone skipping for shipment cost reduction
- product sourcing and procurement
- packaging solutions
- back-order management
- returns management
- Customer Support Services:
- inbound call center services
- technical support and order status
- returns and refunds processing
- call centers integrated into fulfillment platform
- cross-sell/up-sell services
- collaborative chat
- intuitive e-mail response
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Today, the Company is primarily focused on five diverse lines of business,
or industry verticals. This is a result of a significant effort made by
the Company to diversify both its industry concentration and client base
over the past several years. Prior to 2001, the Company was primarily
focused on the telecommunications industry, with over 90% of its revenues
being derived through this vertical. While a large portion of the
Company's revenues are still derived from this industry group, the chart
below is indicative of the diversification efforts achieved in recent
years.
BUSINESS MIX
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
Business Line/Vertical 2004 2003 2004 2003
---------------------- ------ ------ ------ ------
Telecommunications 20.8% 26.2% 20.5% 24.3%
Modems 20.6 19.8 20.0 19.8
Retail/Catalog 31.0 25.4 26.9 26.4
Direct Marketing 15.7 17.6 22.0 17.1
Business-to-Business ("B2B") 11.9 11.0 10.6 12.4
------ ------ ------ ------
100.0% 100.0% 100.0% 100.0%
====== ====== ====== ======
Telecommunications and Modems. The Company continues to be a major
provider of fulfillment and customer support services to the
telecommunications industry. In spite of a significant contraction and
consolidation in this industry in the past several years, the Company
continues to provide customer support services and fulfillment of
telephones, caller ID equipment, digital subscriber line ("DSL") and other
telecommunications products to companies such as BellSouth Corporation and
Qwest Communications International, Inc. and their customers. Inventory
for our telecommunications and DSL modem clients is held on a consignment
basis, with the exception of certain BellSouth inventory for which we are
contractually indemnified, and includes items such as telephones, Caller
ID equipment, DSL modems and ancillary equipment. Despite the termination
in the third quarter of 2004 of two programs with one of our
telecommunication clients, which contributed $2.3 million in revenue for
the nine months ended September 30, 2004, we anticipate that the
percentage of our revenues attributable to telecommunications and DSL
modem clients will remain fairly constant for the remainder of the year
due mainly to increased volumes (but at lower margins as compared to 2003)
from our DSL modem business, which is still in a strong growth mode. The
telephone and caller ID equipment business is mature, yet steady.
Retail, Catalog and Direct Marketing. The Company also provides a variety
of these services for a significant number of retail, catalog and direct
marketing clients, including such companies as The Coca-Cola Company, Ann
Taylor Retail, Inc., Smith & Hawken, Ltd., Tactica International, Inc.,
Porsche Cars North America, Inc., Nordstrom.com LLC, Martha Stewart Living
Omnimedia, Inc., and Thane International. We take orders for our retail,
catalog and direct marketing clients via the Internet, through customer
service representatives at our Pueblo and Reno call centers or through
direct electronic transmission from our clients. The orders are processed
through one of our order management systems and then transmitted to one of
our eight fulfillment centers located across the country and are shipped
to the end consumer or retail store location, as applicable, typically
within 24 hours of when the order is received. Inventory for our retail,
catalog and direct marketing clients is held on a consignment basis, with
minor exceptions, and includes items such as shoes, dresses, accessories,
books and outdoor furniture. Our revenues are sensitive to the number of
orders and customer service calls received. Our client contracts do not
guarantee volumes. We anticipate that the percentage of our revenues
attributable to our retail and catalog clients will increase during the
remainder of 2004 due to the anticipated additions of new channels,
product lines and divisions for existing clients, along with internal
growth and a strengthening of the overall economy. Actual sales volumes
experienced in the first nine months of 2004 for our retail/catalog
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
vertical increased over $1.0 million from the first nine months of 2003.
However, we have been notified that the Martha Stewart Living Omnimedia
business will end in March 2005. For the nine months ended September 30,
2004, this client represented 4.7% of total revenues.
