SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2005
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
1934
For the transition period from ______________ to ______________
Commission file number 000-23740
INNOTRAC CORPORATION
(Exact name of registrant as specified in its charter)
Georgia 58-1592285
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
6655 Sugarloaf Parkway Duluth, Georgia 30097
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (678) 584-4000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
----- -----
Indicate 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 August 10, 2005
------------------------------
Common Stock $.10 par value per share 12,277,861 Shares
INNOTRAC CORPORATION
INDEX
Page
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Part I. Financial Information
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets at
June 30, 2005 (Unaudited) and December 31, 2004 3
Condensed Consolidated Statements of Operations for the
Three Months Ended June 30, 2005 and 2004 (Unaudited) 4
Condensed Consolidated Statements of Operations for the
Six Months Ended June 30, 2005 and 2004 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2005 and 2004 (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 4. Submission of Matters to a Vote of Securities Holders 21
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 as
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 six months ended June 30, 2005 are not necessarily indicative of the
results for the entire year ending December 31, 2005. These financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto included in the Company's 2004 Annual Report on Form 10-K, which
is available on our website at www.innotrac.com.
2
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 2005 DECEMBER 31, 2004
------------- -----------------
(UNAUDITED)
ASSETS
Current assets:
Cash and cash equivalents ........................... $ 1,323 $ 1,377
Accounts receivable (net of allowance for doubtful
accounts of $1,196 at June 30, 2005 and $1,624 at
December 31, 2004) ............................... 17,877 18,405
Inventory ........................................... 2,753 2,662
Prepaid expenses and other .......................... 1,961 1,986
-------- --------
Total current assets ............................. 23,914 24,430
-------- --------
Property and equipment:
Rental equipment .................................... 486 556
Computer software and equipment ..................... 29,567 29,034
Furniture, fixtures and leasehold improvements ...... 5,007 4,957
-------- --------
35,060 34,547
Less accumulated depreciation and amortization ...... (24,318) (22,048)
-------- --------
10,742 12,499
-------- --------
Goodwill ............................................... 25,169 25,169
Other assets, net ...................................... 1,150 1,275
-------- --------
Total assets ..................................... $ 60,975 $ 63,373
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................... $ 6,317 $ 6,023
Line of credit ...................................... -- 3,063
Accrued expenses and other .......................... 2,706 2,630
-------- --------
Total current liabilities ........................ 9,023 11,716
-------- --------
Noncurrent liabilities:
Other noncurrent liabilities ........................ 1,037 1,098
-------- --------
Total noncurrent liabilities ..................... 1,037 1,098
-------- --------
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, 12,274,360 (2005) and 11,948,743 (2004)
shares issued and outstanding .................... 1,227 1,195
Additional paid-in capital .......................... 65,875 64,644
Accumulated deficit ................................. (16,187) (15,280)
-------- --------
Total shareholders' equity ....................... 50,915 50,559
-------- --------
Total liabilities and shareholders' equity ....... $ 60,975 $ 63,373
======== ========
See notes to condensed consolidated financial statements.
3
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JUNE 30,
---------------------------
2005 2004
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues ......................................... $18,943 $19,807
Cost of revenues ................................. 9,680 8,977
------- -------
Gross profit ............................ 9,263 10,830
------- -------
Operating expenses:
Selling, general and administrative expenses .. 8,632 9,158
Depreciation and amortization ................. 1,208 1,370
------- -------
Total operating expenses ................... 9,840 10,528
------- -------
Operating (loss) income ................. (577) 302
------- -------
Other expense:
Interest expense .............................. 42 77
------- -------
Total other expense ..................... 42 77
------- -------
(Loss) income before income taxes ................ (619) 225
Income taxes ..................................... -- --
------- -------
Net (loss) income ....................... $ (619) $ 225
======= =======
(Loss) income per share:
Basic ......................................... $ (0.05) $ 0.02
======= =======
Diluted ....................................... $ (0.05) $ 0.02
======= =======
Weighted average shares outstanding:
Basic ......................................... 12,222 11,731
======= =======
Diluted ....................................... 12,222 12,316
======= =======
See notes to condensed consolidated financial statements.