Revenues attributable to our direct marketing clients increased in the
first half of 2004 due to a highly successful new product introduced by
one of our newer direct marketing clients, but weakened considerably in
the third quarter as that product matured and the client's advertising for
that product was reduced. The direct marketing vertical was weak
throughout all of 2003.
On October 21, 2004, Tactica International, Inc. ("Tactica"), one of the
Company's direct response clients, filed a voluntary petition for relief
under Chapter 11 in U.S. Bankruptcy Court. For the nine months ended
September 30, 2004, this client represented 3.6% of total revenues. As of
October 21, 2004, Tactica owed $2,753,281 in principal to Innotrac for
past fulfillment and call center services. On October 25, 2004 the
Bankruptcy Court approved, on an interim basis, a Stipulation and Consent
Order ("Stipulation") entered into between Tactica and Innotrac, whereby
Tactica has acknowledged the validity of Innotrac's claim and Innotrac's
first priority security interest in and warehouseman's lien on Tactica's
inventory held by Innotrac. According to Tactica's bankruptcy filing,
Tactica has valued this inventory at approximately $7.6 million as of
September 30, 2004. This Stipulation allows Tactica to continue to sell
its inventory while reducing the receivables owed by Tactica to Innotrac.
The Stipulation requires that the proceeds from the sale of such inventory
be split with Innotrac 55%/45% on the first $1.6 million in customer
orders and 60%/40% thereafter upon receipt of Tactica customer payments.
Additionally, Tactica is required to prepay Innotrac for any services
prior to its inventory being shipped.
The Company has recorded a reserve associated with this receivable. Based
on the Stipulation and an appraisal performed by a third party independent
appraiser, the reserve was decreased from $2.1 million at June 30, 2004 to
$1.5 million at September 30, 2004. The Company hopes to recover a
substantial portion of the receivable, but it is too early in Tactica's
Chapter 11 proceeding to predict the ultimate recovery.
Business-to-Business. The Company also provides these services for
business-to-business ("B2B") clients including Books Are Fun, Ltd. (a
subsidiary of Reader's Digest), NAPA and The Walt Disney Company. This is
a small, but growing area of our business.
RESULTS OF OPERATIONS
The following table sets forth unaudited summary operating data, expressed
as a percentage of revenues, for the three and nine months ended September
30, 2004 and 2003. The data has been prepared on the same basis as the
annual consolidated financial statements. In the opinion of management, it
reflects normal and recurring adjustments necessary for a fair
presentation of the information for the periods presented. Operating
results for any period are not necessarily indicative of results for any
future period.
The financial information provided below has been rounded in order to
simplify its presentation. However, the percentages below are calculated
using the detailed information contained in the condensed consolidated
financial statements.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Three Months Nine Months
Ended September 30, Ended September 30,
2004 2003 2004 2003
------ ------ ------ ------
Revenues ....................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues ............................... 49.7 46.1 46.4 47.2
------ ------ ------ ------
Gross margin .................................. 50.3 53.9 53.6 52.8
Selling, general and administrative expenses ... 45.0 47.6 46.3 48.2
Depreciation and amortization .................. 7.2 7.3 6.8 7.9
------ ------ ------ ------
Operating (loss) income ....................... (1.9) (1.0) 0.5 (3.3)
Other expense, net ............................. .4 0.9 .4 1.1
------ ------ ------ ------
(Loss) income before income taxes ............. (2.3) (1.9) 0.1 (4.4)
Income tax benefit ............................. -- 0.6 -- 1.6
------ ------ ------ ------
Net (loss) income ............................. (2.3)% (1.3)% 0.1% (2.8)%
====== ====== ====== ======
THREE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 2003
Revenues. Net revenues decreased 4.9% to $17.6 million for the three months
ended September 30, 2004 from $18.5 million for the three months ended September
30, 2003. The decrease in revenues is primarily due to decreases in volumes from
our telecom and direct marketing clients of approximately $1.2 million and
$692,000, respectively, offset by an increase of approximately $746,000 from our
retail/catalog business and an increase in our B2B business of approximately
$118,000.