4
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004
----------- -----------
(UNAUDITED) (UNAUDITED)
Revenues ......................................... $38,181 $39,802
Cost of revenues ................................. 19,633 17,915
------- -------
Gross profit ............................ 18,548 21,887
------- -------
Operating expenses:
Selling, general and administrative expenses .. 16,886 18,642
Depreciation and amortization ................. 2,460 2,622
------- -------
Total operating expenses ................... 19,346 21,264
------- -------
Operating (loss) income ................. (798) 623
------- -------
Other expense:
Interest expense .............................. 109 171
------- -------
Total other expense ..................... 109 171
------- -------
(Loss) income before income taxes ................ (907) 452
Income taxes ..................................... -- --
------- -------
Net (loss) income ....................... $ (907) $ 452
======= =======
(Loss) income per share:
Basic ......................................... $ (0.07) $ 0.04
======= =======
Diluted ....................................... $ (0.07) $ 0.04
======= =======
Weighted average shares outstanding:
Basic ......................................... 12,111 11,748
======= =======
Diluted ....................................... 12,111 12,501
======= =======
See notes to condensed consolidated financial statements.
5
Financial Statements-Continued
INNOTRAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2005 AND 2004
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30,
-------------------------
2005 2004
----------- -----------
(UNAUDITED) (UNAUDITED)
Cash flows from operating activities:
Net (loss) income ....................................... $ (907) $ 452
Adjustments to reconcile net (loss) income to net cash
provided by operating activities:
Depreciation and amortization ........................... 2,460 2,622
Loss on disposal of fixed assets ........................ -- 100
(Decrease) increase in allowance for doubtful accounts .. (435) 1,015
Amortization of deferred compensation ................... -- 51
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable ........... 962 (2,213)
(Increase) decrease in inventory ..................... (91) 5,899
Decrease (increase) in prepaid expenses and other .... 31 (927)
Decrease in accounts payable ......................... 295 627
Increase in accrued expenses and other ............... 49 239
------- -------
Net cash provided by operating activities ......... 2,364 7,865
------- -------
Cash flows from investing activity:
Capital expenditures .................................... (583) (1,317)
------- -------
Cash flows from financing activities:
Net repayments under line of credit ..................... (3,063) (7,717)
Repayment of capital lease and other obligations ........ (36) (39)
Loan fees paid .......................................... -- (15)
Stock reacquired to settle employee stock bonus
withholding tax obligation ........................... -- (286)
Exercise of employee stock options ...................... 1,264 643
------- -------
Net cash used in financing activities ............. (1,835) (7,414)
------- -------
Net decrease in cash and cash equivalents .................. (54) (866)
Cash and cash equivalents, beginning of period ............. 1,377 2,228
------- -------
Cash and cash equivalents, end of period ................... $ 1,323 $ 1,362
======= =======
Supplemental cash flow disclosures:
Cash paid for interest .................................. $ 121 $ 198
======= =======
See notes to condensed consolidated financial statements.
6
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
(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, 2004.
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 tests goodwill
annually for impairment as of January 1 or sooner if circumstances
indicate.
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.
Accounting for 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 was
recorded against the net deferred tax asset as of December 31, 2004 and
June 30, 2005 (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 the material selection, packaging and shipping process.
Innotrac's call center services business recognizes revenue according to
written pricing agreements based on the number of calls, minutes or hourly
rate basis. All other revenues are recognized as services are rendered.
7
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
(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 (loss) income and net (loss) income per share would have been
the following pro forma amounts (in thousands, except per share data):
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------ ----------------
2005 2004 2005 2004
------ ----- ------- -----
Net (loss) income $ (619) $ 225 $ (907) $ 452
Pro forma net (loss) income $ (725) $ 125 $(1,120) $ 253
Basic and diluted net (loss)
income per share $(0.05) $0.02 $ (0.07) $0.04
Basic and diluted pro forma net
(loss) income per share $(0.06) $0.01 $ (0.09) $0.02
Under the fair value based method, compensation cost, net of tax is
$106,000 and $100,000 for the three months ended June 30, 2005 and 2004,
respectively and $213,000 and $199,000 for the six months ended June 30,
2005 and 2004, respectively.
During the three months ended June 30, 2005 and 2004, options representing
214,617 and 59,250 shares were exercised, respectively. During the six
months ended June 30, 2005 and 2004, options representing 275,617 and
135,000 shares were exercised, respectively.
2. FINANCING OBLIGATIONS
The Company has a revolving bank credit agreement with a maximum borrowing
limit of $25.0 million, which was scheduled to expire in June 2005. In May
2005, the Company extended the agreement through September 1, 2005.
Although the maximum borrowing limit is $25.0 million, the credit facility
limits borrowings to a specified percentage of eligible accounts receivable
and inventory, which totaled $15.5 million at June 30, 2005. At June 30,
2005 the Company had $15.5 million available under the revolving credit
agreement.
The Company has granted a security interest in all of its assets to the
lender as collateral under this revolving credit agreement. The revolving
credit agreement contains various restrictive financial and change of
ownership control covenants. 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 June 30,
2005 was 1.43 to 1.00. Additionally, the revolving credit
8
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
(UNAUDITED)
agreement contains a minimum tangible net worth requirement of $24.0
million. The Company's tangible net worth at June 30, 2005 was $25.7
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. During the
three months ended June 30, 2005 and 2004, the Company incurred interest
expense related to the line of credit of approximately $30,000 and $51,000,
respectively, resulting in a weighted average interest rate of 5.31% and
3.17%, respectively. During the six months ended June 30, 2005 and 2004,
the Company incurred interest expense related to the line of credit of
approximately $82,000 and $125,000, respectively, resulting in a weighted
average interest rate of 4.95% and 3.20%, respectively. The Company also
incurred unused revolving credit facility fees of approximately $10,000 and
$22,000 during the three months ended June 30, 2005 and 2004, respectively,
and $23,000 and $39,000 during the six months ended June 30, 2005 and 2004,
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, "Earnings per Share":
Three Months Six Months
Ended June 30, Ended June 30,
--------------- ---------------
2005 2004 2005 2004
------ ------ ------ ------
Diluted earnings per share:
Weighted average shares outstanding ... 12,222 11,731 12,111 11,748
Employee and director stock options and
unvested restricted shares ......... -- 585 -- 753
------ ------ ------ ------
Weighted average shares assuming
dilution ........................... 12,222 12,316 12,111 12,501
====== ====== ====== ======
Options outstanding to purchase 1.3 million shares of the Company's common
stock for both the three and six months ended June 30, 2005, and 333,150
shares and 112,500 shares for the three and six months ended June 30, 2004,
respectively, 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 deferred
tax assets will not be realized. Innotrac's gross deferred tax asset as of
June 30, 2005 and December 31, 2004 was approximately $12.9 million and
$12.8 million, respectively. This deferred tax asset was generated
primarily by net operating loss carryforwards created mainly by a 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, 2004 that expires between 2020 and 2024.
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
9
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
(UNAUDITED)
ultimate realization of the gross deferred tax asset in future years.
Therefore, a valuation allowance of approximately $10.0 million and $9.7
million has been recorded as of June 30, 2005 and December 31, 2004,
respectively. Income taxes associated with future earnings will be offset
by a reduction in the valuation allowance. For the six months ended June
30, 2005, the deferred tax benefit of $314,000 was offset by a
corresponding increase of the deferred tax asset valuation allowance. When,
and if, the Company can return to consistent profitability, and management
determines that it is likely 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 33.3% of the shares
outstanding on June 30, 2005. 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 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 six
months ended June 30, 2005 and 2004, the Company did not meet the minimum
employee requirements of 359 full-time employees, as measured on a
quarterly basis, incurring a penalty of approximately $100 and $6,000 for
the three months ended June 30, 2005 and 2004, respectively, and
approximately $5,000 and $10,000 for the six months ended June 30, 2005 and
2004, respectively.
10
INNOTRAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2005 AND 2004
(UNAUDITED)
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.