Cost of Revenues. Cost of revenues increased 2.4% to $8.8 million for the three
months ended September 30, 2004 compared to $8.5 million for the three months
ended September 30, 2003. Cost of revenues increased primarily due to the
implementation and start-up costs associated with several new clients in the
third quarter of 2004 and a change in the business mix, offset by reduced costs
associated with lower revenues.
Gross Profit. For the three months ended September 30, 2004, the Company's gross
profit decreased by $1.1 million to $8.9 million, or 50.3% of revenues, compared
to $10.0 million, or 53.9% of revenues, for the three months ended September 30,
2003. This decrease in gross profit was due primarily to a change in the
business mix to clients with lower margin revenue along with the start-up costs
associated with several new clients and the reduction in revenues described
above.
Selling, General and Administrative Expenses. S,G&A expenses for the three
months ended September 30, 2004 decreased to $7.9 million, or 45.0% of revenues,
compared to $8.8 million, or 47.6% of revenues, for the same period in 2003.
This net decrease was attributable to an adjustment of $576,000 in allowances
for doubtful accounts related to the Tactica receivable and $239,000 of lower
account services related costs.
Interest Expense. Interest expense for the three months ended September 30, 2004
decreased to $63,000 compared to $180,000 for the same period in 2003. This
decrease was attributable to a reduction in borrowings from the line of credit
during the three months ended September 30, 2004 compared to the same period in
2003.
Income Taxes. The Company's effective tax rate for the three months ended
September 30, 2004 and 2003 was 0% and 31.0%, respectively. At December 31,
2003, a valuation allowance was recorded against the
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Company's net deferred tax assets as losses in recent years created uncertainty
about the realization of tax benefits in future years. Income taxes associated
with earnings for the three months ended September 30, 2004 were offset by a
reduction of this valuation allowance resulting in an effective tax rate of 0%
for the three months ended September 30, 2004.
NINE MONTHS ENDED SEPTEMBER 30, 2004 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
2003
Revenues. Net revenues increased 5.4% to $57.4 million for the nine months ended
September 30, 2004 from $54.5 million for the nine months ended September 30,
2003. The increase in revenues is primarily due to an increase from our direct
marketing clients of approximately $3.0 million, an increase of $1.0 million in
our retail/catalog business and an increase of $690,000 from our DSL and cable
modem clients, net of decreases in our telecom and B2B businesses of $1.4
million and $657,000, respectively.
Cost of Revenues. Cost of revenues increased 3.8% to $26.7 million for the nine
months ended September 30, 2004 compared to $25.7 million for the nine months
ended September 30, 2003. Cost of revenues increased slightly primarily due to
the overall increase in revenues and the implementation, start-up costs
associated with several new clients in the third quarter of 2004 and a change in
the business mix.
Gross Profit. For the nine months ended September 30, 2004, the Company's gross
profit increased by $2.0 million to $30.8 million, or 53.6% of revenues,
compared to $28.8 million, or 52.8% of revenues, for the nine months ended
September 30, 2003. This increase in gross profit was due primarily to greater
operating efficiencies throughout our facilities, and the change in the business
mix to clients with higher margin revenue along with the overall increase in
revenues described above, offset slightly by the implementation and start-up
costs associated with several new clients in the third quarter of 2004.
Selling, General and Administrative Expenses. S,G&A expenses for the nine months
ended September 30, 2004 increased to $26.6 million, or 46.3% of revenues,
compared to $26.4 million, or 48.3% of revenues, for the same period in 2003.
This net increase was attributable to $363,000 additional allowance for doubtful
accounts, $677,000 higher facility cost during the first nine months of 2004,
offset by $266,000 of lower information technology related costs, $361,000 of
lower equipment costs and $654,000 of lower account services related costs.
There was also a reduction in sales and marketing expenses of $144,000 in 2004
as compared to 2003. Additionally, the nine months ended September 30, 2003
included one-time credits relating to contract penalty fee reversals, property
tax refunds and coupon accrual reversal, totaling approximately $485,000. The
decrease as a percentage of revenues is due to the overall increase in revenues.
Interest Expense. Interest expense for the nine months ended September 30, 2004
decreased to $234,000 compared to $581,000 for the same period in 2003. This
decrease was attributable to a reduction in borrowings from the line of credit
during the nine months ended September 30, 2004 compared to the same period in
2003.
Income Taxes. The Company's effective tax rate for the nine months ended
September 30, 2004 and 2003 was 0% and 35.9%, respectively. At December 31,
2003, a valuation allowance was recorded against the Company's net deferred tax
assets as losses in recent years created uncertainty about the realization of
tax benefits in future years. Income taxes associated with earnings for the nine
months ended September 30, 2004 were offset by a reduction of this valuation
allowance resulting in an effective tax rate of 0% for the nine months ended
September 30, 2004.
16
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 $1.5 million at September
30, 2004 as compared to $2.2 million at December 31, 2003. Additionally, the
Company had reduced its borrowings under its revolving credit facility
(discussed below) to $4.3 million outstanding at September 30, 2004 as compared
to $11.8 million at December 31, 2003. The Company generated positive cash flow
from operations of $8.4 million during the nine months ended September 30, 2004.
The Company also generated positive cash flow from operations for all of 2003.
We anticipate positive cash flows from operations during the remainder of 2004.
One of the primary contributors to generating cash in the first nine months of
2004 was a further reduction in inventory of approximately $6.3 million. This
also contributed to a further reduction in borrowings under our revolving credit
facility of approximately $7.5 million.
The Company currently has a revolving credit agreement with a bank maturing in
June 2005. Although the facility has a maximum borrowing limit of $25.0 million,
the credit facility limits borrowings to a specified percentage of eligible
accounts receivable and inventory, which totaled $15.3 million at September 30,
2004. We recently reduced the maximum borrowing amount of this facility from
$40.0 million to $25.0 million as the Company does not anticipate a need for the
larger amount. The Company and its subsidiary have granted a security interest
in all of their assets and the subsidiary has provided a guarantee to the lender
as collateral under this revolving credit agreement.
The revolving credit agreement contains various restrictive financial and change
of ownership control covenants. The provisions of the revolving credit agreement
require that the Company maintain a lockbox arrangement with the lender, and
allows the lender to declare any outstanding borrowing amounts to be immediately
due and payable as a result of noncompliance with any of the covenants under the
credit agreement. Accordingly, in the event of noncompliance, these amounts
could be accelerated.
The lender recently agreed to increase the limit on annual capital expenditures
under the agreement from $2.0 million to $3.0 million for fiscal 2004. Capital
expenditures were $2.1 million in the nine months ended September 30, 2004. We
anticipate capital expenditures of no greater than $3.0 million for all of 2004.
Interest on borrowings is payable monthly at rates equal to the prime rate, or
at the Company's option, LIBOR plus up to 225 basis points. On August 13, 2004,
the Company fixed $2.0 million of its $4.3 million of borrowings at a 90-day
LIBOR rate of 3.21%. Interest expense of approximately $20,000 and $82,000
related to the 90-day LIBOR rate was incurred for the three and nine months
ended September 30, 2004, respectively. During the three months ended September
30, 2004, and 2003 the Company also incurred interest expense related to the
variable portion of the line of credit of approximately $30,000, and $161,000,
respectively. During the nine months ended September 30, 2004, and 2003 the
Company incurred interest expense related to the variable portion of the line of
credit of approximately $93,000 and $562,000, respectively. At September 30,
2004, the Company had $10.9 million of additional availability under the
revolving credit agreement.