In March 2005, the Company learned that trading activity by members of the
IPOF Group may have further violated the short swing profit rules under
Section 16(b). The Company promptly initiated another investigation and is
presently engaged in discussions with the IPOF Group regarding the recovery
by the Company of disgorgeable profits of the IPOF Group pursuant to
Section 16(b).
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 offerings include 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; and
- 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; and
- intuitive e-mail response.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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.
BUSINESS MIX
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
Business Line/Vertical 2005 2004 2005 2004
- ---------------------- ----- ----- ----- -----
Telecommunications 13.2% 21.3% 13.3% 20.4%
Modems 17.5 17.4 18.7 19.8
Retail/Catalog 30.7 27.2 28.6 25.1
Direct Marketing 30.0 25.0 28.9 24.7
Business-to-Business ("B2B") 8.6 9.1 10.5 10.0
----- ----- ----- -----
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. 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 2004) 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., Porsche Cars North America,
Inc., Nordstrom.com LLC, 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. Despite the end of the Tactica International,
Inc. business, which represented 3.5% and 4.2% of total revenues for the
three and six months ended June 30, 2004, respectively, and the end of the
Martha Stewart Living Omnimedia business in March 2005, which represented
4.6% and 4.5% of total revenues for the three and six months ended June 30,
2004, respectively, we anticipate that the percentage of our revenues
attributable to our retail and catalog clients will remain fairly
consistent during 2005 due to the addition of several new clients.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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. 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. This
Stipulation allowed Tactica to continue to sell its inventory while reducing the
receivables owed by Tactica to Innotrac. Tactica defaulted on the Stipulation
and on January 18, 2005, Innotrac issued a Notice of Default to Tactica. In
March 2005, Innotrac and Tactica reached a verbal agreement that would permit
Innotrac to liquidate the Tactica inventory in order to pay down the receivable
balance, with any excess proceeds to be remitted to Tactica. Innotrac, Tactica
and the Creditor's Committee in the Tactica bankruptcy case have reached an
agreement on the terms of the liquidation and an additional amount of the
proceeds to be remitted to the unsecured creditors of Tactica, which was
approved by the bankruptcy court on June 23, 2005. Based on this agreement and
management's estimate of the net realizable value of the inventory, the reserve
associated with the Tactica receivable was reduced from $1.2 million to $775,000
at March 31, 2005. The actual results of the liquidation could vary from this
estimate. As of June 30, 2005, Tactica owed $2.8 million in principal to
Innotrac for past fulfillment and call center services.
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 six months ended June 30, 2005 and
2004. The data has been prepared on the same basis as the annual consolidated
financial statements. In the opinion of management, it reflects normal and
recurring adjustments necessary for a fair presentation of the information for
the periods presented. Operating results for any period are not necessarily
indicative of results for any future period.
The financial information provided below has been rounded in order to simplify
its presentation. However, the percentages below are calculated using the
detailed information contained in the condensed consolidated financial
statements.
Three Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
2005 2004 2005 2004
----- ----- ----- -----
Revenues ...................................... 100.0% 100.0% 100.0% 100.0%
Cost of revenues .............................. 51.1 45.4 51.4 45.0
----- ----- ----- -----
Gross margin ............................... 48.9 54.6 48.6 55.0
Selling, general and administrative expenses .. 45.6 46.2 44.2 46.9
Depreciation and amortization ................. 6.4 6.9 6.5 6.6
----- ----- ----- -----
Operating (loss) income .................... (3.1) 1.5 (2.1) 1.5
Other expense, net ............................ .2 .4 .3 .4
----- ----- ----- -----
(Loss) income before income taxes .......... (3.3) 1.1 (2.4) 1.1
Income tax benefit ............................ -- -- -- --
----- ----- ----- -----
Net (loss) income .......................... (3.3)% 1.1% (2.4)% 1.1%
===== ===== ===== =====
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2005 COMPARED TO THREE MONTHS ENDED JUNE 30, 2004
Revenues. Net revenues decreased 4.4% to $18.9 million for the three months
ended June 30, 2005 from $19.8 million for the three months ended June 30, 2004.
This decrease was primarily attributable to the conclusion of two programs for a
major client and the termination of services for Tactica International, Inc. and
Martha Stewart Living Omnimedia business, partially offset by revenues from
several new clients and increased volumes from our direct marketing clients.
Cost of Revenues. Cost of revenues increased 7.8% to $9.7 million for the three
months ended June 30, 2005, compared to $9.0 million for the three months ended
June 30, 2004. The cost of revenue increase was primarily due to an increase in
freight expense related to the increase in volume for our direct marketing
clients.
Gross Profit. For the three months ended June 30, 2005, the Company's gross
profit decreased by $1.6 million to $9.3 million, or 48.9% of revenues, compared
to $10.8 million, or 54.6% of revenues, for the three months ended June 30,
2004. This decrease in gross profit was due primarily to a change in the
business mix to clients with lower margin revenue.
Selling, General and Administrative Expenses. S,G&A expenses for the three
months ended June 30, 2005 decreased to $8.6 million, or 45.6% of revenues,
compared to $9.2 million, or 46.2% of revenues, for the same period in 2004.
This net decrease was primarily attributable to an additional $376,000 in the
allowance for doubtful accounts related to the Tactica receivable recorded in
2004, a reduction in account services related costs of $132,000 in 2005 as
compared to 2004 and a reduction of corporate salary expense of $154,000 in 2005
as compared to 2004, offset by an increase in facility costs of approximately
$134,000, primarily related to the new facility opened in Delaware in the second
half of 2004.
Interest Expense. Interest expense for the three months ended June 30, 2005
decreased to $42,000, compared to $77,000 for the same period in 2004. This
decrease was attributable to a reduction in borrowings from the line of credit
during the three months ended June 30, 2005 compared to the same period in 2004.
Income Taxes. The Company's effective tax rate for the three months ended June
30, 2005 and 2004 was 0%. 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 losses and earnings for the three months ended June
30, 2005 and 2004 were offset by a corresponding increase or reduction of this
valuation allowance resulting in an effective tax rate of 0% for the three
months ended June 30, 2005 and 2004.
SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO SIX MONTHS ENDED JUNE 30, 2004
Revenues. Net revenues decreased 4.1% to $38.2 million for the six months ended
June 30, 2005 from $39.8 million for the six months ended June 30, 2004. This
decrease was primarily attributable to a reduction in revenue from our
telecommunications vertical as a result of the conclusion of two programs for a
major client offset by a net increase in revenues from our direct marketing and
retail/catalog verticals as a result of the addition of several new clients and
increased volumes, reduced by the termination of services for Tactica
International, Inc. and Martha Stewart Living Omnimedia.
Cost of Revenues. Cost of revenues increased 9.6% to $19.6 million for the six
months ended June 30, 2005, compared to $17.9 million for the six months ended
June 30, 2004. The cost of revenue increase was primarily due to an increase in
freight and labor expense related to the increase in volume for our direct
marketing clients and increased labor costs associated with increased volumes
for our retail/catalog and B2B clients.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Gross Profit. For the six months ended June 30, 2005, the Company's gross profit
decreased by $3.3 million to $18.5 million, or 48.6% of revenues, compared to
$21.9 million, or 55.0% of revenues, for the six months ended June 30, 2004.
This decrease in gross profit was due primarily to a change in the business mix
to clients with lower margin revenue and the addition of several new clients
whose margins have not yet reached the level of a mature client.
Selling, General and Administrative Expenses. S,G&A expenses for the six months
ended June 30, 2005 decreased to $16.9 million, or 44.2% of revenues, compared
to $18.6 million, or 46.9% of revenues, for the same period in 2004. This net
decrease was primarily attributable to an additional $840,000 in the allowance
for doubtful accounts related to the Tactica receivable recorded in 2004
compared to a $440,000 reduction in the allowance for doubtful accounts related
to the Tactica receivable recorded in 2005, a reduction in account services
related costs of $338,000 in 2005 as compared to 2004 and a reduction of
corporate salary expense of $274,000 in 2005 as compared to 2004, offset by an
increase in facility costs of approximately $192,000, primarily related to the
new facility opened in Delaware in the second half of 2004.