During the nine months ended September 30, 2004, the Company generated $8.4
million in cash flow from operating activities compared to a use of $2.1 million
in cash flow from operating activities in the same period in 2003. The increase
in cash provided from operating activities was primarily the result of the
reduction of $6.3 million in inventory. In 2003, the use of cash primarily
related to the payment for $6.2 million of inventory received in the fourth
quarter of 2002.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
During the nine months ended September 30, 2004, net cash used in investing
activities for capital additions was $2.1 million as compared to $1.0 million in
2003. All of these expenditures were funded through existing cash on hand, cash
flow from operations and borrowings under the Company's credit facility.
During the nine months ended September 30, 2004, the net cash used in financing
activities was $7.1 million compared to $3.5 million provided by financing
activities in the same period in 2003. The primary difference between years is
attributable to borrowings of $2.6 million under the credit facility in 2003
versus a reduction in outstanding borrowings of $7.5 million in 2004.
Additionally, during 2003, the Company generated cash of $1.0 million through
the exercise of previously granted employee stock options, compared to $748,000
generated in 2004. We anticipate that additional employee stock options will be
exercised during the balance of 2004 resulting in additional cash payments to
the Company.
The Company estimates that its cash and financing needs through 2004 will be met
by cash flows from operations and its credit facility. The Company has generated
positive cash flows from operations in each of the last three years and
anticipates doing so again in 2004. 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.
CRITICAL ACCOUNTING POLICIES
Critical accounting policies are those policies that can have a significant
impact on the presentation of our financial position and results of operations
and demand the most significant use of subjective estimates and management
judgment. Because of the uncertainty inherent in such estimates, actual results
may differ from these estimates. Specific risks inherent in our application of
these critical policies are described below. For all of these policies, we
caution that future events rarely develop exactly as forecasted, and the best
estimates routinely require adjustment. These policies often require difficult
judgments on complex matters that are often subject to multiple sources of
authoritative guidance. Additional information concerning our accounting
policies can be found in Note 1 to the condensed consolidated financial
statements in this Form 10-Q and Note 2 to the condensed consolidated financial
statements appearing in our Annual Report on Form 10-K for the year ended
December 31, 2003. The policies that we believe are most critical to an
investor's understanding of our financial results and condition and require
complex management judgment are discussed below.
Goodwill and Other Acquired Intangibles. The Company accounts for goodwill and
other intangible assets in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets". Under SFAS No. 142, goodwill impairment is deemed to exist
if the net book value of a reporting unit exceeds its estimated fair value.
Innotrac's goodwill carrying amount as of September 30, 2004 was $25.2 million.
This asset relates to the goodwill associated with the Company's acquisition of
Universal Distribution Services ("UDS") in December 2000 (including an earnout
payment made to the former UDS shareholders in February 2002), and the
acquisition of iFulfillment, Inc. in July 2001. In accordance with SFAS No. 142,
the Company performed a goodwill valuation in the first quarter of 2004. The
valuation supported that the fair value of the reporting unit at January 1, 2004
exceeded the carrying amount of the net assets, including goodwill, and thus no
impairment was determined to exist. The Company performs this impairment test
annually as of January 1 or sooner if circumstances indicate.
Deferred Tax Asset. 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 basis of assets and liabilities
using enacted tax rates in effect in the years in which the differences are
expected to reverse. A valuation allowance is recorded against deferred tax
assets if the Company considers it is more likely than not
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
that deferred tax assets will not be realized. Innotrac's gross deferred tax
asset as of September 30, 2004 and December 31, 2003 was approximately $12.7
million and $12.8 million, respectively. This deferred tax asset was generated
primarily by net operating loss carryforwards created primarily by the special
charge of $34.3 million recorded in 2000 and the net losses generated in 2002
and 2003. Innotrac has a tax net operating loss carryforward of $31.5 million at
December 31, 2003 that expires between 2020 and 2023.
Innotrac's ability to generate the expected amounts of taxable income from
future operations is dependent upon general economic conditions, competitive
pressures on sales and margins and other factors beyond management's control.
These factors, combined with losses in recent years, create uncertainty about
the ultimate realization of the gross deferred tax asset in future years.