Interest Expense. Interest expense for the six months ended June 30, 2005
decreased to $109,000, compared to $171,000 for the same period in 2004. This
decrease was attributable to a reduction in borrowings from the line of credit
during the six months ended June 30, 2005 compared to the same period in 2004.
Income Taxes. The Company's effective tax rate for the six months ended June 30,
2005 and 2004 was 0%. 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 losses and earnings for the six months ended June 30, 2005 and
2004 were offset by a corresponding increase or reduction of this valuation
allowance resulting in an effective tax rate of 0% for the six months ended June
30, 2005 and 2004.
LIQUIDITY AND CAPITAL RESOURCES
The Company funds its operations and capital expenditures primarily through cash
flow from operations and borrowings under a bank credit facility. The Company
had cash and cash equivalents of approximately $1.3 million at June 30, 2005 as
compared to $1.4 million at December 31, 2004. Additionally, the Company did not
have any borrowings under its revolving credit facility (discussed below) at
June 30, 2005, as compared to $3.1 million at December 31, 2004. The Company
generated positive cash flow from operations of $2.4 million during the six
months ended June 30, 2005. We anticipate positive cash flows from operations
during the remainder of 2005.
The Company currently has a revolving credit agreement with a bank maturing in
September 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 $15.5 million at June
30, 2005. The Company has granted a security interest in all of its assets 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.
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. During the three
months ended June 30, 2005 and 2004, the Company incurred interest expense
related to the line of credit of approximately $30,000 and $51,000,
respectively, resulting in a
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
weighted average interest rate of 5.31% and 3.17%, respectively. During the six
months ended June 30, 2005 and 2004, the Company incurred interest expense
related to the line of credit of approximately $82,000 and $125,000,
respectively, resulting in a weighted average interest rate of 4.95% and 3.20%,
respectively. The Company also incurred unused revolving credit facility fees of
approximately $10,000 and $22,000 during the three months ended June 30, 2005
and 2004, respectively, and $23,000 and $39,000 during the six months ended June
30, 2005 and 2004, respectively. At June 30, 2005, the Company had $15.5 million
of additional availability under the revolving credit agreement.
During the six months ended June 30, 2005, the Company generated $2.4 million in
cash flow from operating activities compared to $7.9 million in the same period
in 2004. The decrease in cash provided from operating activities was primarily
the result of the reduction of $5.9 million in inventory in 2004 compared to an
increase in inventory of $91,000 in 2005 offset by a net decrease in accounts
receivable of $527,000 in 2005 compared to a net increase of $1.2 million in
2004 and a net loss of $907,000 in 2005 compared to net income of $452,000 in
2004.
During the six months ended June 30, 2005, net cash used in investing activities
for capital additions was $583,000 as compared to $1.3 million in 2004. 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 six months ended June 30, 2005, cash used in financing activities was
$1.8 million compared to $7.4 million in the same period in 2004. The primary
difference between years is attributable to a reduction in outstanding
borrowings of $3.1 million in 2005 compared to a reduction in outstanding
borrowings of $7.7 million in 2004. Additionally, during 2004, the Company
generated cash of $643,000 through the exercise of previously granted employee
stock options, compared to $1.3 million generated in 2005.
The Company estimates that its cash and financing needs through 2005 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 four years and
anticipates doing so again in 2005. 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 consolidated financial statements
appearing in our Annual Report on Form 10-K for the year ended December 31,
2004. 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.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Innotrac's goodwill carrying amount as of June 30, 2005 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 2005. The
valuation supported that the fair value of the reporting unit at January 1, 2005
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.
Accounting for 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 more likely than not that
deferred tax assets will not be realized. Innotrac's gross deferred tax asset as
of June 30, 2005 and December 31, 2004 was approximately $12.9 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, 2004
that expires between 2020 and 2024.