Therefore, a valuation allowance of approximately $9.8 million and $9.9 million
has been recorded as of September 30, 2004 and December 31, 2003. Income taxes
associated with future earnings will be offset by a reduction in the valuation
allowance. For the three and nine months ended September 30, 2004, an income tax
benefit of $77,000 and an income tax provision of $14,000, respectively, was
offset by a corresponding reduction of the deferred tax asset valuation
allowance. When, and if, the Company can return to consistent profitability, and
management determines that it will be able to utilize the deferred tax assets
prior to their expiration, then the valuation allowance can be reduced or
eliminated.
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.
The Company makes estimates each reporting period associated with its reserve
for uncollectible accounts. These estimates are based on the aging of the
receivables and known specific facts and circumstances. One of Innotrac's direct
marketing clients, Tactica, with a substantial past due balance at September 30,
2004 and December 31, 2003, filed for Chapter 11 bankruptcy protection on
October 21, 2004. Subsequently, Innotrac and Tactica entered into a Stipulation
and Consent Order whereby the client has acknowledged the validity of the
Company's claim and first priority security interest in and warehouseman's lien
on Tactica's inventory held by Innotrac. Due primarily to the financial
condition, payment history and aging of the receivables of this client, the
Company established a specific reserve of $1.1 million for this account at
December 31, 2003. The specific reserve was increased to $2.1 million at June
30, 2004 due primarily to the breach of the previous arrangement and further
deterioration in the aging of the receivable. Based on the Stipulation and an
appraisal performed by a third party independent appraiser, the specific reserve
was decreased from $2.1 million at June 30, 2004 to $1.5 million at September
30, 2004. The receivable balance totaled approximately $2.7 million at September
30, 2004.
Management will continue to assess the level of reserve needed against this
account on a quarterly basis. The Company anticipates recovering a substantial
portion of the receivable, but it is too early in Tactica's Chapter 11
proceeding to predict the ultimate recovery.
19
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
Management believes the Company's exposure to market risks (investments,
interest rates and foreign currency) 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. The Company does not transact any
sales in foreign currency. 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 believes this 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 discussed in our Annual Report on Form 10-K
for the year ended December 31, 2003 and other filings on file with the
Securities and Exchange Commission.
ITEM 4 - CONTROLS AND PROCEDURES
Our management, with the participation of the Chief Executive and Chief
Financial Officers, evaluated our disclosure controls and procedures (as defined
in federal securities rules) as of September 30, 2004. No system of controls, no
matter how well designed and operated, can provide absolute assurance that the
objectives of the system of controls are met, and no evaluation of controls can
provide absolute assurance that the system of controls has operated effectively
in all cases. Our disclosure controls and procedures however are designed to
provide reasonable assurance that the objectives of disclosure controls and
procedures are met. Based on the evaluation discussed above, our CEO and CFO
have concluded that our disclosure controls and procedures were effective as of
the date of that evaluation to provide reasonable assurance that the objectives
of disclosure controls and procedures are met.
There were no changes in our internal control over financial reporting that have
materially affected, or are reasonably likely to materially affect, Innotrac's
internal control over financial reporting during the third quarter of 2004.
20
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS
Exhibits:
10.20 Lease, dated August 16, 2004, by and between Centerpoint 800 LLC
and Innotrac Corporation
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d - 14(a).
31.2 Certification of Chief Financial Officer Pursuant to Rule
13a-14(a)/15a - 14(a).
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C.
Section 1350.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C.
Section 1350.
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INNOTRAC CORPORATION
------------------------------------------
(Registrant)
Date: November 12, 2004 By: /s/ Scott D. Dorfman
--------------------
Scott D. Dorfman
President, Chief Executive Officer and
Chairman of the Board (Principal Executive
Officer)
Date: November 12, 2004 /s/ David L. Gamsey
-------------------
David L. Gamsey
Senior Vice President, Chief Financial
Officer and Secretary (Principal Financial
and Accounting Officer)
22