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 $10.0 million and $9.7 million
has been recorded as of June 30, 2005 and December 31, 2004. Income taxes
associated with future earnings will be offset by a reduction in the valuation
allowance. For the six months ended June 30, 2005, an income tax benefit of
$314,000 was offset by a corresponding increase 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 June 30, 2005
and December 31, 2004, 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. In March 2005, Innotrac and Tactica reached a verbal
agreement that would permit Innotrac to liquidate the Tactica inventory in order
to pay down the receivable balance, with any excess proceeds to be remitted to
Tactica. Innotrac, Tactica and the Creditor's Committee in the Tactica
bankruptcy case have reached an agreement on the terms of the liquidation and an
additional amount of the proceeds to be remitted to the unsecured creditors of
Tactica, which was approved by the bankruptcy court on June 23, 2005. Based on
this agreement and management's estimate of the net realizable value of the
inventory, the reserve associated with the Tactica receivable was reduced from
$1.2 million to $775,000 at March 31, 2005. The actual results of the
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
liquidation could vary from this estimate. As of June 30, 2005, Tactica owed
$2.8 million in principal to Innotrac for past fulfillment and call center
services.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 2004, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS" No. 123(R), "Share-Based
Payment," which revises SFAS No. 123, "Accounting for Stock-Based Compensation."
The revised Statement clarifies and expands SFAS No. 123's guidance in several
areas, including measuring fair value, classifying an award as equity or as a
liability, and attributing compensation cost to reporting periods. The revised
statement supercedes Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"), and its related implementation guidance.
Under the provisions of SFAS 123(R), the alternative to use APB 25's intrinsic
value method of accounting that was provided in SFAS No. 123, as originally
issued, is eliminated, and entities are required to measure liabilities incurred
to employees in share-based payment transactions at fair value. The Company
currently accounts for its stock-based compensation plans under 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. SFAS No. 123(R) will be effective for the
Company beginning January 1, 2006.
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, 2004 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 Officer and the
principal financial officer, evaluated our disclosure controls and procedures
(as defined in federal securities rules) as of June 30, 2005. 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 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 principal financial officer 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 second quarter of 2005.
20
PART II - OTHER INFORMATION
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 3, 2005, the Company held its annual meeting of shareholders in Duluth,
Georgia. As of the record date, April 8, 2005, there were 12,117,591 shares of
Common Stock issued, outstanding and entitled to vote at the annual meeting.
Represented at the meeting in person or by proxy were 11,883,838 shares
representing 98.07% of the total shares of Common Stock entitled to vote at the
meeting.
The purpose of the meeting was to re-elect the following director to a
three-year term expiring in 2008. The following table sets forth the number of
votes cast "for" reelection and the number of votes "withheld" for the director.
There were no abstentions or broker non-votes.
NUMBER OF VOTES
---------------------
FOR WITHHELD
---------- --------
Bruce V. Benator ....................................... 11,622,013 261,825
The directors whose terms continued after the meeting are Scott D. Dorfman,
Alston Gardner, Martin J. Blank and Joel E. Marks.
ITEM 6 - EXHIBITS
Exhibits:
10.4 Loan Documents Modification Agreement between Innotrac Corporation
and Wachovia Bank, National Association, successor by merger to
SouthTrust Bank, dated May 20, 2005.
10.16 Second Amendment to Lease Agreement dated March 5, 2003 by and
between ProLogis-Macquarie Kentucky I LLC and Innotrac Corporation.
10.17 Second Amendment to Lease Agreement dated June 23, 2005 by and
between The Prudential Insurance Company of America and Innotrac
Corporation.
10.21 Fourth Lease Extension and Modification Agreement dated July 8, 2005
by and between Teachers Insurance and annuity Association of
America, for the Benefit of its Separate Real Estate Account and
Innotrac Corporation.
31.1 Certification of Chief Executive Officer Pursuant to Rule
13a-14(a)/15d - 14(a).
31.2 Certification of principal 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 principal 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: August 12, 2005 By: /s/ Scott D. Dorfman
------------------------------------
Scott D. Dorfman
President, Chief Executive Officer
and Chairman of the Board (Principal
Executive Officer)
Date: August 12, 2005 /s/ Christine A. Herren
------------------------------------
Christine A. Herren
Senior Director and Controller
(Principal Financial Officer and
Principal Accounting Officer)
22